Commercial Paper (CP)Commercial Paper evolved as a source of short term finance in our country in the early years of 1990s. Commercial paper can be defined as an unsecured promissory note issued by an organisation to raise funds for a short period of time ranging from 90 days to 364 days. It is issued by one organisation to other business organizations viz., insurance companies, pension funds and banks. The money raised by CP is usually very sizeable. The debt being unsecured, the organisation having good credit rating is entitled to issue the CP. Its regulation falls under the purview of the Reserve Bank of India. The merits and limitations of a Commercial Paper are as follows:
- A commercial paper is very insecure and does not contain any restrictive conditions;
- Due to its freely transferable nature, it has high liquidity;
- It is liable to provide more funds compared to other sources. Generally, the cost of CP to the issuing firm is comparatively lower than the cost of commercial bank loans;
- A commercial paper generates a continuous source of funds. This is due to the maturity that can be tailored to suit the needs of the issuing firm. In addition to this, the a commercial paper that matures can be repaid by selling new commercial paper;
- Companies can deposit their surplus funds in commercial paper that can generate good returns.
- Companies that are wealthy and highly rated can raise money through commercial papers. New and moderately rated companies may not be in a position to raise funds through this method;
- The magnitude of money that can be raised through commercial paper is limited to the glut liquidity available with the suppliers of funds at that point of time;
- Commercial paper is a remote method of financing because when an organization is incapable of redeeming its commercial paper, an extension of the maturity period is not provided.