MUKESH PATEL SCHOOL OF TECHNOLOGY MANAGEMENT & ENGINEERING

Cash & Marketable

Securities Management
FAA Assignment 2

Abbas Sheik Dawood (101), MBA Tech (IT) - Shirpur

Bhavuk Chandak (103), MBA Tech (IT) - Shirpur
Dharmendra Choudhary (104), MBA Tech (IT) – Shirpur
Shruti Bihani (201), MBA Tech (Chemical) – Mumbai
Vaibhav Chaudhary (301), MBA Tech (Manufacturing) - Mumbai
Siddharth Devnani (302), MBA Tech (Manufacturing) – Mumbai
 Cash & Marketable Securities Management

Table of Contents
Motives for Holding Cash .......................................................................................................... 2
Speeding Up Cash Receipts ....................................................................................................... 3
Collections ............................................................................................................................. 3
Collection Float ...................................................................................................................... 3
Earlier Billing .......................................................................................................................... 4
Concentration Banking .......................................................................................................... 4
Slowing Down Cash Payouts...................................................................................................... 5
Float ....................................................................................................................................... 6
Electronic Commerce ................................................................................................................ 7
Electronic Data Interchange (EDI) ......................................................................................... 7
1. Electronic Funds Transfer (EFT) ................................................................................. 7
2. Financial EDI (FEDI) .................................................................................................... 7
Cost & Benefits of EDI ........................................................................................................... 7
Indian Systems of EFT ............................................................................................................ 8
National Electronic Funds Transfer (NEFT) ........................................................................ 8
Real Time Gross Settlement (RTGS) .................................................................................. 8
Electronic Clearance Service (ECS) .................................................................................... 8
Cheque Truncation System (Check 21).............................................................................. 8
Outsourcing ............................................................................................................................... 9
Benefits of outsourcing ......................................................................................................... 9
Disadvantages of Outsourcing............................................................................................. 10
Business process outsourcing (BPO) ................................................................................... 11
Maintaining Cash Balances ...................................................................................................... 12
Compensating Balances and Fees ....................................................................................... 12
Recent Trends ...................................................................................................................... 12
Investment in marketable securities ....................................................................................... 13
Marketable Securities.......................................................................................................... 13
Criteria for Selecting Marketable Securities:....................................................................... 13
Marketable Securities Portfolio........................................................................................... 14
Common Marketable Securities .......................................................................................... 15
List of Illustrations ................................................................................................................... 18
Bibliography............................................................................................................................. 18

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 Cash & Marketable Securities Management

Motives for Holding Cash

John Maynard Keynes suggested three reasons for individuals to hold cash. These were

 Transactions motive: to meet the payment requirements, such as purchases,

salaries, taxes and dividends arising in the course of any business.
 Speculative motive: to take advantage of temporary opportunities such as fall in
price of some raw material.
 Precautionary motive: to maintain a safety buffer or cushion to meet unexpected
cash requirements.

It is important to note that not all cash needs require holding cash balances exclusively. A
portion of these requirements can be met by holding marketable securities or cash
equivalent assets and also by maintaining unused borrowing capacity such as bank lines of
credit.

Cash management involves efficient collection, expenditure and temporary investment of

cash. A cash budget tells us how much cash we are likely to have and when are we going to
have it and for how long. It serves as a foundation for forecasting cash and controlling it.

For a large firm this information is usually computer based. Frequent reports on the cash
balances in its various bank accounts is necessary and on cash expenditure as well as on
marketable securities. All this information helps a firm to manage its cash efficiently.

The various collection and disbursement methods that a firm employs to improve its cash
management efficiency constitute speeding up cash receipts and slowing down cash
payouts.

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Speeding Up Cash Receipts

It includes two methods that are the speeding up of collections or by concentration banking.
First we shall discuss acceleration of collections that includes steps taken by a firm from the
time a product or service is sold until the customers’ checks are collected and become
usable funds for the firm.

Collections
A number of methods are designed to speed up the collection process these are as follows:

 Expedite preparing and mailing of invoice

 Accelerate the mailing of payments from customers to the firm
 Reduce the time during which payments received by the firm remain uncollected
funds

Collection Float
The second and third items in the above list collectively represent the collection float, the
total time between the mailing of a check by a customer and the availability of cash to the
receiving firm. The second item refers to the mail float or the time for which the check is in
the mail. The third item is the deposit float which has two aspects processing float and
availability float. Processing float is the time taken by a firm to process checks internally.
Availability float involves the time consumed in clearing the check through the banking
system.

