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INTRODUCTION A commercial bill is one which arises out of a genuine trade transaction, i.e. credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay amount mentioned therein after a certain specified date. Thus, a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a creation period. A bill of exchange is a self-liquidating paper and negotiable/; it is drawn always for a short period ranging between 3 months and 6 months. Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. It enhances he liability to make payment in a fixed date when goods are bought on credit. According to the Indian Negotiable Instruments Act, 1881, bill or exchange is a written instrument containing an unconditional order, signed by the maker, directing to pay a certain amount of money only to a particular person, or to the bearer of the instrument. Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) or the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. The bank discount this bill by keeping a certain margin and credits the proceeds. Banks, when in need of money, can also get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60 days or 90 days, depending on the credit extended in the industry. Hence Commercial Bill is a Bill of exchange used in the buying and selling of goods.Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) or the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. The bank discount

this bill by keeping a certain margin and credits the proceeds. Banks, when in need of money, can also get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60 days or 90 days, depending on the credit extended in the industry. An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates. Bill financing is an important mode of meeting the credit needs of trade and industry in developed economies because it facilitates an efficient payment system being self-liquidating in nature. In India bill financing has been popular since long in ancient Hundi form. The existence of an approved bills market enables rediscounting of bills which is a traditional instrument of credit control. As such, the Indian central Banking Enquiry Committee (1931) had strongly recommended the establishment of a market in commercial bills. But nothing could be done by the Reserve Bank till 1952, on account of the war, the indifference of British Government and the partition of the country. The RBI pioneered effort on developing bill culture in India. It introduced Bill Market Scheme (BMS) in 1952 to provide demand loan against banks promissory notes supported by their constituents 90 days usance bills or promissory notes. The scheme was designed to ease the problem of providing temporary finance to commercial banks by the Reserve Bank as a lender of last resort. But, it did not succeed in developing a genuine bill market. Finally in November 1970, based on the recommendations of Narasimham committee, RBI introduced Bill Rediscounting Scheme (BRS)also known as New Bill Market Scheme (NBMS) which continues till date in modified form. Under this scheme, all scheduled commercial banks are eligible to rediscount genuine trade bills arising out of sale/purchase of goods with the RBI and other approved institutions.

DEFINTION OF A BILL Section 5 of the negotiable Instruments Act defines a bill exchange a follows: an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person ort to the beater of the instrument. In other words it is an unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a third party at a future date. The future date may be either fixed or negotiable. A bill of exchange must be in writing and signed and dated. Also called draft.

FEATURES OF A BILL OF EXCHANGE Here are some important features of a commercial bill. 1. A Bill of Exchange must be in writing 2. It must be dated 3. It must contain an order to pay a certain sum of money 4. The money must be paid to a definite person or to his order or bearer 5. The draft must be accepted for payment by the party on whom the order is made.

PARTIES TO A BILL OF EXCHANGE A bill of exchange is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three partiesthe drawer, the drawee, and the payee. The person who draws the bill is called the drawer. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.

To summarize -: i. The Drawer who prepares the bill. ii. The Drawee in whose name the bill has been drawn. iii. The Payee to whom the bill has to be paid. iv. The Endorsee to whom the bill has been transferred by way of endorsement by the payee.

TYPES OF COMMERCIAL BILL Many types of bills are in circulation in a bill market. They can be broadly classified as follows: 1) Demand and Usince Bills Demand bills are others called sight bills. These bills are payable immediately as soon as they are presented to the drawee. No time of payment is specified and hence they are payable at sight. Usince bills are called time bills. These bills are payable immediately after the expiry of time period mentioned in the bills. The period varies according to the established trade custom or usage prevailing in the country.

