Treasury Management Services

Money market instruments
‡ Treasury bills - On- tap Bills - Ad hoc Bills - Auctioned T- Bills Call / Notice money market Certificates of Deposits Commercial Papers Commercial bills Collateralised Borrowing and Lending Obligation

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Treasury bills
‡ Are short- term instruments issued by the RBI on behalf of the government to tide over short- term liquidity shortfalls ‡ Is used by the Government to raise short- term funds to bridge seasonal or temporary gaps between its receipts and expenditure ‡ Are repaid at par on maturity ‡ interest amount is known as discount

Features of T- Bills
‡ ‡ ‡ ‡ ‡ ‡ Negotiable securities Highly liquid ± shorter tenure, inter- bank repos Absence of default risk Assured yield, low transaction cost Eligible for inclusion in the securities for SLR purposes Not issued in scrip form ± purchases and sales are effected through the Subsidiary General Ledger (SGL) account

Participants in the T- Bill market
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ RBI Banks mutual funds financial institutions primary dealers provident funds Corporate foreign banks foreign institutional investors state governments.

Salient Features of the auction technique
‡ The auction - done only at Reserve Bank of India, Mumbai. ‡ Bids are submitted in terms of price per Rs 100. ‡ Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day. ‡ Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected.

Types of Auctions
Multiple ± price auction or French auction ‡ all bids equal to or above the cut-off price are accepted. ‡ the bidder has to obtain the treasury bills at the price quoted by him. Uniform ± price auction or Dutch auction ‡ all the bids equal to or above the cut-off price are accepted at the cut- off level ‡ the bidder obtains the treasury bills at the cut-off price and not the price quoted by him.

Commercial Paper
‡ Introduced in January 1990 ‡ unsecured short- term promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period ‡ Generally issued at a discount by the leading creditworthy and highly rated corporates to meet their working capital requirement ‡ Corporates, primary dealers, satellite dealers and the All-India Financial Institutions (FIs) are eligible to issue CP

‡ Maturity period ranges from 15 days to less than one year ‡ Usually privately placed with the investors either through merchant bankers or banks ‡ Credit rating ± P2 of CRISIL or equivalent ‡ Issued as unsecured promissory note or in a dematerialized form at a discount ‡ Discount freely determined by market forces

‡ Usually priced between lending rate of scheduled commercial banks and a representative money market rate ‡ Can issue up to 100% of their fund- based working capital limits ‡ Paper attracts stamp duty ‡ No prior approval of RBI ‡ Underwriting the issue not mandatory

Can be issued to: ‡ ‡ ‡ ‡ ‡ ‡ ‡ Individuals Banks Companies Registered Indian Corporate Bodies Unincorporated Bodies Non ± resident Indians ( Non- transferable & non- repatriable) Foreign Institutional Investors ( limit set by SEBI)

Process for issuing a commercial paper
‡ Resolution passed by BOD ± approving and authorising executives ‡ Rated by credit rating agency ‡ Select an Issuing and Paying Agent ( scheduled bank) ‡ Arrange for dealers for placement of the CPs ( merchant banks, brokers and banks) ‡ Every CP issue has to be reported to RBI through IPA

Guidelines for issuance of commercial paper
Eligibility: A company shall be eligible to issue CP provided ± (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s.

Rating requirement: ‡ Obtain credit rating from either CRISIL or ICRA or CARE or the Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) or such other credit rating agency as may be specified by RBI ‡ The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. ‡ Further, the participants shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review.

Maturity : ‡ can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. ‡ If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day.

Denomination: ‡ Minimum of Rs. 5 lakh and multiples thereof

nvestment in CP ‡ CP may be issued to and held by individuals, banking companies, insurance companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). ‡ investment by FIIs would be within the 30 per cent limit set for their investments in debt instruments. ‡ Non resident Indians can invest in CP¶s on a non repatriable, non transferable basis.

ssuing and paying agent (IPA): ‡ Only a scheduled commercial bank ‡ Verifies all original certificates ‡ Holds custody of original of credit support document ‡ After authentication of the entire CP document ± issues an IPA certificate ‡ Reports the issue to RBI

Mode of Issuance ‡ CP can be issued either in the form of a promissory note or in a dematerialised form through any of the depositories approved by and registered with SEBI. ‡ Underwriting is not permitted Preference for Demat: ‡ Issuers and subscribers are encouraged to prefer exclusive reliance on demat form. ‡ Banks, financial institutions and primary dealers are advised to invest only in demat form

Stand ± by facility: ‡ Not obligatory for banks or financial institutions to provide stand- by facility. ‡ Can provide credit enhancement facility within the prudential norms

Trading ‡ Trading is Over-the-counter or on the NSE. ‡ Secondary market transactions do not attract any stamp duty. ‡ There are no brokers in the Commercial Paper market. ‡ Trading is done over the counter with the counterparties involved.

