CAPITAL, MONEY MARKET &FDI

Government Securities Market in India – A Primer

1. What is a Bond?
1.1 A bond is a debt instrument in which an investor loans money to an entity (typically corporate or
government) which borrows the funds for a defined period of time at a variable or fixed interest rate.
Bonds are used by companies, municipalities, states and sovereign governments to raise money to
finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the
issuer.
What is a Government Security (G-Sec)?
1.2 A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or
the State Governments. It acknowledges the Government’s debt obligation. Such securities are short
term (usually called treasury bills, with original maturities of less than one year) or long term (usually
called Government bonds or dated securities with original maturity of one year or more). In India, the
Central Government issues both, treasury bills and bonds or dated securities while the State
Governments issue only bonds or dated securities, which are called the State Development Loans
(SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged
instruments.
a. Treasury Bills (T-bills)
1.3 Treasury bills or T-bills, which are money market instruments, are short term debt instruments
issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day
and 364 day. Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at
a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of ₹100/-
(face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed
at the face value of ₹100/-. The return to the investors is the difference between the maturity value or
the face value (that is ₹100) and the issue price (for calculation of yield on Treasury Bills please see
answer to question no. 26).
b. Cash Management Bills (CMBs)
1.4 In 2010, Government of India, in consultation with RBI introduced a new short-term instrument,
known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the
Government of India. The CMBs have the generic character of T-bills but are issued for maturities
less than 91 days.
c. Dated G-Secs
1.5 Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on
the face value, on half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40
years.
The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry /
depository of G-Secs and deals with the issue, interest payment and repayment of
principal at maturity. Most of the dated securities are fixed coupon securities.
Instruments:
i) Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life (i.e. till
maturity) of the bond. Most Government bonds in India are issued as fixed rate bonds.
For example – 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years maturing on April
22, 2018. Coupon on this security will be paid half-yearly at 4.12% (half yearly payment being half of
the annual coupon of 8.24%) of the face value on October 22 and April 22 of each year.
ii) Floating Rate Bonds (FRB) – FRBs are securities which do not have a fixed coupon rate. Instead it
has a variable coupon rate which is re-set at pre-announced intervals (say, every six months or one
year). FRBs were first issued in September 1995 in India. The variable coupon rate for payment of
interest on this FRB 2024 was decided to be the average rate rounded off up to two decimal places, of
the implicit yields at the cut-off prices of the last three auctions of 182 day T- Bills, held before the
date of notification. The coupon rate for payment of interest on subsequent semi-annual periods was
announced to be the average rate (rounded off up to two decimal places) of the implicit yields at the
cut-off prices of the last three auctions of 182 day T-Bills held up to the commencement of the
respective semi-annual coupon periods.
iii) The Floating Rate Bond can also carry the coupon, which will have a base rate plus a fixed spread,
to be decided by way of auction mechanism. The spread will be fixed throughout the tenure of the
bond. For example, FRB 2031 (auctioned on May 4, 2018) carry the coupon with base rate equivalent
to Weighted Average Yield (WAY) of last 3 auctions (from the rate fixing day) of 182 Day T-Bills plus a
fixed spread decided by way of auction. Zero Coupon Bonds – Zero coupon bonds are bonds with no
coupon payments. However, like T- Bills, they are issued at a discount and redeemed at face value.
The Government of India had issued such securities in 1996. It has not issued zero coupon bonds
after that.
iv) Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted index of
inflation with a view to protecting the Principal amount of the investors from inflation. A 5 year Capital
Indexed Bond, was first issued in December 1997 which matured in 2002.
v) Inflation Indexed Bonds (IIBs) - IIBs are bonds wherein both coupon flows and Principal amounts
are protected against inflation. The inflation index used in IIBs may be Whole Sale Price Index (WPI)
or Consumer Price Index (CPI). Globally, IIBs were first issued in 1981 in UK. In India, Government of
India through RBI issued IIBs (linked to WPI) in June 2013. Since then, they were issued on monthly
basis (on last Tuesday of each month) till December 2013. Based on the success of these IIBs,
Government of India in consultation with RBI issued the IIBs (CPI based) exclusively for the retail
customers in December 2013. Further details on IIBs are available on RBI website under FAQs.
