Read the case study and answer question:

Radiant limited is a well known Pharmaceutical company. The company is planning to expand and modernize its business operations for which it requires 500 crores. Akshat, the finance manager of the company, advised to issue Equity Shares in the Capital market.

The Board finally decided to issue 300 crores through issue of Shares to general public electronically in the primary market. For the remaining 200 crores, the company will give a privilege to existing shareholders to subscribe to new shares as per the conditions of Radiant limited.

In order to meet floatation cost, for raising funds in the capital market the company decided to issue a money market instrument. Further the company will get the shares listed in the secondary market. Listing with stock exchange will facilitate buying and selling of securities and provide safety of investment to the investors.

Which money market instrument will be issued by Radiant limited for meeting floatation cost?

Commercial paper

The correct answer is Option (4) → Commercial paper.

Commercial paper will be issued by Radiant limited for meeting floatation cost.

Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong. It is sold at a discount and redeemed at par. The original purpose of commercial paper was to provide short-terms funds for seasonal and working capital needs. For example companies use this instrument for purposes such as bridge financing.
Example: Suppose a company needs long-term finance to buy some machinery. In order to raise the long term funds in the capital market the company will have to incur floatation costs (costs associated with floating of an issue are brokerage, commission, printing of applications and advertising, etc.). Funds raised through commercial paper are used to meet the floatation costs. This is known as Bridge Financing.

OTHER OPTIONS

• Call Money: Call money is short-term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio.

• Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilise a large amount of money for short periods.

• Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds.