TREASURY BILLS

Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. TYPES OF TREASURY BILLS There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 12months Treasury bills etc. In India, at present, the Treasury Bills in vogue are the 91-days and 364-days Treasury bills. BENEFITS OF INVESTMENT IN TREASURY BILLS No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.

FORM The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form. MINIMUM AMOUNT OF BIDS Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof. ELIGIBILITY: All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. REPAYMENT The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai. AVAILABILITY All the treasury Bills are highly liquid instruments available both in the primary and secondary market.

ISSUANCE As mentioned above, treasury bills are issued at a discount to the face value. In view of this, while submitting tenders under auction for subscription, a subscriber is required to quote the price in the case of treasury bills. The difference between the face value and the price is known as the discount on the treasury bill.

CALENDAR OF AUCTION AS ANNOUNCED BY RESERVE BANK OF INDIA FOR 1999-2000 Treasury Bills

Notified amount (Rs crore) 250 1000

Day of auction

Day of payment

91 days 364 days

Every Friday Wednesday to coincide with reporting Friday

Following Monday Following Thursday

PRIMARY MARKET In the primary market, treasury bills are issued by auction technique. SALIENT FEATURES OF THE AUCTION TECHNIQUE The auction of treasury bills is done only at Reserve Bank of India, Mumbai. Bids are received at Mumbai office during banking hours ie upto 2 pm on the date of auction. The bids are received in terms of price per Rs 100. For example, a bid for 91 day treasury bill auction could be for Rs 97.50. Further, bids cannot be submitted with prices for more than two decimals. The auction committee of Reserve Bank of India decides the cut-off price and the results are announced on the same day. Bids above the cut-off price receive full allotment ; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected.

TYPES OF AUCTIONS There are two types of auction for treasury bills: Multiple Price Based or French Auction: Under this method, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him. This method is followed in the case of 364days treasury bills and is valid only for competitive bidders. Uniform Price Based or Dutch auction: Under this system, all the bids equal to or above the cut-off price are accepted at the cut- off level. However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him. This method is applicable in the case of 91 days treasury bills only.

CLASSIFICATION OF BIDS The bids submitted can be classified as competitive and non competitive bids. Competitive Bids Competitive bids can be submitted by any person or institutions like, banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, institutions and trusts in India. Non Competitive Bids There is a provision to accept non- competitive bids in respect of all treasury bills auctions. State Governments, Provident Funds and Nepal Rashtra bank are allowed to submit noncompetitive bids in the case of 91 days treasury bills. In the case of 364 days treasury bills however, only State Governments can participate as non-competitive bidders. The Reserve Bank of India participates as a non-competitive bidder in the auction. The unsubscribed portion of the competitive bids also devolves on the Reserve Bank of India. In the case of non-competitive bids, only the amount is indicated. They do not indicate any price. All the non-competitive bids are accepted at the weighted average price of the competitive bids. TO SUMMARIZE, The Reserve Bank of India conducts the auction of treasury bills of varying maturities as per the notified amount on pre announced auction dates. The auction for the notified amount is conducted on a competitive bid basis, which are submitted on a price basis. Non-competitive bids are also submitted and accepted, but the allotment is outside the notified amount and based only on quantity and not price. For consideration of competitive bidding, the bidding starts with the bid with lowest yield or highest price being awarded Treasury bills at their bid price. Successively higher yielding bids are accepted and are awarded Treasury bills at their bid price until the total amount accepted equals the notified amount. The highest yield accepted by the Reserve Bank of India is referred to the cut-off yield and the corresponding price is called the cut-off price.

YIELD CALCULATION The yield of a Treasury Bills is calculated as per the following formula: Y = (100-P)*365*100 P*D Wherein Y = discounted yield P = Price D = Days to maturity DAY COUNT

For treasury bills the day count is taken as 365 days for a year. This concludes the primary phase of issuance of Treasury bills and thereafter the Treasury bills undergo trading in the secondary market until their maturity dates. SECONDARY MARKET PARTICIPANTS The major participants in the secondary market are scheduled banks, financial Institutions, Primary dealers, mutual funds, insurance companies and corporate treasuries. Other entities like cooperative and regional rural banks, educational and religious trusts etc. have also begun investing their short term funds in treasury bills. ADVANTAGES Market related yields Ideal matching for funds management particularly for short term tenors of less than 15 days. Transparency in operations as the transactions would be put through Reserve Bank of Indias SGL or Clients Gilt account only Two way quotes offered by primary dealers for purchase and sale of treasury bills. Certainty in terms of availability, entry & exit

