CALL/NOTICE MONEY MARKET OPERATIONS IN INDIA

The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call/notice money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days. Banks borrow in this money market for the following propose. To fill the gaps or temporary mismatches in funds To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows Thus call money usually serves the role of equilibrating the short-term liquidity position of banks Call loan market transitions and participants
In India, call loans are given for the following purposes:

1. To commercial banks to meet large payments, large remittances to maintain liquidity with the RBI and so on. 2. To the stock brokers and speculators to deal in stock exchanges and bullion markets. 3. To the bill market for meeting matures bills. 4. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market. 5. To individuals of very high status for trade purposes to save interest on O.D or cash credit.
The participants in this market can be classified into categories viz.

1. Those permitted to act as both lenders and borrowers of call loans. 2. Those permitted to act only as lenders in the market. The first category includes all commercial banks. Co-operative banks, DFHI and STCI. In the second category LIC, UTI, GIC, IDBI, NABARD, specified mutual funds etc., are included. They can only lend and they cannot borrow in the call market.
Advantages of call money

In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among themselves and such loans are called inter-

bank loans. They are very popular in India. So many advantages are available to commercial banks. They are as follows:
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High Liquidity: Money lent in a call market can be called back at any time when needed. So, it is highly liquid. It enables commercial banks to meet large sudden payments and remittances by making a call on the market. High Profitability: Banks can earn high profiles by lending their surplus funds to the call market when call rates are high volatile. It offers a profitable parking place for employing the surplus funds of banks temporarily. Maintenance Of SLR: Call market enables commercial bank to minimum their statutory reserve requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR requirements. In absence of call market, banks have to maintain idle cash to meet5 their reserve requirements. It will tell upon their profitability. Safe And Cheap: Though call loans are not secured, they are safe since the participants have a strong financial standing. It is cheap in the sense brokers have been prohibited form operating in the call market. Hence, banks need not pay brokers on call money transitions. Assistance To Central Bank Operations: Call money market is the most sensitive part of any financial system. Changes in demand and supply of funds are quickly reflected in call money rates and give an indication to the central bank to adopt an appropriate monetary policy. Moreover, the existence of an efficient call market helps the central bank to carry out its open market operations effectively and successfully.

Drawbacks of call money

The call market in India suffers from the following drawbacks:

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Uneven Development: The call market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated with stock exchanges. Hence the market is not evenly development. Lack Of Integration: The call markets in different centers are not fully integrated. Besides, a large number of local call markets exist without an\y integration. Volatility In Call Money Rates: Another drawback is the volatile nature of the call money rates. Call rates very to greater extant indifferent centers indifferent seasons on different days within a fortnight. The rates very between 12% and 85%. One can not believe 85% being charged on call loans.

Prudential norms of RBI Lending of scheduled commercial banks, on a fortnightly average basis, should not exceed 25 per cent of their capital fund. However, banks are allowed to lend a maximum of 50% on any day, during a fortnight. Borrowings by scheduled commercial banks should not exceed 100 per cent of their capital fund or 2 per cent of aggregate deposits, whichever is higher. However, banks are allowed to borrow a maximum of 125 per cent of their capital fund on any day, during a fortnight. Interest Rate Eligible participants are free to decide on interest rates in call/notice money market.

Bills of Exchange and discount market Definition of a bill

Section 5 of the negotiable Instruments Act defines a bill exchange a follows: an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person ort to the beater of the instrument.
Types of Bills:

Many types of bills are in circulation in a bill market. They can be broadly classified as follows: 1. 2. 3. 4. 5. 6. Demand and usince bills. Clean bills and documentary bills. Inland and foreign bills. Export bills and import bills. Indigenous bills. Accommodation bills and supply bills.

Demand and Usance Bills

Demand bills are others called sight bills. These bills are payable immediately as soon as they are presented to the drawee. No time of payment is specified and hence they are payable at sight. Usince bills are called time bills. These bills are payable immediately after the expiry of time period mentioned in the bills. The period varies according to the established trade custom or usage prevailing in the country.

