Market for Commercial Paper and Certificate of Deposits

Here , I am going to discuss about the concept of two money market instruments, namely,Commercial Paper (CP) and Certificate of Deposits (CD) .They were launched in 1990s.

Commercial Paper :

Commercial Paper is unsecured money market instrument issued in the form of the promissory notes.It was introduced in India since 1990s with a view to enabling highly rated corporate borrowers to diversify their source of short term borrowing and to provide an additional instrument to investors .subsequently,primary dealers and all India financial institution were allowed to issue CP to enable them to meet their short term funding requirement .

Not all the corporate are eligible to issue the CP .There should be the following criteria for that 1.Tangible assets should not be less than 4 crore in balance sheet.2.company has been sanctioned working capital limit by all india financial institution .3 . The borrowal account of the company is classified as Standard Assets by financial institution.

The minimum credit rating should be A2 as per rating symbol prescribed by SEBI.

CP can be issued for the maturity period of 7 days to  a maximum of one year. CP can be issued in denomination of Rs 5 lakh or multiple thereof.Only a scheduled bank can act as Issuing and Paying Agent. (IPA). idividuals ,Banking companies, corporate bodies and unincorporated bodies,Non resident Indian (NRI) and foreign institutional Investors etc can invest in CPs.

Certificate of Deposits:

CD is a negotiable money market instrument and issued in dematerialised form or Usance Promissory Note against funds deposited at a bank or other financial institution for a specified period of time.

CDs can be issued by scheduled bank and all India Financial institution that have been permitted by RBI within umbrella limit fixed by RBI.

Minimum amount of CDs should be Rs 1 lakh and in multiple of Rs 1 lakh thereafter. CDs can be Issued to individuals ,corporation , companies , trust ,funds , association , NRI etc.

Maturity period is minimum 7 days and maximum  year. from the date of when issued by banks while when issued by the FIs , the minimum is 1 year and maximum 3 year from date of issue.

Cds are freely transferable by endorsement and delivery.Cds in demat form can be transferred as per procedure applicable in other demat securities.There is no lock in period in CDs.

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