SHIFA A RASHEED

A variety of money market instruments are available in a well

developed money market in India, till 1986 only few instruments
are available. They are;
• T-Bills
• Money at call
• Commercial bills
• Promissory notes
In addition the following new instruments are available;
• Commercial Papers
• Certificate of Deposits
• Inter-Bank Participation Certificate and
• Repo Instruments
• Money market instrument, issued by large banks and
corporations to garner money from the market to meet short
term needs in the form of promissory notes.
• CP can be issued for maturity between a minimum of 7days
and a maximum of up to 1 year from the date of issue. So it
doesn't need to be registered with SEBI
• Sold at a discount from face value, and carries high interest
repayment rates than bonds.
• It enable short term funding requirements/fulfill current
requirements/ working capital needs.
• Commercial paper is rated prime, desirable, or satisfactory,
depending on the credit standing of the issuing company.
• All private sector company, public sector units, Financial
institutions(FIs) non banking company etc. are eligible to issue
CP.

Who can invest in CP

• Individuals, banks, other corporate bodies, and unincorporated
bodies, NRIs and Foreign Institutional Investors(FIIs).
• Short term money market instrument.
• Issued at discount to face value basis but it can also be issued in
interest bearing form.
• Negotiable by endorsement and delivery and flexible as well
as liquid instruments.
• Unsecured instruments, not backed by any asset of the company.
• Sold either directly by issuing company to the investors or
through banks or merchant banks.
• It helps highly rated company to easily raise fund.
Advantages Disadvantages
• Simplicity • Regulation
• Flexibility • Availability
• High return • Reduce the availability of
• Movement of funds credit from banks
• Diversification
• Easy to raise short term fund
• Mainly 2 types;
• Direct paper: it is issued mainly by large finance companies and
bank holding companies directly to the investors.
• Dealer paper: it is issued by security dealers on behalf of their
corporate customers(non- financial companies and smaller
financial companies)
• On the recommendations of Vaghul Working Group, detailed
guidelines were issued by RBI in December 1989, through non-
banking companies direction,1989 and finally January 1 1990
CP was introduced. In India.
• It was aimed at proving highly rated corporates with a
diversified short term borrowings and provide an additional
instruments to investors.
• Rate of interest is lesser as compared to the banks.
A company can issue commercial paper only if it has;
• A tangible net worth not less than Rs.10crore as per the latest
balance sheet;
• Minimum current ratio of 1.33:1;
• A fund based working capital limit of Rs.25crore or more;
• A debt servicing ratio closer to 2;
• The company is listed on stock exchange;
• Subject to CAS discipline;
• Classified under health code no 1 by the finance banks;
• The issuing company would need to obtain p1 from CRISIL
CP shall be issued in multiples of Rs.25lakhs but the minimum
amount to be invested by a single investor shall be Rs.1crore.
The CP shall be issued for a minimum maturity period of 7 days
and maximum of 6 month from the date of issue their will be no
grace period on maturity.
The aggregate amount shall not exceed 20 percent of the
issuer fund based
CP issued in the form of usance promissory note negotiable by
endorsement and delivery. The rate of discount could be freely
determined by the issuing company. The issuing company has to
bear all floatation cost, including stamp duty, dealers fees, and
credit rating agency fee.
The issue of commercial paper cannot be underwritten or
coopted in any manner. However, commercial banks can provide
standby facility for redemption of the paper on the maturity
date.
Investment in CP can be made by any person or banks or
corporate bodies registered or incorporated in India and un
incorporated bodies too. NRIs can in
The companies issuing CP would be requested to ensure that the
relevant provisions of the various statues such as Companies
Act,1956 the IT Act, 1961 and the Negotiable Instrument
Act,1981 are complied with.
• Short term deposits instruments issued by banks and FIs to raise
large some of money.
• Issued in the form of usance promissory notes.
• Negotiable and are in marketable from bearing specific face
value and maturity.
• Transferable.
• Negotiable certificate of deposits.
 ISSUERS  SUBSCRIBERS
• Commercial banks & • Individuals
• Financial institutions • Corporations
• Trusts
• Associations &
• NRIs
• All scheduled commercial banks except regional rural banks are co
operative banks are allowed to issue CDs
• Freely transferable by endorsement and deliver
• Highly liquid and marketable