Clean Bills and Documentary Bills

When bills have to be accompanied by documents of title to goods like Railways, receipt, Lorry receipt, Bill of Lading etc. the bills are called documentary bills. These bills can be further classified into D/A bills and D/P bills. In the case of D/A bills, the documents accompanying bills have to be delivered to the drawee immediately after acceptance. Generally D/A bills are drawn on parties who have a good financial standing. On the order hand, the documents have to be handed over to the drawee only against payment in the case of D/P bills. The documents will be retained by the banker. Till the payment o0f such bills. When bills are drawn without accompanying any documents they are called clean bills. In such a case, documents will be directly sent to the drawee.
Inland and Foreign Bills

Inland bills are those drawn upon a person resident in India and are payable in India. Foreign bills are drawn outside India an they may be payable either in India or outside India. They may be drawn upon a person resident in India also. Foreign boils have their origin outside India. They also include bills drawn on India made payable outside India.
Export and Foreign Bills

Export bills are those drawn by Indian exports on importers outside India and import bills are drawn on Indian importers in India by exports outside India.
Indigenous Bills

Indigenous bills are those drawn and accepted according to native custom or usage of trade. These bills are popular among indigenous bankers only. In India, they called hundis the hundis are known by various names such as Shah Jog, Nam Jog, Jokhani, Termainjog. Darshani, Dhanijog, and so an.
Accommodation Bills and Supply Bills

If bills do not arise out of genuine trade transactions, they are called accommodation bills. They are known as kite bills or wind bills. Two parties draw bills on each other purely for the purpos4 of mutual financial accommodation. These bills are discounted with bankers and the proceeds are shared among themselves. On the due dates, they are paid. Supply bills are those neither drawn by suppliers or contractors on the government departments for the goods nor accompanied by documents of title to goods. So, they are not considered as negotiable instruments. These bills are useful only for the purpose of getting advances from commercial banks by creating a charge on these bills.

Operations in Bill Market:

From the operations point of view, the bill market can be classified into two viz.
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Discount Market Acceptance Market

Discount Market

Discount market refers to the market where short-term genuine trade bills are discounted by financial intermediaries like commercial banks. When credit sales are effected, the seller draws a bill on the buyer who accepts it promising to pay the specified sum at the specified period. The seller has to wait until the maturity of the bill for getting payment. But, the presence of a bill market enables him to get payment immediately. The seller can ensure payment immediately by discounting the bill with some financial intermediary by paying a small amount of money called Discount rate on the date of maturity, the intermediary claims the amount of the bill from the person who has accept6ed the bill. In some countries, there are some financial intermediaries who specialize in the field of discounting. For instance, in London Money Market there are specialise in the field discounting bills. Such institutions are conspicuously absent in India. Hence, commercial banks in India have to undertake the work of discounting. However, the DFHI has been established to activate this market.
Acceptance Market

The acceptance market refers to the market where short-term genuine trade bills are accepted by financial intermediaries. All trade bills cannot be discounted easily because the paties to the bills may not be financially sound. In case such bills are accepted by financial intermediaries like banks, the bills earn a good name and reputation and such bills can readily discounted anywhere. In London, there are specialist firms called acceptance house which accept bills drawn by trades and import greater marketability to such bills. However, their importance has declined in recent times. In India, there are no acceptance houses. The commercial banks undertake the acceptance business to some extant.

Advantages of commercial bills:

Commercial bill market is an important source of short-term funds for trade and industry. It provides liquidity and activates the money market. In India, commercial banks lay a significant role in this market due to the following advantages:
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Liquidity: Bills are highly liquid assets. In times of necessity, bills can be converted into cash readily by means of rediscounting them with the central bank. Bills are self-liquidating in character since they have fixed tenure. Moreover, they are negotiable instruments and hence they can be transferred freely by a mere delivery or by endorsement and delivery. Certainty Of Payment: Bills are drawn and accepted by business people. Generally, business people are used to keeping their words and the use of the bills imposes a strict financial discipline on them. Hence, bills would be honored on the due date. Ideal Investment: Bills are for periods not exceeding 6 months. They represent advances for a definite period. This enables financial institutions to invest their surplus funds profitably by selecting bills of different maturities. For instance, commercial banks can invest their funds on bills in such a way that the maturity of these bills may coincide with the maturity of their fixed deposits. Simple Legal Remedy: In case the bills are dishonored\, the legal remedy is simple. Such dishonored bills have to be simply noted and protested and the whole amount should be debited to the customers accounts. High And Quick Yield: The financial institutions earn a high quick yield. The discount is dedicated at the time of discounting itself whereas in the case of other loans and advances, interest is payable only when it is due. The discounts rate is also comparatively high. Easy Central Bank Control: The central bank can easily influence the money market by manipulating the bank rate or the rediscounting rate. Suitable monetary policy can be taken by adjusting the bank rate depending upon the monetary conditions prevailing in the market.