How payment is received and made for CP ‡ The initial investor in CP shall pay the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA ‡ On maturity of CP, when the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA. ‡ when the CP is held in demat form, the holder of the CP will have to get it redeemed through depository and receive payment from the IPA.

Coupon Terms ‡ CP will be issued at a discount to face value as may be determined by the issuer and redeemable at par on maturity. Risks Involved ‡ Liquidity risk : This risk is managed be laying down deal size limits for the dealers, heads of desk and heads of groups. ‡ Credit risk : This risk is managed by laying down counterparty limits based upon the financial strength of the counterparty. ‡ Operational risk : The risk involved in the operations of the issuer.

Certificates of Deposit
‡ Unsecured, negotiable, short- term instruments in bearer form, issued by commercial banks and development financial institutions ‡ are time deposits of specific maturity similar to fixed deposits ‡ CDs are in bearer form and are transferable and tradable ‡ CDs are subject to SLR and CRR requirements ‡ No ceiling on the amount to be raised by banks ‡ Introduced in June 1989

‡ Permit to issue ± scheduled commercial banks ( excluding Regional Rural Banks and Local area banks) and financial institutions ‡ attract stamp duty as applicable to negotiable instruments ‡ Issued to individuals, corporations, companies, trusts, funds, associates, etc. ‡ NRIs can subscribe on a non- repatriable basis ‡ Issued by commercial banks on a discount to face value basis ‡ CDs of development financial institutions can be coupon bearing

‡ Discount rate is market- determined ‡ Coupon rates on CDs issued by banks and financial institutions are published by RBI on fortnightly as well as monthly basis ‡ From June 30, 2002 banks and financial institutions were required to issue CDs only in the dematerialised form ‡ Banks and financial institutions cannot issue loans against CDs ‡ They cannot buy- back their own CDs before maturity

Guidelines for issue of CDs
Eligibility: ‡ can be issued by - scheduled commercial banks excluding Regional Rural Banks and Local Area Banks - select All- India financial institutions permitted by RBI Aggregate amount ‡ Can issue depending on their requirements ‡ A Financial Institution may issue CDs within the overall umbrella limit fixed by RBI ± CD with other instruments (term money, term deposits, commercial papers and inter corporate deposits) should not exceed 100% of its net owned funds as per the latest audited balance sheet

Minimum size of Issue and Denominations: ‡ Minimum amount from a single subscriber should not be less than Rs. 1 lakh and in the multiples of Rs. 1 lakh thereafter Who can subscribe: ‡ Can be issued to individuals, corporations, companies, trusts, funds and associations ‡ NRIs can also subscribe but on a non- repatriable basis. It cannot be endorsed to another NRI in the secondary market

Maturity ‡ Banks ± not less than 7 days and not more than 1 year ‡ FIs ± issue for a period not less than 1 year and not exceeding 3 years from the date of issue Discount/ coupon rate: ‡ May be issued at a discount on face value ‡ Issuing bank/ FI is free to determine the discount/ coupon rate ‡ Banks/ FIs are also allowed to issue CDs on a floating rate basis Reserve requirements: ‡ Banks have to maintain CRR and SLR on the issue price of the CDs

Transferability: ‡ Physical CDs ± freely transferable by endorsement and delivery ‡ Dematted CDs - can be transferred as per the procedure applicable to other demat securities ‡ No lock- in period for the CDs. Loans / Buy- back: ‡ Banks/ FIs cannot grant loans against CDs ‡ They cannot buy- back their own CDs before maturity

