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(^388) Financial Management
generally noted that banks do not look favourably on credit requests only in periods of
tight money. A firm relying too heavily on CP may, therefore, find itself shut off from an
important source of capital in future periods of need. Therefore, a finance manager
must be careful not to impair relations with its bank. He must maintain lines of credit of
commercial banks in order to tide over money market conditions. Another limitation is
that CP must be paid when due. There is no extension of maturity, as in the case of a
short-term bank loan.
Growth of Commercial Paper Market
The roots of commercial paper can be traced back in the early 19th century when the
firms in the U.S.A. began selling open market paper as a substitute for a bank loan
needed for satisfying short-term financial require≠ments. These firms facing great
problem in getting loan from banks because of the existence of the unit-banking system
were compelled to go to the market directly to raise resources from cities like New
York.
During the first hundred years or so, the CPs were issued by non-financial business
firms only. But subsequently, consumer financial companies also began issuing the paper,
first through dealers and later directly with investors. By early 1950s, the U.S.A. had a
large market for CPs. The commercial paper market in the U.S.A. is highly organised
and sophisticated and the paper must be sold in denomination of $ 100,000. The issuing
companies tailor both the maturity and the amount of the paper to the needs of the
investors. Thus, the maturities and amounts of directly placed paper cover a wide
range of combinations. Most U.S. papers are exempted from registration under the
U.S. Securities Act, 1933. They have a maturity span of 270 days or less which is
longer than the Indian paper. Under Section 3(a) (3), CPs are sold only to accredited
investors to finance non-current transactions.
The U.S. marketed commercial paper worth $ 323 billion in 1986 accounting for over
90 per cent of the value of issues outstanding with all national CP markets is by far the
largest in the world.
The U.K. CP market is modelled after the U.S. CP market. The Bank of England has
prescribed that the issuer of the sterling CP must have net assets of at least U.K.
Pound 50 million with shares listed in the Stock Exchange in London or be a wholly
owned subsidiary guaranteed by a parent which fulfils this criteria. Further, only a
public limited company can issue CP. The maturity period of CPs range between 7 and
364 days.
In Canada, the second most important and the oldest commercial paper market where
CP was launched in the early fiftees, the CPs are generally issued for a term ranging
from 7 to 364 days. CP issued by a Canadian company is generally secured by the
pledge of assets.