Drawbacks of commercial bills:

In spite of these merits, the bill market has not been well developed in India. The reasons for the slow growth are the following:
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Absence Of Bill Culture: Business people in India prefer O.D and cash credit to bill financing therefore, banks usually accept bills for the conversion of cash credits and overdrafts of their customers. Hence bills are not popular.

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Absence Of Rediscounting Among Banks: There is no practice of rediscounting of bills between banks who need funds and those who have surplus funds. In order to enlarge the rediscounting facility, the RBI has permitted financial institutions like LIC, UTI, GIC and ICICI to rediscount genuine eligible trade bills of commercial banks. Even then, bill financial is not popular. Stamp Duty: Stamp duty discourages the use of bills. Moreover, stamp papers of required denomination are not available. Absence Of Secondary Market: There is no active secondary market for bills. Rediscounting facility is available in important centers and that too it restricted to the apex level financial institutions. Hence, the size of the bill market has bee curtailed to a large extant. Difficulty In Ascertaining Genuine Trade Bills: The financial institutions have to verify the bills so as to ascertain whether they are genuine trade bills and not accommodation bills. For this purpose, invoices have to be scrutinized carefully. It involves additional work. Limited Foreign Trade: In many developed countries, bill markets have been established mainly for financing foreign trade. Unfortunately, in India, foreign trade as a percentage to national income remains small and it is reflected in the bill market also. Absence Of Acceptance Services: There is no discount house or acceptance house in India. Hence specialised services are not available in the field of discounting or acceptance. Attitude Of Banks: Banks are shy rediscounting bills even the central bank. They have a tendency to hold the bills till maturity and hence it affects the velocity of circulation of bills. Again, banks prefer to purchase bills instead of discounting them. A Foreign exchange market or Forex market is a market in which currencies are bought and sold. It is to be distinguished from a financial market where currencies are borrowed and lent.

Forex market General Features of Forex Market

Foreign exchange market is described as an OTC (Over the counter) market as there is no physical place where the participants meet to execute their deals. It is more an informal arrangement among the banks and brokers operating in a financing centre purchasing and selling currencies, connected to each other by tele communications like telex, telephone and a satellite communication network, SWIFT(Society for Worldwide Interbank Financial Telecommunication). The term foreign exchange market is used to refer to the wholesale a segment of the market, where the dealings take place among the banks. The retail segment refers to the dealings take place between banks and their

customers. The retail segment refers to the dealings take place between banks and their customers. The retail segment is situated at a large number of places. They can be considered not as foreign exchange markets, but as the counters of such markets. The leading foreign exchange market in India is Mumbai, Calcutta, Chennai and Delhi is other centres accounting for bulk of the exchange dealings in India. The policy of Reserve Bank has been to decentralize exchages operations and develop broader based exchange markets. As a result of the efforts of Reserve Bank Cochin, Bangalore, Ahmadabad and Goa have emerged as new centre of foreign exchange market.
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Size of the Market:- Foreign exchange market is the largest financial market with a daily turnover of over USD 2 trillion. Foreign exchange markets were primarily developed to facilitate settlement of debts arising out of international trade. But these markets have developed on their own so much so that a turnover of about 3 days in the foreign exchange market is equivalent to the magnitude of world trade in goods and services. The largest foreign exchange market is London followed by New York, Tokyo, Zurich and Frankfurt.