Figure 1 Collection Float Timeline

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 Cash & Marketable Securities Management

Earlier Billing
Another way to speed up the collection of receivables is to get the invoices or bills to the
customers earlier. Customers have different payment habits. Some pay the bills on the final
due date or may be even after that and others pay as soon as they receive the bill or invoice.
In both the cases faster preparing and mailing of invoices helps in faster payment because
earlier receipt of invoices result in earlier discount and due dates. Billing can be done on the
computer for achieving faster preparation of invoices. Some companies even enclose the bill
with the material. Billing can be completely eliminated by the use of preauthorized debit.
Preauthorized debit means the transfer of funds from a payer’s bank account on a specified
date to the payee’s bank account. The transfer is initiated by the payee with the payer’s
advance authorization. The customer signs an agreement with a firm allowing the firm to
debit the customer’s account automatically on a specified date and transfer funds from the
customer’s account to the firm’s account.

Concentration Banking
It basically means the movement of cash from field banks into the firm’s central cash pool
residing in a concentration bank. The firms move part or all of the deposits to one central
location, which is known as a concentration bank. The process of cash concentration has
several effects:

 It improves control over inflows and outflows of corporate cash

 It reduces idle balances that is it keeps only the necessary amount of deposit
balances in the regional banks to meet transaction needs
 It allows for more effective investments. Pooling excess balances provides the larger
cash amounts needed for higher yielding, short term investment opportunities that
require a larger minimum purchase.

The concentration banking is dependent on the timely transfer of funds between banks or
financial institutions. There are three principle methods employed to move funds between
financial institutions which are as follows:

 Depository Transfer Check (DTC): This arrangement moves funds through the use of
a pre-printed check drawn on a local bank and payable to a single company account
at a concentration bank. Funds are not immediately available on receipt of the DTC
because the check must still be collected through the usual channels.
 Automated Clearinghouse (ACH) electronic transfer: This is essentially an electronic
version of the depository transfer check, which can be used between banks that are
members of the automated clearing house system. Transferred funds become
available one business day later.
 Wire Transfer: This is the fastest way to transfer funds between banks. It is a generic
term used for electronic funds transfer using a two-way communications system,
such as Fedwire (Federal Reserve Wire System). It is simply a telephone-like
communication which via book keeping entries, removes funds from a payer bank
account and deposits them in an account of a payee bank.

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Slowing Down Cash Payouts

The second way in which one can hold cash is by slowing down the payments. The motives
for slowing down payouts are the same as the motives of speeding up receipts. The firm
always would want to make most use of money it already has, before it has been spent.

To minimize the time cash deposits are idle and to slow down expenditures, the firm needs
to effectively manage its CONTROL OF DISBURSEMENTS.

A firm should build a system in which it should be able to transfer funds between multiple
accounts/banks in such a way that the account from which disbursements are made should
have an adequate but should not allow building up of excess balance and these excess funds
should be transferred to invest in marketable securities.

 A convenient way to do this is by centralising disbursements into a single dedicated

account or several dedicated accounts. In this case, funds are transferred to this
account at the precise time disbursements are made. The idea is to have just enough
cash in the account through which there is an outflow predicted and use the rest of
the cash. The firm should aim to make disbursement only at that precise time, after
which it would hamper the firm's credit standing, or an additional expense would be
incurred due to late payment.
 Cash discount: There is a possibility that cash discount is offered. In this case the
firm should send the payment at the end of the discount period.
 Dividends and Payroll: For payroll and dividend separate accounts can be
maintained as described in "dedicated accounts". Balance in this account can be
maintained depending on prediction of when the cheques will be deposited by the
employees. Balance can be maintained to a minimum by this. For example if payday
is on 10th of every month, initially it should be observed what the trend is regarding
debiting of the payroll dedicated account over the next few days. Eventually using
this prediction the firm does not need to deposit all the required funds for payroll at
once, and can deposit into this account part by part according to the trend
observed.

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This system is also followed by firms for dividend payments. In the case of dividend
payments it is observed that there is a greater delay of depositing of cheques. Hence firms
can take advantage of it.

