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Like CPs, short-term
debentures are issued by corporate entities. However, unlike
CPs, they represent additional funding for the corporate ie the funds
borrowed by issuing short term debentures are over and above the funds
available to the corporate from its consortium bankers. Normally,
debenture issuance attracts stamp duty; but issuers get around this by
issuing only a letter of allotment (LOA) with the promise of issuing a
formal debenture later – however the debenture is never issued and
the LOA itself is redeemed on maturity. These LOAs are freely tradable
but transfers attract stamp duty.
Bills of exchange are promissory notes issued for
commercial transactions involving exchange of goods and services. These
bills form a part of a company’s banking limits and are discounted
by the banks. Banks in turn rediscount bills with each other.
Long term debt instruments
By convention, these are instruments having a maturity exceeding one
year. The main instruments are Government of India dated securities
(GOISEC), State Government securities (state loans) public sector bonds
(PSU bonds), corporate debentures etc.
Most of these are coupon bearing instruments ie interest payments
(called coupons) are payable at pre specified dates called "coupon
dates". At any given point of time, any such instrument has a
certain amount of accrued interest with it ie interest which has accrued
(but is not due) calculated at the "coupon rate" from the date
of the last coupon payment. eg if 30 days have elapsed from the last
coupon payment of a 14% coupon debenture with a face value of Rs 100,
the accrued interest will be
100*0.14*30/365 = 1.15
Whenever coupon-bearing securities are traded, by convention, they are
traded at a base price with the accrued interest separate – in
other words, the total price would be equal to the summation of the base
price and the accrued interest.
A brief description of these instruments is as follows:
Government of India dated securities (GOISECs): Like
treasury bills, GOISECs are issued by the Reserve Bank of India on
behalf of the Government of India. These form a part of the borrowing
program approved by Parliament in the Finance Bill each year (Union
Budget). They are issued in dematerialized form but can be issued in
denominations as low as Rs 100 in physical certificate form. They have
maturity ranging from 1 year to 30 years. Very long dated securities ie
those having maturity exceeding 20 years were in vogue in the seventies
and the eighties while in the early nineties, most of the securities
issued have been in the 5-10 year maturity bucket. Very recently,
securities of 15 and 20 years maturity have been issued.
Like T-Bills, GOISECs are most commonly issued in dematerialized form
in the "SGL" account although it can be issued in physical
certificate form on specific request. Tradability of physical securities
is very limited. The SGL passbook contains a record of the holdings of
the investor. The RBI acts as a clearing agent for GOISEC transactions
by being the custodian and operator of the SGL account. GOISECs are
transferable by endorsement and delivery for physical certificates.
Transactions of securities held in SGL form are effected through SGL
transfer notes. Transfer of GOISECs does not attract stamp duty or
transfer fee. Also no tax is deductible at source on the coupon payments
made on GOISECs.
Like T-Bills, GOISECs are issued through the auction route. The RBI pre
specifies an approximate amount of dated securities that it intends to
issue through the year. However, it has broad flexibility in exceeding
or being under that figure. Unlike T-Bills, it does not have a pre set
timetable for the auction dates and exercises its judgement on the
timing of each issuance, the duration of instruments being issued as
well as the quantum of issuance.
Sometimes the RBI specifies the coupon rate of the security proposed to
be issued and the prospective investors bid for a particular issuance
yield. The difference between the coupon rate and the yield is adjusted
in the issue price of the security. On other occasions, the RBI just
specifies the maturity of the proposed security and prospective
investors bid for the coupon rate itself. In either case, just as in
T-Bills, the auction is conducted on a French auction basis. Also, the
RBI has wide latitude in deciding the cut off rate for each auction and
can end up with unsold securities, which devolve on itself.
Apart from the auction program, the RBI also sells securities in its
open market operations (OMO) which it has acquired in devolvements or
sometimes directly through private placements. Similarly, it also buys
securities in open market operations if it feels fit.
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