The business in foreign exchange markets in India has shown a steady increase as a consequence of increase in the volume of foreign trade of the country, improvement in the communications systems and greater access to the international exchange markets. Still the volume of transactions in these markets amounting to about USD 2 billion per day does not compete favorably with any well developed foreign exchange market of international repute. The reasons are not far to seek. Rupee is not an internationally traded currency and is not in great demand. Much of the external trade of the country is designated in leading currencies of the world, Viz., US dollar, pound sterling, Euro, Japanese yen and Swiss franc. Incidentally, these are the currencies that are traded actively in the foreign exchange market in India.
24 Hours Market

The markets are situated throughout the different time zones of the globe in such a way that when one market is closing the other is beginning its operations. Thus at any point of time one market or the other is open. Therefore, it is stated that foreign exchange market is functioning throughout 24 hours of the day. However, a specific market will function only during the business hours. Some of the banks having international network and having centralized control of funds management may keep their foreign exchange department in the key centre open throughout to keep up with developments at other centers during their normal working hours. In India, the market is open for the time the banks are open for their regular banking business. No transactions take place on Saturdays.

Efficiency

Developments in communication have largely contributed to the efficiency of the market. The participants keep abreast of current happenings by access to such services like Dow Jones Telerate and Teuter. Any significant development in any market is almost instantaneously received by the other market situated at a far off place and thus has global impact. This makes the foreign exchange market very efficient as if the functioning under one roof.
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Currencies Traded in Forex Markets In most markets, US dollar is the vehicle currency, Viz., the currency used to denominate international transactions. This is despite the fact that with currencies like Euro and Yen gaining larger share, the share of US dollar in the total turn over is shrinking. Physical Markets In few centers like Paris and Brussels, foreign exchange business takes place at a fixed place, such as the local stock exchange buildings. At these physical markets, the banks meet and in the presence of the representative of the central bank and on the basis of bargains, fix rates for a number of major currencies. This practice is called fixing. The rates thus fixed are used to execute customer orders previously placed with the banks. An advantage claimed for this procedure is that exchange rate for commercial transactions will be market determined, not influenced by any one bank. However, it is observed that the large banks attending such meetings with large commercial orders backing up, tend to influence the rates

Commercial Papers What is a commercial paper?

A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determent by the issuing company.
Features of Commercial Paper

1. Commercial paper is a short-term money market instrument comprising usince promissory note with a fixed maturity. 2. It is a certificate evidencing an unsecured corporate debt of short term maturity. 3. Commercial paper is issued at a discount to face value basis but it can be issued in interest bearing form.

4. The issuer promises to pay the buyer some fixed amount on some future period but pledge no assets, only his liquidity and established earning power, to guarantee that promise. 5. Commercial paper can be issued directly by a company to investors or through banks/merchant banks.
Advantages of Commercial Paper
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Simplicity: The advantage of commercial paper lies in its simplicity. It involves hardly any documentation between the issuer and investor. Flexibility: The issuer can issue commercial paper with the maturities tailored to match the cash flow of the company. Easy To Raise Long Term Capital: The companies which are able to raise funds through commercial paper become better known in the financial world and are thereby placed in a more favorable position for rising such long them capital as they may, form time to time, as require. Thus there is in inbuilt incentive for companies to remain financially strong. High Returns: The commercial paper provides investors with higher returns than they could get from the banking system. Movement of Funds: Commercial paper facilities securitization of loans resulting in creation of a secondary market for the paper and efficient movement of funds providing cash surplus to cash deficit entities.

