Yubi – Commercial Papers
Benefits of Commercial Papers
Benefits to Issuers
Fulfill short-term working capital needs: CPs provide an economical option to companies to fund their short-term loan needs for periods between seven days to one year. Companies can receive more funding at lower interest rates through commercial papers than loans from financial institutions.
Flexible: The terms of the CP, such as maturity, and coupon rate, can be customized as per the requirement of the issuing company. Hence, CPs are more flexible than other borrowing options such as loans.
Tax friendly: Interest on CPs is considered part of the expense to a company. So, it helps to reduce the firm’s tax liability.
Benefits to Investors
Diversification: If you have parked money in traditional debt instruments, you may invest in CPs to build a diversified short-term portfolio to fulfill short-term goals.
Lower risk than longer-term papers: CPs are short-term instruments, so they are less likely to be affected by interest rate changes than longer-term papers like bonds.
Regulated: The Reserve Bank of India (RBI) regulates CPs. So, the issuer must follow the RBI’s rules and regulations while issuing commercial papers.
Flexibility to invest across different maturities: As the maturity of a commercial paper can be anywhere between seven days to one year, investors have the option to invest in CPs that mature at different periods.
How do Commercial Papers Work?
Companies use CPs to get short-term loans for seven days to one year. The company issuing the CP agrees upon an interest rate/coupon rate basis of the requirement and credit rating of the company/issue. Investors can purchase the securities in the primary market either directly from the issuer or through distribution networks, including platforms such as Yubi, during the launch of the issue. Investors can also buy CPs in the secondary market through platforms such as Yubi before the tenure of the instrument expires.
The interest rate of the CP is linked to the creditworthiness of the underlying issuer. So, a company with a good credit rating can raise money at a lower interest rate than a company with a lower credit rating by issuing commercial papers.
Companies can issue CPs in two varieties. The first is at face value with interest/coupon. The other more popular version is when the paper’s face value is discounted, and the discount is the interest received by the investor. Here’s an example of the second instance of discounted CP. Issuers could sell a CP with a face value of Rs 1,000 and maturity of one year at a discount rate of Rs 918 to give the investor a coupon of 9% at the time of maturity.
Individuals, non-resident Indian (NRIs), companies, banks, and foreign portfolio investors (FPIs) usually invest in CPs.
Why Is It For You?
Yubi bond platform YubiInvest provides trade and investment options across various debt instruments, including CPs. The platform is a one-stop destination to trade and invest in CPs with details regarding history, yields offered, and the capability to place bids for the underlying securities.
In addition to investing and transacting, the platform also provides portfolio management services which include comprehensive risk management tracking of the underlying securities. The underlying engine behind the platform provides a single source for all the factual and trend data of the securities traded, which includes independent data validation, on-ground verification, peer-benchmarking, forensic check on financials and portfolio and sectoral insights.
Plutus provides unparalleled efficiencies, including complete digitization, a neat repository, and actionable tasks for all sales counterparties within minutes. It also provides efficient credit, price discovery, and liquidity in the secondary debt market.
What is the coupon rate?
The coupon rate is the interest offered by the CP. This coupon is usually provided in the form of a discount on the instrument’s face value.
What is the maturity date?
The maturity date is the period by when the CP will mature. At the time of maturity, the CP issuer returns the capital invested in buying the securities.
Who regulates CP in India?
The Reserve Bank of India (RBI) is the regulatory authority for the country’s money markets, and commercial paper is a money market instrument.
What is the credit rating of CP?
Credit ratings are provided by independent credit rating agencies in the country and denote the creditworthiness of the underlying issuer. The ratings impact the coupon/interest rate. For instance, a company issuing CP with a low credit rating would require to offer a higher coupon rate to attract investors than a higher rated CP.
What is a term sheet?
A term sheet is a document associated with any fixed-income instrument, including CPs, which provides all the terms and conditions pertaining to the issuance. This will include terms regarding coupon rate, maturity date, and credit rating, among other details. A term sheet thus provides all the details required of the CP to make a qualified investment decision.
Who can invest in CPs?
Individuals, non-resident Indian (NRIs), companies, banks, and foreign portfolio investors (FPIs) may invest in CPs.