Commercial Paper
Commercial Paper (CP) is a short-term, unsecured money market instrument issued by creditworthy corporates, primary dealers, and all-India financial institutions to raise funds for working capital and short-term financing needs. In India, CP is issued in denominations of Rs 5 lakh and multiples thereof, with maturities ranging from 7 days to 1 year.
Commercial Paper is a key instrument in India's money market, offering well-rated companies an alternative to short-term bank borrowings for funding working capital. Because CP is unsecured — backed only by the issuer's creditworthiness and not any specific collateral — it is accessible only to companies with a minimum credit rating of P-2 or A-2 (or equivalent) from a SEBI-registered credit rating agency. The RBI regulates CP issuances under its guidelines on money market instruments.
From the issuer's perspective, CP often represents cheaper funding than a cash credit facility from a bank, particularly when market conditions are favourable and high-quality issuers are perceived as very low risk. Large corporates in India — Tata Group companies, Reliance Industries, and public sector enterprises — regularly accessed the CP market during periods of tight credit conditions to fund their short-term liquidity needs at rates competitive with or below bank lending rates. The CP market also gave non-banking financial companies (NBFCs) access to short-term market funding at rates linked to prevailing money market conditions.
For investors, CP is primarily a wholesale money market instrument. Mutual funds — especially liquid funds and ultra-short-term funds — are major CP investors, as these instruments offer better yields than treasury bills with comparable short maturities for AAA-rated issuers. Individual retail investors rarely access CP directly due to the high minimum denomination of Rs 5 lakh. The credit quality of CP in a mutual fund's portfolio is a key due diligence parameter — post the 2018 NBFC credit crisis, fund houses became significantly more cautious about CP issued by lower-rated or concentrated-exposure NBFCs.
One structural risk with CP is rollover risk. An issuer that relies heavily on CP for working capital needs must refinance its CP at maturity with fresh issuances. During periods of market stress — like the aftermath of the IL&FS default — investors became reluctant to roll over CP for NBFC issuers, forcing several NBFCs into acute liquidity crunches. This maturity mismatch, where long-term assets were funded with short-term CP, was identified as a systemic vulnerability and led to tighter RBI regulations on NBFC asset-liability management.