Presentation On Certificate of Deposits: Treasury Management

Presentation on
Certificate of Deposits
Treasury Management
Presented by:
Anubhav Kathuria
09BS0000347
Gopal Krishan 09BS0002792
Certificate of Deposits
Introduced in India on 27th March, 1989
Definition
Certificates of Deposit (CDs) is a negotiable money
market instrument and issued in dematerialized
form or as a Usance Promissory Note, for funds
deposited at a bank or other eligible financial
institution for a specified time period.
History
The Tambe Working Group: 1982 opposed launch of
CDs on grounds of FIs not supporting the instrument
and absence of secondary market for the same
The Vaghul Working Group: Recommended setup of a
discount house and align the short term instruments
rates with that of other rates in financial system of the
country
1988: Discount and Finance House of India (DFHI)
was setup and fixed deposits with short term of 15 to 45
days were abolished
Purpose
Bulk mobilization of resources as part
of effective fund management
Offers attractive yields
Offers liquidity to CDs holders

through ready marketability
Eligibility
 Scheduled commercial banks except RRBs and LABs
 All financial institutions that have been permitted by RBI to

issue short term resources within the umbrella fixed limits
Aggregate Amount
• Banks can issue as per requirements
• Sum of term deposits, term money, CPs, CDs and inter

corporate deposits should not exceed 100% of its net
worth as per the latest audited balance sheet
Minimum Size of Issue & Denomination
Minimum Rs. 1 lakh
Multiples of 1 lakh thereafter
Maturity
From 7 days to 1 year; if issued by Bank
From 1 year to 3 years; if issued by FI

Subscribers
 Individuals
 Corporations and companies
 Trusts and funds
 Associations
 NRIs (only on repatriate basis and should be stated on
the instrument)
It is not endorsable in secondary market to another
NRI
Discount/Coupon rate
 Issued at a discount on face value which the issuer is free to
determine
 Can be issued on floating rate basis determined timely based on a pre

determined formula that indicates the spread over a transparent
benchmark
Compliance
• Banks have to maintain appropriate SLR and CRR on the issue
price of CDs
• Standardized market practices and documentation on the

guidelines issued by Fixed income Money Market and
Derivatives Association of India (FIMMDA) on June 20th, 2002
Transferability
 Transferable by endorsement or delivery
 If in dematerialized form, it can be transferred as per the rules

applicable to other dematerialized securities
 No Lock-in period
Other Requirements
 Banks cannot buy back their own issued CDs
 No loan can be given on a CDs
 Submit fortnightly report to RBI on their CDs under
section 42 of the RBI Act, 1935

 Banks show CDs under the head ‘liabilities’ in their
balance sheet as CDs issued and maintain a register with

all the particulars of CDs issued
Format
 As per RBI rules it should be issued in dematerialized
form only
 As per Depositories Act, 1996, physical form can be
issued after bank/FI informs Monetary Policy
Department, Reserve Bank of India, Central Office, Fort,
Mumbai - 400 001
 There is no grace period for CDs and payment should be
made on the same day. If a holiday, payment should be
made on the immediate following day
 Stamp duty also have to be paid
Format of CD
Name of the bank/institution
No. Rs.___________ Dated:______________
NEGOTIABLE CERTIFICATE OF DEPOSIT
_________months/days after the date hereof, _____<Name of the
Bank/Institution>____________,at _____<name of the place>________,
hereby promise to pay to _______ <name of the depositor>__________ or
order the sum of Rupees ________<in words>____________ only, upon
presentation and surrender of this instrument at the said place, for deposit
received.

For ________<Name of the institution>____

Date of maturity _______________ without days of grace.
_________________________________________________________________________________________
Instructions Endorsements Date
1.
2.
Security and Payment
 Signed by 2 or more authorized signatories
 Payment is made on issue of the physical certificate by

the last holder
 Question of liability in chain of endorsement may arise

so payment should be made only through crossed cheque
Procedure for payment
Respective Depository Participant(DPs)
Transfer or delivery instructions through ISIN
“CD Redemption Account” maintained by the
issuer
Copy of delivery instruction
Arrangement for payment to the holder
Issue of Duplicate Certificate
COMPLIANCE
 A notice should be given in at least 1 local newspaper
 Lapse of reasonable period from date of issue of notice
in newspaper
 Execution of an indemnity bond by the investor to the
satisfaction of the issuer of CDs
Issued only in physical form and no stamping is
required
“Duplicate Copy”
DFHI
Set up in 1988 by RBI
Functions revised in 1995
PURPOSE- Market Maker
Stagnant Secondary Market
Impediments
 High Returns
 Lack of Information
 High Rate of Interest for Banks/FIs
 Primary Market not widely spread
In 2004, Amalgamated with SBI Gilts to form SBI DFHI
Ltd.
CDs in US
Introduced in 1964
Comparison to Savings Accounts
Similar – Insured and Virtually risk free
Dissimilar- Fixed Term & Fixed Interest Rate
Terms range from 30 days to 5 years or 10 years at
different competitive rates
Minimum Amount is $ 1,00,000
FDIC & NCUA(Fund name NCUSIF)
Difference with Indian CD- Maturity before Date with
substantial penalty
Types of CDs in US
Callable CDs
Brokered CDs
Bump up CDs
Liquid CDs
Step up or Step Down CDs
Variable Rate CDs
Add on CDs
Zero Coupon CDs
CDs in UK
Introduced in 1958 and Int. Rate related to LIBOR
Similar to Negotiable Money Market Deposits
Maturity 30 days to 1 year or 5 years
Eurodollar CDs
Yankee CDs
Problem
A three month CD is issued on 6th September 1999 and
matures on 6th December 1999, it has a Face Value of
£ 20,000,000 and a coupon of 5.45%. What are the
total maturity proceeds?
Yield
P = [(1+ DR/100 )x N/M) ] x 100
where,
P = Proceeds
DR = Discount Rate
N = Total Period in a year (12 months or 365 days)
M = Maturity period
References
Master circulars on issue of Certificate of Deposits,
2004, 2006 and 2008
Financial Markets and Institutions by Dr. S.
Gurusamy, Chapter 6, Certificate of Deposits (CD)
Market
Indian Money Market- An Introduction
The Money Markets Handbook
Thank
You

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Offers attractive yields

Offers liquidity to CDs holders

 All financial institutions that have been permitted by RBI to

• Sum of term deposits, term money, CPs, CDs and inter

Multiples of 1 lakh thereafter

From 1 year to 3 years; if issued by FI

 Can be issued on floating rate basis determined timely based on a pre

• Standardized market practices and documentation on the

 If in dematerialized form, it can be transferred as per the rules

 No loan can be given on a CDs

 Submit fortnightly report to RBI on their CDs under

section 42 of the RBI Act, 1935

balance sheet as CDs issued and maintain a register with

 Payment is made on issue of the physical certificate by

 Question of liability in chain of endorsement may arise

Similar to Negotiable Money Market Deposits

Maturity 30 days to 1 year or 5 years

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