RBI Guidelines on Commercial Paper Issue The important guidelines are:

1. A company can issue commercial paper only if it has: 1. A tangible net worth of not less than Rs. 10croes as per the latest balance sheet; 2. Minimum current ratio of 1.33:1, 3. A fund based working capital limit of Rs. 25 crores or more.; 4. A debt servicing ratio closer to 2; 5. The company is listed on a stock exchange; 6. Subject to CAS discipline; 7. It is classified under Health Code no. 1 by the financing banks; 8. The issuing company would need to obtain p1 from CRISIL; 2. Commercial paper shall be issued in multiples of Rs. 25 lakhs but the minimum amount to be invested by a single investor shall be Rs. 1 crore. 3. The commercial paper shall be issued for minimum maturity period of 7 days and the maximum period of 6 months from the date of issue. There will be no grace period on maturity. 4. 0the aggregate amount shall not exceed 20% of the issuers fund based working capital. 5. The commercial paper is issued in the form of usince promissory notes, negotiable by endorsement and delivery. The rate of discount could be

freely determined by the issuing company. The issuing company has to bear all flotation cost, including stamp duty, dealers, fee and credit rating agency fee. 6. The issue of commercial paper cannot be underwritten or co-opted in any manner. However, commercial banks can provide standby facility for redemption of the paper on the maturity date. 7. Investment in commercial paper can be made by any person or banks or corporate bodies registered or incorporated in India and un-incorporated bodies too. Non-resident Indians can invest in commercial paper on nonrepatriation basis. 8. The companies issuing commercial paper would be required to ensure that the relevant provisions of the various statutes such as companies Act, 1956, the IT At, 1961 and the Negotiable Instruments Act, 1981 are complied with.
Procedure and Time Frame Doe Issue Commercial Paper

1. Application to RBI through financing bank or leader of consortium bank for working capital facilities together with a certificate from credit rating agency. 2. RBI to communicate in writing their decision on the amount of commercial paper to be issued to the leader bank. 3. Issue of commercial paper to be completed within 2 weeks from the date of approval of RBI through private placement. 4. The issue may be spread shall bear the same maturity date. 5. Issuing company to advise RBI through the bank/leader of the bank, the amount of actual issue of commercial paper within 3 days of completion of the issue.
Implications of Commercial Paper

The issue of commercial paper is an important step in disintermediation bringing a large number of borrowers as well as investors in touch with each other, without the intervention of the banking system as financial intermediary. Directly from borrowers can get at least 20% of their working capital requirements directly from market at rates which can be more advantageous than borrowing through a bank. The forts class borrowers have the prestige of joining the elitist commercial paper club with the approval of CRISIL, the banking system and the RBI, however RBI has presently stipulated that the working capital limits of the banks will be reduced to the extent of issue of commercial paper, industrialists have already made a plea that the issue of commercial paper should be outside the scheme of bank finance and other guidelines such as recommendation of banks and approval of RBI has not accepted the plea at present as commercial paper is a unsecured borrowing and not related to a trade transaction. The main aim of the RBI is to ensure

that commercial paper develops a sound money market instrument.si, in the initial stages emphasis should be on the quality rather than quantity. Impact on commercial banks The impact of issue of commercial paper on commercial banks would be of two dimensions. One is that banks themselves can invest in commercial paper and show this as short term investment. The second aspect is that the banks are likely to lose interest on working capital loan which has been hitherto lent to the companies, which have, now started borrowing through commercial paper. Further, the larger companies might avail of the cheap funds available in the market during the slack season worsening the banks surplus fund position\, but come to the banking system for borrowing during the busy season when funds are costly. This would mean the banks are the losers with a clear impact on profitability. However, the banks stand to gain by charging higher interest rate on reinstated portion especially of it done during busy season and by way of service charge for providing standby facilities and issuing and paying commission. Further when large borrowers are able to borrow directly from the market, banks will correspondingly be freed from the pressure on resources.
Certificate of Deposits

Certificate of deposits(CD) are short term deposit instruments issued by banks and financial institutions to raise large sums of money.
Features of Certificate Of Deposit
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Document of title to time deposit. Unsecured negotiable promotes. Freely transferable by endorsement and delivery. Issued at discount to face value. Repayable on a fixed date without grace days. Subject to stamp duty like the usince promissory notes.

On the recommendations of the Vaghul Committee, the RBI formulated a scheme in June 1989 permitting scheduled commercial banks (excluding RRBs) to issue CDs. It terms of the scheme, CDs can be issued by scheduled commercial banks at discount on face value and the discount rates are marketdetermined. The RBI has issued detailed guidelines for the issue of CDs and , with the changes introduced subsequently, the scheme for CDs has been liberalized.

