Certificate of deposits, Financial Management

A Certificate of Deposit (CD) can be defined as a negotiable promissory note, secure and short-term in nature. CDs are issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor.

In India, Certificates of Deposits (CDs) were introduced in 1989 based on the Vaghul Committee recommendations. The introduction of CDs further widened the money market instruments giving the investors a greater flexibility to deploy short-term surplus funds. Certificates of Deposits are lowest risk category investment options and stand next to T-bills.

Scheduled commercial banks, and all selected FIs in India are permitted by the RBI to issue CDs for raising short-term resources. Regional Rural Banks (RRBs) and Local Area Banks (LABs) are excluded from issuing CDs. While banks have freedom to issue CDs depending on their requirement, FIs are allowed to issue CDs within the overall umbrella limit as fixed by the RBI from time to time. As per the RBI guidelines the issued CDs together with other instruments like term money, term deposits, commercial papers and inter-corporate deposits should not exceed 100 percent of its Net Owned Fund (NOF). The NOF is considered as per the latest audited balance sheet.

CDs can be issued to individuals, corporations, companies, trusts, funds, etc. NRIs can also subscribe to CDs, but on non-repatriable basis. This should be clearly stated on the certificate and it cannot be endorsed to another NRI in the secondary market. CDs may be issued at a discount on face value with the issuing bank/FI having the freedom to determine the discount/coupon rate. However, Banks/FIs are also allowed to issue CDs on floating rate basis.

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

CDs are issued only in the dematerialized form. However, according to the Depositories Act, 1996, investors have the option to seek certificate in physical form. If an investor insists on physical certificate, the issuer should approach the RBI. The issuance of CDs will attract stamp duty. Physical CDs are freely transferable by endorsement and delivery while demat CDs are transferred as other demat securities. There is no lock-in period for the CDs.

Posted Date: 9/8/2012 7:09:04 AM | Location : United States

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