2) Clean Bills and Documentary Bills When bills have to be accompanied by documents of title to goods like Railways, receipt, Lorry receipt, Bill of Lading etc. the bills are called documentary bills. These bills can be further classified into D/A bills and D/P bills. In the case of D/A bills, the documents accompanying bills have to be delivered to the drawee immediately after acceptance. Generally D/A bills are drawn on parties who have a good financial standing. On the order hand, the documents have to be handed over to the drawee only against payment in the case of D/P bills. The documents will be retained by the banker. Till the payment o0f such bills. When bills are drawn without accompanying any documents they are called clean bills. In such a case, documents will be directly sent to the drawee. 3) Inland and Foreign Bills Inland bills are those drawn upon a person resident in India and are payable in India. Foreign bills are drawn outside India an they may be payable either in India or outside India. They may be drawn upon a person resident in India also. Foreign boils have their origin outside India. They also include bills drawn on India made payable outside India. 4) Export Bills Export bills are those drawn by Indian exports on importers outside India and import bills are drawn on Indian importers in India by exports outside India. 5) Indigenous Bills Indigenous bills are those drawn and accepted according to native custom or usage of trade. These bills are popular among indigenous bankers only. In India, they called hundis the hundis are known by various names such as Shah Jog, Nam Jog, Jokhani, Termainjog. Darshani, Dhanijog, and so an.

6) Accommodation Bills and Supply Bills If bills do not arise out of genuine trade transactions, they are called accommodation bills. They are known as kite bills or wind bills. Two parties draw bills on each other purely for the purpos4 of mutual financial accommodation. These bills are discounted with bankers and the proceeds are shared among themselves. On the due dates, they are paid. Supply bills are those neither drawn by suppliers or contractors on the government departments for the goods nor accompanied by documents of title to goods. So, they are not considered as negotiable instruments. These bills are useful only for the purpose of getting advances from commercial banks by creating a charge on these bills. OPERATIONS IN BILL MARKET From the operations point of view, the bill market can be classified into two viz. 1) Discount Market Discount market refers to the market where short-term genuine trade bills are discounted by financial intermediaries like commercial banks. When credit sales are affected, the seller draws a bill on the buyer who accepts it promising to pay the specified sum at the specified period. The seller has to wait until the maturity of the bill for getting payment. But, the presence of a bill market enables him to get payment immediately. The seller can ensure payment immediately by discounting the bill with some financial intermediary by paying a small amount of money called Discount rate on the date of maturity; the intermediary claims the amount of the bill from the person who has accept6ed the bill. In some countries, there are some financial intermediaries who specialize in the field of discounting. For instance, in London Money Market there are specialize in the field discounting bills. Such institutions are conspicuously absent in India. Hence, commercial banks in India have to

undertake the work of discounting. However, the DFHI has been established to activate this market. 2) Acceptance Market The acceptance market refers to the market where short-term genuine trade bills are accepted by financial intermediaries. All trade bills cannot be discounted easily because the parties to the bills may not be financially sound. In case such bills are accepted by financial intermediaries like banks, the bills earn a good name and reputation and such bills can readily discounted anywhere. In London, there are specialist firms called acceptance house which accept bills drawn by trades and import greater marketability to such bills. However, their importance has declined in recent times. In India, there are no acceptance houses. The commercial banks undertake the acceptance business to some extent.

ADVANTAGES OF A COMMERCIAL BILL Commercial bill market is an important source of short-term funds for trade and industry. It provides liquidity and activates the money market. In India, commercial banks lay a significant role in this market due to the following advantages: 1) Liquidity: Bills are highly liquid assets. In times of necessity, bills can be converted into cash readily by means of rediscounting them with the central bank. Bills are self-liquidating in character since they have fixed tenure. Moreover, they are negotiable instruments and hence they can be transferred freely by a mere delivery or by endorsement and delivery. 2) Certainty Of Payment: Bills are drawn and accepted by business people. Generally, business people are used to keeping their words and the use of the bills imposes a

strict financial discipline on them. Hence, bills would be honored on the due date. 3) Ideal Investment: Bills are for periods not exceeding 6 months. They represent advances for a definite period. This enables financial institutions to invest their surplus funds profitably by selecting bills of different maturities. For instance, commercial banks can invest their funds on bills in such a way that the maturity of these bills may coincide with the maturity of their fixed deposits. 4) Simple Legal Remedy: In case the bills are dishonored\, the legal remedy is simple. Such dishonored bills have to be simply noted and protested and the whole amount should be debited to the customers accounts. 5) High And Quick Yield: The financial institutions earn a high quick yield. The discount is dedicated at the time of discounting itself whereas in the case of other loans and advances, interest is payable only when it is due. The discounts rate is also comparatively high. 6) Easy Central Bank Control: The central bank can easily influence the money market by manipulating the bank rate or the rediscounting rate. Suitable monetary policy can be taken by adjusting the bank rate depending upon the monetary conditions prevailing in the market. 7) Profitability: Since the discount on a bill is front ended the yield is much higher than in other loans and advances, where interest is paid quarterly or half yearly. Evens out Inter-bank Liquidity Problems: The development of healthy parallel bills discounting market would stabilize the violent fluctuations in

