Sunday, June 3, 2012

K.DEBENTURES

MEANING AND DEFINITIONS

Meaning :
The word debenture is derived from the Latin word, `Debere' which means 'to owe something to someone'. Debenture is an acknowledgement of debt issued by a company under its common seal. It also means that debenture is a proof of loan taken by the company on certain terms and conditions.

Definitions :
(a)     According to Section 82 of the Companies Act-'Debenture to any member of the company is a movable property, transferable in the manner provided by the Articles of Associations'.
(b)     According to Oxford Dictionary `Debenture is a certificate issued by a company acknowledging that it has borrowed money on which interest is being paid.'
 
INTRODUCTION

Company can issue debentures to raise loan capital. It is the method of raising borrowed capital. A person purchasing a debenture is called as debenture holder of the company. He is creditor of the company. He is entitled to get interest at a fixed rate. Debentures can be issued at any time by all companies may be public or private. The power to issue debentures rests with the Board of Directors vide Section 292 of the Companies Act. Debentures may be issued at par, at a premium or at a discount.

Debentures refers to a certificate issued by a person or corporation with the purpose of acknowledging or creating a debt. Debentures are generally unsecured by assets and are interest bearing securities.


WHAT IS A DEBENTURE ?


A Debenture means a document / debt security / certificate of loan or a loan bond evidencing, containing an acknowledgement of indebtedness issued by a company  ( called the Issuer ) under the companies seal and giving an undertaking which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the companies property or undertaking and which acknowledges a loan to the companies property which offers to pay interest in lieu of the money borrowed for a certain period at a fixed rate and at the intervals as stated in the debenture.

A debenture is defined as a certificate of agreement of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures.

A type of debt instrument that is not secured by physical asset or collateral.  Debentures are backed only by the general creditworthiness and reputation of the issuer. 

Although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.

In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is defined as "any form of borrowing that commits a firm to pay interest and repay capital. In practice, these are applied to long term loans that are secured on a firm's assets. Where securities are offered, loan stocks or bonds are termed 'debentures' in the UK or 'mortgage bonds' in the US.

The advantage of debentures to the issuer is they leave specific assets burden free, and thereby leave them open for subsequent financing. Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.
 
In essence it represents a loan taken by the issuer who pays an agreed rate of interest during the lifetime of the instrument and repays the principal normally, unless otherwise agreed, on maturity. 

These are long-term debt instruments issued by private sector companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years. Long maturity debentures are rarely issued, as investors are not comfortable with such maturities

Debentures enable investors to reap the dual benefits of adequate security and good returns. Unlike other fixed income instruments such as Fixed Deposits, Bank Deposits they can be transferred from one party to another by using transfer from. Debentures are normally issued in physical form. However, Corporates / PSU’s have started issuing debentures in Demat form. Generally, debentures are less liquid as compared to PSU bonds and their liquidity is inversely proportional to the residual maturity. Debentures can be secured or unsecured. 

In corporate finance, the term is used for a medium-to-long-term debt instrument  used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note.

Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements.

DEBENTURES EXAMPLE:
For example, most Debentures are essentially unsecured bonds issued by corporations relying on the credit worthiness of the issuer for their distribution, although a Debenture in the United Kingdom is usually a secured debt. The interest income that holders of Debentures receive is generally derived from a company’s corporate profits. Some Debentures feature a convertibility option, whereby the Debenture can be converted into shares of the corporation’s common stock. These securities are known as convertible Debentures. Because of the convertibility feature of these securities, they typically carry lower interest rates than Debentures without the convertibility feature. In the case that the corporation goes into bankruptcy, the Debenture holders get treated as general creditors.

WHAT ARE THE DIFFERENT TYPES OF DEBENTURES?
Debentures are divided into different categories on the basis of:
(1)  Convertibility of the instrument
(2)  Security 
(3)  Types of nature.

Debentures can be classified on the basis of convertibility into:

a)  Non Convertible Debentures (NCD):
These instruments retain the debt character and can not be converted in to equity shares

b)  Partly Convertible Debentures (PCD):
A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.

c)  Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company.

d)  Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue.

WHAT IS THE PROCEDURE FOR THE ISSUE OF DEBENTURES IN INDIA?

The relevant sections of the companies act 1956 dealing with the procedure for the issue of debentures are 56(3), 60, 64, 67, 70-74,108-13,117-23,128-29,133-34,143,152-54,292 and 293.
Debentures are issued in accordance with the provisions of the articles, usually by a resolution of the board of directors. Debentures may be issued  
at par,  
at a premium, or  
at a discount  
if permitted by the articles of the company. Debentures unlike shares may be issued at a discount without any restriction. The reason is that they do not form part of the capital of the company. Particulars of any commission, discount or allowance paid either directly or indirectly to any person for his subscribing or procuring subscription for debentures of the company must be filed with the registrar.
Debentures may be redeemable at par or at premium but their redemption at a discount is not permitted.
Section 117 provides that no company shall, after the commencement of the act issue debentures carrying voting rights at any meeting of the company.
The legal provisions as to prospectus, allotment, issue of certificates etc. applicable to shares also apply to debentures, but the condition of minimum subscription is not applicable to the issue of debentures.
Register and index of debenture-holders:
Every company shall maintain a register of its debenture-holders and enter therein the following particulars:
i) The name, address and occupation of each debenture holder.
ii) The debentures held by each holder with their distinctive numbers, amount paid or considered as paid on them.
iii) The date on which each person was entered in the register as a debenture-holder.
iv) The date on which any person ceased to be a debenture holder.
Every company having more than fifty debenture-holders will maintain index of debenture-holder unless it is maintained in the form of an index. Any alteration in the register shall be entered in the index within fourteen days.
Debenture trust deed:
Where secured debentures are issued by a company, it is usual to execute a trust deed conveying property to the trustees in trust for debentures-holders. Security is enforced or action is taken thereafter by the trustees instead of individual debenture-holders. The trust deed contains provisions about the respective right of the company and the debenture-holders.
The following are the advantages of having a trust deed.
1. In case of a default by the company, the trustees are there to take the necessary steps instead of leaving to the initiative of individual debenture-holders.
2. The trustees will have a legal mortgage of the property and will also hold the title deeds. So the persons who lend subsequently, cannot gain priority over the debenture-holders.
3. The debenture-holders can through the trustee sell the property charged, and thus, realize the security without the aid of the court.
4. The trustees are empowered to see that the property is kept insured and properly maintained.
5. The trustees are authorized to appoint a receiver out of the court or to enter into the possession of the property any carry on the business of the company in case of urgency.
Section 118 of the act requires every company to give to every debenture-holder or any member of the company a copy of any trust deed in respect of debentures. Such a copy shall be given within seven days from the date of request on payment of the specified fees. The trust deed shall be open for inspection by any member or debenture-holder on payment of fees as if it were the register of members.
Trustees for debenture-holders must exercise care and caution in exercising the powers which the trust deed confers on them otherwise they would be guilty of breach of trust. Any provision contended in a trust deed exempting a trustee from liability for breach of trust or negligence would be void. Section 119 nullifies clauses whereby the trustee is exempted from or indemnified against a liability for breach of trust. However, a release given after the liability has arisen and a provision in a trust deed for giving such a release by a majority of not less than three-fourths in value of the debenture-holders present and voting in person or by proxy at a meeting for this purpose, is not void
STATUTORY PROVISIONS RELATED TO ISSUE OF DEBENTURES

