What is Commercial Paper?

Commercial papers are debt instruments issued by corporations to finance their short-term liquidity needs. These liquidity needs can be for funding working capital, enabling operations or financing inventory, or meeting payroll expenses. Of late, it is gaining in popularity as a fixed-income investment in India.

Why do companies issue commercial papers instead of borrowing from banks?

Companies issue commercial papers as a form of short-term financing because it is a source of diversified and flexible fundraising from individual investors.

Who can issue commercial papers?

Banks, NBFCs, financial institutions, foreign corporations, and other such entities issue commercial papers. The issuer entities generally undergo the due diligence of credit rating agencies like CRISIL (Credit Rating Information Services of India Ltd.), ICRA (Investment Information and Credit Rating Agency of India Ltd.), and CARE (Credit Analysis and Research Ltd.) to evaluate their credibility and financial health.

What is the general tenure of commercial papers?

Commercial papers are debt tools with tenure as short as 7 days but not more than one year.

Are commercial papers secured?

Commercial papers are unsecured debt instruments with a promise of repayment on the maturity date. The issuer of the commercial paper promises to pay the purchaser a specified amount in cash at a future date without any collateral or assets backing the payment.

What is the general price of commercial paper?

Commercial papers are issued in multiples of Rs 5 lakhs. They are sold at discounted face value with the promise to pay a defined face value at maturity. The difference between the discounted value and the face value at maturity is the investment return for the investor.

Are commercial papers listed on the stock exchange?

Commercial Papers are regulated by RBI and are allowed by SEBI to be listed starting from 22nd October 2019.

How to purchase commercial papers?

Listed commercial papers can be bought from secondary markets. Unlisted commercial papers can be bought from brokerage houses and intermediaries.

Do commercial papers pay interest?

Commercial papers generally do not pay interest. Instead of paying interest, they are issued at a discount to face value and when the instrument reaches maturity, the investor will receive the face value.

Is it safe to invest in commercial papers?

The issuer companies are rated by agencies based on potential default risk, their financial strengths, and business fundamentals. Overall, commercial papers carry less risk in comparison to equity products. However, investors should evaluate the risk-return trade-off of every opportunity before investing.

What are the benefits of investing in commercial papers?

• Buy at discount – Commercial papers are issued at a discount and repaid on maturity at the par value.
• Demat – Purchased units of commercial papers are reflected in the demat account of the investor.
• Short-tenure – The maturity period of commercial papers is less than a year and also can be liquidated with very little loss in value.
• Good yield – *Recently in March 2023, Bajaj Finance, Aditya Birla Finance, and Tata Capital Financial paid 7.84%-7.90% for a three-month paper.
• Strong issuer financial health – The issuer’s financial health and creditworthiness are evaluated by RBI-authorized credit rating agencies, making the deals much safer.

What are the disadvantages of investing in commercial papers?

The minimum ticket price is Rs 5 lakh for investing in commercial papers. Though the debt instruments are rated, they carry inherent default risk as they are unsecured.

Conclusion

For companies issuing the instrument, commercial papers are a quick and flexible way to raise money for short-term needs and for an investor, it is an opportunity to invest in a short-tenure fixed-income investment that yields competitive returns.