the call money market as banks could buy and sell bills to even out their liquidity mismatches. 8) Discount rate and effective Rate of Interest: Banks and finance companies discounting bills prefer to discount L/C (letter of credit) backed bills compared to clean bills. The rate of discount applicable to clean bills is usually higher than the rate applicable to L / C based bills. The bills are generally discounted up front, i.e. the discount is payable in advance. As a consequence, the effective rate of interest is higher than the quoted rate (discount). The discount rate varies from time to time depending upon the short term interest rate. The computation of the effective rate of interest on bills discounting is shown below in Illustration: Illustration: The innovative finance Ltd, discounts the bills of its clients at the rate specified below: 1) 2) L / C backed bills 22 per cent per annum Clean bill 24 per cent per annum

Required. Compute the effective rate of interest implicit in the two types of bills assuming usance period of (a) 90 days for the L/C based bill and (b) 60 days for the clean bill and value of the bill, Rs 10,000 Solution: Effective rate of Interest on L / C based bill: Value of the bill, Rs 10,000 Discount charge, Rs 550 {Rs 10,000 x 0.22 x 90 / 360} Amount received by the client, Rs 9,450 (Rs 10,000 Rs 550)

Quarterly effective interest rate, 5.82 percent (Rs 550 / Rs 9,450 x 100) Annualized effective rate of interest, [(1.0582)4 1] x 100,25.39 per cent Effective rate of interest on clean Bill: Value of bill, Rs 10,000 Discount charge ( Rs 10,000 x 0.24 x 60/ 360), Rs 400 Amount received by the client (Rs 10,000 R 400), Rs 9,600 Quarterly rate of interest (Rs 400 / Rs 9,600 x 1000, 4.17 percent Effective rate of interest per annum, [(1.0417)4 1] x100 = 17.75 percent

DISADVANTAGES OF A COMMERCIAL BILL In spite of these merits, the bill market has not been well developed in India. The reasons for the slow growth are the following: 1) Absence Of Bill Culture: Business people in India prefer O.D and cash credit to bill financing therefore, banks usually accept bills for the conversion of cash credits and overdrafts of their customers. Hence bills are not popular. 2) Absence Of Rediscounting Among Banks: There is no practice of re-discounting of bills between banks who need funds and those who have surplus funds. In order to enlarge the rediscounting facility, the RBI has permitted financial institutions like LIC, UTI, GIC and ICICI to rediscount genuine eligible trade bills of commercial banks. Even then, bill financial is not popular.

3) Stamp Duty: Stamp duty discourages the use of bills. Moreover, stamp papers of required denomination are not available. 4) Absence Of Secondary Market: There is no active secondary market for bills. Rediscounting facility is available in important centers and that too it restricted to the apex level financial institutions. Hence, the size of the bill market has been curtailed to a large extent. 5) Difficulty In Ascertaining Genuine Trade Bills: The financial institutions have to verify the bills so as to ascertain whether they are genuine trade bills and not accommodation bills. For this purpose, invoices have to be scrutinized carefully. It involves additional work. 6) Limited Foreign Trade: In many developed countries, bill markets have been established mainly for financing foreign trade. Unfortunately, in India, foreign trade as a percentage to national income remains small and it is reflected in the bill market also. 7) Absence Of Acceptance Services: There is no discount house or acceptance house in India. Hence specialised services are not available in the field of discounting or acceptance. 8) Attitude Of Banks: Banks are shy rediscounting bills even the central bank. They have a tendency to hold the bills till maturity and hence it affects the velocity of circulation of bills. Again, banks prefer to purchase bills instead of discounting them.

MEASURES TO DEVELOP BILL MARKET One of the objectives of the Reserve Bank in setting up the Discount and finance House of India was to develop commercial bills market. The bank sanctioned a refinance limit for the DFHI against collateral of treasury bills and against the holdings of eligible commercial bills. With a view to developing the bills market, the interest rate ceiling of 12.5 per cent on rediscounting of commercial bills was withdrawn from May 1, 1989. To develop the bills market, the Securities and Exchange Board of India (SEBI) allowed, in 1995-96, 14 mutual funds to participate as lenders in the bills rediscounting market. During 1996-97, seven more mutual funds were permitted to participate in this market as lenders while another four primary dealers were allowed to participate as both lenders and borrowers. In order to encourage the bills culture, the Reserve Bank advised banks in October 1997 to ensure that at least 25 percent of inland credit purchases of borrowers be through bills.

