Understanding Commercial Paper

Commercial paper is an important short-term debt instrument used by companies to raise funds. Let's examine the given statements about commercial paper to determine their accuracy.

Analyzing Statements on Commercial Paper

We will analyze each statement provided in the question about commercial paper:

• Statement I: It is unsecured money market instrument issued in the form of a promissory note.
• Statement II: It was introduced in India in 1990.
• Statement III: They are issued by the Reserve Bank of India.

Detailed Analysis of Each Statement

Let's break down each statement:

Statement I: It is unsecured money market instrument issued in the form of a promissory note.

Commercial paper is indeed a short-term, unsecured debt instrument. It is part of the money market, which deals with short-term funds. Companies with high credit ratings issue commercial paper to meet their short-term funding needs, such as working capital requirements. It is typically issued in the form of a promissory note, which is a written promise to pay a specific amount of money by a specific date. Therefore, this statement is correct.

Statement II: It was introduced in India in 1990.

Commercial paper was introduced in India in 1990 as part of the financial sector reforms aimed at developing the money market and providing alternative funding sources for corporates. This introduction helped expand the instruments available in the Indian money market. Therefore, this statement is correct.

Statement III: They are issued by the Reserve Bank of India.

Commercial paper is issued by eligible participants in the financial market, primarily highly-rated corporate bodies, Primary Dealers (PDs), and All-India Financial Institutions (AIFIs). These entities issue CP to raise short-term funds directly from investors. The Reserve Bank of India (RBI) regulates the issuance of commercial paper and the overall money market but does not itself issue commercial paper. The RBI issues instruments like Treasury Bills and bonds on behalf of the government, but not commercial paper. Therefore, this statement is incorrect.

Conclusion on the Statements

Based on the analysis:

• Statement I is correct.
• Statement II is correct.
• Statement III is incorrect.

The statements that are correct are I and II.

Revision Table: Commercial Paper Facts

Additional Information: Money Market Instruments

The money market is where financial instruments with high liquidity and short maturities (generally less than one year) are traded. Besides commercial paper, other key money market instruments include:

• Treasury Bills (T-Bills): Short-term debt instruments issued by the government.
• Certificates of Deposit (CDs): Time deposits issued by banks and financial institutions.
• Call Money/Notice Money: Short-term lending/borrowing between banks.
• Repo Rate / Reverse Repo Rate: Instruments used by the RBI for liquidity management.

Understanding these instruments is crucial for comprehending the functioning of the short-term financial market.