 Intentional delay: Float can be intentionally be increased by firms to cause a

deliberate delay in payments. But in this we must realise that one firms gain is
another firms loss. The payees will receive payment much later than they would
want to. This can lead to supplier relations being hurt and this can affect the
goodwill of the company.
 Remote disbursement: This is done by strategically selecting geographically remote
banks. This enables the cheques to remain outstanding for the maximum amount of
time.
 Controlled Disbursement: In this system the firm directs cheques to be drawn at a
branch that gives them notification in the morning of total amount of money which
will be cleared that day towards cheques deposited

Float
Funds in the bank are generally greater than the balance shown on the company's books.
The difference between bank balance and books balance of cash is called net float. It is the
consequence of delays between when the cheques are made till when they are cleared by
the payee's bank.

"Playing the float": The amount of the net float can be estimated accurately. If this is done
then bank balances can be reduced to put funds to more profitable uses.

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Electronic Commerce

Electronic commerce (EC) is the exchange of business information in an electronic format or

more generally, it encompasses all the business conducted through the means of computer
networks and it offers an alternative to the paper based systems. The electronic commerce
spectrum ranges from unstructured systems of email and facsimile to the highly structured
messaging system called Electronic Data Interchange (EDI). The recent advances in
telecommunications and computer technologies have made computer networks an integral
part of the economic infrastructure. E-commerce in India is still in nascent stage, but even
the most-pessimistic projections indicate a boom.

Electronic Data Interchange (EDI)

This involves the transfer of business information in a computer readable format. This
information includes invoices, purchase orders etc. EDI not only involves direct, computer-
to-computer data movement via communication links but also the physical delivery among
businesses of electronic data storage items such as computer tapes, disks and CD-ROMs.
There are two major subsets of EDI, and they are listed below:

1. Electronic Funds Transfer (EFT)

This form of EDI involves a transfer of value (money) between two depository
institutions
International examples include Automated Clearing House (ACH) and wire transfers.
Internationally, EFT may involve instructions and transfers by the way of Society for
Worldwide Interbank Financial Telecommunication (SWIFT) and the Clearing House
Interbank Payment System (CHIPS).

2. Financial EDI (FEDI)

FEDI involves a no value transfer, a transfer of business information between a firm
and a bank or between banks. Examples include Lockbox remittance information
and bank balance information.

Cost & Benefits of EDI

A horde of benefits have been attributed to the application of EDI for financial and other
services, they include the following:

1. Faster movement of information and payments with greater reliability

2. Improved cash forecasting and cash management
3. Customers benefit from such a faster and reliable service
4. Reduce mail, paper, document and storage costs
5. Speed of transactions eliminates float

But all these benefits come at a price. The movement of data requires computer hardware
and software. The training of the personnel to use the system adds a cost to the company.
Additionally time, money and effort must be spent to convince the suppliers and customers
to do business electronically with the firm. The elimination of float period means the loss of
favourable float in disbursements, which is a very high price to pay.

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Indian Systems of EFT

National Electronic Funds Transfer (NEFT)
National Electronic Funds Transfer (NEFT) is a nation-wide system that facilitates individuals
to electronically transfer funds from any bank branch to any other bank branch in the
country. NEFT uses the Public Key Infrastructure (PKI) technology to ensure end-to-end
security and rides on the INdian FInancial NETwork (INFINET) to connect the bank branches
for electronic transfer of funds. This system operates on the principle of deferred net
settlement (DNS) which settles payments in batches. There is no limit on the amount to be
transferred in this system. Presently, NEFT operates in batches from 9 am to 5 p.m. There
are six settlements at 9 am, 11 am, 12 noon, 1 pm, 3 pm and 5 pm on week days and three
settlements at 9 am, 11 am and 12 noon on Saturdays.