SIZE OF A COMMERCIAL BILL MARKET The size of the commercial market is reflected in the outstanding amount of commercial bills discounted by banks with various financial institutions. The share of bill finance in the total bank credit increased from 1993-94 to 1995-96 but declined subsequently. This reflects the underdevelopment state of the bills market. The reasons for the underdevelopment are as follows:

The Reserve Bank made an attempt to promote the development of the bill market by rediscounting facilities with it self till 1974. Then, in the beginning of the 1980s, the availability of funds from the Reserve Bank under the bill rediscounting scheme was put on a discretionary basis. It was altogether stopped in 1981. The popularity of the bill of exchange as a credit instrument depends upon the availability of acceptance sources of the central bank as it is the ultimate source of cash in times of a shortage of funds. However, it is not so in India. The Reserve Bank set up the DFHI to deal in this instrument and extends refinance facility to it. Even then, the business in commercial bills has declined drastically as DFHI concentrates more on other money market instruments such as call money and treasury bills. It is mostly foreign trade that is financed through the bills market. The size of this market is small because the share of foreign trade in national income is small. Moreover, export and import bills are still drawn in foreign currency which has restricted their scope of negotiation. A large part of the bills discounted by banks are not genuine. They are bills created by converting the cash-credit/overdraft accounts of their customers. The system of cash-credit and overdraft from banks is cheaper and more convenient than bill financing as the procedures for discounting and rediscounting are complex and time consuming. This market was highly misused in the early 1990s by banks and finance companies which refinanced it at times when it could to be refinanced. This led to channeling of money into undesirable uses.

BILL DISCOUNTING AND PURCHASING Meaning of word discounting

A contract Sources of short-term finance The process of calculating the present value of some future amount

When a firm holds other drawers bills of exchange with distant terms of payment and is money short, the amount of the bill shall be subject to a discount. Discounting is a special form of lending, when a bank buys a bill prior to maturity at a price lower than the nominal amount of the bill of exchange (with a discount).Discounting bills indicates the operation by means of which a bank, having previously deducted the interest, advances to its client - the creditor - the amount corresponding to the value of one or more bills bearing a future date which the client cedes to the bank by endorsement. The discounting of bills are a widely used source of short-term finance. Commercial bill discount refers to the service that the holder commercial acceptance draft transfers his draft to bank for obtaining funds before the day of draft maturity. The cash received is posted to the bank account and the bill of exchange charges are posted to the appropriate expense account. If the drawee does not pay the bill of exchange on the date of maturity, it is protested. In the case the bill is dishonoured on due date the amount due on the bill together with interest and other charges is debited by the bank to the drawers account. The demand bills are repayable on demand and there is no maturity, the banker is entitled to demand their payment immediately on presentation before the drawee. The banker credits the account of the customer with the amount of the bill after deducting his charges or discount. This practice is called purchasing and discounted of bills. The bills purchased and discounted by the banks are shown in its balance sheet as part of loans and advances.

Banks should take utmost care in discounting or purchasing of bills. They have to take all precautions in assessing the creditworthiness of the parties intending to avail of this facility. Regular credit limits on annual basis are fixed by the banks on individual parties for purchase and discounting of clean bills and documentary bills separately, clean bills are treated as unsecured advances because their realization depends exclusively on the reputation, creditworthiness and honesty of the parties. Documentary bills on other hand are considered safer like secured advances. Apart from creditworthiness of the parties to such bills, the banks should also rely upon the worth of the documents to title to goods attached with the bills such as Railway Receipts are made in favour of the banks. The banks should grant the limits for various facilities gradually and carefully. Documentary credit should be granted initially to a new customer. Clean limits may be granted subsequently if the customers conduct in respect of the documentary bills proves to be satisfactory. Smaller credit limits can be prescribed to a new customer. The limit may be raised gradually, according to the need of the customer if the experience with the customer is satisfactory.

