Commercial Paper: Meaning, Features, And Regulation


By Boluwatife Solomon Oshikoya


There are two methods of financing businesses. The most common method of financing businesses is through debt financing. Debt financing allows a company to issue long-term or short-term securities with repayment and Interest. In Nigeria, most companies employ the issuance of debt securities for a plethora of reasons. One of these reasons is raising working capital. It has become a norm for companies to issue commercial papers when raising working capital.


This type of short-term debt product is known as commercial paper. It is issued by businesses and financial institutions. It is typically regarded as a low-risk investment and is used to raise money for working capital and other urgent needs. Corporate entities use commercial paper (“CP”), an unsecured short-term debt instrument, to finance working capital needs and settle short-term debts. Simply put, it is an unconditional promise from the issuer to pay a specific amount on the investor’s behalf at a later time

For instance, an engineering firm needs money to purchase additional equipment to carry out its object clause. They only require it temporarily and don’t want to commit to a long-term loan. They can create something known as “commercial paper” rather than obtaining a loan from a bank. This is similar to a large cheque, but written by the company.

They offer the commercial paper to investors, wealthy people, or anyone else willing to pay, promising to recoup the loan. By purchasing commercial paper, the investing parties can choose whether or not to provide the engineering firm with the funding. Like a cheque, the business can use the money it receives from commercial paper to purchase additional equipment.

The maturity of commercial paper in Nigeria ranges from 15 days at the minimum to 270 days at the most. Usually, the debt is issued at a discount reflecting market interest rates.


Just has every security has its peculiarities so do commercial papers. Some of the peculiarities inckude;

  1. It is short-term security. It matures within 15 days -270 days of issuance of the commercial paper.
  2. All commercial papers must be registered with a licensed security depository in Nigeria.
  3. Commercial papers can be issued to and held by inlicenseds and corporate entities.
  4. There are numerous parties to a commercial paper transaction.They include:
  1. Issuer: this is the party seeking to raise capital through the commercial paper
  2. Issuing and placing agent: this is an institution charged with the sponsoring and registration of commercial papers on the security exchange platforms. A security exchange commission license is mandatory to ply this business route.
  3. Collecting and paying agent: this is usually a bank that the issuer appoints to collect and pay the investors at the time of maturity. Banks that are registered with the Security Exchange Commission can double as issuing and placing agents and collecting and paying agents.
  4. Credit rating agencies: these are companies that help rate the creditworthiness of the issuer by ascertaining their financial strength, prospect, and track records.
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E.Guarantor: commercial papers can be guaranteed or unguaranteed. For the guaranteed commercial papers; banks, and corporate entities can serve as guarantors.


The issuance of securities is generally regulated by the Security and  Exchange Commission as stipulated by the InveststipulateSecurities Act. As noted above, commercial papers issued by a company are securities and they are therefore regulated under the Investment and securities act by the Security exchange commission. However, it is important to note that the Investment and Securities Act stipulates in section 67 that no individuals shall sell or dispose of securities to the public except a public company or a statutory body or bank. Commercial papers fall outside the scope of this provision as they are over-the-counter securities which makes it a private placement of securities.

According to the Central Bank of Nigeria’s (CBN) circular to all deposit money banks and discount houses dated July 12, 2016, deposit money banks and discount houses are only permitted to transact in commercial papers (CPs) that are registered, quoted, or intended for a quotation on authorized securities exchanges, whether acting as an issuer, guarantor, or issuing, placing, paying and collecting agent (IPCA), collecting and paying agent. The issuance of commercial paper is currently administered by the following:

  1. CBN Guidelines on the Issuance and Treatment of Bankers Acceptances and commercial papers dated 18 November 2009 and re-issued on 11 September 2019(CBN Guidelines)
  2. FMDQ Commercial Paper Registrations and Quotation Rukes August 2019(FMDQ Rules)

An over-the-counter marketplace for trading securities can be found in Nigeria at FMDQ OTC Securities Exchange. On the FMDQ platform, commercial paper issuance is a private placement between dealers and buyers rather than a public issue. It is a private conversation and has no impact on the general public. Neither the SEC nor the ISA has any authority over private placements. So, a private company is permitted to issue commercial papers on the FMDQ platform.