Format of CDs: ‡ Banks/ FIs should issue only in the dematerialised form ‡ Investors have the option to seek a certificate in physical form ‡ Issuance of CD will attract stamp duty ‡ No grace period for repayment ‡ If maturity date happens to be a holiday, payment should be made on the immediate preceding working day Security aspect: ‡ Banks should see that certificates are printed on good quality security paper and take precautions against tempering of the document ‡ Signed by two or more authorized signatories

Payment of certificate: ‡ Physical certificate may be presented for payment by the last holder ‡ Banks should make payment only by a crossed cheque ( defect in the chain of endorsements may arise) ‡ Dematted CDs- approach respective depository participants Issue of duplicate certificates: ‡ In case of loss of physical CDs, duplicate may be issued after compliance of the following: a. A notice is required to be given in at least one local newspaper b. Lapse of a reasonable period ( 15 days) from the date of the notice in the newspaper c. Execution of the indemnity bond by the investor to the satisfaction of the issuer of the CD

Commercial bills
‡ short- term, negotiable and self- liquidating instrument with low risk ‡ Enhances liability to make payment on a fixed date when goods are bought on credit ‡ Indian Negotiable Instruments Act, 1881 ± a bill of exchange is a written instrument containing an unconditional order, signed by the maker, directing to pay a certain amount of money only to a particular person, or to the bearer of the instrument ‡ Trade bills when accepted by commercial banks are called commercial bills ‡ Banks can rediscount such bills with financial institutions such as LIC, UTI, GIC, ICICI and IRBI ‡ Maturity period varies from 30 days, 60 days or 90 days, depending on the credit extended in the industry.

Types of commercial bills
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Demand bill Usance bill Clean bill Documentary bill Inland bill Foreign bill Export bill Import bill Hundi Derivative Usance Promissory Note

Call / Notice money market
‡ Is a market for very short- term funds repayable on demand and with a maturity period varying between one day to a fortnight. ‡ When borrowed or lent for a day ± known as call (overnight) money ‡ When borrowed or lent for more than a day and up to 14 days ± known as notice money ‡ No collateral security is required ‡ Highly risky and extremely volatile

‡ The most visible market since day-to-day surplus funds of banks are traded ‡ Accounts for a major part of the total turnover of the money market ‡ The interest rate paid on call loans is known as call rate. Participants in the call money market: ‡ Scheduled and non- scheduled commercial banks ‡ Foreign banks ‡ State, district and urban cooperative banks ‡ Discount and Finance House of India

Factors influencing call money market rate ‡ Liquidity conditions ‡ Reserve requirements prescriptions and stipulations regarding Average Reserve Maintenance ‡ Structural factors ‡ Investment policy of non- bank participants who are the major lenders of funds in the call market ‡ Liquidity changes and gaps in the Foreign Exchange market Measures for curbing high volatility: ‡ Increasing the number of participants ‡ Through repos ‡ Freeing of inter- bank liabilities from reserve requirements

Collateralised Borrowing and Lending Obligation
‡ Clearing Corporation of India Limited launched CBLO on January 20, 2003 to provide liquidity to non- bank entities hit by restrictions on access to the call money market. ‡ The minimum order lot for auction market is Rs. 50 lakh and in multiples of Rs. 5 lakh thereof. ‡ The minimum order lot for normal market is fixed at Rs. 5 lakh and in multiples of Rs. 5 lakh thereof.

Gilt edged securities markets
‡ The Indian capital market is broadly divided into the gilt-edged market and the industrial securities market. ‡ The gilt-edged market refers to the market for Government and semi-government securities, backed by the RBI. ‡ Government securities are tradable debt instruments issued by the Government for meeting its financial requirements.

‡ The term gilt-edged means 'of the best quality'. This is because the Government securities do not suffer from risk of default and are highly liquid (as they can be easily sold in the market at their current price). ‡ The open market operations of the RBI are also conducted in such securities.