HOW TO PURCHASE TREASURY BILLS Treasury bills can be purchased either from the primary market or the secondary market. Primary Market A bid will have to be made in the weekly auctions of Treasury bills as given earlier. The bid will have to be submitted to RBI, Mumbai. The bid can be submitted to RBI, Mumbai, or through the bank/Primary Dealer with whom he has a Constituent SGL account. Secondary Market A treasury bill can be purchased at any point of time from the secondary market, commensurate with the short term period for which funds are available. HOW TO TRADE IN SECONDARY MARKET Call up the dealer and obtain the quotes. For dealing enquiry at PNB Gilts, contact dealing department in Delhi on Tel no. 011- 3325759, 3325779, or branch offices of PNB Gilts on the following phone numbers:

Mumbai 022-2691812/2692248 Chennai 044-8591750/8591751

Calcutta 033-2210394/2210395 Ahmedabad 079-6423037/6423058 Strike the deal with the dealer over the phone. In case of client having a Gilt account with PNB Gilts Ltd., a mandate letter to be faxed with relevant details (of treasury bills, rate, settlement date, counterparty) to concerned branch. In case of purchase of Treasury bills, send payment to PNB Gilts Ltd. through high value cheque.

SETTLEMENT SYSTEMS The entire settlement procedure thereafter would be handled by PNB Gilts Ltd. which would be as follows: In Case of Purchase From PNB Gilts Ltd : On conclusion of a deal, PNB Gilts would: obtain payment from the client in Delhi/its branch offices, ensure transfer of the Treasury Bills to the Gilt account of the client on the settlement date itself in Mumbai.

In terms of Reserve Bank of India rules, Gilt account for Treasury bills can be maintained only at Reserve Bank of India, Mumbai. In Case Of Settlement with Other Counterparties and Gilt Account Maintained With PNB Gilts Ltd. Purchase: After concluding a deal, the client would fax relevant details (of treasury bills, rate, settlement date, counterparty) to concerned branch. PNB Gilts Ltd. would obtain payment in Delhi/other branches from the client through high value. PNB Gilts Ltd. would ensure receipt of SGL Form III on behalf of client in Mumbai, and deposit of the same for credit of the Treasury bills to the Gilt Account.

Sale: If the client has sold a Treasury Bills: After concluding a deal, the client would fax relevant details (of treasury bills, rate, settlement date, counterparty) to concerned branch. PNB Gilts Ltd. would ensure issuance of SGL Form III for transfer of Treasury bills to buyers account, and receive payment from the counterparty in Mumbai. PNB Gilts Ltd. in turn would make the payment, to the client through any of its branch offices.

ADVANTAGES OF DEALING WITH PNB GILTS LTD.

All deals can be concluded through any of PNB Gilts branch offices or corporate office in Delhi inspite of Treasury Bills settlement permitted only at Reserve Bank of India, Mumbai. Facility of Gilt Account from Delhi/ Mumbai/Chennai/Ahmedabad/Calcutta. The rates offered are competitive. There is total transparency in the transaction. Regular and reliable market update available to our constituent clients. Direct deals with PNB Gilts Ltd. No involvement of brokers / other intermediaries.

HOW TO ENSURE TRANSPARENCY IN OPERATIONS The rates at which Treasury Bills of different residual maturities are being traded are available in leading Financial Newspapers and can be compared with the rates available from other sources. All SGL settlements of Treasury Bills are published in leading financial newspapers on the following day. The transactions once closed have to be confirmed in writing by both the parties giving full particulars. Transactions done through NSE brokers are available on NSE Screens.

TREASURY BILLS AN EFFECTIVE CASH MANAGEMENT PRODUCT Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be deployed in treasury bills to maximise returns Banks do not pay any interest on fixed deposits of less than 15 days,or balances maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well. Further, since every week there is a 91 days treasury bills maturing and every fortnight a 364 days treasury bills maturing, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements. EXAMPLE: Suppose party A has a surplus cash of Rs 200 crore to be deployed in a project. However, it does not require the funds at one go but requires them at different points of time as detailed below: Funds Available as on 1.1.2000 Rs. 200 crore Deployment in a project Rs. 200 crore As per the requirements 6.1.2000 13.1.2000 Rs. Rs. 50 crore 20 crore

02.2.2000 08.2.2000

Rs. Rs.

