Commercial paper in India


Commercial paper in India

Commercial Paper in India is a new addition to short-term instruments in Indian Money market since 1990 onward. The introduction of Commercial paper as the short-term monetary instrument was the beginning of a reform in Indian Money market on the background of trend of Liberalization which began in the world economy during 1985 to 1990. A commercial paper in India is the monetary instrument issued in the form of promissory note.[1] It acts as the debt instrument to be used by large corporate companies for borrowing short-term monetary funds in the money market. An introduction of Commercial Paper in Indian money market is an innovation in the Financial system of India. Prior to injection of Commercial Paper in Indian money market i.e. before 1990, the corporate companies had to depend upon the crude and traditional method of borrowing working capital from the commercial banks by pledging the inventory of raw materials as Collateral security. It involved more loss of time for the borrowing companies in availing the short-term funds for day-to-day production activities. The commercial paper has become effective instrument for these corporate companies to avail the short-term funds from the money market within shortest possible time limit by avoiding the hassles of direct negotiation with the commercial banks for availing the short-term loans.


Contents

Commercial Paper market

The introduction of commercial paper as debt instrument has promoted commercial paper market as one of the components of Indian money market. In this commercial paper market, the issuers of commercial paper create supply while the subscribers to commercial paper create demand for these papers. The interaction between supply and demand for commercial papers promotes the commercial paper market. The main issuers of Commercial paper in this market are corporate and the main subscribers to the Commercial papers are the banking companies. Commercial Paper is issued by the issuers at a discount to face value of Commercial paper. The face value of Commercial Paper is in the denomination of Rs. 0.5 million and multiples thereof. The maturity period of Commercial paper in the Commercial Paper market ranges between minimum of 15 days and maximum of 1 year from the date of issue.[2] The subscriber to the commercial paper is the investor, and a single investor in the Commercial paper market is not allowed to invest less than Rs. 0.5 million. The other issuers of Commercial paper in this market are Primary dealers and All India Financial Institutions. The other investors or subscribers to Commercial paper in this market are individuals, Non-Resident Indians and Foreign Institutional Investors.

Commercial Paper and Credit Rating agencies

Since Commercial paper is unsecured debt instrument in Indian money market, the issuers of Commercial paper are required to maintain relatively higher Credit rating. According to Reserve Bank of India norms, the issuers of Commercial Paper are eligible to issue Commercial Papers only if they have P2 or equivalent credit rating from any of the credit rating agencies in India. The main agencies are Credit Rating Information Services of India Limited (CRISIL), Credit Analysis and Research Limited (CARE), Investment Information and Credit Rating Agency of India Limited (ICRA). This credit rating is essential for the issue of Commercial papers because a Commercial paper is not backed by any collateral and so only corporate with high-quality credit ratings will easily find buyers without having to offer a substantial discount (higher cost) for the issue of Commercial paper.[3]

Issuers of Commercial Paper

The issuers of Commercial papers in Indian money market are broadly classified into:

During the decade of 2000-01 to 2010-11, Leasing and finance companies had the average share of 70% of total issue of Commercial papers; while Manufacturing companies and Financial institutions had the average share of 15% each.[4]

Growth of Commercial Paper market in India

Commercial Paper market had relatively higher growth from 1997-98 onward. On October 15 1997, total outstanding amount on Commercial paper transaction in Indian money market was Rs. 3377 crore.[5] This outstanding amount increased substantially to Rs. 1,28,347 crore on July 15, 2011. [6] This growth of Commercial paper market may be attributed to the rapid expansion of corporate manufacturing and financial companies in liberalized and Globalized Indian economy during the last decade of 20th century and the first decade of 21st century. The growth of Commercial Paper market in India was more conspicuous after the financial year 2007-08. On 15 July, 2007, total outstanding amount on Commercial paper transaction was Rs. 28,129 crore. This amount increased to Rs. 48,342 crore on 15 July, 2008.[7] Since then, there was substantial increase in the outstanding amount on Commercial paper transactions to the highest level of Rs. 1,28,347 until 15 July, 2011. This period was largely dominated by the Late-2000s financial crisis. In this period, RBI reduced Repo rate drastically from 9% to 4%. However, Prime rate of commercial banks in India remained rigid at 12%.[8] The discounting rate on Commercial papers was in the range of 6.5% to 10% in October 2010.[9] It is explicit from these statistics that the cost of borrowing working capital through Commercial paper transaction became relatively lower for the corporate companies in India in comparison to the cost of borrowing the same working capital through cash credit facility from the commercial banks. The obvious result was an absolute growth of the Commercial paper market in India, particularly, after 2007-08 onward.