vi) Bonds with Call/ Put Options – Bonds can also be issued with features of optionality wherein
the issuer can have the option to buy-back (call option) or the investor can have the option to sell the
bond (put option) to the issuer during the currency of the bond. It may be noted that such bond may
have put only or call only or both options. The first G-Sec with both call and put option viz. 6.72% GS
2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The
optionality on the bond could be exercised after completion of five years tenure from the date of
issuance on any coupon date falling thereafter. The Government has the right to buy-back the bond
(call option) at par value (equal to the face value) while the investor had the right to sell the bond (put
option) to the Government at par value on any of the half-yearly coupon dates starting from July 18,
2007.
vii) Special Securities - Under the market borrowing program, the Government of India also issues,
from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the
Food Corporation of India, etc. (popularly called oil bonds, fertiliser bonds and food bonds
respectively) as compensation to these companies in lieu of cash subsidies These securities are
usually long dated securities and carry a marginally higher coupon over the yield of the dated
securities of comparable maturity. These securities are, however, not eligible as SLR securities but
are eligible as collateral for market repo transactions. The beneficiary entities may divest these
securities in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising
funds.
Government of India has also issued Bank Recapitalisation Bonds to specific Public Sector Banks in
2018. These securities are named as Special GoI security and are non-transferable and are not
eligible investment in pursuance of any statutory provisions or directions applicable to investing
banks. These securities can be held under HTM portfolio without any limit.
viii) STRIPS – Separate Trading of Registered Interest and Principal of Securities. - STRIPS are the
securities created by way of separating the cash flows associated with a regular G-Sec i.e. each semi-
annual coupon payment and the final principal payment to be received from the issuer, into separate
securities. They are essentially Zero Coupon Bonds (ZCBs). However, they are created out of existing
securities only and unlike other securities, are not issued through auctions. Stripped securities
represent future cash flows (periodic interest and principal repayment) of an underlying coupon
bearing bond. Being G-Secs, STRIPS are eligible for SLR. All fixed coupon securities issued by
Government of India, irrespective of the year of maturity, are eligible for Stripping/Reconstitution,
provided that the securities are reckoned as eligible investment for the purpose of Statutory Liquidity
Ratio (SLR) and the securities are transferable.
STRIPS in G-Secs ensure availability of sovereign zero coupon bonds, which facilitate the
development of a market determined zero coupon yield curve (ZCYC). STRIPS also provide
institutional investors with an additional instrument for their asset liability management (ALM). Further,
as STRIPS have zero reinvestment risk, being zero coupon bonds, they can be attractive to retail/non-
institutional investors. Market participants, having an SGL account with RBI can place requests
directly in e-kuber for stripping/reconstitution of eligible securities
 Sovereign Gold Bond (SGB): SGBs are unique instruments, prices of which are linked to commodity
price viz Gold. SGBs are also budgeted in lieu of market borrowing. The calendar of issuance is
published indicating tranche description, date of subscription and date of issuance. The Bonds shall
be denominated in units of one gram of gold and multiples thereof. Minimum investment in the Bonds
shall be one gram with a maximum limit of subscription per fiscal year of 4 kg for individuals, 4 kg for
Hindu Undivided Family (HUF) and 20 kg for trusts

State Development Loans (SDLs)

State Governments also raise loans from the market which are called SDLs. SDLs are dated
securities issued through normal auction similar to the auctions conducted for dated securities issued
by the Central Government (please see question 3). Interest is serviced at half-yearly intervals and
the principal is repaid on the maturity date. Like dated securities issued by the Central Government,
SDLs issued by the State Governments also qualify for SLR. They are also eligible as collaterals for
borrowing through market repo as well as borrowing by eligible entities from the RBI under the
Liquidity Adjustment Facility (LAF) and special repo conducted under market repo by CCIL.

