FINANCIAL MARKET

DEBT
COMMERCIAL PAPER

PRESENTED BY:
POOJA AVALE

ANJAN JAIN

19

RAKESH JAIN

22

ABHISHEK KUMAR

30

TRISHITA SENGUPTA

44

UNNATI MISTRY

60

CONTENTS
INTRODUCTION

PLACE OF TRADING
TYPES OF DEBTS
COMMERCIAL PAPER
WHY IT IS INTRODUCED
FEATURES
STRUCTURE OF COMMERCIAL PAPER MARKET
ADVANTAGE & DISADVANTAGE
Growth in the cp market
Conclusion

INTRODUCTION
An amount of money borrowed by one
party from another.

 A debt arrangement gives the borrowing

party permission to borrow money under
the condition that it is to be paid back at a
later date, usually with interest.
The interest rate on a debt instrument is
largely determined by the perceived
repayment ability of the borrower.
Many corporations/individuals use debt
instruments as a method for making large
purchases that they could not afford under
normal circumstances.
In finance, debt is a means of using
anticipated income and future purchasing
power in the present before it has actually
been earned.
Some companies and corporations use
debt as a part of their overall corporate
finance strategy

PLACE OF TRADING

 Most debt securities are traded over-thecounter,

Much of the trading now conducted
electronically.
The total value of trades conducted daily
in the debt markets is much larger than
that of stocks, as debt
securities/instruments are held by many
large institutional investors as well as
governments and non-profit organizations.

TYPES OF DEBTS
Government securities
Commercial paper
Certificate of deposit
Call money market

COMMERCIAL PAPER
Commercial paper consist of short term
unsecured promissory nots issued by well
known and financially strong compnies
Commercial paper is traded mainly in the
primary market. Opportunities fo resale in the
secondary market are mre limited.
Commercial paper is rated prime desiraable
on the credit standing of the issuing company.

Why It Is Introduced?
It was introduced in india in 1990 with a view
to enabling highly rated corporate borrowers
to diversify their sources of short term
borrowings and to provide an additional
instrument to investors.
Subsequently primary dealers and all-india
financial instituions werealso permitted to
issue CP to enable them to meet their short
term funding requirements for their
operations.

FEATURES
Definition
Commercial Papers are negotiable shortterm unsecured promissory notes with
fixed maturities, issued by well rated
companies generally sold on discount
basis. These are basically instruments
evidencing the liability of the issuer to pay
the holder in due course a fixed amount

(face value of the instrument) on the

specified due date
Issuers
Corporates, Primary Dealers & All-India
Financial Institutions that have been
permitted to raise short-term resources
under the umbrella limit fixed by Reserve
Bank of India are eligible to issue CPs

Eligibility Criteria for Issuers

An Issuer would be eligible to issue CP
provided :(a) the tangible net worth of the company,
as per the latest audited balance
sheet,
is not less than Rs.4crores.
(b) The company has been sanctioned
working capital limit by Bank/s or All-India
Financial Institutions.
(c) The borrowal account of the company
is classified as a Standard Asset by the
financing Bank/s or All-India Financial
Institutions.

Compulsory Credit Rating

All eligible Issuers shall obtain the credit
rating for issuance of CPs from either
CRISIL or ICRA or CARE or FITCH or such
other credit rating agencies as may be
specified by the Reserve Bank of India
from time to time, for the purpose. The
credit rating shall be P-1 (best) or P-2 (2nd
best). The issuers shall ensure at the time
of issuance of CP that the rating so
obtained is current and has not fallen due
for review

Maturity Period
CPs can be issued for maturities between
a minimum of 7 days and a maximum of
up to one year from the date of issue. The
maturity date of the CP should not go
beyond the date up to which the credit
rating of the issuer is valid
Minimum Investment
CPs can be issued in denominations of
Rs.5 lakhs or multiples thereof. Amount

invested by a single investor should not be

less than Rs.5 lakhs (face value)

Issuing & Paying Agent

An IPA has to be compulsorily appointed
by the Issuer as the Servicer & only a
Scheduled Commercial Bank can act as an
IPA for the issuance of CPs. All Investors
shall be given a copy of the IPA certificate
to the effect that the Issuer has a valid
agreement with the IPA and that all the
documents are in order

Investors
CPs may be issued to & held by
individuals, banking companies, other
corporate bodies registered or
incorporated in India and unincorporated
bodies, Non-Resident Indians (NRIs) and
Foreign Institutional Investors (FIIs).
However, investment by FIIs would be
within the limits set for their investments

by Securities and Exchange Board of India

(SEBI)
Form of the Instrument
While option is available to both Issuers
and Investors to issue/hold CPs in
dematerialized or physical form, Issuers
and Investors are encouraged to prefer
dematerialized form of issue/holding.
However, with effect from June 30, 2001,
CPs are to be compulsorily issued only in
the dematerialized form

Procedure at the time of Maturity

On maturity of the CP, when the CP is
held in physical form, the holder of the CP
shall present the instrument for payment
to the Issuer through the IPA. However,
when the CP is held in the demat form, the
holder of the CP will have to get it
redeemed through the Depository and
receive the payment from the IPA into his
bank/trading account

Other Features
CPs will be issued at a discount to face

value as may be determined by the issuer.

