Commercial papers:
It is an unsecured promissory note issued by a firm having good creditworthiness to raise funds for a short period varying from 1 month to 1 year. These are issued by a firm to other firms, insurance companies, to pension funds and to banks. Only those firms having good credit rating can issue commercial papers. The RBI regulates the issue of commercial papers.
Merits of Commercial Papers:
- The best way on part of the company to take advantage of short term interest fluctuation in the market.
- It has a wide range of maturity.
- It is unsecured and thus does not create any liens on assets of the company.
- Good rating reduces the cost of capital for the company.
Limitations of Commercial Papers:
- It is available only to a few selected blue-chip and profitable companies.
- By issuing this paper, the credit available from the banks may get reduced.
- Issue of commercial papers is very closely – regulated by RBI guidelines.