BILL DISCOUNTING IN INDIA Discounting and purchasing bills as a method of granting credit was not much popular in India. The bill market in India is underdeveloped. There is little market for bills of exchange in the real sense of the term, except the one created by the Reserve Bank of India for the purpose of accommodation. The RBI appointed a study group on enlarging the use of Bills of Exchange as an instrument of credit and the creation of a Bill Market in February, 1970. The study group considered the general question of enlarging the use of bill of exchange for providing credit. The promissory notes lodged

by the customers under the bill market scheme was not out of trade transactions but came into existence only to enable the banks to seek refinance from the Reserve Bank. Therefore, the study group remarked that these bills are not bills in the true sense nor is there a market for them. It is in effect an accommodation scheme on the basis of improvised bills. There has been scarcity of sufficient trade bills which could be rediscounted with the RBI. The Reserve Bank of India adopted some appropriate steps such as an upward revision of rediscount rates in order to attract market players with surplus funds to the bill market, reduction of stamp duty on bills drawn in connection with a commercial or a cooperative bank, discarding the unwieldy procedure of endorsing bills at its physical delivery at each time of rediscounting. In spite of such actions, however, the bill market has not been properly developed. In 1981, the Reserve Bank of India stopped to re-discount the bills under the scheme and permitted the banks to re-discount the bills with one another as well as with approved financial institutions under the procedure laid down under the scheme. The financial institutions include Life Insurance Corporation, Unit Trust of India, ICICI, IDBI, State Bank of India, Mutual Fund, Export Credit Guarantee Corporation (ECGC) and selected urban corporative banks. Under the Bill Re-Discounting Scheme, all licensed scheduled banks are eligible to offer bills of exchange for re-discounting. The eligible banks were required to apply to the Reserve Bank of India for sanction of limits for re-discounting of bills under the scheme giving their estimated credit requirement for 12 months ending October each year. Limits are sanctioned or renewed for a period of one year. Genuine trade bills are eligible for re-discounting under the scheme. The bank discounting the bill has to give a certificate regarding the solvency and creditworthiness of the drawers of the bills. The bills are, therefore, discounted on the

creditworthiness of the drawers of the bills though the signatures of the bankers of the drawee who accepted the bills are also of significance. Bills of exchange discounted by the eligible banks are to be endorsed in favour of the re-discounting institution and delivered to it at the time of re-discounting. The river process is required at the time of maturity of bills. In order to remove the administrative problems, the bills over the face value of Rs 10 lakhs were till recently required to be physically lodged with the rediscounting institution. The RBI further simplified the procedure of re-discounting in December 1988 by dispensing with the necessity of physical lodgment of discounted bills. The bill rediscounting scheme was introduced with a view to generate genuine bills in the money market and to even out liquidity within the banking system. The ultimate objective was to have a broad based bill market in which all institutions should participate. To encourage the use of bills, Reserve Bank of India has recently introduced an element of compulsion upon the corporate borrowers of banks. It has asked all commercial banks to advice their corporate borrowers that they should finance their domestic credit purchases from small scale industrial units as also from small industries and others taken together at least to the extent of 25 percent by way of acceptance of bills upon them by their suppliers. This requirement which has been enforced from January 1, 1998, is to be stipulated as one of the covenants for sanction of working capital credit limits. Reserve Bank of India has also authorized the banks to charge additional interest to those borrowers who do not comply with this requirement in any quarter. This is current situation of bill discounting markets in India.

SIZE OF BILL MARKET IN INDIA Bill markets established for the purpose of financing foreign trade in India. The size of the commercial market is reflected in the outstanding amount of commercial bills discounted by banks with various financial institutions. There should be large number of dealers and brokers in the bill market for smooth functioning of the market. However the bill market is India has not been developed fully. In the real sense, there is no such market in India for bills of exchange. The RBI has done some work in this respect. THE FOLLOWING TABLE GIVES THE IDEA OF THE SIZE OF BILL MARKET IN INDIA YEAR BILL PURSCHAED TOTAL AND DISCOUNTED CREDIT (RS.CRORES) 1955-56 1960-61 1965-66 1970-71 1975-76 1980-81 1985-86 1 1988-89 1995-96 7,019 29,345 84,719 2,54,015 08 11.55 149 208 342 963 2,350 3,190 5,035 BANK BILLS PURCHASED AND DISCOUNTED AS A % OF TOTAL (RS.CRORES) CREDIT 761 1,320 2,288 4,660 10,877 25,371 56,067 20 16 15 21 22 13 09

