Certificate of Deposit (CD) is a negotiable money market instrument, issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for the issue of CDs are presently governed by various directives/guidelines issued by the Reserve Bank of India (RBI), as amended from time to time. The guidelines for the issue of CDs, incorporating all amendments issued till date, are provided below for reference.
Eligibility
CDs can be issued by:
- Scheduled commercial banks (excluding Regional Rural Banks and Local Area Banks).
- Select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
Aggregate Amount
- Banks have the freedom to issue CDs based on their funding requirements.
- An FI can issue CDs within the overall umbrella limit prescribed in the Master Circular on Resource Raising Norms for FIs, issued by DBOD and updated periodically.
Minimum Size of Issue and Denominations
- The minimum amount of a CD should be Rs. 1 lakh. The minimum deposit that can be accepted from a single subscriber should not be less than Rs. 1 lakh, and subsequent amounts should be in multiples of Rs. 1 lakh.
Investors
CDs can 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 a non-repatriable basis, which should be clearly stated on the Certificate. These CDs cannot be endorsed to another NRI in the secondary market.
Maturity
- 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.
Discount / Coupon Rate
CDs may be issued at a discount on face value. Banks/FIs are also allowed to issue CDs on a floating rate basis, provided the methodology of compiling the floating rate is objective, transparent, and market-based. The issuing bank/FI is free to determine the discount/coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. The investor should be clearly informed of this methodology.
Reserve Requirements
Banks must maintain appropriate reserve requirements, such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), on the issue price of the CDs.
Transferability
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. There is no lock-in period for the CDs.
Trades in CDs
All OTC trades in CDs must be reported within 15 minutes of the trade on the reporting platform of Clearcorp Dealing Systems (India) Ltd. (CDSIL).
Settlement
All OTC trades in CDs must be cleared and settled under the Delivery versus Payment (DVP) I mechanism through the authorised clearing houses, including the National Securities Clearing Corporation Limited (NSCCL), Indian Clearing Corporation Limited (ICCL), and MCX Stock Exchange Clearing Corporation Limited (CCL) of the stock exchanges.
Loans / Buy-backs
Banks/FIs cannot grant loans against CDs, nor can they buy back their own CDs before maturity. However, the RBI may relax these restrictions for temporary periods through a separate notification.
Format of CDs
Banks/FIs should issue CDs only in dematerialised form. According to the Depositories Act, 1996, investors have the option to seek certificates in physical form. If an investor insists on a physical certificate, the bank/FI may inform the Principal Chief General Manager, Financial Markets Department, Reserve Bank of India. Additionally, the issuance of CDs will attract stamp duty. There will be no grace period for repayment of CDs. If the maturity date coincides with a holiday, the issuing bank/FI should make payment on the immediate preceding working day.
Security Aspect
Since CDs in physical form are freely transferable by endorsement and delivery, banks/FIs must ensure that the certificates are printed on high-quality security paper and necessary precautions are taken to prevent tampering with the document. The certificates should be signed by two or more authorised signatories.
Payment of Certificate
- Since CDs are transferable, the physical certificates may be presented for payment by the last holder. To avoid liability arising from defects in the chain of endorsements, payments should only be made by crossed cheque. Those dealing with these CDs should be cautioned accordingly.
- The holders of dematted CDs must approach their respective depository participants (DPs) and give transfer/delivery instructions to transfer the security represented by the specific International Securities Identification Number (ISIN) to the ‘CD Redemption Account’ maintained by the issuer. The holders must also communicate to the issuer by letter or fax, enclosing a copy of the delivery instruction given to their DP, and indicate the place at which the payment is requested.
Issue of Duplicate Certificates
In case of loss of physical certificates, duplicate certificates can be issued after:
- A notice is published in at least one local newspaper.
- A reasonable period (e.g., 15 days) passes from the date of the notice.
- Execution of an indemnity bond by the investor to the satisfaction of the issuer of CDs.
The duplicate certificate should be issued in physical form, with a clear indication that it is a duplicate, including the original value date, due date, and issue date.
Accounting
Banks/FIs should account the issue price under the head “CDs issued” and show it under deposits. Accounting entries related to the discount will be made as in the case of “Cash Certificates.” Banks/FIs should maintain a register of CDs issued with complete details.
Standardised Market Practices and Documentation
The Fixed Income Money Market and Derivatives Association of India (FIMMDA) may, in consultation with the RBI, prescribe standardised procedures and documentation for the smooth functioning of the CD market, aligned with international best practices. Banks/FIs should refer to the detailed guidelines issued by FIMMDA on June 20, 2002, and as amended from time to time.
Reporting
- Banks should include the amount of CDs in their fortnightly return under Section 42 of the RBI Act, 1934, and separately indicate the amount in the return with a footnote.
- Banks/FIs must report data on the issuance of CDs on the web-based module under the Online Returns Filing System (ORFS) within 10 days from the end of the fortnight to which it pertains.