The legal provisions regarding the issue of debentures are as under :
i)       Issue by public as well as by private companies : A Public company can issue debentures only after obtaining a certificate to commence a business. On the other hand, a private company can issue debentures immediately after incorporation.

ii)      Power to issue under Section 292 (1) : The board of directors has the power to issue debentures, such right can be exercised by passing a resolution in the board meeting.

iii)     Terms of issue and redemption : Debentures can be issued at par, at premium or even at a discount. Similarly debentures can be redeemed at par or at premium but debenture cannot be redeemed at a discount.

iv)     Mode of issue : Debentures can be issued publicly by issuing a prospectus or. privately through private placements.

v)      Voting right : According to the Companies Act, a company cannot issue debentures carrying voting right.

vi)     Security against debentures : Now Companies can issue only secured debentures. Companies (Amendment) Act, 2000 prohibits issue of insecured debentures.

vii)    Permission of SEBI : If the issue exceeds 1 crore, permission from SEBI has to be obtained.

viii)   Register of debentures : Company must maintain a separate register of debenture holders. It must contain a) names, b) addresses c) occupation of debenture holders d) number of debentures allotted e) their distinctive numbers and f) the amount of debentures, etc.

CONDITIONS FOR VALID ISSUE OF DEBENTURES

The Company must follow the conditions which are specified in the Companies Act which are as follows -
1)       A copy of `prospectus' must be filed with the Registrar by a public company when the debentures are to be issued to the general public.

          But when company issues debentures privately a `statement in lieu of prospectus' is to be filed with the Registrar of Companies.

2)       The amount which the company receives from applicants for debentures should be deposited in a schedule bank.

3)       Allotment of debentures may be made by the Board of Directors.
         
4)       Decision of allotment of debentures must be communicated to the applicant by sending a letter of allotment.

5)       The total work of allotment must be completed within 120 days from the date of issue of prospectus.

6)       `Debenture Certificate' must be delivered to the holder within 3 months of allotment.

7)       Allotment must be absolute and unconditional and as per terms noted in the application form.

PROCEDURE RELATING TO ISSUE OF DEBENTURES

A company secretary is mainly related with entire process of issue of debenture. He has to complete all statutory formalities in proper order. The procedure of issuing debentures is as follows :

Procedure of Issue of Debentures

Board Resolution
Resolution by share holders
Consent of SEBI
Approval of Stock Exchange
Credit Rating
Trust Deed
Issue of Prospectus
Receiving Applications and Alloting Debentures
Issue of Debenture Certificate
Register and Index of Debenture holders

1.       Board Resolution : The Board of Directors is required to pass a resolution in the Board meeting. The resolution should clearly specify number of debentures to be issued, face value of debentures, rate of interest payable, terms of redemption, etc.     
2.       Resolution by share holders : If the issue of debentures exceeds the aggregate of paid up capital and free reserves, such resolution in the general meeting is required to be passed.
3.       Consent of SEBI : Permission of SEBI is compulsory in case the issue of debentures exceeds Rs. 1 crore or more.
4.       Approval of stock exchange : Approval of stock exchange is required to be taken before prospectus is issued to the public.
5.       Credit Rating : As per the SERI guidelines of 2000, the company has to get its debenture rated by two recognized credit rating agencies such as CRISIL, CARE. It should be disclosed in the prospectus.
6.       Trust Deed : The trust deed has to be executed between the company and the trustees. Trustees are those who can give guarantee of protecting interest of debenture holders and can redress the grievances of debenture holders, if any.
7.       Issue of prospectus : Before issuing prospectus to the general public it has to be filed with the Registrar. The prospectus is an advertisement for the issue of debentures.
8.       Receiving applications and Alloting debentures : The company must make the arrangement to receive applications along with application money through company's banker and debentures are to be allotted to the applicants by passing a suitable resolution in the board meeting.
9.       Issue of debenture certificate : Debenture certificates are prepared by the secretary. They are signed by at least two directors and issued to the investors within three months of date of allotment. The debentures are credited to demat account if debentures are in dematerialized form.
10.     Register and Index of Debenture Holders :-After the allotment of debentures is made, all details about of debenture holders are entered in the Register of Debenture holders. In case the number of debenture holders exceeds 50, the company is required to maintain Index of debenture holders.

Obtain application form of `Issue of Debentures' and practice to fill it.

