Page 26 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 2: Financial Markets

4. Certificate of Deposit Notes
5. Commercial Papers
Let us understand the main instruments of money market by the discussion hereunder:
1. Call/Notice Money: Call money is the money borrowed or lent on demand for a very
short period. When money is borrowed or lent for a day, it is known as Call (Overnight)
Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working day, (irrespective of the number of
intervening holidays) is "Call Money". When money is borrowed or lent for more than a
day and up to 14 days, it is "Notice Money". No collateral security is required to cover
these transactions.

2. Treasury Bills: Treasury Bills are short term (up to one year) borrowing instruments of the
union government. It is an IOU of the Government. It is a promise by the Government to
pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364
days i.e. less than one year). They are issued at a discount to the face value, and on maturity
the face value is paid to the holder. The rate of discount and the corresponding issue price
are determined at each auction.
3. Certificates of Deposits (CDs): 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 financial 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:

(a) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area
Banks (LABs); and
(b) select All India Financial Institutions that have been permitted by RBI to raise short-
term resources within the umbrella limit fixed by RBI.
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.
4. Commercial Papers (CPs): CP is a note in evidence of the debt obligation of the issuer. On
issuing commercial paper the debt obligation is transformed into an instrument. CP is
thus an unsecured promissory note privately placed with investors at a discount rate to
face value determined by market forces. CP is freely negotiable by endorsement and
delivery. Guidelines for issue of CP were for long governed by various directives issued
by the Reserve Bank of India, as amended from time to time. On July 2, 2007, a master
circular (Ref.No. FMD.MSRG.No.14/02.02.009/2007-08) incorporating all the existing
guidelines/instructions/directives on the subject was issued by the office of Chief General
Manager of RBI, which states the following:

(a) Who can Issue Commercial Paper: Corporates, Primary Dealers (PDs) and the All India
Financial Institutions (FIs) that have been permitted to raise short-term resources
under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP.
A corporate would be eligible to issue CP provided: (a) the tangible net worth of the
company, as per the latest audited balance sheet, is not less than 4 crores;
(b) company has been sanctioned working capital limit by bank/s or all-India
financial institution/s; and (c) the borrowal account of the company is classified as
a Standard Asset by the financing bank/s/institution/s.

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