'Ganesh Steel Ltd.' is a large and credit-worthy company manufacturing steel for the Indian
market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the company decides to tap the money-market.
1) Name and explain the money-market instrument the company can use for the above purpose.
2) What is the duration for which the company can get funds through this instrument?
3) State any other purpose for which this instrument can be used.
Solution
1) Commercial paper can be used by Ganesh Steel Ltd. It is a promissory note which is negotiable and transferable. It is primarily used by large and credit worthy companies for bridge financing. In other words, it is used as an alternative to borrowings from bank and capital market. On commercial paper, the companies pay an interest rate lower than the market rates.
2) Commercial papers have a maturity period ranging from a minimum of 15 days to a maximum of 1 year.
3). Commercial paper can be used to finance the seasonal and working capital requirements of enterprises.
