What is a Certificate of Deposit?
It is a negotiable money market instrument which is issued in a dematerialized form or as a promissory note for funds deposited at a bank or other eligible financial institution for a specified time.
Form of issue
- Banks and financial institutions must issue CDs only in the dematerialized form.
- According to the (Depositories Act 1996), investors however have the option to seek the certificate in physical form. Issuance of a CD will attract stamp duty.
- Certificates should be printed on good quality security paper and care should be taken that it cannot be tampered with.
Certificates of deposit can be issued by the following :
- Scheduled commercial banks excluding Regional Rural Banks (RRBs) and local area banks
- All India financial institutions that have been permitted by RBI to raise short-term resources
Quantum that can be issued
- Banks are free to issue as many as they need
- Financial Institutions can issue as much as they can within the limit set by the RBI.
- The minimum amount of a certificate of deposit must be Rs. 1 lakh. The minimum deposit that can be accepted from a single subscriber must not be less than Rs. 1 lakh.
- They must be in multiples of Rs. 1 lakh there-after.
Eligibility to subscribe
Certificates of deposit can be subscribed by the following :
- Non Resident Indians (NRI) may purchase these on non repatriable basis.
This must be stated on the face of the CD (Certificate of Deposit) These cannot be endorsed to another NRI in the secondary market.
- Maturity of CDs should not be less than 7 days and not more than one year
- Financial Institutions can issue these for a period of not less than 1 year and not more than three years from the date of issue.
- CDs can be issued at a discount on its face value
- Banks and financial institutions are permitted to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market based. The interest rate on floating rate CDs should be reset periodically. The issuing bank is free to decide the discount/ coupon rate.
- Banks should keep statutory reserves (CRR and SLR) on the issue price of CDs.
- Physical CDs are freely transferable by endorsement and delivery
- Dematerialized CDs can be transferred in the same mode as other dematerialized securities.
Lock in period
- There is no lock in period for CDs.
- Banks and financial institutions cannot grant loans against CDs
- Banks and financial institutions cannot buy back their own CDs before maturity.
- As physical CDs are freely transferable by endorsement and delivery banks should ensure certificates are printed on good quality security paper.
- CDs should be signed by two or more authorized signatories.
- CDs are due on the date stated on the instrument
- There is no grace period for CDs
- If the maturity date is a holiday, the issuing bank should make payment on the preceding working day.
- The physical CD should be presented for payment by the last holder.
- Payment must only be by crossed cheque.
- Holders of dematerialized CDs must approach depository participants for encashment.
- Duplicate certificate can be issued after
- A notice is given in at least one local newspaper
- There has been the lapse of a reasonable time from the date of notice in the newspaper – about 15 days.
- The investor executes an indemnity bond
- Duplicate certificates must be issued only in physical form.
- No fresh stamping is required
- The duplicate certificate must clearly state that it is a duplicate one.