On basis of Security, debentures are classified into:

a)  Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of either the principal or interest amount, his assets can be sold to repay the liability to the investors

b)  Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor has to be along with other unsecured creditors of the company.

On basis of types of nature, debentures are classified into:

REDEEMABLE DEBENTURES :
Redeemable debentures are those securities which are to be repaid within a stipulated period / maturity period. For instance, X co issued 9% 7 years $ 1000 Debentures. This issue of debentures has coupon rate of 9% per year and redeemable period of 7 years. The amount raised by issuing these debentures are to be repaid within 7 years from now.


IRREDEEMABLE DEBENTURES :
Irredeemable debentures are those debentures issuing by which the company has no obligations to pay back the value of the debenture on some fixed date or time and has the full authority to choose any time to pay back the debt until the company is a going entity and does not default in it’s interest payments. So we take into account only the sale value (SV) while evaluating the cost of irredeemable debentures.

CONVERTIBLE DEBENTURES :
If an option is given to convert debentures into equity shares at the stated rate of exchange after a specified period, they are called convertible debentures. Convertible Debentures have become very popular in India. On conversion the holders cease to be lenders and become owners.

Debentures are usually issued in a series with a pari passu (at the same rate) clause which entitles them to be discharged ratably though issued at different times. New series of debentures cannot rank pari passu with the old series unless the old series provides so.
New debt instruments issued by public limited companies are participating debentures, convertible debentures with options, third party convertible debentures convertible debentures redeemable at premiums, debt equity swaps and zero coupon convertible notes.

ZERO COUPON BONDS :                                                                                    
A zero-coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments, or have so-called "coupons," hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par (or face) value.

Examples of zero-coupon bonds include                                                                          
U.S. Treasury bills,                                                                                                       
U.S. savings bonds,                                                                                                   
Long-term zero-coupon bonds, and any type of coupon bond that has been stripped of its coupons.

In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures.

Some zero coupon bonds are inflation indexed, so the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power rather than a set amount of money, but the majority of zero coupon bonds pay a set amount of money known as the face value of the bond.

Zero coupon bonds may be long or short term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years. The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have maturities of less than one year and are called bills. The U.S. Treasury bill market is the most active and liquid debt market in the world.

SECURED OR MORTGAGED DEBENTURES
Secured or mortgaged debentures carry either a fixed charge on the particular asset of the company or floating charge on all the assets of the company. Unsecured debentures, on the other hand, have no such charge on the assets of the company. They are also known as simple or naked debentures.

Re-issue of redeemed debentures
Debentures which have been redeemed may be re-issued by a company. Section 121 authorizes the companies to keep alive and re-issue debentures which have been first redeemed by the company unless the articles provide otherwise or the company has shown an intention to cancel the debenture. Such re-issue may be of the same redeemed debentures or new debentures in place of the redeemed ones. On such re-issue the debenture-holders will get the same rights and priorities as any debenture-holder will get the same rights and priorities as any debenture-holder had before the redemption. Thus, the date of redemption of re-issue debentures cannot be later than that of the original debentures.
Re-issued debentures are treated as new debentures are treated as new debentures for the purposes of stamp duty. The company’s balance sheet must give particulars of any redeemed debentures which the company has power to issue.
A contract to subscribe for debentures can be specifically enforced.
Transfer and transmission of debentures:
Bearer debentures are transferable by simple delivery. Registered debentures are transferred in the same manner in which the shares of a company are transferred. A duly filled in and properly stamped instrument of transfer to get her with the certificate relating to debentures or with the letter of allotment must be delivered to the company either by the transferor or by the transferee. Company may, if so authorized by the articles, refuse to register the transfer. If transfer is refused notice of refusal must be given to the transferor and the transferee within two months from the date on which the instrument of transfer was delivered to the company. An appeal lies to the central government within two months from the date of the receipt of notice of refusal.
The legal representative of a deceased debenture-holder may transfer the debentures by executing an instrument of transfer. 
REDEMPTION OF DEBENTURES
As the debenture capital is borrowed capital, it has to be paid back. The repayment of debenture amount to debenture holder is called as redemption of debentures. Every company is required to create a `Debenture Redemption Reserve' for the purpose of redemption of debentures.
Provisions regarding redemption of debentures .
1)      To create Debenture Redemption Reserve (DRR) : According to Section 117C of the Companies Act, the company is required to create DRR out of its profit every year until such debentures are redeemed. At least 50% amount of debentures issued should be redeemed from DRR. Remaining amount should be raised by issue of new equity shares or debentures.
2)      Default in Repayment : In case the default in repayment is made by the company, the debenture holders can file a complaint with `Company Law Board'. The Company Law Board can direct the company to repay the principal amount of debenture with interest.
          Unsecured debenture holders can file a suit in the court for repayment. Secured debenture holders can approach debenture trustees. The trustees can sell off the assets of the company and repay the amount or appoint a court receiver.
3)      Penalty for Default : The person responsible for disobeying the order of Company Law Board, shall be fined more than Rs. 500/- per day of default, till default continues.
Procedure for redemption of debentures :
1)        Board Meeting : Board meeting is held to pass a resolution to redeem the debentures.
2)        Intimation about Redemption to debenture holders : Secretary has to send letter to debenture holders specifying the details of redemption. He also informs them to surrender debenture certificates.
3)        Refund : A secretary informs the banker to make the repayment to debenture holders.
4)        Change in Register of Debenture holders : Once the process of redemption is completed, the changes are made in the Register of Debenture holders.
5)        Changes in the Register of Charges : The charges which were created on company's asset in favour of debenture holders are cancelled and accordingly the changes are made.
6)        Intimation to Registrar of Companies : Company Secretary informs the Registrar about the details of redemption of debentures.

Methods of Redemption of Debentures :

Redemption of Debentures is possible by different methods.