Primary (Urban) Co-operative Banks (UCBs)

2.2 Section 24 (2A) of the Banking Regulation Act 1949, (as applicable to co-operative societies)
provides that every primary (urban) cooperative bank shall maintain liquid assets, the value of which
shall not be less than such percentage as may be specified by Reserve Bank in the Official Gazette
from time to time and not exceeding 40% of its DTL in India as on the last Friday of the second
preceding fortnight (in addition to the minimum cash reserve ratio (CRR) requirement). Such liquid
assets shall be in the form of cash, gold or unencumbered investment in approved securities. This is
referred to as the Statutory Liquidity Ratio (SLR) requirement. It may be noted that balances kept with
State Co-operative Banks / District Central Co-operative Banks as also term deposits with public
sector banks are now not eligible for being reckoned for SLR purpose w.e.f April 1, 2015.
Rural Co-operative Banks
2.3 As per Section 24 of the Banking Regulation Act 1949, the State Co-operative Banks (SCBs) and
the District Central Co-operative Banks (DCCBs) are required to maintain assets as part of the SLR
requirement in cash, gold or unencumbered investment in approved securities the value of which shall
not, at the close of business on any day, be less than such per cent, as prescribed by RBI, of its total
net demand and time liabilities. DCCBs are allowed to meet their SLR requirement by maintaining
cash balances with their respective State Co-operative Bank.
C. Regional Rural Banks (RRBs)
2.4 Since April 2002, all the RRBs are required to maintain their entire Statutory Liquidity Ratio (SLR)
holdings in Government and other approved securities
How are the G-Secs issued?
3.1 G-Secs are issued through auctions conducted by RBI. Auctions are conducted on the electronic
platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI. Commercial banks,
scheduled UCBs, Primary Dealers, insurance companies and provident funds, who maintain funds
account (current account) and securities accounts (Subsidiary General Ledger (SGL) account) with
RBI, are members of this electronic platform. All members of E-Kuber can place their bids in the
auction through this electronic platform. The results of the auction are published by RBI at stipulated
time (For Treasury bills at 1:30 PM and for GoI dated securities at 2:00 PM or at half hourly intervals
thereafter in case of delay). All non-E-Kuber members including non-scheduled UCBs can participate
in the primary auction through scheduled commercial banks or PDs (called as Primary Members-
PMs). For this purpose, the UCBs need to open a securities account with a bank / PD – such an
account is called a Gilt Account. A Gilt Account is a dematerialized account maintained with a
scheduled commercial bank or PD. The proprietary transactions in G-Secs undertaken by PMs are
settled through SGL account maintained by them with RBI at PDO. The transactions in G-Secs
undertaken by Gilt Account Holders (GAHs) through their PMs are settled through Constituent
Subsidiary General Ledger (CSGL) account maintained by PMs with RBI at PDO for its constituent
(e.g., a non-scheduled UCB).
3.2 The RBI, in consultation with the Government of India, issues an indicative half-yearly auction
calendar which contains information about the amount of borrowing, the range of the tenor of
securities and the period during which auctions will be held.
What is Liquidity Adjustment Facility (LAF) and whether Re-repo in Government Securities
Market is allowed?