RBI Guidelines

1. The denomination of CDs could be in multiples of Rs. 5 lakh subject to a minimum size of an issue to a single investor being Rs. 25 lakh. The CDs above Rs.25lakh will be in multiples of Rs.5 lakh. The amount rates to face value (not mortuary value) of CDs issued. 2. The CDs are short-term deposit instruments with maturity period ranging from 3 months to one year. The banks can issues at their discretion the CDs for any member of months/ days beyond the minimum usince period of three months and within the maximum usince of one year. 3. CDs can be issued to individuals, corporations, companies, trust funds, associations, etc. non-resident Indians (NRIs) can also subscribe to CDs but only on a non-repatriation. 4. CDs are freely transferable by endorsement and delivery but only after 45 days of the date of issue the primary investor. As such, the maturity period of CDs available in the market can be anywhere between 1 day and 320 days. 5. They are issued in the form of usince promissory notes payable on a fixed date without days of grace. CDs are subject to payment of stamp duty like the usince promissory notes. 6. Banks have to maintain CRR and SLR on the issue price of CDs and report them as deposits to the RBI. Banks are neither permitted to grant loans against CDs nor to buy them back prematurely. 7. From October 17, 1992, the limit for issue of CDs by scheduled commercial banks (excluding Regional Rural Banks) has been raised from 7 per cent to 10 per cent of the fortnightly aggregate deposits in 1989 90. The ceiling on outstanding of CDs at any point of time are prescribed by the Reserve Bank of India for each bank. Banks are advised by the RBI to ensure that the individual bank wise limits prescribed for issue of CDs are not exceeded at any time. At present the total permissible limits for issue of certificates of deposits (CDs). By the baking system amounts to Rs. 15,038 crore equivalent to 10 per cent of the fortnightly average outstanding aggregate deposits in 1989 90. The outstanding amount of CD issued by 50 scheduled commercial banks as on February 5,1998 amounted to Rs.10,261 crore and formed 70.4 per cent of the limit set for these banks for issue of CDs. To enable banks to mobilize deposits on comparative terms id has been decided to enhance the limits for issue of CDs . Accordingly, with effect from April17m 1993 scheduled commercial banks (excluding Regional Rural Banks) can issue CDs equivalent to 10 per cent of the fortnightly average outstanding aggregate deposits inn 1991 92. Consequently the aggregate limits for issue of CDs by eligible banks would increase from Rs. 15,038 crore of Rs. 20,552 crore. There financial instruments, viz, industrial development banks in India, industrial credit and investment corporation of India and industrial finance corporation of India,

were permitted to issue CDs with a maturity aggregate limit of Rs. 100 crore (enhanced to Rs. 1,350 crore in May 1992) . effective from July 29, 1992 the industrial reconstruction Bank of India has also been permitted by issue CDs upto a limit of Rs. 100 crore.
Advantages of Certificate of Deposits

1. Certificate of deposits are the most convenient instruments to depositors as they enabler their short term surpluses to earn higher return. 2. CDs also offer maximum liquidity as the are transferable by endorsement and delivery. The holder can resell his certificate to another. 3. From the point of view of issuing bank,, it is vehicle to raise resource in times of need and improve their lending capacity. The CDs are fixed term deposits which cannot be withdrawn until the redemption date. 4. This is an ideal instrument for the banks with short term surplus found to invest at attractive.
Government Security Treasury Bills

1. Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. Types Of Treasury Bills There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 6 months and 12months Treasury bills etc. In India, at present, the Treasury Bills are issued for the following tenors 91-days, 182-days and 364days Treasury bills.
Benefits Of Investment In Treasury Bills

No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.