1)      Redemption after fixed period : A notice is given by the company to the debenture holder about redemption due. Debenture holders require to approach to company's banker to get the form of repayment. The debenture holders require to fill up the prescribed printed form and deposit the same along with debenture certificate in the company's office. On receiving these documents, banks shall make payments to the concerned debenture holders.
2)      Redemption by Annual Instalments : In this method, company makes an arrangement to pay the interest, plus principal amount of debentures in annual instalment. Two coupons are attached to debentures. One coupon is for getting refund of annual instalment of principal amount and another one is for receiving payment of annual interest. Such coupons are to be signed and required to be deposited with the company's banker. Accordingly refund is made by the bank on behalf of the company.
3)      Redemption by Draw Method : Company adopts lottery method for redemption. Debentures are divided in different lots, and each lot is taken in draw system. And that lot drawn is paid back after giving them intimiation regarding the payment. In this way all lots are refunded in order of draws.
4)      Redemption by own purchase method : In this method, company purchases its own debentures from open market at a certain price. After purchasing it such debentures are cancelled. By this way debentures are gradually redeemed.
5)      Redemption by fresh issue method : In this method old debentures are redeemed by issue of fresh debentures. The debenture holders get new debentures in place of old debentures.

FEATURES OF DEBENTURES:

1. Investors who invest in the debentures of the company are not the owners of the company. They are the creditors of the company or in other words, the company borrows the money from them.
2. Funds raised by the company by way of debentures are required to be repaid during the life time of the company at the time stipulated by the company. As such, debenture is not a source of permanent capital. It can be considered as a long term source.
3. In practical circumstances, debentures are generally secured i.e. the company offers some of the assets as security to the investors in debentures.
4. Return paid by the company is in the form of interest. Rate of interest is predetermined, but the same can be freely decided by the company. The interest on debenture is payable even if the company does not earn the profits.
5. In financial terms, debentures prove to be a cheap source of funds from the companies point of view.

DISADVANTAGES OF DEBENTURES:

a) By issuing the debentures, the company accepts the risk of two types. These are payment of the interest at a fixed rate, irrespective of the non-availability of profits and repayment of principal amount at the pre-decided time.

If earnings of the company are not stable or if the demand for the products of the company is highly elastic, debentures prove to be a very risky proposition for the company. Any adverse change in the earnings or demand may prove to be fatal for the company.

b) Debentures are usually a secured source for raising the long term requirement of funds and usually the security offered to the investors is the fixed assets of the company.

A company which requires less investment in fixed assets, such as a trading company, may find debentures as a wrong source for raising the long term requirement of funds as it does not have sufficient fixed assets to offer as security.

FROM THE INVESTORS POINT OF VIEW :

#   Debentures do not carry any voting rights and hence its holders do not have any controlling        power over the management of the company.
#   Debenture holders are merely creditors and not the owners of the company.
#   Interest on debentures is fully taxable while shareholders may avoid tax by way of stock              dividend in place of cash dividend.
#   The prices of debentures in the market fluctuate with the changes in the interest rates.
#   Uncertainly about redemption also restricts certain investors from investing in such              
     securities

CONVERSION OF DEBENTURES INTO SHARES

Section 81 (3) of the Companies Act permits the issue of convertible debentures. It enables issue of shares to debenture holders in exchange of the amount due to them, where the terms of issue of debentures provide for such an exchange and such terms are approved both by the special resolution of the general meeting and by the Central Government.

Joint Stock Companies can issue either non-convertible or convertible debentures. Convertible debentures are further classified as
A.       Fully convertible debentures (FCD)
B.       Partly convertible debentures (PCD)

          FCD: Fully convertible debentures are those which can be fully converted into equity shares after a specific period of time. The debenture holder becomes the member of the company on conversion of debentures. He becomes eligible for the shares and other rights of the shareholders. If conversion is made after 18 months but before 36 months of allotment, conversion is optional on the part of debenture holder.

PCD: Partly convertible debentures are those where part of debentures are converted into equity shares and remaining part continues to be debentures. On conversion of partly convertible debentures the debenture holder becomes a member of company and continues to remain as creditor till non-convertible portion is redeemed on maturity.

PROVISIONS FOR CONVERSION OF DEBENTURES INTO SHARES

Prospectus / Letter of Offer : Prospectus of a company must contain time of conversion, rate of conversion and premium amount, if any.
Letter of Option : Letter of Option has to be issued to debenture holder giving details of option of conversion, conversion price, etc.
Filing of copy : A copy of letter of option has to be filed with the SEBI before issuing to the debenture holder.
Rate of conversion : The rate of conversion is usually fixed at the time of issue. In case premium price is not fixed at the time of issue and if amount of convertible debenture exceeds, T 50% Lacs, the debenture holder should be given option of compulsory redemption.
Rejection of conversion offer : In case debenture holder wishes to opt for redemption in place of conversion then it has to be paid within one month from the date of, option and the price must not be less than face value.

PROCEDURE FOR CONVERSION OF DEBENTURE INTO SHARE

Board Resolution : Resolution for conversion is passed in the board meeting. and is also approved by share holders and debenture holders. A Special resolution is passed to that effect. A copy of this resolution is to be filed with the Registrar of companies within 30 days of passing.
Letter of Option : A letter of option is sent to debenture holder and one copy of the same is filed with SEBI.
Allotment of shares : Once the debentures are converted into equity shares a letter of conversion is sent and debenture holders are requested to return debenture certificates.
Change in Register of Charges : Once the shares are allotted, company has to cancel the charges against asset, which were created at the time of issue of debentures, for which changes are required to be made in the Register of Charges.
Entry in Register of Members : Company is required to maintain a Register of Members in which the details about the share holders viz names, address, date of allotment, serial numbers of shares are entered.
Filing of Return of allotment : A Return of Allotment is filed with the Registrar of Companies within 30 days of allotment.




  

J.TREASURY BILLS

What is ' Treasury Bill - T-Bill ' ?

A treasury bill is nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the holder / bearer / investor of the instrument on the due date. The period does not exceed one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is claims against the Government.