LAF is a facility extended by RBI to the scheduled commercial banks (excluding RRBs) and PDs to
avail of liquidity in case of requirement or park excess funds with RBI in case of excess liquidity on an
overnight basis against the collateral of G-Secs including SDLs. Basically, LAF enables liquidity
management on a day to day basis. The operations of LAF are conducted by way of repurchase
agreements (repos and reverse repos – please refer to paragraph numbers 30.4 to 30.8
under question no. 30 for more details) with RBI being the counter-party to all the transactions. The
interest rate in LAF is fixed by RBI from time to time. LAF is an important tool of monetary policy and
liquidity management. The substitution of collateral (security) by the market participants during the
tenor of the term repo is allowed from April 17, 2017 subject to various conditions and guidelines
prescribed by RBI from time to time. The accounting norms to be followed by market participants for
repo/reverse repo transactions under LAF and MSF (Marginal Standing Facility) of RBI are aligned
with the accounting guidelines prescribed for market repo transactions. In order to distinguish
repo/reverse repo transactions with RBI from market repo transactions, a parallel set of accounts
similar to those maintained for market repo transactions but prefixed with ‘RBI’ may be maintained.
Further market value of collateral securities (instead of face value) will be reckoned for calculating
haircut and securities acquired by banks under reverse repo with RBI will be bestowed SLR status
Scheduled commercial banks, Primary Dealers along with Mutual Funds and Insurance Companies
(subject to the approval of the regulators concerned) maintaining Subsidiary General Ledger account
with RBI are permitted to re-repo the government securities, including SDLs and Treasury Bills,
acquired under reverse repo, subject to various conditions and guidelines prescribed by RBI time to
time.
7. How and in what form can G-Secs be held?
7.1 The Public Debt Office (PDO) of RBI, acts as the registry and central depository for G-Secs. They
may be held by investors either as physical stock or in dematerialized (demat/electronic) form. From
May 20, 2002, it is mandatory for all the RBI regulated entities to hold and transact in G-Secs only in
dematerialized (SGL) form.
Physical form: G-Secs may be held in the form of stock certificates. A stock certificate is registered
in the books of PDO. Ownership in stock certificates cannot be transferred by way of endorsement
and delivery. They are transferred by executing a transfer form as the ownership and transfer details
are recorded in the books of PDO. The transfer of a stock certificate is final and valid only when the
same is registered in the books of PDO.
b. Demat form: Holding G-Secs in the electronic or scripless form is the safest and the most
convenient alternative as it eliminates the problems relating to their custody, viz., loss of security.
Besides, transfers and servicing of securities in electronic form is hassle free. The holders can
maintain their securities in dematerialsed form in either of the two ways:
i. SGL Account: Reserve Bank of India offers SGL Account facility to select entities who can
hold their securities in SGL accounts maintained with the Public Debt Offices of the RBI. Only
financially strong entities viz. Banks, PDs, select UCBs and NBFCs which meet RBI
guidelines (please see RBI circular IDMD.DOD.No. 13/10.25.66/2011-12 dt Nov 18, 2011 )
are allowed to maintain SGL with RBI.
ii. Gilt Account: As the eligibility to open and maintain an SGL account with the RBI is restricted,
an investor has the option of opening a Gilt Account with a bank or a PD which is eligible to
open a CSGL account with the RBI. Under this arrangement, the bank or the PD, as a
custodian of the Gilt Account holders, would maintain the holdings of its constituents in a
CSGL account (which is also known as SGL II account) with the RBI. The servicing of
securities held in the Gilt Accounts is done electronically, facilitating hassle free trading and
maintenance of the securities. Receipt of maturity proceeds and periodic interest is also faster
as the proceeds are credited to the current account of the custodian bank / PD with the RBI
and the custodian (CSGL account holder) immediately passes on the credit to the Gilt
Account Holders (GAH).
7.2 Investors also have the option of holding G-Secs in a dematerialized account with a depository
(NSDL / CDSL, etc.). This facilitates trading of G-Secs on the stock exchanges.
8. How does the trading in G-Secs take place and what regulations are applicable to prevent
abuse? Whether value free transfer of G-Secs is allowed?
8.1 There is an active secondary market in G-Secs. The securities can be bought / sold in the
secondary market either through (i) Negotiated Dealing System-Order Matching (NDS-OM)
(anonymous online trading) or through (ii) Over the Counter (OTC) and reported on NDS-OM or (iii)
NDS-OM-Web (para 8.5) and (iv) Stock exchanges
NDS-OM
In August 2005, RBI introduced an anonymous screen-based order matching module called NDS-OM.
