Commercial Paper Market
The Commercial Paper market allows highly rated corporates, NBFCs, and other eligible issuers to raise short-term funds directly from investors at market-determined rates, bypassing banks and providing an important source of working capital and NBFC funding.
Commercial Paper (CP) is a short-term, unsecured, negotiable money market instrument issued by corporates, primary dealers, and non-banking financial companies (NBFCs) to meet their short-term funding requirements. Introduced in India in January 1990, CPs are governed by RBI's master direction on CP and are issued in denominations of Rs 5 lakh or multiples thereof, with maturities ranging from seven days to one year.
Eligibility for CP issuance requires a minimum tangible net worth of Rs 4 crore, a sanctioned working capital limit from banks or financial institutions, and a minimum credit rating of A3 (or equivalent) from a SEBI-registered credit rating agency. The CP must be rated at least 30 days before issuance, and the rating must be current at the time of issuance.
The CP market serves distinct roles for different issuer categories. For manufacturing and services corporates, CPs provide flexible, often lower-cost working capital funding relative to bank fund-based limits during seasons of elevated receivables. For NBFCs, CPs represent a critical wholesale funding channel, particularly for AAA-rated large NBFCs with strong asset liability management. NBFC CP issuance became a systemic concern post the IL&FS crisis of September 2018: the sudden inability of IL&FS entities to roll over their CP obligations triggered a contagion event that highlighted concentration risk in the NBFC funding model.
Investors in CPs include liquid mutual funds, money market funds, corporate treasury desks, and provident funds. Liquid and money market fund portfolios are subject to SEBI circular restrictions on maximum CP concentration per issuer, maturity caps (liquid funds cannot hold instruments beyond 91 days), and valuation methodologies that mark to market beyond 30 days.
RBI publishes CP outstanding data monthly, segmented by issuer category, rating category, and maturity profile. Trends in NBFC CP outstanding are watched as a real-time indicator of NBFC sector funding stress or ease.