The Government of any country issues money market instruments / debt instruments offered to finance their short term requirements / Debt Obligations namely T-Bill or Treasury bill, a short-term debt instrument by borrowing / issuing by the Central / State Government of India. They are promissory notes issued at discount and for a fixed period

Treasury bill are issued only by the RBI on behalf of the Government. Treasury bills are issued for meeting temporary Government deficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security. These were first issued in India in 1917.

These are discounted securities and thus are issued through a competitive bidding process at a discount from par to face value, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder / investor which is the difference between the maturity value and issue price.

Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be deployed in treasury bills to maximize returns.

Banks do not pay any interest on fixed deposits of less than 15 days, or balances 
maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well.

Further, since every week there is a 91 days treasury bills maturing and every fortnight a 364 days treasury bills maturing, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds.

At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered ( unsteady movements ) requirements.

Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowings of the Government. Treasury bill market refers to the market where treasury bills are brought and sold. Treasury bills are very popular and enjoy higher degree of liquidity since they are issued by the government.

Also it can be further termed as short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $ 5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).

For example,
Let's say you buy a 13-week T-bill priced at $9,800. Essentially, the U.S. government (and its nearly bulletproof credit rating) writes you an IOU ( I Owe you ) for $10,000 that it agrees to pay back in three months. You will not receive regular payments as you would do with a coupon bond, for example. 

Instead, the appreciation and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back ( $10,000 ). In this case, the T-bill pays a 2.04% interest rate ( $200 / $9,800 = 2.04% ) over a three-month period.                                                      


STRUCTURE: 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 dematerialized form.OBJECTIVES :These are issued to raise funds for meeting expenditure needs and also provide outlet for parking temporary surplus funds by investors.


TYPES OF TREASURY BILLS :

There are three different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months,12months Treasury bills etc, also namely 91-days, 182-days and 364-days Treasury Bills, sold through a competitive bidding process
of auction.

All T-bills are sold through an auction process, as per a fixed schedule announced by the Reserve Bank of India ( RBI ).                                                                                                                                                                               

T-bills are available for a minimum amount of Rs 25,000. These instruments are issued at a discount to the face value. On maturity of T-Bill, the holder receives the face value.                                                                                                                                                                                                                
The table as under describes the types of T-Bills, day of auction and payments, and the notified amount of auction. 
Type of
T.bills
Day of Auction
Day of payment*

Amount (in Rs. Crores)
91-day
Wednesday
Following Friday
100
182-day
Wednesday of non-reporting week
Following Friday
500
364-day
Wednesday of reporting week
Following Friday
500
* If the day of payment falls on a holiday, the payment is made on the day after the holiday. 
( The instrument is quoted at a discount price to the par value of Rs 100. It is quoted in the secondary market on a yield basis with the minimum trade-able amount of Rs. 25000. The instrument is redeemed at par value with the difference between the issue price and par value being the return on the instrument )

Only a few institutions like state governments and Central Bank of Nepal are allowed to participate in the T-Bills auctions on a non-competitive basis whereby full amount of security is allocated at the yield determined at the auction. 
In India, there are two types of treasury bills viz. 
(I) ordinary or regular and 
(ii) ‘ad hoc’ known as ‘ad hocs’ 


Ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be brought and sold at any time and they have secondary market also.

On the other hand ‘ad hocs’ are always issued in favour of the RBI only. They are not sold through tender or auction. They are purchased by the RBI on top and the RBI is authorized to issue currency notes against them. They are marketable sell them back to the RBI. Ad hocs serve the Government in the following ways:

#   They replenish ( to fill up again ) cash balances of the central Government. Just like 
     State Government get advance (ways and means advances) from the RBI, the Central   
     Government can raise finance through these ad hocs.
#   They also provide an investment medium for investing the temporary surpluses of 
     State Government, semi-government departments and foreign central banks.

Ninety one days treasury bills are issued at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. Such a rate is called cut off rate. 

In the same way, the rate is fixed for 91 days treasury bills sold through auction 91 days treasury bills (top basis) can be re-discounted with the RBI at any time after 14 days of their purchase. Before 14 days a penal rate is charged.

In India, at present, the Treasury Bills in vogue are the 91-days and 364-days Treasury bills.

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

DENOMINATION :
Minimum amount of face value Rs.1 lakh and in multiples there of. There is no specific amount / limit on the extent to which these can be issued or purchased.  
Maturity             : 91 days and 364 days.  
Rate of interest : Market determined, based on demand for and supply of funds in 
the money market.  

WHO CAN PURCHASE / INVEST IN T- BILLS ?
T-bills are predominantly held by banks. 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 organizations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills.

Today, even provident funds, mutual funds and trusts invest in T-bills. So, if you invest in a mutual fund scheme that invests in T-Bills, you can get an indirect exposure to such instruments. 

Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. 

OPERATIONS AND PARTICIPANTS :
The RBI holds day’s treasury bills (TBs) and they are issued on top basis throughout the week. However, 364 days TBs are sold through auction which is conducted once in a fortnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also. 

On the next working day of the date auction, the accepted bids with prices are displayed. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with cheque for the amount due on RBI within 24 hours of the announcement of auction results.

Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recorded in this account invests who do not have SGL account can purchase and sell TBs though DFHI. The DFHI does this function on behalf of-investors with the helps of SGL transfer forms. The DFHI is actively participating in the auctions of TBs. It is playing a significant role in the secondary market also by quoting daily buying and selling rates. It also gives buy-back and sell-back facilities for period’s upto 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market.

The participants in this market are the followers:
RBI and SBI
Commercial banks
State Governments
DFHI
STCI
Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc.
Corporate customers
Public
Through many participants are there, in actual practice, this market is in the hands at the banking sector. It accounts for nearly 90 % of the annual sale of TBs.

HOW TO PURCHASE / INVEST IN TREASURY BILLS ? 
Treasury bills can be purchased either from the primary market or the secondary market.