• Issued at a discount to face value
• Maturity- 7 day and maximum 1year(in case of FIs 1-3)
• Pre mature cancellation not allowed
• No lock in period
• Banks have to maintain appropriate reserves i.e.; CRR, SLR on the
issue of CDs
• Minimum size of the issue of single depositor is 1lakh and additional
can be multiples of 1 lakh
• Duplicate CDs can be issued after giving public notice & obtaining
indemnity
• Buy back and loan against collateral of CD is not permitted
1. Stamp duty: CDs subject to stamp duty, which is 0.5% and 1%.
P.a. which makes CDs less attractive, practical problem of non
availability of stamps of required denominates, time involved
in getting the CDs stamped due to procedural delay at the
stamp office.
2. Development of secondary market: Need to develop an active
and liquid secondary market. The Discount and Finance House
of India(DFHI) has been designated to trade CDs in the
secondary market. Publish daily discount rate in the press and
individually approach the issuing banks.
3. Lock in period: the minimum lock in period is 45 days. Removal
of this stipulation may go a long way in popularizing CDs
• Fixed and predictable returns.
• High rate of returns
• Freely transferable
• Easy selling and transferable in secondary market
• From the point of view of banks, CDs are fixed term deposit
• An ideal instrument for banks for short term surplus funds to
invest at attractive rate of returns.
• Wide selection
DISADVANTAGES
• Limited liquidity
• Inflation risk
• The minimum size of an issue to single investor being 25lakh above
25lakh will be multiples of 5lakh
• Maturity period with 3mnth-1yr, banks can issue CDs any no of month
with minimum 3 month and maximum within 1 year.
• Issued to individuals, corporations, company, trust funds etc. NRIs can
also subscribe to CDs
• Freely transferable by endorsement and delivery only after 45 days
of the issue to the primary investors
• Issued in the form of usance promissory note, subject to stamp duty
• Banks have to maintain CRR, SLR on the issue price of CDs and report
as a deposit s to the RBI. Not permitted to grand loans and
premature buy back is not allowed.
• From October 17, 1992 limit for issue of CDs by scheduled
commercial banks has been raised from 7% to 10%
• IDBI, ICICI and IFCI were permitted to issue CDs with maturity
period of more than 1 year up to 3 year with an initial
aggregate limit of 1000crore
• In July 29, 1992 the IRBI has also permitted to issue CDs up to
a limit of 100crore
• Introduced in October 1988, by RBI Governor.
• To ease the liquidity, banks have the option to share their loans
and credits with other banks for a temporary period by issuing
Participation Certificates.
• Banks and FIs come together either on risk sharing or non risk
sharing basis
• It provide short term funds, depending on the interest scenario
the rate of issue will be negotiable.
• Only scheduled commercial banks can issue IBPCs
• Minimum period shall be 91 days and maximum 180 days in case
of risk sharing basis, and in non- risk sharing basis total period
shall be 90 days.
• Maximum participation in loan/cash credit is 40% of the amount
outstanding or the limit sanctioned which ever is lower.
• Interest rate is determined between issuing bank and participating
bank
• Issuing and participation banks have to enter into participation
contract in the prescribed format
• Not transferable
• Cannot redeemed before due date
• On maturity date the issuing bank makes payment of the IBPC
along with agreed rate of interest to the participating bank
• It provide access to funds against advances comparatively with
less inaptness procedure than through regular consortium tie up
• Banks who are in need of fund can take advantage of the
market if they have an over lent advantage for a short while
• It facilitates banks having surplus funds have to build up and
earn more on their asset over a certain period.
• Repo is the repurchase agreement involves the sales of a
security with an agreement to repurchase the same security
back at a higher price at a later date
• Who deal in government securities(usually T-Bills) use repos as a
form of overnight borrowing.
• Very short term maturity from overnight to 30 days or more.
• Repos provide lenders with extremely low risk.
• The difference between purchase price and original price is
called Repo Rate.
• Repo transactions are conducted in money market to manipulate
short term interest rate and manage liquidity
• In India repos are conducted for 3 days and eligible securities
are decide by RBI, these are usually Gov. promissory notes,
T-Bills and public sector bonds
Reverse Repo Term Repo
It is the opposite of a repo Same as repo except the
A dealer buys government term of the loan is greater
securities from an investor than 30 days
and then sells them back at
a later date for a higher
price