2002-03 2003-04 2004-05 2005-06 2006-07

47,142 51,545 60,217 76,622 87,287

7,29,215 8,40,785 11,00,428 15,70,077 19,28,913

6.46 6.13 5.47 5.08 4.52

BILL MARKET RATES The Bank rate is the rate at which the RBI can discount eligible bills from commercial banks. The Reserve Bank of India fixes the rate at which the commercial banks can discount bills, it is called commercial banks bill finance rate. The relevant rates that determine the cost of bill financing are the Bank Rate, the SBI Hundi Rate, Bazar Bill Rate, Commercial banks bill finance rate and the SBI discount rate. The ceilings on discount rates have been withdrawn by the RBI since 1989. MARKET FOR LONG TERM BILLS The Government securities market has witnessed significant changes during the past decade. Introduction of an electronic screen based trading system, dematerialized holding, straight through processing, establishment of the Clearing Corporation of India Ltd. (CCIL) as the central counterparty (CCP) for guaranteed settlement, new instruments, and changes in the legal environment are some of the major aspects that have contributed to the rapid development of the market. Major participants in the Government securities market historically have been large institutional investors. With the various measures for

development, the market has also witnessed the entry of smaller entities such as co-operative banks, small pension and other funds etc. These entities are mandated to invest in Government securities through respective regulations. However, some of these new entrants have often found it difficult to understand and appreciate various aspects of the Government securities market. The Reserve Bank of India has, therefore, taken several initiatives to bring awareness about the Government securities market among small investors. These include workshops on the basic concepts relating to fixed income securities/ bonds like Government securities, existing trading and investment practices, the related regulatory aspects and the guidelines. This primer is yet another initiative of the Reserve Bank to disseminate information relating to the Government securities market to the smaller institutional players as well as the public. An effort has been made in this primer to present a comprehensive account of the market and the various processes and operational aspects related to investing in Government securities in an easy-to-understand, question-answer format. The primer also has, as annexes, a list of primary dealers (PDs), useful excel functions and glossary of important market terminology. I hope the investors; particularly the smaller institutional investors will find the primer useful in taking decisions on investment in Government securities. Reserve Bank of India would welcome suggestions in making this primer more user-friendly. a. Treasury Bills (T-bills) Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price (for calculation of yield on Treasury Bills please see answer to question no. 26). The Reserve Bank of India conducts auctions

usually every Wednesday to issue T-bills. Payments for the T-bills purchased are made on the following Friday. The 91 day T-bills are auctioned on every Wednesday. The Treasury bills of 182 days and 364 days tenure are auctioned on alternate Wednesdays. T-bills of of 364 days tenure are auctioned on the Wednesday preceding the reporting Friday while 182 T-bills are auctioned on the Wednesday prior to a nonreporting Fridays. The Reserve Bank releases an annual calendar of T-bill issuances for a financial year in the last week of March of the previous financial year. The Reserve Bank of India announces the issue details of Tbills through a press release every week. b. Cash Management Bills (CMBs) Government of India, in consultation with the Reserve Bank of India, has decided to issue a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and redeemed at face value at maturity. The tenure, notified amount and date of issue of the CMBs depends upon the temporary cash requirement of the Government. The announcement of their auction is made by Reserve Bank of India through a Press Release which will be issued one day prior to the date of auction. The settlement of the auction is on T+1 basis. The non-competitive bidding scheme (referred to in paragraph number 4.3 and 4.4 under question No. 4) has not been extended to the CMBs. However, these instruments are tradable and qualify for ready forward facility. Investment in CMBs is also reckoned as an eligible investment in Government securities by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set of CMBs were issued on May 12, 2010. c. Dated Government Securities Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years.

CONCLUSION Thus the size of commercial bill market has increased as compared to before; But it still remains under-developed. This market was highly misused in the early 1990s by banks and finance companies which refinanced it at times when it could to be refinanced. This led to channeling of money into undesirable uses. The reserve bank of India has taken several measures to develop the bill market. Thus, commercial bills are liquidating assets used for short term finance and it is beneficial to several investors. And the yield of returns is much higher as compared to other advances and loans.