Primary Market
A bid will have to be made in the weekly auctions of Treasury bills as given earlier. The bid will have to be submitted to RBI, Mumbai. The bid can be submitted to RBI, Mumbai, or through the bank / Primary Dealer with whom he has a Constituent SGL account.

Secondary Market
A treasury bill can be purchased at any point of time from the secondary market commensurate with the short term period for which funds are available.

ISSUANCE 
As mentioned above, treasury bills are issued at a discount to the face value. In view of this, while submitting tenders under auction for subscription, a subscriber is required to quote the price in the case of treasury bills. The difference between the face value and the price is known as the discount on the treasury bill.

CALENDAR OF AUCTION AS ANNOUNCED BY RESERVE BANK OF INDIA FOR 1999-2000
Treasury
Bills
Notified amount
(Rs crore)
Day of auction
Day of payment
91 days
250
Every Friday
Following Monday
364 days
1000
Wednesday to coincide with reporting Friday
Following Thursday

PRIMARY MARKET
In the primary market, treasury bills are issued by auction technique.

SALIENT FEATURES OF THE AUCTION TECHNIQUE !
The auction of treasury bills is done only at Reserve Bank of India, Mumbai.
Bids are received at Mumbai office during banking hours i.e upto 2 pm on the date
of auction.

The bids are received in terms of price per Rs 100. For example, a bid for 91 day
treasury bill auction could be for Rs 97.50. Further, bids cannot be submitted with
prices for more than two decimals.

The auction committee of Reserve Bank of India decides the cut-off price and the
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.

TYPES OF AUCTIONS
There are two types of auction for treasury bills:
Multiple Price Based or French Auction: 
Under this method, all bids equal to or above the cut-off price are accepted.
However, the bidder has to obtain the treasury bills at the price quoted by him.
This method is followed in the case of 364days treasury bills and is valid only for
competitive bidders.

Uniform Price Based or Dutch auction: 
Under this system, all the bids equal to or above the cut-off price are accepted
at the cut- off level. However, unlike the Multiple Price based method, the bidder
obtains the treasury bills at the cut-off price and not the price quoted by him. This
method is applicable in the case of 91 days treasury bills only.

MINIMUM AMOUNT OF BIDS 
Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and
in multiples thereof.

CLASSIFICATION OF BIDS
The bids submitted can be classified as competitive and non competitive bids.
Competitive Bids
Competitive bids can be submitted by any person or institutions like, banks,
financial institutions, Primary Dealers, firms, companies, corporate bodies,
institutions and trusts in India.

Non Competitive Bids
There is a provision to accept non- competitive bids in respect of all treasury
bills auctions. State Governments, Provident Funds and Nepal Rashtra bank
are allowed to submit non-competitive bids in the case of 91 days treasury bills.

In the case of 364 days treasury bills however, only State Governments can
participate as non-competitive bidders. The Reserve Bank of India participates
as a non-competitive bidder in the auction. The unsubscribed portion of the
competitive bids also devolves on the Reserve Bank of India.

In the case of non-competitive bids, only the amount is indicated. They do not
indicate any price. All the non-competitive bids are accepted at the weighted
average price of the competitive bids.

TO SUMMARIZE,
The Reserve Bank of India conducts the auction of treasury bills of varying
maturities as per the notified amount on pre announced auction dates.
The auction for the notified amount is conducted on a competitive bid basis,
which are submitted on a price basis.

Non-competitive bids are also submitted and accepted, but the allotment is
outside the notified amount and based only on quantity and not price.
For consideration of competitive bidding, the bidding starts with the bid with
lowest yield or highest price being awarded Treasury bills at their bid price.

Successively higher yielding bids are accepted and are awarded Treasury bills
at their bid price until the total amount accepted equals the notified amount.
The highest yield accepted by the Reserve Bank of India is referred to the
cut-off yield and the corresponding price is called the cut-off price.

YIELD CALCULATION
The yield of a Treasury Bills is calculated as per the following formula:

Y = (100-P)*365*100
      —————————
                 P*D      

Wherein Y = discounted yield
               P = Price   
               D = Days to maturity

The following formulae can be used to calculate returns on Treasury bills, when
they are sold prior to maturity:
1. Effective yield for the time a Treasury Bill is held:
    Gain or loss in yield:
    Days to Maturity at date of sale x ( Purchase yield – sale yield )
    No: of Days T-Bill is held

Example:
Assume that a 91 Days Treasury Bills purchased at 9.90% is held for 30 days and
sold at 9.50%. The yield for the time Treasury bill was held would be calculated
as follows:
Days to maturity at date of sale = 91-30 =61
No. of days held                         = 30
Purchase yield – Sale yield        = 9.90 – 9.50 = + 0.40
Gain or loss in yield                    = 61 x ( 0.40 ) = 0.813
                                                       30    
Return for the time Treasury Bill was held =
Purchase yield + (Gain or loss in yield)      = 9.90% + 0.813 = 10.713 %

In other words, the effective return for holding the Treasury Bill for 30 days works
out to 10.713%. Had the Treasury Bills been sold at a yield lower than 9.50% also,
the effective return would have still been higher.

2. To find the number of days a Treasury Bills must be held to break even in yield

Days to maturity at date of sale =
Days to maturity at date of purchase X Purchase yield
                                     Sale yield
Example
Assume that a 91 Days T Bills is bought at 9.90%.
How long must it be held to avoid a loss if it is to be sold at 10%
Days to maturity remaining at date of sale = 91 x 9.90  = 90
                                                                            10
Days to maturity at purchase                       = 91
Days to maturity at sale                                = 90
Break even period                                        = 91 - 90 = 1 day.
The above examples clearly indicate that even if the Treasury Bills are sold in the
secondary market prior to maturity, the returns cannot be termed as speculative
yields. These are actual yields that are determined by market conditions prevailing
at that specific point of time.

