Dec 8, 2017
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How many types of debt instruments are available in India?

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How many types of debt instruments are available in India?

Debt Instruments

Debt Instruments are obligation of issuer to pay in future the interest and also principal to the owner such of debt instrument.  It has are different types such as Bonds, Debentures, Commercial Papers, Certificates of Deposit, Government Securities (G – Secs) etc. The Government Securities (G-Secs) market is the oldest and the largest one. It has element in terms of market capitalization, trading volumes and outstanding securities. Government securities plays a very important role in the Indian economy. It also determines the level of interest rates in the country. Government securities are treated as the risk-free rate of return instruments.

The Reserve Bank of India have permitted  Primary dealers, banks and also financial institutions to deal in debt instruments. It also provides with coupon rate i.e fixed rate of return.  In present situation retailer investor gets fixed income. They also started taking interest in debt instrument specially in government securities.

Types of Debt Instruments

There are different kinds of Debt Instruments available in India such as;

  • Bonds.
  • Certificates of Deposit.
  • Commercial Papers.
  • Debentures.
  • Fixed deposits.
  • G – Secs (Government Securities).
  • National savings Certificate (NSC).

1. Bonds

A Bond is simply means that ‘I owe you’. In these, an investor invests money in a company or also government securities  for a predetermined interest rate. If a company plans for business expansion, it has an option to borrow money from individual investors. The company issues bonds with different rate of interest and issues them to public. Investors invest in the debt instruments with a belief that the company will repay the amount and the interest at predetermined date. The government, municipalities, variety of institutions and also corporations are permitted to issue the debt instruments.

2.Debenture

A debenture is similar to a bond only the securitization conditions are different. The Debenture is unsecured debt. It does not have any pledge on assets. It is a agreement between the debenture holder and the company. Also on maturity, a fixed interest rate and the principal amount.

In finance, Government and also large companies issues long-term debt instrument to obtain funds. The advantage of debentures to the issuer is that they do not have any lien on assets and thereby leave them open for subsequent financing. Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights.

3. Commercial Papers (CP)

It is an unsecured money market instrument. It is also promissory note. Commercial paper introduced in India in 1990. Highly rated corporate borrowers/ also to diversify their sources of short-term borrowings and to provide an additional instrument to investors .  It also enables them to meet their short-term funding requirements for their operations. CP issued in multiple of Rs. 5 lakh. Amount invested by a single investor should not be less than Rs.5 lakh (face value).  Duration of CP are 30/45/60/90/120/180/270/364 days. Scheduled bank can only act as an Issuing and Paying Agent IPA for issuance of CP.

4. Certificate of deposit

 CD is a time deposit. A financial instruments issued to consumers by banks, thrift institutions, and also credit unions. Certificate of Deposit are similar to savings accounts by bank. They are insured and virtually risk-free. They are different from savings accounts in that the CD has a specific, fixed term (often 3 months, 6 months, or 1 to 5 years), and, usually, a fixed interest rate. Scheduled commercial banks and also All-India Financial Institutions can issue. The maturity period of CDs issued by banks should be not less than 7 days and not more than one year. The Financial institutions can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

5. Fixed deposit (FD)

Fixed deposit is a financial instrument provided by banks or also Non Banking Financial Corporations which provides investors with high rate of interest than a regular savings account.

Article Categories:
The Companies Act, 2013

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