Commercial paper

Short-term unsecured money-market paper issued at a discount, rated on the A1 to A4 scale, with a tenor of seven days to one year.

Glossary term Last reviewed 2 min read

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An unsecured short-term money-market instrument, issued in the form of a promissory note at a discount to face value, used by companies and financial institutions to fund short-term working capital needs.

Abbreviated CP.

The mechanics

  • Tenor runs from a minimum of seven days to a maximum of one year from the date of issue.
  • Issued at a discount to face value and redeemed at par; the discount is the return. CP does not pay a coupon.
  • Denomination is a minimum of ₹5 lakh, in multiples of ₹5 lakh thereafter.
  • Held in dematerialised form and traded over the counter, with reporting to the trade repository.
  • Unsecured. There is no charge on assets behind it.

Issuance is governed by the RBI’s Commercial Paper and Non-Convertible Debentures (of original or initial maturity upto one year) Directions, 2024, effective 1 April 2024, which also set out who may issue — companies, NBFCs, InvITs and REITs, all-India financial institutions, and bodies corporate, co-operative societies and LLPs meeting a minimum net worth of ₹100 crore — along with the eligibility conditions and the reporting requirements.

The rating

CP must carry a credit rating from a SEBI-registered credit rating agency, and the RBI’s Directions set the minimum at A3 on the short-term scale.

That scale is separate from the long-term scale. It runs A1, A2, A3, A4, then D, with a + modifier available on each of A1 to A4. A1+ is the strongest grade and is where most active CP issuance sits, because money-market investors are generally mandated at the top of the scale.

Short-term ratings do not carry a rating outlook — the instrument matures inside the horizon an outlook would describe.

Why it matters when reading a rating document

A borrower will frequently hold a long-term rating on its bank facilities and a short-term rating covering CP and short-term facilities at the same time. These are separate ratings on separate objects, and there is no single company rating that subsumes them.

CP also carries a specific refinancing risk that shows up in the liquidity paragraph of a rationale: it is short paper that generally has to be rolled, so the agency will usually assess the availability of backup bank lines against the outstanding CP programme. A downgrade below the market’s tolerance can close the roll abruptly, which is why short-term rating movement is watched more closely than its narrow scale suggests.

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