Certificate of Deposit

Certificate of Deposit (CD) is a negotiable money market instrument, which can be issued by Scheduled Commercial Banks (excluding Cooperative Banks, Regional Rural Banks and Local Area Banks) or select All India FIs in the physical form or demat form to raise short term resources within limit prescribed by RBI. This instrument has come back to limelight in the current situation when 3 of the private sector banks raised Rs 700 crore from the market.

Banks have been given freedom to issue CDs, based on their short term funding requirements. Since Certificate of Deposit is a money market instrument, the issuance period ranges from 7 days to 12 months for Banks whereas select FIs could issue these instruments from 12 months to 36 months. The minimum face value of CD should be Rs 100,000/- and in multiples of Rs 100,000/- thereafter.

The CDs could be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-residents are also eligible to subscribe CDs, but only on non-repatriation basis. CDs issued to NRIs can’t be further endorsed to another NRI in secondary market. CDs attract stamp duty at the time of issuance as well as transfer or re-issuance at the rate of .005% and .0001% respectively.

The CDs could be issued at fixed coupon/discount rate or at floating rate. The floating rate is, generally, bench-marked with repo rate or FBIL rate, which are reset periodically depending upon duration. CDs are transferable in nature by endorsement when in physical form whereas CDs in demat forms could be transferred as per procedure laid down for other securities.

Banks are supposed to maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on the face value of the CDs. Bank’s are not permitted to grant loans against CDs, and buy-back of CDs before maturity is also not allowed. On maturity of CD, the last holder of the CD would be seeking payment from issuing bank by tendering physical CD. CD in demat form would be tendered to the respective depository participant (DP) for seeking maturity proceeds.

Difference between CDs and FDs

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