What is Certificate of Deposit?

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Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period.

It has been introduced in India in 1989 to increase the range of money market instruments in the country. This post will explain various norms and features of certificate of deposits.

Participants of Certificate of Deposit

Certificate of deposit shall be issued by Scheduled commercial banks (excluding Regional Rural Banks and Local Area Banks) and select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

Certificate of Deposits shall be issued to Individuals, Corporations, Companies (including banks and PDs), trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non- repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.

Quantum of Certificate of Deposit

Banks have the freedom to issue CDs depending on their liquidity requirement and Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter. An FI can issue CDs within the overall umbrella limit prescribed by RBI.

Maturity of Certificate of Deposit

The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue.

FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue. There will be no grace period for repayment of CDs. If the maturity date happens to be a holiday, the issuing bank/FI should make the payment on the immediate preceding working day.

Format of Certificate of Deposits

Banks / FIs should issue CDs only in dematerialized form. However, according to the Depositories Act, 1996, investors have the option to seek a certificate in physical form. Accordingly, if an investor insists on the physical certificate, the bank / FI may inform the Chief General Manager, Financial Markets Regulation Department, Reserve Bank of India, Central Office, Fort, Mumbai – 400 001 about such instances separately. Further, issuance of CDs will attract stamp duty. Physical Certificates should be signed by two or more authorized signatories.

In case of loss of physical certificates, duplicate certificates shall be issued after compliance of norms prescribed by RBI. Duplicate certificates should be issued in physical form.

Other Norms of Certificate of Deposit

CDs in physical form are freely transferable by endorsement and delivery.  CDs in demat form can be transferred as per the procedure applicable to other demat securities. CDs may be issued at a discount on face value (A discount rate is the rate of return used to discount future cash flows back to their present value.)

There is no lock-in period for CDs. Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy back their own CDs before maturity.

Fixed Income Money Market and Derivatives Association of India (FIMMDA) may prescribe, in consultation with the RBI, standardized procedure and documentation that are to be followed by the participants of CD market.

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