Page 29 - DMGT409Basic Financial Management

Basic Financial Management

Notes 2. The company should have been sanctioned as a fund based limit for bank(s) finance and /

or the All India Financial Institutions.
3. Company can issue CPs amounting to 75% of the permitted bank (working capital limit)
credit.

4. Company’s CPs receives a minimum rating of (P2 from CRISIL, A-2 form ICRA, etc).
5. The minimum size of each CP is ` 5 lakhs or multiples thereof.
6. The size of any single issue should not be less than ` 1 crore.
7. The CP is in the form of usance promissory note negotiable by endorsement and delivery.

Advantages of CP

1. It is an alternative source of finance and proves to be helpful during the period of tight
bank credit.

2. It is a cheaper source of short-term finance when compared to the bank credit.
Disadvantages of CP

1. It is available only for large and financially sound companies.

2. It cannot be redeemed before the maturity date.

2.3.2 Certificates of Deposit

Certificates of Deposit 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 fi nancial
institution for a specified time period. Guidelines for issue of CDs are presently governed by

various directives issued by the Reserve Bank of India, as amended from time to time. CDs can
be issued by
1. scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks
(LABs); and
2. select all-India Financial Institutions that have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.

!
Caution Banks have the freedom to issue CDs depending on their requirements. An FI

may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with
other instruments viz., term money, term deposits, commercial papers and intercorporate
deposits should not exceed 100 per cent of its net owned funds, as per the latest audited
balance sheet.
Advantages of Certificate of Deposit as a Money Market Instrument

The key advantages of certificate of deposits are as follows:
1. Since one can know the returns from before, the certificates of deposits are considered

much safe.
2. One can earn more as compared to depositing money in savings account.
3. The Federal Insurance Corporation guarantees the investments in the certifi cate of
deposit.

22 LOVELY PROFESSIONAL UNIVERSITY