FACTORS LIKELY TO IMPACT YIELD MOVEMENTS:
Some of the following factors are likely to have an impact on the secondary market
yield movements of sovereign paper, both Government securities and Treasury bills:
#   Government’s Borrowing programme Monetary policies
#   Liquidity in the financial systems
#   Foreign Exchange fluctuations
#   Economic & Political scenario

DAY COUNT
For treasury bills the day count is taken as 365 days for a year.
This concludes the primary phase of issuance of Treasury bills and thereafter
the Treasury bills undergo trading in the secondary market until their maturity dates.

SECONDARY MARKET
PARTICIPANTS
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
Ideal matching for funds management particularly for short term tenors of less
 than 15 days. Transparency in operations as the transactions would be put
through Reserve Bank of India’s SGL or Client’s Gilt account only Two way
quotes offered by primary dealers for purchase and sale of treasury bills.
Certainty in terms of availability, entry & exit

HOW TO TRADE IN SECONDARY MARKET ?  
Can contact the dealer and obtain the quotes.  
List of Primary Dealers in Government Securities Market                                  (As on July 06, 2011)
STAND ALONE  PRIMARY DEALERS
BANK  PRIMARY DEALERS
Deutsche Securities (India) Pvt. Ltd.
5th Floor, Nirlon Knowledge Park, Block 1
Western Express Highway
Goregaon (East)
Mumbai- 400 063
Phone: (022) 66703066/3067/3068
Fax : 66703070
The Royal Bank of Scotland N.V.
82, Sakhar Bhavan
Nariman Point
Mumbai - 400 021.
Phone: (022) 66386100/66386131 , 66386132/128
ICICI Securities Primary Dealership Limited
ICICI Centre
H.T.Parekh Marg
Churchgate
Mumbai- 400 020
Phone: (022) 22882460/70, 66377421
Bank of America
Treasury Operations
Gr.Floor, Express Towers
Nariman Point, Mumbai- 400 021
Phone: (022) 66323000 extn.3150
Morgan Stanley India Primary Dealer Pvt. Ltd.
18F/19F, Tower 2, One Indiabulls Centre
841, Senapati Bapat Marg
Mumbai – 400 013
Bank of Baroda
Specialised Integrated Treasury
4th & 5th Floor, Baroda Sun Tower
C-34,G-Block,Bandra Kurla complex
Bandra ( East)
Mumbai - 400 051
Nomura Fixed Income Securities Pvt. Ltd.
Ceejay House, 11th Level
Plot F, Shivsagar Estate
Dr.Annie Besant Road
Worli
Mumbai - 400 018
Phone - (022) 40374037
Fax - (022) 40374111
Canara Bank
Treasury & Investment  Operations Division,
223, Maker Chambers III, 7th Floor
Nariman Point Mumbai-400 021
Phone: (022)  22864601/22800101-105 ,22661348
PNB Gilts Ltd.
5, Sansad Marg
New Delhi- 110 001
Phone:  Mumbai -(022) 22693315/17
New Delhi (011) 23325751,22693315/17
Citibank N.A
5th Floor,Citibank Centre
Bandra Kurla Complex
Bandra (E), Mumbai-400 051
Phone:(022) 40015453/51, 40015378
SBI DFHI Ltd
3rd Floor, Voltas House,
23, J.N.Heredia Marg
Ballard Estate
Mumbai- 400 001
Phone:(022) 22625970/73 ,22610490 ,66364696
Corporation Bank
Investment & International Banking Division
15, Mittal Chambers, Nariman Point
Mumbai-400 021
Phone:(022) 22833238/22023304 ,
22832429/22022796/22871054
STCI Primary Dealer Limited
A/B1-801 (A Wing) 8th Floor Marathon Innova,
Marathon Nextgen Compound
Off Ganpatrao Kadam Marg, Lower Parel(W)
Mumbai- 400 013
Phone:(022) 30031100, 66202261 /2200
HDFC Bank Ltd.
Treasury Mid Office,
1st Floor,HDFC Bank House
Senapati Bapat Marg,Lower Parel
Mumbai- 400 013
Phone:(022) 24904702/4935/
3899,66521372/9892975232
Goldman Sachs (India) Capital Markets Pvt. Ltd.
951-A, Rational House
Appasaheb Marathe Marg
Prabhadevi
Mumbai 400 025
Hongkong and Shanghai Banking Corpn. Ltd.(HSBC)
Treasury Services
52/60,Mahatma Gandhi Road
Mumbai- 400 001
Phone:(022) 22681031/34/33 ,22623329/22681031/34/38

J P Morgan Chase Bank N.A, Mumbai Branch
J.P. Morgan Tower

Off C.S.T. Road, Kalina
Santacruz(East)
Mumbai - 400 098
Phone -61573000
Fax- 61573990 & 61573916

Kotak Mahindra Bank Ltd.
Treasury Operations
1st Floor,Bakhtawar
Nariman  Point,Mumbai -400 021.
Phone:(022)  6659 6022/6454 ,66596235/6454

Standard Chartered Bank
Financial Market Operation
Crescenzo, 5th Floor
Plot no. C-38 & 39, G – Block
Bandra Kurla Complex
Mumbai – 400 051

Axis Bank Ltd.
Treasury Operation (SLR & Money Market)
Corporate Office,4th Floor, Axis House
Bombay Dyeing Compound
Pandurang Budhkar Marg
Worli
Mumbai - 400 025

IDBI Bank Ltd.
IDBI Tower

WTC Complex, Cuffe Parade
Mumbai 400 005

HOW TO ENSURE TRANSPARENCY IN OPERATIONS ?

The rates at which Treasury Bills of different residual maturities are being traded
are available in leading Financial Newspapers and can be compared with the
rates available from other sources.

All SGL settlements of Treasury Bills are published in leading financial newspapers
on the following day.

The transactions once closed have to be confirmed in writing by both the parties
giving full particulars.