This is an order driven electronic system, where the participants can trade anonymously by placing
their orders on the system or accepting the orders already placed by other participants. Anonymity
ensures a level playing field for various categories of participants. NDS-OM is operated by the CCIL
on behalf of the RBI (Please see answer to the question no.19 about CCIL). Direct access to the
NDS-OM system is currently available only to select financial institutions like Commercial Banks,
Primary Dealers, well managed and financially sound UCBs and NBFCs, etc. Other participants can
access this system through their custodians i.e. with whom they maintain Gilt Accounts. The
custodians place the orders on behalf of their customers. The advantages of NDS-OM are price
transparency and better price discovery.
8.2 Gilt Account holders have been given indirect access to the reporting module of NDS-OM through
custodian institutions.
8.3 Access to NDS-OM by the retail segment, comprising of individual investors having demat
account with depositories viz. NSDL and/or CDSL, desirous of participating in the G-Sec market is
facilitated by allowing them to use their demat accounts for their transactions and holdings in G-Sec.
This access would be facilitated through any of the existing NDS-OM primary members, who also act
as Depository Participants for NSDL and/or CDSL. The scheme seeks to facilitate efficient access to
retail individual investor to the same G-Sec market being used by the large institutional investor in a
seamless manner.
ii. Over the Counter (OTC)/ Telephone Market
8.4 In the G-Sec market, a participant, who wants to buy or sell a G-Sec, may contact a bank /
PD/financial institution either directly or through a broker registered with SEBI and negotiate price and
quantity of security.
Who are the major players in the G-Secs market?
Major players in the G-Secs market include commercial banks and PDs besides institutional investors
like insurance companies. PDs play an important role as market makers in G-Secs market. A market
maker provides firm two way quotes in the market i.e. both buy and sell executable quotes for the
concerned securities. Other participants include co-operative banks, regional rural banks, mutual
funds, provident and pension funds. Foreign Portfolio Investors (FPIs) are allowed to participate in the
G-Secs market within the quantitative limits prescribed from time to time. Corporates also buy/ sell the
G-Secs to manage their overall portfolio.
What is shut period?
‘Shut period’ means the period for which the securities cannot be traded. During the period under
shut, no trading of the security which is under shut is allowed. The main purpose of having a shut
period is to facilitate finalizing of the payment of maturity redemption proceeds and to avoid any
change in ownership of securities during this process. Currently, the shut period for the securities held
in SGL accounts is one day.
18. What is Delivery versus Payment (DvP) Settlement?
Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of
securities and funds happen simultaneously. This ensures that unless the funds are paid, the
securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in
transactions.
Short sale" means sale of a security one does not own. Entities eligible to undertake short sales are
(a) Scheduled commercial banks, (b) Primary Dealers, (c) Urban Cooperative Banks as permitted
under circular UBD.BPD (PCB). (d) Any other regulated entity which has the approval of the
concerned regulator (SEBI, IRDA, PFRDA, NABARD, NHB)
23. What is the relationship between yield and price of a bond?
If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or market yields
decline, the price of the bond rises. In other words, the yield of a bond is inversely related to its price.
The relationship between yield to maturity and coupon rate of bond may be stated as follows:
 When the market price of the bond is less than the face value, i.e., the bond sells at a
discount, YTM > > coupon yield.
  When the market price of the bond is more than its face value, i.e., the bond sells at a
premium, coupon yield > > YTM.
 When the market price of the bond is equal to its face value, i.e., the bond sells at par, YTM =
coupon yield.
24. How is the yield of a bond calculated?
24.1 An investor who purchases a bond can expect to receive a return from one or more of the
following sources:
 The coupon interest payments made by the issuer;
 Any capital gain (or capital loss) when the bond is sold/matured; and
 Income from reinvestment of the interest payments that is interest-on-interest.
