Reserve Bank of India vides its communication FINANCIAL MARKETS REGULATION DEPARTMENT Notification No. FMRD.DIRD. XX /XX.XX.XXX/2020-21 dated December 4, 2020, placed on its web site the following for your comments which can be sent to fmrdfeedback@rbi.org.in by January 31, 2021.

https://taxguru.in/rbi/draft-certificate-deposit-reserve-bank-directions-2020.html

The above directions were issued to all entities/agencies eligible to deal in Certificate of Deposit.

These directions shall come into force with effect (a specified date) after receipt of comments from persons interested in the matter

 To interpret its precepts, the following presumptions have to be made: (Exactly reproduced to avoid misinterpretations)

i. “Benchmark Interest Rates means interest rates administered by Financial Benchmark Administrators.

ii. Certificate of Deposit (CD) is a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against funds deposited at the bank for a specified time period. (CD)

iii. Delivery versus Payment (DvP) means a settlement mechanism that stipulates that the transfer of funds from the buyer of securities is made simultaneously with the transfer of securities by the seller of securities.

iv. A depository shall have the meaning assigned in Section 2 (e) of the Depositories Act, 1996 (22 of 1996).

v. Electronic Trading Platform (ETP) shall have the meaning assigned in paragraph 2(1) (iii) of the Electronic Trading Platforms (Reserve Bank) Directions, 2018 dated October 05, 2018, or as modified from time to time.

vi. Financial Benchmark Administrator (FBA) means a person who controls the creation, operation, and administration of financial benchmark(s) authorized under Financial Benchmark Administrators (Reserve Bank) Directions, dated June 26, 2019.

vii. A Non-resident means and includes a ‘person resident outside India’ as defined in section 2 (w) of Foreign Exchange Management Act, 1999 (42 of 1999).

viii. Over-the-Counter (OTC) markets refer to markets where transactions are undertaken in any manner other than on exchanges and shall include those undertaken on electronic trading platforms (ETPs).

ix. Recognized stock exchanges shall have the meaning assigned in Section 2 (f) of the Securities Contract Regulation Act, 1956.

x. A person resident in India shall have the same meaning assigned to it in Section 2 (v) of the Foreign Exchange Management Act, 1999.

xi. Small Finance Banks means banks licensed in terms of the Reserve Bank Guidelines for Licensing of Small Finance Banks dated November 27, 2014, as amended from time to time.”

Who are the eligible issuers?

Eligible issuers

Certificate of Deposit (CD) can be issued by all scheduled commercial banks (excluding regional rural banks) and small finance banks. CDs issued by All India Financial Institutions shall be guided by the directions contained in Master Circular FID.FIC. 1/01.02.00/2015-16 on Reserve Bank on Resource raising norms for financial institutions dated July 01, 2015, as amended from time to time.

CDs can be issued to all residents of India and to non-residents as permissible under Foreign Exchange Maintenance Act (FEMA) 1999.

General Guidance

Being issued in dematerialized form, and in terms of Rs 5 lacs and in multiples of Rs 5 lacs thereafter, it shall not be issued for less than 7 days with a maximum of one year or less.

CDs shall be issued on a T+1 basis where T represents the date of closure of the offer period for issuance of the CDs.

What is the discount or its coupon rate?

  • Yes, they can be issued at a discount to the face value and it can be issued on a fixed/floating rate basis provided it is reset periodically. It should be linked to a benchmark published by a Financial Benchmark Administrator or approved by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) for this purpose.
  • FIMMDA shall ensure that any floating rate approved by them for this purpose is determined transparently, objectively and in arm’s length transactions

What about the secondary market?

 Secondary market – trading venue and settlement

CDs shall be traded either in OTC markets, including Electronic Trading Platforms or any recognized stock exchange with the approval of RBI.

The settlement cycle for OTC trades will be T+0 or T+1 basis. All settlements shall be settled on a DvP basis through the Clearing Corporation of any recognized stock exchange or any other mechanism to be duly approved by RBI.

Though banks are not authorized to give loans against CDs, they are permitted to buy back the CDs subjected to the following conditions:

  • A minimum of 30 days has to pass after the issue of CDs.
  • The terms and conditions for all buyers would remain the same on identical terms and conditions and obviously, the investors have full rights to either accept or reject the buyback offer. Yes, the market price determines its buyback price. They get fully extinguished after being bought back.

The trading time will be between 9.00 AM and 5.00 PM on any working day or as may be prescribed by RBI.

What about repayment instructions? What are they?

No grace period is available for repayment of CDs. Obviously, the banks would not fix the maturity date to coincide with any scheduled holiday.

Accounting for CD transactions shall be as per the applicable accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI) or other standard-setting organizations or as specified by the relevant regulations of the Reserve Bank.

Stringent reporting standards have been prescribed for CDs.

a. “Primary issuances: Details of primary issuance of a CD shall be reported by the issuer on the Financial Market Trade Reporting and Confirmation Platform (“F-TRAC”) of Clearcorp Dealing System (India) Ltd by 5.30 PM on the day of issuance or as decided by the Reserve Bank from time to time.

b. Secondary market transactions: All secondary market transactions other than those on the exchanges in CDs shall be reported, with time stamp, within 15 minutes of execution (the time when the price is agreed) on the F-TRAC platform.

c. Secondary market transactions on exchanges: All secondary market transactions in CDs undertaken on recognized stock exchanges shall be reported on the F-TRAC platform by the exchanges after the close of business on the same day.

d. Buyback transactions: Details of the buyback of a CD shall be reported by the issuer on the F-TRAC platform in the prescribed format by 5.30 PM on the day of the buyback.

e. Reporting by depositories: The depositories shall report to the Reserve Bank, the details of the CDs held with them in the dematerialized form, in the prescribed format furnished in Annex I, at fortnightly intervals (on the 15th day and on the last day of the month) and as and when called upon to do so by the Reserve Bank”.

f. One can refer to the details of Annex 1 from the RBI website.

Important consequences of violation of RBI instructions indicate RBI may disallow the entity from accessing the CD market not exceeding one month at a time and all such instances would get public disclosure by RBI.

Conclusion

Certificate of Deposit is a popular form of raising resources over OTCs including ETMs under strict rules and regulations prescribed by RBI enabling SCBs and SMBs. It has been seen that the rate of interest payable on CDs is reasonable and helpful in developing healthy money markets.

It is expected that CD markets would show an increasing trend in mobilizing resources and would result in long term growth.

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Disclaimer: These views of mine based on laid down directions of RBI from its website in the public domain does not involve any legal opinion or consultation and none of us including myself, taxguru.in or RBI is responsible legally for this article. Please treat it for information purposes. The constant reference to the RBI website is always advised. 

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