Sources of finance notes: Long term sources, short term sources, innovative sources of finance, commercial papers etc.
QUESTION: What is commercial paper? How is it different from debenture? Discuss the regulations applicable to commercial papers?
Commercial paper represents unsecured promisor notes issued by the firms to raise the short-term funds. The maturity period of commercial paper mostly ranges from 91 days to 180 days in India. It is sold at a discount from the face value and redeemed at face value on its maturity.
Only a company which is listed on the stock exchange and has a net worth of at least ₹10 crores can issue commercial papers. It is a cheap source of raising short term finance.
FEATURES OF COMMERCIAL PAPER
- It is a short-term money market instrument.
- It is a certificate evidencing an unsecured corporate debt of short-term maturity issues generally to meet working capital requirements.
- It can be issued in dematerialised form.
DIFFERENCE BETWEEN COMMERCIAL PAPER AND DEBENTURES
|BASIS OF DIFFERENCE||COMMERCIAL PAPER||DEBENTURES|
|Meaning||Commercial paper is a short-term money market instrument issued by the big companies for meeting the short-term liabilities.||Debentures are the creditorship securities that the company issues to raise long term loans.|
|Time Period||The maturity period of commercial paper is short mostly ranges from 91 to 180 days.||The maturity period for debentures is ling term ranges from 3 to 5 years or more.|
|Secured or unsecured||Commercial papers are usually unsecured.||Debentures may be secured or unsecured.|
|Types||Types of commercial papers are: Promissory Notes ChequeDraftCertificate of deposits||Types of debentures are: Registered debentureBearer debentureConvertible debentureNon-convertible debentureSecured debentureUnsecured debentureRedeemable debentureIrredeemable debenture|
|Return||It is sold at a discount and redeemed a face value on its maturity.||The fixed rate of interest is the return on debentures.|
|Redemption on maturity||Commercial papers cannot be redeemed before maturity.||Debentures can be redeemed before maturity by purchasing them in the open market or by redeeming in instalments.|
|Cost involved||Commercial paper is a cheap source of raising credit for short term.||Debentures involves comparatively more cost than in issuing.|
|Provide funds for||Commercial papers provide funds for meeting the working capital requirements.||Debentures are issued to meet fixed capital requirements.|
|Market||Commercial papers are dealt in money market.||Debentures are dealt in capital market.|
|Minimum amount of investment||Minimum amount to be invested in commercial paper by single buyer is ₹1 crore.||There is no such limit in case of debentures.|
|Issue price||Commercial papers shall be issued in multiple of 25 lakhs.||Debentures can be issued in multiple of ₹1 or ₹10.|
|Issue at premium||Commercial papers cannot be issued at premium.||Debentures can be issued at premium.|
|Issue as collateral security||Commercial papers cannot be issued as collateral security.||Debentures can be issued as collateral security.|
|Endorsement||Commercial papers are negotiable instruments which are endorsed by mere delivery.||Registered debentures cannot be endorsed by mere delivery.|
REGULATIONS APPLICABLE TO COMMERCIAL PAPERS:
Who can issue commercial paper: Commercial papers can be issued by following institutions:
- Non-banking financial institutions
- All India Financial institutions
- Co-operative societies
- Government entities
- Limited Liability Partnerships
Who can invest in Commercial Paper: All the residents of Indian can invest in the commercial paper.
Appointment of the IPA (Issuing and Paying Agent) or Who can act as IPA:
- The issuer shall appoint an IPA for the issuance of the commercial paper and enter into an agreement with Issuing and Paying Agent.
- Any schedule bank can act as an IPA.
- IPA should have Demat Account- Commercial Papers Securities Account’ and an exclusive ‘Commercial Papers Funds Account’ for each issuer.
Mode of Issue: All the commercial papers must be issued by the way of private placement only.
Reporting requirements relating to issuance of commercial papers: The issuer shall report the details of issuance of F-TRAC platform by close of the business hours of the same day of the issuance.
The IPA will also report the delay in funding the Commercial Paper funds account for redemption on maturity date.
Parties involved in Commercial Paper Issue: The following are the parties involved in issued of the commercial papers:
- Issuing and Paying Agent
- Registrar and Transfer Agent
- Credit Rating Agency
- Independent trustee when the Commercial Paper issue is supported by credit enhancement.
Stamp duty applicable on CP Issue: Commercial Papers are issued for stamp duty as appliable to Usuance Promissory Note. Being the lowest maturity among all unsecured debt products. The stamping of UPN (Usuance Promissory Note) would be as per the Indian Stamp Act 1899.
Redemption of CP: Commercial papers are redeemed on maturity date through IPA who makes the redemption payment to the investors. Maturity date is the final date of the payment for redemption of the commercial paper and no grace period is allowed for the same. Redemption day of Commercial paper should be a Mumbai business day.
Buy Back of Commercial Paper:
- Buy-back of the commercial paper should be made at the prevailing market price.
- Buy back offer should be extended to all the investors in the CP issue. Terms of buy back should be identical for all the investors in the issue.
- Buy back offer may not be made 30 days from the date of the issue.
- Issuer shall inform the buy back to the IPA on the same day.
Underwriting of CP: CP issue cannot be underwritten.
CP in Demat Form: CP shall be issued in the form of a promissory note and held in a dematerialized form through any of the depositories approved by and registered with the SEBI (Securities and Exchange Board of India).