The three yield measures commonly used by investors to measure the potential return from investing
in a bond are briefly described below:
i) Coupon Yield
24.2 The coupon yield is simply the coupon payment as a percentage of the face value. Coupon yield
refers to nominal interest payable on a fixed income security like G-Sec. This is the fixed return the
Government (i.e., the issuer) commits to pay to the investor. Coupon yield thus does not reflect the
impact of interest rate movement and inflation on the nominal interest that the Government pays.
Coupon yield = Coupon Payment / Face Value
ii) Current Yield
24.3 The current yield is simply the coupon payment as a percentage of the bond’s purchase price; in
other words, it is the return a holder of the bond gets against its purchase price which may be more or
less than the face value or the par value. The current yield does not take into account the
reinvestment of the interest income received periodically.
Current yield = (Annual coupon rate / Purchase price) X100
iii) Yield to Maturity
24.4 Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its maturity. The
price of a bond is simply the sum of the present values of all its remaining cash flows. Present value is
calculated by discounting each cash flow at a rate; this rate is the YTM. Thus, YTM is the discount
rate which equates the present value of the future cash flows from a bond to its current market price.
In other words, it is the internal rate of return on the bond
hat is Convexity?
27.4 Calculation of change in price for change in yields based on duration works only for small
changes in yields. This is because the relationship between bond price and yield is not strictly linear.
Over large variations in yields, the relationship is curvilinear i.e., the reduction in option free bond
price is less than the change calculated based only on duration for yield increase, and increase in
option free bond price will be more than the change calculated based only on duration for yield
decrease. This is measured by a concept called convexity, which is the change in duration of a bond
due to change in the yield of the bond.
For Cooperative banks, investments classified under 'Held to Maturity' (HTM) category need not be
marked to market and will be carried at acquisition cost unless it is more than the face value, in which
case the premium should be amortized over the period remaining to maturity. The individual scrip in
the ‘Available for Sale’ (AFS) category in the books of the cooperative banks will be marked to market
at the year-end or at more frequent intervals. The individual scrip in the ‘Held for Trading’ (HFT)
category will be marked to market at monthly or at more frequent intervals. The book value of
individual securities in AFS and HFT categories would not undergo any change after marking to
market.

What is Money Market?

30.1 While the G-Secs market generally caters to the investors with a long-term investment horizon,
the money market provides investment avenues of short term tenor. Money market transactions are
generally used for funding the transactions in other markets including G-Secs market and meeting
short term liquidity mismatches. By definition, money market is for a maximum tenor of one year.
Within the one year, depending upon the tenors, money market is classified into:
i. Overnight market - The tenor of transactions is one working day.
ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.
iii. Term money market – The tenor of the transactions is from 15 days to one year.
What are the different money market instruments?
30.2 Money market instruments include call money, repos, T- Bills (for details refer para 1.3), Cash
Management Bills (for details refer para 1.4), Commercial Paper, Certificate of Deposit and
Collateralized Borrowing and Lending Obligations (CBLO).
Call money market
30.3 Call money market is a market for uncollateralized lending and borrowing of funds. This market is
predominantly overnight and is open for participation only to scheduled commercial banks and the
primary dealers.
Repo market
30.4 Repo or ready forward contact is an instrument for borrowing funds by selling securities with an
agreement to repurchase the said securities on a mutually agreed future date at an agreed price
which includes interest for the funds borrowed.
30.5 The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against
buying of securities with an agreement to resell the said securities on a mutually agreed future date at
an agreed price which includes interest for the funds lent.
30.6 It can be seen from the definition above that there are two legs to the same transaction in a repo/
reverse repo. The duration between the two legs is called the ‘repo period’. Predominantly, repos are
undertaken on overnight basis, i.e., for one day period. Settlement of repo transactions happens along
with the outright trades in G-Secs.