According to the CBN Guidelines, a commercial paper issuer must meet the following criteria to be considered a financing vehicle:

  1. Possess three (three) years’ worth of audited financial statements, the most recent of which should not be older than 18 (eighteen) months from the end of the previous fiscal year; and
  2. possess a credit line that has been approved by a Nigerian bank acting as an issuing and paying agent, or IPCA, in which case the bank guarantees the issue. This is appropriately included in CBN Guidelines paragraph 3.0(b)(i).
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Paragraph 5.1 of the CBN Guidelines stipulates that a rating agency registered in Nigeria or an international rating agency that the CBN accepts must rate the issuer of a CP or the specific issue itself. When submitting declarations and data to a licensed securities depository, the issuer had to have obtained an indicative rating.

 Paragraph 7.2 of the CBN Guidelines outlines CP shall be issued at the primary market for a minimum value of N100 million and in multiples of N50 million, thereafter.

Finally, Paragraph 8.0 of the CBN Guidelines stipulates that the total amount of guaranteed commercial papers issued by a bank and extended to a single obligor shall not exceed 30% of the bank’s shareholders’ funds, unaffected by losses, and shall not exceed 150% of such funds.

Commercial papers may be issued directly or through an SPV, according to paragraph 4.1 of the FMDQ Rules. However, when commercial papers are issued through an SPV, the promoter or sponsor of the SPV will need to meet the FMDQ Rules’ eligibility requirements.

Additional requirements are also prescribed for a commercial paper issuer or promoter, among other things, in paragraph 4 of the FMDQ Rules. The additional requirements are:

  1. it must be duly incorporated under Applicable Law;18
  2. it must have been incorporated for not less than 5 years and must have been in operation for not less than 3 years before the date of application for registration of the program;
  3. it must have shareholders’ funds (unimpaired by losses) not less than NGN500 million as evidenced by its latest audited accounts, not being later than 12 (twelve) months from the date of submission of the application to register the program, and shall be maintained at or above that level for the entire period that the commercial paper remains on the FMDQ Exchange; and
  4. where it does not meet the requirements in paragraphs (b) – (c) above, the prospective commercial paper issuance must be backed by a guarantor or a credit enhancement provider that meets those requirements and such other requirements as may be prescribed by FMDQ from time to time;


According to the CBN Guidelines, the necessary documentation for the issuance of a commercial paper must include:

  1. The commercial paper raising mandate;
  2. The issuer and promoter’s board resolution to borrow;
  3. The Agency Agreement;
  4. The commercial paper Note;
  5. Bank guarantee, where applicable;
  6. Investment instruction/ investment mandate;
  7. Investment advice;
  8. Custodial agreement;
  9. Information memorandum on the issuer or promoter;
  10. The latest credit report from the rating agency; and
  11. A backstop loan request for guaranteed commercial papers.
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When registering a commercial paper program on its platform, the FMDQ Rules require the issuer and promoter to make the following documentation and disclosures.

  1. FMDQ Application Form;
  2. Memorandum and articles of association or other relevant constitutional documents;
  3. Certificate of incorporation or its equivalent;
  4. Particulars of directors and shareholders;
  5. 3 (three) years of audited financial statements, with the most recent not exceeding 12 (twelve) months from the date of submission of the application for registration;
  6. Most recent unaudited interim reports and accounts;
  7. External auditor’s comfort letter on the issuer/ promoter;
  8. Corporate profile of the issuer/ promoter;
  9. Documentation providing information and details of any charges/ encumbrances on cash flows;
  10. A comprehensive schedule of the current debt profile;
  11. Details of any litigations/ claims certified by the external solicitor;
  12. Evidence that the commercial paper issuance does not exceed the limit of its borrowing powers;
  13. For non-bank corporate issuers or promoters, a bank reference on the issuer or promoter, and a credit information report on the issuer or promoter obtained by a CBN licensed credit bureau; and
  14. Evidence of payment of the application fee.


Over the years, most companies have opted to raise capital by issuing CPs due to its perception as a quicker and more efficient method of business financing. Since CPs are also unsecured, the company is not required to have any collateral and no charge will be placed on its assets. To encourage investors to purchase the security, it is crucial to remember that the issuer of a CP will demand an investment grade from a rating agency. Investments in CPs are popular among investors because they offer quick and impressive returns. Most times, investors who can’t commit money for a long time can purchase CPs at a discount and see returns in under 270 days.

The CBN and FMDQ have set the minimum CP issue value at N100 million, so not all businesses, especially MSMEs, can benefit from this instrument. CPs have been established as a less expensive and more convenient tool for short-term corporate financing. MSMEs also frequently receive below-average ratings and assessments from credit rating agencies because they fall short of the requirements for approved credit ratings. Due to these factors, MSMEs in Nigeria are unlikely to choose CPs as their method of securing capital.

Boluwatife  is a law graduate from Lagos State University with keen interest in dispute resolution, commercial and business transactions. Phone number: 09034397747




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