Transactions done through NSE brokers are available on NSE Screens.

EXAMPLE:
Suppose party A has a surplus cash of Rs 200 crore to be deployed in a project.
However, it does not require the funds at one go but requires them at different
points of time as detailed below:                                                                                                                                                        
Funds Available as on 1.1.2000 Rs. 200 crore
Deployment in a project Rs. 200 crore
As per the requirements
06.1.2000                Rs.     50 crore
13.1.2000                Rs.     20 crore
02.2.2000                Rs.     30 crore
08.2.2000                Rs.     100 crore
Out of the above funds and the requirement schedule, the party has following two
options for effective cash management of funds:

Option I
Invest the cash not required within 15 days in bank deposits
The party can invest a total of Rs 130 crore only, since the balance Rs 70 crores
is required within the first 15 days. Assuming a rate of return of 6% paid on bank
deposits for a period of 31 to 45 days, the interest earned by the company works
out to Rs 76 lacs approximately.

Option II
Invest in Treasury Bills of various maturities depending on the funds requirements 
The party can invest the entire Rs 200 crore in treasury bills as treasury bills of even
less than 15 days maturity are also available. The return to the party by this deal
works out to around Rs 125 lacs, assuming returns on Treasury Bills in the range
of 8% to 9% for the above periods.

PORTFOLIO MANAGEMENT STRATEGIES
Strategies for managing a portfolio can broadly be classified as active or passive
strategies.

BUY AND HOLD 
A buy and hold strategy can be described as a passive strategy since the
Treasury bills once purchased, would be held till its maturity. The salient
features of this strategy are:
Return is fixed or locked in at the time of investment itself.
The exposure to price variations due to secondary market fluctuations is eliminated.
There is no risk of default on maturity.

BUY AND TRADE
This strategy can also be described as an active market strategy. The returns on
this strategy are higher than the buy and hold strategy as the yield can be
optimized by actively trading the treasury bills in the secondary market before
maturity.

BENEFITS OF INVESTMENT IN TREASURY BILLS
Safety:
#   Investments in T.Bills are highly safe since the payment of interest and   
      Repayment of principal are assured by the Government.
#   They carry zero default risk since they are issued by the RBI for and on behalf of
      the Central Government.  
#   These are highly liquid and safe investment giving attractive yield. 
#   Simplified settlement
#   Transparency.  
#   Zero default risk being sovereign paper. 
#   No tax deducted at source. 
#   Transparent since they are issued by the country's central bank.   

Liquidity: 
#   Investments in TBs are also highly liquid because they can be converted into
      cash at any time at the option of the inverts.
#   The DFHI announces daily buying and selling rates for TBs. They can be
      discounted with the RBI and further refinance facility is available from the RBI
      against TBs. Hence there is a market for TBs.
#   Highly liquid money market instrument. They can be traded in the secondary
      market High degree of tradability and active secondary market facilitates
      meeting unplanned fund requirements.

Ideal Short-Term Investment:
#   Idle cash can be profitably invested for a very short period in TBs. TBs are
      available on top throughout the week at specified rates.  
#   Financial institutions can employ their surplus funds on any day. The yield on
      TBs is also assured. Better returns especially in the short term.
#   Extremely liquid since institutions can park their short term excess funds.

Ideal Fund Management:
TBs are available on top as well through periodical auctions. They are also 
available in the secondary market. Fund managers of financial institutions build 
portfolio of TBs in such a way that the dates of maturities of TBs may be matched 
with the dates of payment on their liabilities like deposits of short term maturities. 
Thus, TBs help financial manager’s it manage the funds effectively and profitably.

Statutory Liquidity Requirement:
As per the RBI directives, commercial banks have to maintain SLR 
(Statutory Liquidity Ratio) and for measuring this ratio investments in TBs are taken 
into account. TBs are eligible securities for SLR purposes. Moreover, to maintain 
CRR (Cash Reserve Ratio). TBs are very helpful. They can be readily converted into 
cash and thereby CRR can be maintained. Approved assets for SLR purposes and 
DFHI is the market maker in these instruments and provide (daily) two way quotes to 
assure liquidity.

Source Of Short-Term Funds:
The Government can raise short-term funds for meeting its temporary budget deficits 
through the issue of TBs. It is a source of cheap finance to the Government since the 
discount rates are very low.

Non-Inflationary Monetary Tool:
TBs enable the Central Government to support its monetary policy in the economy. 
For instance excess liquidity, if any, in the economy can be absorbed through the 
issue of TBs. Moreover, TBs are subscribed by investors other than the RBI. Hence 
they cannot be mentioned and their issue does not lead to any inflationary pressure 
at all.( Recommended reading: Treasury bills and inflation control )

Hedging Facility:
TBs can be used as a hedge against heavy interest rate fluctuations in the call loan 
market. When the call rates are very high, money can be raised quickly against TBs 
and invested in the call money market and vice versa. TBs can be used in ready 
orward transitions.

DEFECTS OF TREASURY BILLS :
Poor Yield:
The yield form TBs is the lowest. Long term Government securities fetch more interest 
and hence subscriptions for TBs are on the decline in recent times.

Absence Of Competitive Bids:
Though TBs are sold through auction in order to ensure market rates for the investors, 
in actual practice, competitive bids are competitive bids are conspicuously absent. 
The RBI is compelled to accept these non-competitive bids. Hence adequate return
is not available. It makes TBs unpopular.

Absence Of Active Trading:
Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs is adversely affected.

RETURNS OFFERED :
The price of a government security in the markets is determined by the forces of demand and supply, as is the case in any market. It also depends on other factors such as:
#   Economic conditions.
#   General money market conditions, including the position of money supply in the
      economy.
#   Interest rates prevalent in the market and the rates of new issues.
#   Credit quality of the issuer.
REPAYMENT :
The treasury bills are repaid at par on the expiry of their tenor at the office of the
Reserve Bank of India, Mumbai.