Commercial Papers

It is a type of unsecured, short-term debt instruments issued by financial institutions and large corporations in the form of promissory note. Commercial Papers can be issued between a minimum of 15 days to maximum of one year from date of issue.

Because the instrument is unsecured (no more than a promise to pay, hence the name), investors look solely to the creditworthiness of the issuer for repayment of their savings. Commercial paper is issued and traded like a security. But because it is short term by nature and not purchased by retail investors, it is exempt from most securities laws.

Commercial Papers can be issued in denominations of Rs.5 lakh. It is issued at a discount from face value reflecting prevailing market interest rates.

Commercial papers are typically used for financing the payroll, accounts payable, inventories and other short-term liabilities. It is backed by any form of collateral, making it a form of unsecured debt.

Commercial paper is sold at a discount to its face value to compensate the investor, as opposed to paying cash interest like a typical debt security. In other words, the difference between the face value at maturity and the investor’s discounted purchase price is the investor’s “profit.” The need for commercial paper often arises due to corporations facing a short-term need to cover expenses.

CP often referred to as an unsecured promissory note, as the security is not supported by anything other than the issuer’s promise to repay the face value at the maturity date specified on the note.

Difference between CD vs Commercial Paper

There are two glaring differences between commercial paper and a CD. The first is who can issue them. A CD is issued by financial institutions and banks. Commercial papers are issued by primary dealers, large corporations and All-India Financial Institutions. The second difference is the minimum amount of deposit. A certificate of deposit requires a minimum investment of ₹1 lakh and thereafter permits multiples of it. A commercial paper, on the other hand, is issued for investments of at least ₹5 lakhs and in multiples of ₹5 lakh, thereafter.