Page 47 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes of the issue of CDs. Thus, the minimum denomination of CDs was reduced from ` 25 lakh
to ` 5 lakh, minimum size of a single issue reduced from ` 1 crore to ` 10 lakh further to `
1 lakh in June 2002, having maturity period of 91 days to 1 year (earlier maturity period
was 3 months to 1 year). CDs can be issued at a discount and rate of discount is determined
by market forces. These CDs are freely transferable after a lock-in-period of 30 days
(earlier 45 days) after the issue. All scheduled banks other than RRBs and term-lending
institutions can issue them. CDs are subject to CRR and SLR requirements. CDs cannot be
bought back by issuing institutions, nor can they lend against CDs. CDs can be purchased
by anyone.

Despite tremendous potentiality, CDs as instrument of money market could not gain an
importance primarily because of absence of an active secondary market, high price of
CDs, preference of the holders in primary market to hold them to maturity and lack of
information to the investors.
 Commercial Paper: Commercial Paper (CP) was introduced by the RBI in India in 1989 to
enable highly rated corporate borrowers to diversify their sources of short-term borrowing
and also to provide an additional instrument to investors. The RBI stipulated terms and
conditions for issuing CP like, eligibility, modes of issue, maturity periods, denominations
and issuance procedure. The guidelines in respect of the above were revised time and
again keeping in view the experience of the working of the CP.
Thus, corporates, PDs and SDs are eligible for issuing CP for a minimum period of maturity
of 7 days and maximum period of 1 year. It is significant to note that there is no lock-in
period for CP. The issuing company must have tangible net worth of ` 4 crore. The fund-
based working capital limit of the company should not be less than ` 4 crore. A company
can issue CPs to the extent of 75% of working capital limit. The minimum size of an issue
to a single investor is to be ` 25 lakh and in denomination of ` 5 lakh each. The company
should have a minimum credit rating of P2 from CRISIL and A2 from ICRA.
CP can be issued as a promissory note or in a dematerialized form. Underwriting is not
permitted. The maximum amount that can be issued by issue of CP will be 30% of fund-
based working capital. The RBI permission is required for issue of CP.
 Derivative Promissory Notes: The RBI introduced an innovative instrument termed as
'derivative usance promissory note', in September 1988. Under this instrument, banks
were permitted to issue derivative usance promissory note for a period not exceeding 90
days under the strength of underlying bills. This instrument was introduced with a view
to developing the secondary market in bills by simplifying the procedures and
documentation involved in rediscounting the bill. This instrument was exempt from
stamp duty.
 Repurchase Options: REPO has, of late, emerged as an important innovative instrument
in the developed money markets of the world. Repo is a versatile and perhaps the most
popular among market instruments. Repo refers to a transaction in which a participant
acquires fund immediately by selling securities and simultaneously agreeing for repurchase
of the same or similar securities after specified period of time at a given price. The
transaction combines elements of both a securities purchase/sale operation and also a
money market borrowing/lending operation. Typically, it signifies lending on a
collateralised basis. The term of contract is in terms of a 'repo rate' representing the
money market borrowing/lending rate. The transaction is called a repo when viewed
from the perspective of the buyer of the securities. Thus, a given agreement, called as a
repo or reverse repo, would depend on which party initiates the transaction. Like other
money market instruments, repos also help equilibrating between demand and supply of
short-term funds.

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