30 crore 100 crore

Out of the above funds and the requirement schedule, the party has following two options for effective cash management of funds: Option I Invest the cash not required within 15 days in bank deposits The party can invest a total of Rs 130 crore only, since the balance Rs 70 crores is required within the first 15 days. Assuming a rate of return of 6% paid on bank deposits for a period of 31 to 45 days, the interest earned by the company works out to Rs 76 lacs approximately. Option II Invest in Treasury Bills of various maturities depending on the funds requirements The party can invest the entire Rs 200 crore in treasury bills as treasury bills of even less than 15 days maturity are also available. The return to the party by this deal works out to around Rs 125 lacs, assuming returns on Treasury Bills in the range of 8% to 9% for the above periods. PORTFOLIO MANAGEMENT STRATEGIES Strategies for managing a portfolio can broadly be classified as active or passive strategies. BUY AND HOLD A buy and hold strategy can be described as a passive strategy since the Treasury bills once purchased, would be held till its maturity. The salient features of this strategy are: Return is fixed or locked in at the time of investment itself. The exposure to price variations due to secondary market fluctuations is eliminated. There is no risk of default on maturity.

BUY AND TRADE This strategy can also be described as an active market strategy. The returns on this strategy are higher than the buy and hold strategy as the yield can be optimised by actively trading the treasury bills in the secondary market before maturity. YIELD CALCULATIONS The following formulae can be used to calculate returns on Treasury bills, when they are sold prior to maturity: 1. Effective yield for the time a Treasury Bill is held: Gain or loss in yield:

Days to maturity at date of sale No.of Days T-Bill is held Example:

X (Purchase yield

------------------------------------------ .... Sale yield)

Assume that a 91 Days Treasury Bills purchased at 9.90% is held for 30 days and sold at 9.50%. The yield for the time Treasury bill was held would be calculated as follows: Days to maturity at date of sale = 91-30 =61 No. of days held = 30 Purchase yield Sale yield = 9.90 9.50 = + 0.40 Gain or loss in yield = 61 ------X (+0.40) = +0.813 30 Return for the time Treasury Bill was held = Purchase yield + (Gain or loss in yield) = 9.90% + 0.813 = 10.713 % In other words, the effective return for holding the Treasury Bill for 30 days works out to 10.713%. Had the Treasury Bills been sold at a yield lower than 9.50% also, the effective return would have still been higher. 2. To find the number of days a Treasury Bills must be held to break even in yield Days to maturity at date of sale = Days to maturity at date of purchase X Purchase yield --------- ---------------------------------------------Sale yield Example Assume that a 91 Days T Bills is bought at 9.90%. How long must it be held to avoid a loss if it is to be sold at 10% Days to maturity remaining at date of sale = 91X9.90 --------=90 10 Days to maturity at purchase = 91 Days to maturity at sale = 90

Break even period = 91- 90 = 1 day. The above examples clearly indicate that even if the Treasury Bills are sold in the secondary market prior to maturity, the returns cannot be termed as speculative yields. These are actual yields that are determined by market conditions prevailing at that specific point of time. FACTORS LIKELY TO IMPACT YIELD MOVEMENTS Some of the following factors are likely to have an impact on the secondary market yield movements of sovereign paper, both Government securities and Treasury bills: Governments Borrowing programme Monetary policies Liquidity in the financial systems Foreign Exchange fluctuations Economic & Political scenario

TREASURY BILLS AND DATED SECURITIES

Treasury Bills are the instruments of short term borrowing by the Central/State govt. They are promissory notes issued at discount and for a fixed period. These were first issued in India in 1917. Objectives These are issued to raise funds for meeting expenditure needs and also provide outlet for parking temporary surplus funds by investors. Investors Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. Denomination Minimum amount of face value Rs.1 lac and in multiples there of. There is no specific amount/limit on the extent to which these can be issued or purchased. Maturity : 91 days and 364 days. Rate of interest Market determined, based on demand for and supply of funds in the money market. Other features These are highly liquid and safe investment giving attractive yield. Approved assets for SLR purposes and DFHI is the market maker in these instruments and provide (daily) two way quotes to assure liquidity. RBI sells treasury bills on auction basis (to bidders quoting above the cut -off price fixed by RBI) every fortnight by calling bids from banks, State Govt. and other specified bodies. DATED SECURITIES

These are those instruments which have tenure over one year. The returns on dated securities are based on fixed coupon rates akin to corporate bonds. These are considered risk free.