Features Form

The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form. Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof.
Eligibility:

All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills.
Repayment

The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai.
Availability

All the treasury Bills are highly liquid instruments available both in the primary and secondary market.
Day Count

For treasury bills the day count is taken as 365 days for a year.
Primary Market

n the primary market, treasury bills are issued by auction technique. CALENDAR OF AUCTION FOR TREASURY BILLS Treasury Bill 91 day 182 day 364 day Day of auction Day of payment Every Wednesday Following Friday Wednesday preceding thenon- Following Friday Reporting Friday Wednesday preceding the Following Friday reporting Friday

Salient Features Of The Auction Technique

The auction of treasury bills is done only at Reserve Bank of India, Mumbai. Bids are submitted in terms of price per Rs 100. For example, a bid for 91-day Treasury bill auction could be for Rs 97.50. Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day. Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected.
Secondary Market & Players

The major participants in the secondary market are scheduled banks, financial Institutions, Primary dealers, mutual funds, insurance companies and corporate treasuries. Other entities like cooperative and regional rural banks, educational and religious trusts etc. have also begun investing their short term funds in treasury bills.
Advantages

Market related yields Transparency in operations as the transactions would be put through Reserve Bank of Indias SGL or Clients Gilt account only Two way quotes offered by primary dealers for purchase and sale of treasury bills. Certainty in terms of availability, entry & exit
Types of Government Securities

Government Securities are of the following types:Dated Securities : are generally fixed maturity and fixed coupon securities usually carrying semi-annual coupon. These are called dated securities because these are identified by their date of maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Government security maturing in 2012, which carries a coupon of 11.03% payable half yearly. The key features of these securities are:

They are issued at face value. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.
Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and 1995-96 respectively. The key features of these securities are:

They are issued at a discount to the face value. The tenor of the security is fixed. The securities do not carry any coupon or interest rate. The difference between the issue price (discounted price) and face value is the return on this security. The security is redeemed at par (face value) on its maturity date.
Partly Paid Stock is stock where payment of principal amount is made in installments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately. The first issue of such stock of eight year maturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a few more times thereafter. The key features of these securities are:

They are issued at face value, but this amount is paid in installments over a specified period. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.
Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it. Floating rate bonds of four year maturity were first issued on September 29, 1995, followed by another issue on December 5, 1995. Recently RBI issued a floating rate bond, the coupon of which is benchmarked against average yield

on 364 Days Treasury Bills for last six months. The coupon is reset every six months. The key features of these securities are: They are issued at face value. Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the time of issuance. The benchmark rate may be Treasury bill rate, bank rate etc. Though the benchmark does not change, the rate of interest may vary according to the change in the benchmark rate till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.
Bonds with Call/Put Option: First time in the history of Government Securities market RBI issued a bond with call and put option this year. This bond is due for redemption in 2012 and carries a coupon of 6.72%. However the bond has call and put option after five years i.e. in year 2007. In other words it means that holder of bond can sell back (put option) bond to Government in 2007 or Government can buy back (call option) bond from holder in 2007. This bond has been priced in line with 5 year bonds. Capital indexed Bonds are bonds where interest rate is a fixed percentage over the wholesale price index. These provide investors with an effective hedge against inflation. These bonds were floated on December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of 6 per cent over the wholesale price index. The principal redemption is linked to the Wholesale Price Index. The key features of these securities are:

They are issued at face value. Coupon or interest rate is fixed as a percentage over the wholesale price index at the time of issuance. Therefore the actual amount of interest paid varies according to the change in the Wholesale Price Index. The tenor of the security is fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The principal redemption is linked to the Wholesale Price Index.
Features of Government Securities

Eligibility All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions,

mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to purchase Government Securities. Availability Government securities are highly liquid instruments available both in the primary and secondary market. They can be purchased from Primary Dealers. PNB Gilts Ltd., is a leading Primary Dealer in the government securities market, and is actively involved in the trading of government securities.
Forms of Issuance of Government Securities

Banks, Primary Dealers and Financial Institutions have been allowed to hold these securities with the Public Debt Office of Reserve Bank of India in dematerialized form in accounts known as Subsidiary General Ledger (SGL) Accounts. Entities having a Gilt Account with Banks or Primary Dealers can hold these securities with them in dematerialized form. In addition government securities can also be held in dematerialized form in demat accounts maintained with the Depository Participants of NSDL.
Minimum Amount

In terms of RBI regulations, government dated securities can be purchased for a minimum amount of Rs. 10,000/-only.Treasury bills can be purchased for a minimum amount of Rs 25000/- only and in multiples thereof. State Government Securities can be purchased for a minimum amount of Rs 1,000/only.
Repayment

