ISSUANCE OF COMMERCIAL PAPERS AND CERTIFICATE OF DEPOSITS

Presented By: LAVINA JAIN SYBFM ROLL NO:25

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TABLE OF CONTENT

1. Commercial paper: Introduction ..3 Issuance of commercial paper .4-7 2. Certificate Of Deposit: Introduction ..8 Issuance of certificate of deposit ..9-13 3. Acknowledgement ..14 4. Bibliography 15

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COMMERCIAL PAPER:
INTRODUCTION
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates.

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ISSUANCE OF COMMERCIAL PAPER

Guidelines for issue of CP are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. In pursuance of the Statement on Monetary and Credit Policy for the Year 2000 - 2001, to keep pace with several developments in the financial market, it has been decided to modify the guidelines in the light of recommendations made by an Internal Group. Now, the Reserve Bank in exercise of the powers conferred by Sections 45 J, 45 K and 45 L of the Reserve Bank of India Act, 1934 (2 of 1934) issues the following guidelines replacing all earlier directions/guidelines on the subject: Eligibility for issuance of CP

Presently, companies, which satisfy the following requirements, shall be eligible to issue commercial paper : The tangible net worth of the company is not less than Rupees four crore Working capital (fund-based) limit of the company is not less than four crore The minimum credit rating of the company shall be P-2 from CRISIL or equivalent from other Rating agencies The borrowal account of the company is classified as a Standard Asset.

Besides companies, Primary Dealers (PDs) and Satellite Dealers are also permitted to issue CP.

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Period of CP

CP can be issued for maturities between 15 days to less than one year.

Denomination and minimum size of CP

CP can be issued in multiples of Rs.5 lakh. Minimum amount to be invested by single investor - Rs.25 lakh (face value).

Secondary market transaction may be for Rs.5 lakh or multiples thereof.

Ceiling on amount of issue

The aggregate amount to be raised by way of CP shall not exceed the working capital (fund-based) limit sanctioned by bank/s to an issuer company.

Mode of Issue

The commercial paper is in the form of usance promissory note negotiable by endorsement and delivery and issued at discount to face value.

Eligible Investors

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CP can be issued to individuals, banks, companies, other corporate bodies registered in India and unincorporated bodies. However, CP issued to NRIs will not transferable and will be on a non-repatriable basis. Procedure for Issue of CP The company which proposes to issue CP has to submit its proposal to the financing banking company along with a certificate issued by Credit Rating Agency. The financing banking company, after satisfying that the issuing company fulfils the eligibility criteria takes the proposal on record. The issuing company thereafter makes arrangements for privately placing the issue and has to ensure that it shall completes the issue of CP with in the period of two weeks. Once the CP is issued, the financing banking company makes arrangements for reducing the working capital fund based limit to the extent of the amount of CP issued. The issuing company has to advise the RBI through its financing company the amount of CP actually issued with three days from the date of completion of the issue.

Prohibition against underwriting or co-acceptance

No company shall have the issue of CP under written or co-accepted.

Limits and the Amount of Issue of CP

CP can be issued as a "stand alone" product. The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors. Banks and FIs will, however, have the flexibility to fix working capital limits duly taking into account the resource pattern of companies financing including CPs. An FI can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term
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deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription. CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP shall have the same maturity date. Every CP issue should be reported to the Chief General Manager, Industrial and Export Credit Department (IECD), Reserve Bank of India, Central Office, Mumbai through the Issuing and Paying Agent (IPA) within three days from the date of completion of the issue, incorporating details as per Schedule II.Every issue of CP, including renewal, should be treated as a fresh issue. Role and Responsibilities The role and responsibilities of issuer, IPA and CRA are set out below : (a) Issuer With the simplification in the procedures for CP issuance, issuers would now have more flexibility. Issuers would, however, have to ensure that the guidelines and procedures laid down for CP issuance are strictly adhered to. (b) Issuing and Paying Agent (IPA) (i) IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and amount mobilised through issuance of CP is within the quantum indicated by CRA for the specified rating. (ii) IPA has to verify all the documents submitted by the issuer viz., copy of board resolution, signatures of authorised executants (when CP in physical form) and issue a certificate that documents are in order. It should also certify that it has a valid agreement with the issuer (Schedule III). (iii) Original documents verified by the IPA should be held in the custody of IPA.

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CERTIFICATE OF DEPOSIT:
INTRODUCTION
A certificate of deposit (CD) is a fixed-deposit investment option offered by banks and lending institutions. It offers higher interest rates than conventional savings accounts because it requires investors to deposit funds for a specified term ranging from one month to more than five years. However, like savings accounts, CDs are a secure form of investment, as theyare insured by government agencies. In the US, CDs issued by banks and worth up to $100,000 are insured by Federal Deposit Insurance Corporation (FDIC). Certificates of Deposit (CDs) is

a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period.

