Commercial paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations

(for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates.

Eligibility for issuance of CP Presently, companies, which satisfy the following requirements, shall be eligible to issue commercial paper : The tangible net worth of the company is not less than Rupees four crore Working capital (fund-based) limit of the company is not less than four crore The minimum credit rating of the company shall be P-2 from CRISIL or equivalent from other Rating agencies The borrowal account of the company is classified as a Standard Asset. Besides companies, Primary Dealers (PDs) and Satellite Dealers are also permitted to issue CP. Period of CP CP can be issued for maturities between 15 days to less than one year. Denomination and minimum size of CP CP can be issued in multiples of Rs.5 lakh. Minimum amount to be invested by single investor - Rs.25 lakh (face value). Secondary market transaction may be for Rs.5 lakh or multiples thereof. Ceiling on amount of issue The aggregate amount to be raised by way of CP shall not exceed the working capital limit sanctioned by bank/s to an issuer company. Mode of Issue The commercial paper is in the form of usance promissory note negotiable by endorsement and delivery and issued at discount to face value. Procedure for Issue of CP The company which proposes to issue CP has to submit its proposal to the financing banking company along with a certificate issued by Credit Rating Agency. The financing banking company, after satisfying that the issuing company fulfils the eligibility criteria takes the proposal on record. The issuing company thereafter makes arrangements for privately placing the issue and has to ensure that it shall completes the issue of CP with in the period of two weeks. Once the CP is issued, the financing banking company makes arrangements for reducing the working capital fund based limit to the extent of the amount of CP issued. The issuing

company has to advise the RBI through its financing company the amount of CP actually issued with three days from the date of completion of the issue. Limits and the Amount of Issue of CP The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors. Banks and FIs will, however, have the flexibility to fix working capital limits duly taking into account the resource pattern of companies financing including CPs. An FI can issue CP within the overall limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription. CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP shall have the same maturity date. Every CP issue should be reported to the Chief General Manager, Industrial and Export Credit Department (IECD), Reserve Bank of India, Central Office, Mumbai through the Issuing and Paying Agent (IPA) within three days from the date of completion of the issue, incorporating details as per Schedule II. Every issue of CP, including renewal, should be treated as a fresh issue.