References

  1. ^ Bhole, LM (1999). Financial Institutions and Markets. New Delhi: Tata McGraw Hill Publishing Company Limited. pp. 564. ISBN 0-07-463313-9. 
  2. ^ Reserve Bank of India. "Guidelines for issue of Commercial Paper". http://rbidocs.rbi.org.in/rdocs/notification/PDFs/16259.pdf. 
  3. ^ Investopedia. "Commercial Paper". http://www.investopedia.com/terms/c/commercialpaper.asp#axzz1X5Fi9Svk. 
  4. ^ GSIC Research, Reserve Bank of India Publication. Macroeconomic and Monetary Developments First Quarter Review 2010-11. 
  5. ^ Weekly statistical supplement, Reserve Bank of India (19/09/1998). "Commercial Paper issued by companies". RBI Bulletin. http://www.rbi.org.in/scripts/WSSView.aspx?Id=13. 
  6. ^ Weekly statistical supplement, Reserve Bank of India (02/09/2011). "Commercial Paper issued by companies". RBI Bulletin. http://www.rbi.org.in/scripts/WSSView.aspx?Id=16377. 
  7. ^ "Commercial Paper issued by Companies". Weekly Statistical Supplement. 29/08/2008. http://www.rbi.org.in/scripts/WSSView.aspx?Id=12705. Retrieved 12 September 2011. 
  8. ^ Pai Panandiker, D. H. (17/05/2010). "Market for Commercial Paper". Reuters. http://in.reuters.com/article/2010/05/17/idINIndia-48539920100517. Retrieved 12 September 2011. 
  9. ^ "Commercial Paper issued by Companies". Weekly Statistical Supplement. 04/02/2011. http://www.rbi.org.in/scripts/WSSView.aspx?Id=15687. Retrieved 12 September 2011. 

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Commercial paper — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia

  • India — /in dee euh/, n. 1. Hindi, Bharat. a republic in S Asia: a union comprising 25 states and 7 union territories; formerly a British colony; gained independence Aug. 15, 1947; became a republic within the Commonwealth of Nations Jan. 26, 1950.… …   Universalium

  • India–Iran relations — Relations between India and Iran date back to the common prehistoric Indo Iranian heritage (which connects all of Greater Persia and Greater India) and the Indo Parthian and Indo Scythian kingdoms of antiquity to the strongly Persianized Islamic… …   Wikipedia

  • commercial transaction — ▪ economics Introduction       in law, the core of the legal rules governing business dealings. The most common types of commercial transactions, involving such specialized areas of the law and legal instruments as sale of goods and documents of… …   Universalium

  • paper — Synonyms and related words: Bible paper, CD, IOU, India paper, MO, MS, Manila paper, acceptance, acceptance bill, alabaster, analysis, archives, art paper, article, assignment, autograph, bank acceptance, bank check, baryta paper, bill, bill of… …   Moby Thesaurus

  • Commercial Revolution — The Commercial Revolution was a period of European economic expansion, colonialism, and mercantilism which lasted from approximately the 16th century until the early 18th century. It was succeeded in the mid 18th century by the Industrial… …   Wikipedia

  • Paper clip — A paper clip (or sometimes paperclip) is a device which holds several sheets of paper together by means of pressure: it leaves the paper intact and can be quickly and easily removed, unlike the staple, which will damage the paper unless removed… …   Wikipedia

  • Paper size — A size chart illustrating the ISO A series and a comparison with American letter and legal formats …   Wikipedia

  • commercial fishing — Introduction  the taking of fish and other seafood and resources from oceans, rivers, and lakes for the purpose of marketing them.       Fishing is one of the oldest employments of humankind. Ancient heaps of discarded mollusk shells (shell… …   Universalium

  • paper — I (New American Roget s College Thesaurus) n. writing paper, wallpaper, newsprint, rag paper, pulp paper, foolscap, etc.; paper money, bill, banknote, folding money; certificate, deed, document; newspaper, journal; monograph, article, composition …   English dictionary for students


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.