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ISSUANCE OF CERTIFICATE OF DEPOSIT

Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time. The guidelines for issue of CDs, incorporating all the amendments issued till date, are given below for ready reference. 1. Eligibility CDs can be issued by (i) scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}; and (ii) select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit (prescribed in paragraph 3.2 below) fixed by RBI.

2. Aggregate Amount Banks have the freedom to issue CDs depending on their funding requirements. An FI can issue CD within the overall umbrella limit prescribed in the Master Circular on Resource Raising Norms for FIs, issued by DBOD and updated from time-to-time.

3. Minimum Size of Issue and Denominations Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter.

4. Investors CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.

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5. Maturity The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

6. Discount / Coupon Rate CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank / FI is free to determine the discount / coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. The investor should be clearly informed of the same.

7. Reserve Requirements Banks have to maintain appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.

8. Transferability CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the CDs.

9. Trades in CDs All OTC trades in CDs shall be reported within 15 minutes of the trade on the FIMMDA reporting platform.
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10. Loans / Buy-backs Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. However, the RBI may relax these restrictions for temporary periods through a separate notification.

11. Format of CDs Banks / FIs should issue CDs only in dematerialised form. However, according to the Depositories Act, 1996, investors have the option to seek certificate in physical form. Accordingly, if an investor insists on physical certificate, the bank / FI may inform the Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office, Fort, Mumbai - 400 001 about such instances separately. Further, issuance of CDs will attract stamp duty. A format (Annex I) is enclosed for adoption by banks / FIs. There will be no grace period for repayment of CDs. If the maturity date happens to be a holiday, the issuing bank/FI should make payment on the immediate preceding working day. Banks / FIs, therefore, should fix the period of deposit in such a manner that the maturity date does not coincide with a holiday to avoid loss of discount / interest rate.

12. Security Aspect Since CDs in physical form are freely transferable by endorsement and delivery, it will be necessary for banks/FIs to see that the certificates are printed on good quality security paper and necessary precautions are taken to guard against tampering with the document. They should be signed by two or more authorised signatories.
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13. Payment of Certificate Since CDs are transferable, the physical certificates may be presented for payment by the last holder. The question of liability on account of any defect in the chain of endorsements may arise. It is, therefore, desirable that banks take necessary precautions and make payment only by a crossed cheque. Those who deal in these CDs may also be suitably cautioned. The holders of dematted CDs will approach their respective depository participants (DPs) and give transfer / delivery instructions to transfer the security represented by the specific International Securities Identification Number (ISIN) to the 'CD Redemption Account' maintained by the issuer. The holders should also communicate to the issuer by a letter / fax enclosing the copy of the delivery instruction they had given to their respective DP and intimate the place at which the payment is requested to facilitate prompt payment. Upon receipt of the demat credit of CDs in the "CD Redemption Account", the issuer, on maturity date, would arrange to repay to holders / transferors by way of Banker's cheque / high value cheque, etc.

14. Accounting Banks / FIs may account the issue price under the Head "CDs issued" and show it under deposits. Accounting entries towards discount will be made as in the case of "Cash Certificates". Banks / FIs should maintain a register of CDs issued with complete particulars.

15. Reporting Banks should include the amount of CDs in the fortnightly return under Section 42 of the RBI Act, 1934 and also separately indicate the amount so included by way of a footnote in the return.

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Further, banks / FIs should submit a fortnightly return, as per the format given in Annex II, to the Chief General Manager, Financial Markets Department, RBI, within 10 days from the end of the fortnight date. 6 e-mail within 10 days from the end of the fortnight. Data on issuance of CDs, which are being reported in physical form / through e-mail, should also be concurrently reported on the web-based module under the Online Returns Filing System (ORFS).

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ACKNOWLEDGEMENT
The project on DEBT MARKET is a result of cooperation, hard work and good wishes of many people. I student of H.R.COLLEGE would like to thank the project guide PROF.PRIYANKA RAJDEV for the involvement in my project and timely assessment that provided with valued guidance throughout my study. I express my deep gratitude to all my college friends and my family members whose efforts and creativity has helped me giving a final shape and structure to the project work. I am also thankful to all those seen and unseen hands and heads which have been of director help in the completion of this project work.

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BIBLIOGRAPHY
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/16259.pdf http://rbidocs.rbi.org.in/rdocs/notification/PDFs/90CD010711FL.pdf

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