Government securities are repaid at par on the expiry of their tenor. The different repayment methods are as follows : For SGL account holders, the maturity proceeds would be credited to their current accounts with the Reserve Bank of India. For Gilt Account Holders, the Bank/Primary Dealers, would receive the maturity proceeds and they would pay the Gilt Account Holders. For entities having a demat acount with NSDL,the maturity proceeds would be collected by their DP's and they in turn would pay the demat Account Holders.
Day Count

For government dated securities and state government securities the day count is taken as 360 days for a year and 30 days for every completed month. However for Treasury bills it is 365 days for a year.
Benefits of Investing in No tax deducted at source Government Securities

Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals Qualifies for SLR purpose Zero default risk being sovereign paper Highly liquid. Transparency in transactions and simplified settlement procedures through CSGL/NSDL.
State Government Securities

State Government Securities are securities/loans issued by the Reserve Bank of India on behalf of various state governments for financing their developmental needs. These securities are auctioned by the Reserve Bank of India from time to time. These auctions are of fixed coupon, with pre announced notified amounts for different states.
Approved Securities

Approved securities are the securities, which are eligible for SLR purposes under Section 24 of the Banking Regulation Act.
CAPITAL MARKETS IN INDIA

Capital market is the market for long term funds unlike the money market, which is market for short term funds. Capital market refers to all the facilities and institutional arrangements for borrowing and lending term funds (medium and long term). The demand for long term money capital comes predominantly from private sector manufacturing industries and from govt. for economic development. The supply of funds comes largely from individual savers, corporate savings, banks, insurance companies, specialised financing agencies and the govt. Segments of Capital market : It is segregated into gilt edged market and the industrial securities. The gilt edged market refers to the market for govt. and semi-govt. securities which are traded in the market in stable value and are sought after by banks and other institutions. The industrial securities market refers to the market for shares and debentures of old as well as new companies. This market is further

divided as primary market and secondary market. The primary market refers to the set up which helps the industry to raise funds by issuing different types of securities, which are issued directly to the investors, both individual and institutions. It discharges the important function of transfer of savings, especially of the individuals. The new issues of securities are placed in the form of public issues, rights issues or private placement. The financial intermediaries such merchant bankers, issue houses, registrars etc. help in efficient operations of this market. The secondary market refers to the network for subsequent sale and purchase of securities. On allotment, the securities can be sold and purchased in the secondary market. The secondary market is represented by stock exchanges in the capital market. The SEs provide an organised market place for the investor to trade in securities. Role of capital market 1 mobilisation of savings and acceleration of capital formation 2 Promotion of industrial growth 3 Raising long term capital 4 Ready and continuous market 5 Proper channelisation of funds 6 Provision of variety of services.

Question Bank: For 15 marks 1) What is Call money market? Give its features, Advantages and disadvantages 2) What is Monetary policy of RBI ? Explain about its credit control Methods ? 3) What are the functions of RBI? 4) What are Commercial papers? Mention its features and RBI guidelines related to commercial papers ? 5) What is companies Act? Elaborate Part 3 of Companies act 6) Explain SEBI Act 1992 with reference to Objectives, Powers and functions of SEBI? 7) What are the methods of Marketing Industrial Securities in the market ? 8) Explain intermediaries in Primary and Secondary Market? For 7 or 8 marks 1) Trading Procedure of Securities in Secondary market?

What are Derivatives? Explain Futures and option trade? Write a note on Certificate of Deposit? Write a note on Capital issue control act? Write a note on treasury bills and its benefits What are different types of Bill? Give advantages of Commercial papers Write a note on Off balance sheet items of commercial banks? 9) Write a note on RBI 10) Write a short note on Capital market in India? 11) What is State government Securities and what are the benefits of investing in Government Securities? 12) Write a note on Forex market and its features 13) What are benefits of Listing Securities on a stock exchange 14) Write a note on stock exchange and bye laws of Stock exchange 15) What are features of Government securities ?

2) 3) 4) 5) 6) 7) 8)