'Mission Coach Ltd.' is a large and creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries 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 a huge flotation cost. To meet the expenses of the flotation cost, the company decides to tap the money market.
(a) Name and explain the money-market instrument the company can use for the above purpose.
(b) What is the duration for which the company can get funds through this instrument?
(c) State any other purpose for which this instrument can be used.

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Solution

(a) The money market instrument that can be used by Mission Coach Ltd. is 'commercial paper'. Commercial paper is an unsecured short-term money market instrument. It is a negotiable and transferable promissory note with a maturity period ranging from a minimum of 15 days to a maximum of 1 year. They were introduced in India in 1990. Commercial papers are mainly issued by large and credit-worthy companies to raise short-term funds.

(b) Commercial papers provide funds and have a maturity period ranging from a minimum of 15 days to a maximum of 1 year.

(c) Another purpose for the issuance of commercial paper is to finance the seasonal and working capital needs of an organization.

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"Mission Coach" is a large creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries 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 expense of floatation cost, the company decides to tap the money market.

(i) Name and explain the money market instrument the company can use for the above purpose.

(ii) What is the duration for which the company can get funds through the instrument?

(iii) State any other purpose for which this instrument can be used.

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