0Raising Fund through Commercial Paper:
Every business requires the funds for expansion. The requirement of fund can be both Long term and short term. The cost of raising funds for a business is very important and material. Lets discuss about the short term funding. There are number of ways from which business can raise the funds for short term requirements. Below are some of the options:
- Through Banks
- Through Private Money Lenders
- Advances against the Asset
- CP’s
In this short term funds requirement, I will be giving some brief overview of Commercial Papers.
Commercial Paper:
Commercial Paper is one of the modes of raising the funds for short term purpose. Commercial Papers fulfil the short term capital requirement of the Corporate and diversify the source of financing.
Lets understand, what is Commercial Paper and how it is cost effective than bank loans.
Commercial Paper as per RBI,
“CP’s are unsecured money market which is issued in the form of Promissory Note”.
CP’s were introduced by the RBI in 1990 to aid companies in raising money. The Growth of Commercial Paper market in India money market is higher due to rates of bank loans.
How Commercial Paper Works?
First of all, not all business can raise the money through Commercial Paper. There are some eligibility criteria for raising the funds through Commercial Paper. The Commercial Papers can be issued only by Corporate having net worth more than 4 Cr., Primary Dealers and All India Financial Institutions (FIs). For issuing the CP, eligible participant also needs the credit ratings. Also, Commercial Papers are issued at Discount and Face Value of CP’s is Rs. 500,000.
There are issuers in Market and there are subscribers in the market. Issuers as stated above and subscribers can be Individuals, NRI, Corporate Bodies, Banks, FII’s etc. So, the issuer of CP can directly sell to investors or CP dealers who in turn resell into the money market. CP’s are actively traded into OTC market.
How CP’s are more Beneficial than Banks for Short Term Financing?
Commercial Papers are more beneficial than any other source of finance. The only disadvantage of Commercial Paper is that it is its eligibility criteria, as it is easily available to Top Rated companies. Below are some important benefits of raising funds through CP’s :
- Commercial Papers are very easy and quickly available source for finance.
- Cost of Finance: The cost of CP’s ranges from 6-8% and with regard to banks and other sources of finance it ranges from 10-12%. So the raising of the funds from Commercial Paper is always beneficial.
- Amount of CP: The eligible issuer can issue the commercial paper of amount which is approved by the board of directors or as prescribed by the Credit Agency whichever is lower. The amount which is to be raised does not depend on the working capital limits. Hence company can issue the CP over and above the working capital limits.
- Easy Exit: If issuer is in no need of funds, it can easily buy back the CP and can make the exit from the market.
The availability of cheaper funds in the money market always better than Bank Loans. Hence companies are routing to CP’s for short term borrowing now a days.