30.7 The consideration amount in the first leg of the repo transactions is the amount borrowed by the
seller of the security. On this, interest at the agreed ‘repo rate’ is calculated and paid along with the
consideration amount of the second leg of the transaction when the borrower buys back the security.
The overall effect of the repo transaction would be borrowing of funds backed by the collateral of G-
Secs.
30.8 The repo market is regulated by the Reserve Bank of India. All the above mentioned repo market
transactions should be traded/reported on the electronic platform called the Clearcorp Repo Order
Matching System (CROMS).
30.9 As part of the measures to develop the corporate debt market, RBI has permitted select entities
(scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs, NBFCs, mutual funds,
housing finance companies, insurance companies) to undertake repo in corporate debt securities.
This is similar to repo in G-Secs except that corporate debt securities are used as collateral for
borrowing funds. Only listed corporate debt securities that are rated ‘AA’ or above by the rating
agencies are eligible to be used for repo. Commercial paper, certificate of deposit, non-convertible
debentures of original maturity less than one year are not eligible for this purpose. These transactions
take place in the OTC market and are required to be reported on FIMMDA platform within 15 minutes
of the trade for dissemination of trade information. They are also to be reported on the clearing house
of any of the exchanges for the purpose of clearing and settlement.
Triparty Repo
"Tri-party repo" means a repo contract where a third entity (apart from the borrower and lender),
called a Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate
services like collateral selection, payment and settlement, custody and management during the life of
the transaction. Funds borrowed under repo including tri-party repo in government securities shall be
exempted from CRR/SLR computation and the security acquired under repo shall be eligible for SLR
provided the security is primarily eligible for SLR as per the provisions of the Act under which it is
required to be maintained.
Tri Party Repo Dealing System (TREPS) facilitates, borrowing and lending of funds, in Triparty Repo
arrangement. CCIL is the Central Counterparty to all trades from TREPS and also perform the role
and responsibilities of Triparty Repo Agent. All the repo eligible entities are entitled to participate in
Triparty Repo. The entity type admitted include, Public Sector Banks, Private Banks, Foreign Banks,
Co-operative Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers,
Bank cum Primary Dealers, NBFCs, Corporates, Provident/ Pension Funds, Payment Banks, Small
Finance Banks, etc.
TREPS Dealing System is an anonymous order matching System provided by CCDS (Clearcorp
Dealing Systems (India) Ltd) to enable Members to borrow and lend funds. It also disseminates online
information regarding deals concluded, volumes, rate etc., and such other notifications as relevant to
borrowing and lending under Triparty Repo by the members. The borrowing and/ or lending can be
done for settlement type T+0 and T+1.
Commercial Paper (CP)
30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note and held in a dematerialized form through any of the depositories approved by and
registered with SEBI. A CP is issued in minimum denomination of ₹5 lakh and multiples thereof and
shall be issued at a discount to face value No issuer shall have the issue of CP underwritten or co-
accepted and options (call/put) are not permitted on a CP. Companies, including NBFCs and AIFIs,
other entities like co-operative societies, government entities, trusts, limited liability partnerships and
any other body corporate having presence in India with net worth of ₹100 cr or higher and any other
entities specifically permitted by RBI are eligible to issue Commercial papers subject to conditions
specified by RBI. All residents, and non-residents permitted to invest in CPs under Foreign Exchange
Management Act (FEMA), 1999 are eligible to invest in CPs; however, no person can invest in CPs
issued by related parties either in the primary or secondary market. Investment by regulated financial
sector entities will be subject to such conditions as the concerned regulator may impose.
RBI has issued Reserve Bank Commercial Paper Directions 2017 - FMRD.DIRD.01/CGM (TRS) -
2017 dated August 10, 2017
Certificate of Deposit (CD)
30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible
financial institution for a specified time period. Banks can issue CDs for maturities from 7 days to one
year whereas eligible FIs can issue for maturities from 1 year to 3 years.