presentation of CODs

8/7/2019 presentation of CODs

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CertificatesCertificates ofof

depositdeposit

Ravi Bhushan KumarJaya Toufiq(PGDM)


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A certificate of deposit is a certificate

issued by a bank. This deposit attracts afixed rate of interest, which is normallypayable to the holder of the instrumenttogether with the nominal amount invested,

at redemption date. CODs are normally issued in multiples of

Rs.1 lakh thereafter.

What is Certificates Of Deposit:


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Name of issuing bank

Date of issue

Date of redemption/maturity

Amount of the deposit

Annual interest rate paid on the deposit

The CODs will contain the

following information:


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CDs can be subscribed by an individual, as well as,by an institution.

The instrument is to be stamped according to therates prescribed by the Indian stamp Act.

The CDs should fall due for payment on a working

day. In case the due date falls on a holiday, thepayment is to be made on the previous workingday.

Features:-


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No advance can be taken against the

security of the CDs There is no limit for investment in CDs by

the bank.

Cont


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1. Introduction:

CODs is a negotiable money instrumentand issued in dematerialized form or asa Usance promissory Note against

funds deposit at a bank or othereligible financial institution for aspecified time period.

Guidelines for issue of CDs are presently

governed by various directives issued by

the RBI, as amended from time totime.(july1, 2010) :


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CODs can be issued by:

1. Scheduled Commercial Bank excludingRegional Rural Bank(RRBs) and LocalArea Banks (LABs)

2. Select all-India Financial Institutionsthat have been permitted by RBI toraise short-term resources within theumbrella limit fixed by RBI.

2. Eligibility:


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1. Banks have the freedom to issue CDs

depending on their requirements.2. An FI may issue CDs within the overallumbrella limit fixed by RBI, i.e., issue of CDtogether with other instruments, viz., term

money, term deposits, commercial papers andinter-corporate deposits should not exceed100 per cent of its net owned funds, as perthe latest audited balance sheet.

3. Aggregate Amount


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Minimum amount of a CD should be

Rs.1 lakh, i.e., the minimum depositthat could be accepted from a singlesubscriber should not be less thanRs.1 lakh and in the multiples of Rs. 1lakh thereafter.

4. Minimum Size ofIssue and

Denominations:


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CDs can be issued to individuals,

corporations, companies, trusts, funds,associations, etc.

Non- Resident Indians (NRIs) may alsosubscribe to CDs, but only on non-

repatriable basis, which should be clearlystated on the Certificate. Such CDs cannotbe endorsed to another NRI in thesecondary market.

5.Investors :


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1. The maturity period of CDs issued by

banks should be not less than 7 days and notmore than one year.

2. The FIs can issue CDs for a period notless than 1 year and not exceeding 3 years

from the date of issue

6. Maturity :


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CDs in physical form are freely

transferable by endorsement anddelivery. CDs in demat form can betransferred as per the procedureapplicable to other demat securities.There is no lock-in period for theCDs.

7.T

ransferability:


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Steps :

Investor surrender physical certificates toDepository Participant (DP).

DP make request for dematerialisation todepository which in turn request the issuer forthe same.

Issuer confirm to depository certificate maydemateralised and receive physical certificatefrom DP.

DP gives statement of holding to investor

8.Dematerialisation of

Physical COD:


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A notice is required to be given in at

least one local newspaper; Lapse of a reasonable period (say 15

days) from the date of the notice in

the newspaper; and Execution of an indemnity bond by

the investor to the satisfaction ofthe issuer of CDs

9.Issue of Duplicate

Certificates :


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The maturity value (MV) of an NCD will be

the nominal amount deposited (N

) plus theinterest for the period. If for instance adeposit of Rs 10 lakh is made on 1 Marchfor 90 days, and interest paid on the

amount is 15% (referred to as a 15% 90-day NCD), the maturity value is calculatedas follows:

Calculations:


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Nominal amount Rs.10,00,000Int. for period(15%x 10,00,000x90/365)Rs. 36,986

MV: Rs.10,36,986 The general formula would be:MV = N x (1 + (1 x c/100 x d/365)N= Rs.10,00,000

C= 15%D= 90 daysMV= Rs.10,36,986

Cont


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If the holder sells this instrument to another

party before the redemption date, the proceeds

can be calculated. Remember that financialinstruments are traded between parties on a yieldto maturity (expressed as an interest rate) basis,because interest is the price that is paid formoney borrowed. The proceeds of the sale are

calculated as follows:

Proceeds = MV / [1 + (d/365 x i/100)]

Cont


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Where:

MV: Maturity value

D: Remaining tenor in daysI: Yield at which the instrument was tradedexpressed as a fixed If, in the above example, the NCD is sold on 31 March

at a yield of 14%, the proceeds to the seller (the

amount the buyer will pay) is: Proceeds = Rs.1 036 986 / [1 + (60/365 x 14/100)]

= Rs.1 013 658

Cont


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Where:MV: Rs.10,36,986

D: 60daysI: 14 The buyer will be the new holder, and he may

present the NCDs to the bank on redemption dateto receive the maturity value of R1 036 986 or

sell it in the secondary market prior to maturity. The scheme of Certificate of Deposits (CDs) was

introduced by RBI as a step towards deregulationof interest rates on deposits.

Cont


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As this instrument is issued at

discount, the rate of interest iscalculated on the basis of calculationsas follows:

Rate of Interest on CDs:


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Example: P Co. has to make payment

of Rs. 2 million (Rs. 20 lakhs) on 16thApril, 2011. It has a surplus moneytoday i.e., 15th January, 2011 and thecompany has decided to invest inCertificate of Deposit (CDs) ofleading nationalized bank at 8% p.a.What money is required to be

invested now?

Cont:


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Amount required for making payment on 16th April, 2011 = Rs.

20,00,000

Investment in Certificates of Deposit (CDs) on 15th January, 2011Rate of interest 8% p.a.

Number of days to maturity 91 days

Interest on Re. I for 91 days = Re. 0.08 X 91/365 = 0.0199452

Amount to be received for Re.1 = 1.0199452

Invested now, value after 91 days = Re. 1.00 + Re. 0.0199452 = Rs.1.0199452

Calculation of amount now to be invested to get Rs. 20 lakhs after 91days

Rs.20,00,000 / Rs.1.0199452

= Rs.19,60,889 say Rs.19,60,890

Soluti

on:


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THANK YOU

Documents

presentation of CODs