Commercial Ppr

8/11/2019 Commercial Ppr

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FINANCIAL MARKET

DEBT

COMMERCIAL PAPER


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PRESENTED BY:

POOJA AVALE 3

ANJAN JAIN 19

RAKESH JAIN 22

ABHISHEK KUMAR 30

TRISHITA SENGUPTA 44

UNNATI MISTRY 60


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CONTENTS

INTRODUCTION

PLACE OF TRADING

TYPES OF DEBTS

COMMERCIAL PAPER

WHY IT IS INTRODUCED

FEATURES

STRUCTURE OF COMMERCIAL PAPER MARKET

ADVANTAGE & DISADVANTAGE


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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


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PLACE OF TRADING

Most debt securities are traded over-the-counter,

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-profitorganizations.

TYPES OF DEBTS

Government securities

Commercial paper

Certificate of deposit

Call money market


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COMMERCIAL PAPERCommercial 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 creditstanding of the issuing company.

Why It Is Itroduced?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 theirshort term funding requirements for their operations.


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FEATURES

Definition

Commercial Papers are negotiable short-term 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 IssuersAn 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

Banks or All-India Financial Institutions.

(c) The borrowal account of the company is classified as a

Standard Asset by the financing Banks or All-India Financial

Institutions.


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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 Indiafrom 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 daysand 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


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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 ForeignInstitutional 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 andInvestors 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


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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


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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.


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CONCLUSION

Credit is an unavoidable part of our reality

these days; nobody can deny that it is a

critical component of our global financial

markets. However, any extreme is usually

bad, and that truth extends to credit anddebt.

People, who over consume, overspend and

charge their way through life will inevitably

pay the piper, and not just in terms of their

financial stability.


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