Real Time Gross Settlement (RTGS)

The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer
mechanism where transfer of money takes place from one bank to another on a 'real time'
and on 'gross' basis. This is the fastest possible money transfer system through the banking
channel. Settlement in 'real time' means payment transaction is not subjected to any waiting
period. The transactions are settled as soon as they are processed. 'Gross settlement' means
the transaction is settled on one to one basis without bunching with any other transaction.
Considering that money transfer takes place in the books of the Reserve Bank of India, the
payment is taken as final and irrevocable. Contrary to DNS, in RTGS, transactions are
processed continuously throughout the RTGS business hours. RTGS is primarily for very large
transactions and the minimum amount to be transferred is `100000.The RTGS service
window for customer's transactions is available from 9.00 hours to 16.30 hours on week
days and from 9.00 hours to 12.30 noon on Saturdays for settlement at the RBI end.
However, the timings that the banks follow may vary depending on the customer timings of
the bank branches.

Electronic Clearance Service (ECS)

ECS is a mode of electronic funds transfer for transactions that are repetitive and periodic in
nature. ECS is used by institutions for making bulk payment of amounts towards distribution
of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards
telephone / electricity / water dues, cess / tax collections, loan instalment repayments,
periodic investments in mutual funds, etc. Essentially, ECS facilitates bulk transfer of monies
from one bank account to many bank accounts or vice versa using the services of an ECS
Centre at an ECS location.

Cheque Truncation System (Check 21)

Cheque Truncation System (CTS) is being introduces an image-based processing of cheques
& will lead down certain features in the printing of cheque.

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 Cash & Marketable Securities Management

Outsourcing

Outsourcing is defined as Subcontracting a certain business operation to an outside firm-

whether abroad or at home - instead of doing it “in-house”. All other essential but non core
areas of business are candidates for outsourcing. Outsourcing is often viewed as involving
the contracting out of a business function - commonly one previously performed in-house -
to an external provider. In this sense, two organizations may enter a contractual agreement
involving an exchange of services and payments.

Use of lockbox service (oldest corporate cash management service) is an example of

outsourcing of a critical but noncore financial process.

The growing interest shown by firms in e-commerce makes area of disbursements well
suited for outsourcing. Most likely a bank would manage this outsourced operation. For
example- a firm might deliver a single file of all payment instructions to a bank in EDI format.
The bank would then separate payments by type and the make then payments. This service
is helpful to a firm needing to make international payments. So, major money–center banks
would have the technical expertise necessary to handle many currencies and clearing the
systems involved.

Benefits of outsourcing
 Reducing and controlling operating costs: This involves reducing the scope, defining
quality levels, re-pricing, re-negotiation, cost re-structuring. Outsourcer can use
economies of scale and their specialized expertise to perform an outsourced business
operation. Hence, a firm gets the service at both a lower cost and higher quality than it
could have provided itself.

 Focus on Core Business: Outsourcing may free up time thereby eliminating distractions
& personnel so that the company can focus more on its core businesses. Resources (for
example investment, people, and infrastructure) are focused on developing the core
business.

 Cost restructuring: Operating leverage is a measure that compares fixed costs to

variable costs. Outsourcing changes the balance of this ratio by offering a move from
fixed to variable cost and also by making variable costs more predictable.

 Continuity & Risk management: Outsourcing provides a level of continuity to the

company while reducing the risk that a substandard level of operation would bring to
the company. So Outsourcing may permit multiple companies to share risk. An
approach to risk management for some types of risks is to partner with an outsourcer
who is better able to provide the mitigation.

 Improve quality: Achieve a steep change in quality through contracting out the service
with a new service level agreement.

 Knowledge: Access to intellectual property and wider experience and knowledge

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 Operational expertise: Access to operational best practice that would be too difficult or
time consuming to develop in-house.

 Access to talent: Access to a larger talent pool and a sustainable source of skills, in
particular in science and engineering.

 Enhance capacity for innovation: Companies increasingly use external knowledge

service providers to supplement limited in-house capacity for product innovation.

 Reduce time to market: the acceleration of the development or production of a

product through the additional capability brought by the supplier.

Disadvantages of Outsourcing
However, outsourcing does have its disadvantages:

 Poor quality control over process.

 Creates potential redundancies.

 Other companies may also be using the service provider. Therefore in some cases,
the best interests of the service provider may be diluted with other users.

 Loss in customer focus and concentrate on the product (the outsourced process).

 The loss of talent generated internally.

 Employees may react badly to outsourcing and consequently their quality of work
may suffer

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Business process outsourcing (BPO)

• It is a subset or a specialized form of outsourcing in which an entire business process is
handed over to a third party service provider. .It involves multi-year contracts that can
run into hundreds of millions of dollars. BPO is typically categorized into (a) back office
outsourcing - which includes internal business functions such as human resources or
finance and accounting, & (b) front office outsourcing - which includes customer-
related services such as contact center services.