Features of Government securities
‡ Issued at face value ‡ No default risk as the securities carry sovereign guarantee ‡ Ample liquidity as the investor can sell the securities in the secondary market ‡ Interest payment on half yearly basis on face value ‡ No tax deducted at source ‡ Can be held in D ± mat form

‡ Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change ‡ Redeemed at face value on maturity ‡ Maturity ranges from 2- 30 years

Debt instruments
Type Central government securities Typical features long term bonds issued by RBI on behalf of GOI. Coupon payment are semi annually long term bonds issued by RBI on behalf of state govt. Coupon payment are semi annually Long term bonds issued by govt agencies and guaranteed by central or state govt. Coupon payment are semi annually. long term bonds issued by PSU. 51% govt equity stake Medium term bonds issued by private companies. Coupon payment are semi annually

State government securities

Government guaranteed Bonds

Public sector units Corporate

Minimum subscription
Government Securities will be issued for a minimum amount of Rs.10,000 (Face Value) and in multiples of Rs.10,000 thereafter. Payment for the Government Securities shall be made by the applicants/investors on such dates as mentioned in the Specific Notification, by means of cash or cheque drawn on Reserve Bank of India, Mumbai or any specified office of Reserve Bank of India or Banker's pay order or by authority to debit their current account with Reserve Bank of India or by Electronic Fund Transfer in a secured environment or by any other means as specified by Reserve Bank of India.

Auctions for price government securities are normally multiple± price auctions either yield based or price based. Yield Based: Price Based:

Procedure for application
Offers for purchase of Government Securities shall be submitted by Interested persons in the form of application as specified by RBI from time to time. FIIs, NRIs and Overseas Corporate bodies should submit their applications through the designated banks which have been authorized by the Reserve Bank of India to act as a banker to FIIs or authorized to deal in Foreign Exchange as the case may be. Applications duly filled in should be submitted to the office of RBI or any other institution notified for the purpose, before the close of banking hours on the specified date/s

Payment of interest

Interest on Government Securities will be paid at the Public Debt Offices of the RBI at Ahmedabad, Bangalore, Bhubaneswar, Kolkata, Hyderabad, Jaipur, Kanpur, Mumbai, etc or any other Office of RBI notified for this purpose from time to time, or at branches of State Bank of India and Associate banks conducting Government business. Interest on securities held in Bond Ledger Account with any of the Offices of RBI /Agency as specified by RBI in this behalf, will be paid at such office/Agency


‡ The NSE has begun trading in government bonds. ‡ The transaction in Government Security Market which are recorded by the RBI in Special General Ledger account are being published now to attain transparency in the working of the market. ‡ FII in the category of 100% debt funds have been permitted from 30 January 1997 to invest in central and state government securities in both primary and Secondary market


The RBI issues government securities as a way of borrowing money to be used by the government. There are many types of government securities issued by RBI: ‡ ‡ ‡ ‡ ‡ Dated securities with a fixed maturity date Zero coupon bonds Partly paid stock Floating rate bonds Treasury Bills

Dated securities

These are generally fixed maturity and fixed coupon securities usually carrying semi- annual coupon. These are called dated securities because these are identified by their date of maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Government security maturing in 2012, which carries a coupon of 11.03%payable half yearly.

‡ They are issued at face value. ‡ Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. ‡ The tenor of the security is also fixed. ‡ Interest /Coupon payment is made on a half yearly basis on its face value. ‡ The security is redeemed atpar (face value) on its maturity date

Zero coupon bonds
These are issued at discount to face value and redeemed at par. These were issued first on January 19, 1994 . They are issued at a discount to the face value. The tenor of the security is fixed. The securities do not carry any coupon or interest rate. The difference between the issueprice (discounted price) and face value is the return on this security. The security is redeemed atpar (face value) on its maturity date

Partly Paid Stock
It is a stock wherepayment ofprincipal amount is made in installments over a given time frame. Itmeets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately. The first issue of such stock of eight year maturity was made on November 15, 1994 for Rs. 2000 crore

They are issued at face value, but this amount ispaid in installments over a specifiedperiod. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Couponpayment ismade on a half yearly basis on its face value. The security is redeemed atpar (face value) on its maturity date.

Floating Rate Bonds
These are bonds with variable interest rate with a fixed percentage over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it. Floating rate bonds of four year maturity were first issued on September 29, 1995, followed by another issue on December 5, 1995. Recently RBI issued a floating rate bond, the coupon of which is benchmarked against average yield on 364 Days Treasury Bills for last six months. The coupon is reset every six months

‡ They are issued at face value. ‡ Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc. ‡ Though the benchmark does not change, the rate of Interest may vary according to the change in the benchmark rate till redemption of the security. ‡ The tenor of the security is also fixed. ‡ Interest /Coupon payment is made on a half yearly basis on its face value. ‡ The security is redeemed at par (face value) on its maturity date

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