No issuer shall have the issue of CPs
underwritten

ADVANTAGES
It is quick and cost effective way of
raising working capital
Best way to the company is to take
advantage of short term interest
fluctuations in the market
It provides the exit option to the
investors to quit the investment
They are cheaper then bank loans
As commercial papers are required to be
rated , good rating reduces the cost of
capital for the company
It is unsecured and thus does not create
any liens on the assets of the company
It has wide range of maturity
It is exempt from federal sec and state
securities registration requirements

DISADVANTAGES

 It is available only to a few selected blue

chip and profitable companies.
By issuing commercial paper the credit
available from the banks may be
reduced.
Issue of commercial paper is closely
regulated by rbi guidelines.

Growth in the CP market:

CP market in India has witnessed many
ups and downs. Since its introduction in
1990 and until the end of the financial
year of 1992-93, the activity in the CP
market in India was minimal and volume
was very small. The amount outstanding
at end of the year 1992-93 rose to Rs.578
crore from Rs.86 crore as at the end of
the financial year 1989-90. Relaxation in
the terms and conditions for the issue of
CPs (eligibility criteria, denomination of
CP, quantum of CP etc.) and decline in

discount rates helped in strong growth of

the CP market.
Outstanding CP amount as at the end of
March 1994 was Rs.3246 crores.
However, withdrawal of stand-by facility
for CP in October 1994, rising discount
rates and shrinking short term surplus
funds brought a sharp decline in the
amount raised through CP. The
outstanding amount sharply declined by
Rs.2660 crores and was Rs.604 crore at
the end of March 1995. It further declined
to Rs.76 crore by the end of March 1996.
However, fall in the discount rates,
revived the CP market and the
outstanding amount of CP reached
Rs.646 crores by the end of March 1997.
Thereafter CP market took pace and
started showing increase from May 1997.
This can be evidenced by the fact that
amount outstanding at the end of March
1998 was Rs.1500 crores. By end-March
1999 it became Rs.4770 crores and by
end-January 2000 it was Rs.7814 crores.

 The outstanding amount of CPs increased

from Rs.6295 crores in mid-April 2001 to
Rs.8566 crores in end-June 2001.
Dematerialised investment norms again
brought decline in the outstanding
amount of CPs to Rs.6982 crores by endaugust 2001. It increased thereafter and
peaked at Rs.8913 crores at midNovember 2001 before declining to
Rs.7224 crores by March 31, 2002. At the
end of June 2005, the outstanding
amount of CPs was Rs.17782 crores.
As per annual report 2008 published by
RBI, the total outstanding amount of
commercial papers increased from
Rs.17863 crores (March 2007) to
Rs.50062 crores (January 2008) - a 180%
increase in a period spanning 10 months.
At the end of March 2008, outstanding
amount was Rs.32592 crores and by July
2008 it reached Rs.51569 crores.
The Weighted Average Discount Rate
(WADR) decreased from 9.98% to 8.12%

as on March 31, 2002. It further declined

to 7.32% by end-July 2002.
It was 11.33% as on March 31, 2007
which declined to 7.65% at end October
2007 but hardened to 10.38% as on
March 31, 2008 and further to 10.95% as
on July 31, 2008.
The annual report of RBI, 2008 also states
leasing and finance companies are the
predominant issuers of CPs holding a
share above 70%, followed by
manufacturing companies and financial
institutions.
The outstanding amount of CP jumped to
Rs.75506 crores by March 2010after
crossing a peak of over Rs.100000 crores
in the last quarter of 2009.

CONCLUSION
To conclude, the commercial paper market
was developed to
meet short-term requirements of the firms at
interest rates and
terms more favourable than the bank loans.
In recent past, prominent corporates like
Power Finance Corporation, Tata Power, Tata
Motor and IDFC have been observed raising
short-term funds through

commercial papers. As per latest updatesThe

Reserve Bank of India has decided to
encourage long term foreign investment in
corporate debt by lowering the sub-limit for
investors in short term commercial papers.
It has lowered the commercial paper sub-limit
to $2 billion from $3.5 billion at present. The
balance $1.5 billion will continue to be part of
the total corporate debt limit of $51 billion
and will be available to eligible foreign
investors for investment in corporate debt
Bibliography
Wikipedia.com
Vipul prakashan debt markets