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(^386) Financial Management
l The debt: equity ratio, including the proposed debenture issue, should not
exceed1:1.
l The debentures shall first be offered to the existing Indian resident shareholders
of the company on a pro rata basis.
Commercial Papers
An emerging source of financing working capital requirements of corporate enterprises
is Commercial Paper (CP). Commercial paper is a short-term money market instrument,
consisting of unsecured promissory notes with a fixed maturity, usually between seven
days and three months, issued in bearer form and on a discount basis. Issue may be
made on an interval basis or more generally under revolving underwriting facility extended
by banks, tailored to the needs of the cash flow requirements of the issuer. Thus,
commercial paper is a Certificate evidencing an unsecured corporate debt of short
maturity. It represents a promise by the borrowing company to repay loan at a specified
date. In law, the CP comes closest to a ìPromissory note.î
Since CP represents unsecured, short-term promissory notes, only the highly reputed
and creditworthy companies are able to take advantage of this source of funds.
Commercial paper can be sold directly by issuing company or through commercial
paper dealers who either act as broker or purchase the paper outright for quick resale.
Issuing companies tailor both the maturity and the amount of the notes to the needs of
the investors. Thus. the maturities and amounts of the notes to the needs of the investors.
Thus, the maturities and amounts of directly placed paper cover a wide range of
combinations.
Commercial paper is different from bankerís acceptance. Thus, in the former it is the
obligation of the issuing company while in the case of the latter both the drawer and the
accepting bank have obligations. Another major difference is that issues of commercial
paper do not have to be tied to a specific transaction whereas in most of the circumstances
bankerís acceptances have to be tied to a specific transactions.
Genesis of Commercial Paper
The genesis of commercial paper is to enable highly rated Corporate borrowers to
diversify their sources of short-term borrowings and also to provide an additional
instrument to investors. A CP is not tied to any specific trade transaction.
It differs from other money market instruments like bankersí acceptances in the sense
that it is an obligation of the issuer only, whereas acceptances are obligations of both
the drawer and the accepting bank. A CP does not carry any underlying collateral
security.