Commercial Paper & Treasury Bill
A Commercial Paper (CP) is an unsecured, short-term debt instrument issued by a Corporation, in the form of promissory note or in dematerialised form, typically for meeting short-term liabilities.
COMMERCIAL PAPER
A Commercial Paper (CP) is
- A money-market instrument
- Issued by corporates and Financial Institutions
- To garner money from the market
- To meet short term needs.
When & why was it introduced in India?
- It was introduced in India in 1990.
- It was aimed at providing high rated corporates with a borrowing option.
- So while they could borrow from a bank, now with the help of a Commercial Papers, they could also borrow from the open market.
- Since Commercial Paper is used to borrow directly from the market, the rate of interest is lesser as compared to the banks.
THUS…
- A commercial paper is a lower cost alternative to borrowing from a bank.
- However not all organisations are in a position to issue Commercial Papers.
- Only reputed organisations whose papers have a good rating
can borrow directly through Commercial Papers and save money.
LETS TAKE AN EXAMPLE…..
- ABC Group are the owners of a large retail stores.
- They want to raise funds from the market to purchase merchandise.
- If they go to a bank for a loan, they would have to pay 10% interest on the loan.
- But from the open market they could perhaps get the loan at only 7%.
- Hence by resorting to an instrument like Commercial Papers, the organization gains 3%.
Therefore
- By issuing Commercial Papers the organisation borrows directly from investors and by-passes the banks.
- As a result, it gets to borrow at a lower rate from the market as compared to what the banks would have charged.
- This process is also called Financial Disintermediation or in other words getting rid of the mediator.
So who is eligible to issue Commercial Papers?
- Corporates
- Primary dealers
- Satellite Dealers
- All-India Financial Institutions (FIs)
And who can invest in CPs?
- Individuals
- Banking companies
- Non-Resident Indians (NRIs) and
- Foreign Institutional Investors (FIIs) etc.
For what maturity periods are CPs issued…..?
- CPs can be issued for maturities between a minimum of 15 days and a maximum of up to one year from the date of issue.
- CP can be issued in denominations of Rs. 5 lakh or multiples thereof.
- Amount invested by single investor should not be less than Rs. 5 lakh (face value).
- Therefore it is used to fund the working capital or current requirements of organisations.
- However, one important point to note is that the borrowed amount can only be used to fulfill current requirements. It is not meant be used for purchase of fixed assets, such as a new plant.
- Commercial Papers is usually issued at a discount from face value and rarely range longer then 270 Days.
- It is mandatory for CPs to be credit rated by approved Credit Rating Agencies as may be specified by RBI from time to time.
Treasury Bills
What Treasury Bills are…
- Treasury Bills or T- Bills are exactly the same as CPs.
- Except that while CPs are issued by corporates, T- Bills are issued by the Government of India for financing its working capital needs.
- T-Bills issued by Reserve Bank of India are for 91 Days, 182 Days and 364 Days T-bills.
- T-Bills are Zero Coupon securities and are issued at discount and redeemed at face Value on Maturity.
T-Bills are Secured.