Page 53 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 2. The company should have been sanctioned as a fund based limit for bank(s) finance and/
or the All India Financial Institutions.
3. Company can issue CPs amounting to 75% of the permitted bank (working capital limit)
credit.
4. Company's CPs receives a minimum rating of (P2 from CRISIL, A-2 form ICRA, etc.).
5. The minimum size of each CP is 5 lakhs or multiples thereof.

6. The size of any single issue should not be less than 1 crore.
7. The CP is in the form of usance promissory note negotiable by endorsement and delivery.

Advantages of CP

1. It is an alternative source of finance and proves to be helpful during the period of tight
bank credit.

2. It is a cheaper source of short-term finance when compared to the bank credit.
Disadvantage of CP

It is available only for large and financially sound companies.

!
Caution Commercial Paper (CP) cannot be redeemed before the maturity date.

3.4.5 Inter-corporate Deposits (ICDs)

A deposit made by one firm with another firm is known as Inter-corporate Deposits (ICDs).
Generally, these deposits are usually made for a period up to six months. Such deposits may be
of three types:

1. Call Deposits: Deposits are expected to be payable on call. In other words, whenever its
repayment is demanded on just one days notice. But, in actual practice, the lender has to
wait for at least 2 or 3 days to get back the amount. Inter corporate deposits generally have
12 per cent interest per annum.
2. Three Months Deposits: These deposits are more popular among companies for investing
the surplus funds. The borrower takes this type of deposits for tiding over a short-term
cash inadequacy. The interest rate on these types of deposits is around 14 per cent per
annum.
3. Six Months Deposits: Generally, the inter-corporate deposits are made for a maximum
period of six months. These types of deposits are usually given to 'A' category borrowers
only and they carry an interest rate of around 16% per annum.

Features of ICDs

1. There are no legal regulations, which make an ICD transaction very convenient.
2. Inter-corporate deposits are given and taken in secrecy.

3. Inter-corporate deposits are given based on borrower's financial sound, but in practice
lender lends money based on personal contacts.

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