An unsecured, short-term debt instrument issued by a
corporation, typically for the financing of accounts receivable, inventories, and short-term liabilities. Maturities on commercial paper rarely are longer than 270 days, and commercial paper usually is issued at a discount to prevailing market interest rates. Commercial paper is not backed by any form of collateral; therefore, only firms with high-quality debt ratings will find buyers easily without having to offer a substantial discount (higher cost) for the debt issue. A company would be eligible to issue CP provided: (i) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore; (ii) the company has been sanctioned working capital limit by bank/s or FIs; and (iii) the borrowal account of the company is classified as a Standard Asset by the financing bank/institution.
Commercial paper is available in a wide range of denominations, can be either discounted or interest-bearing, and usually have a limited or nonexistent secondary market. Commercial paper is usually issued by companies with high credit ratings, meaning that the investment is almost always relatively low risk. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.