• BPO that is contracted outside a company's country is called offshore outsourcing.

BPO that is contracted to a company's neighboring (or nearby) country is called near
shore outsourcing.BPO has been growing steadily in recent years and could be a $500
billion market globally by next year. It is a market for both smaller & larger
multinationals .BPO is an evolution from major (IT) outsourcing contracts that started
in 1990s.Its’s less of a cost play-using cheaper overseas labor to do the same work-
than an effort to led a third party undertake best practices functions that aren’t core
to the corporation’s profit making abilities.

• India remains the foremost location for BPO , followed by countries like China , Mexico
,Brazil & Eastern European nations like Hungary.Leading BPO companies in India
includes GENPACT, WNS SERVICES , IBM DAKSH ,WIPRO ,TCS etc.

• Business process outsourcing enhances the flexibility of an organization in different

ways.

• Most services provided by BPO vendors are offered on a fee-for-service basis .This
helps a company to become more flexible by transforming fixed into variable cost. A
variable cost structure helps a company in responding to changes in required capacity
and does not require a company to invest in assets, thereby making the company
more flexible. Outsourcing may provide a firm with increased flexibility in its resource
management and may reduce response times to major environmental changes

• Secondly a BPO helps an organization to focus on its core competencies, without being
burdened by the demands of bureaucratic restraints.

• Thirdly a BPO increases the speed of business processes using techniques such as
linear programming which can reduce cycle time and inventory levels thereby
increasing efficiency. BPO helped to transform Nortel from a bureaucratic organization
into a very agile competitor. A company can maintain growth goals while avoiding
standard business bottlenecks. BPO therefore allows firms to retain their
entrepreneurial speed and agility, which they would otherwise sacrifice in order to
become efficient as they expanded.

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Maintaining Cash Balances

Most business firms establish a target level of cash balances to maintain. They do not want
to maintain excess cash balances because interest can be earned when these funds are
invested in marketable securities. The greater the interest rate available on marketable
securities, the greater the opportunity cost to maintaining idle cash balances.

The optimum level of cash should be the larger of

1. The transactions balances required when cash management is efficient

2. The compensating balance requirements of commercial banks with which the firm
has deposit accounts.

Transactions balances are determined in keeping with considerations. Also, the higher the
interest rate, the greater the opportunity cost of holding cash, and the greater the
corresponding desire to reduce the firm’s cash holdings, all other things the same. A number
of cash management models have been developed for determining an optimal split between
cash and marketable securities.

Compensating Balances and Fees

Establishing a minimum level of cash balances depends, in part, on the compensating
balance requirements of banks. The requirements for the firm to maintain a certain amount
of demand deposits to compensate a bank for services provided are based on the
profitability of the account.

Because banks differ in the method of account analysis they use, the determination of
compensating balances varies. The firm therefore may be wise to shop around and find the
bank that requires the lowest compensating balances for a given level of activity. If a firm
has a lending arrangement with a bank, the firm may well be required to maintain balances
in excess of those required to compensate the bank for the activity in its account.

Recent Trends
In recent years there has been a marked trend toward paying cash for services rendered by a
blank instead of maintaining compensating balances. The advantage to the firm is that it
may be able to earn more on funds used for compensating balances that the fee for the
services.

The higher the interest rate in the money market, the greater the opportunity cost of
compensating balances, and the greater the advantage of service charges. It is an easy
matter to determine whether the firm would be better off with service charges as opposed
to maintaining compensating balances. One simply compares the charges with the earnings
on the funds released.

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Investment in marketable securities

The earlier parts of the report explain how much of current assets should be kept in cash
and how it is maintained efficiently. However it is important to note that not all of the firms
need for cash call comes from holding cash exclusively. Some of it is also met by holding
marketable securities which can be easily traded for cash.

Firms use these marketable securities as near cash investments. The accumulation of excess
cash in the cash account could be easily earning interest if invested temporarily in
marketable securities. These marketable securities which the firm purchases to meet its cash
requirements are shown in the balance sheet as ‘cash equivalents’ if the remaining
maturities are 3 months or less than that. Other market securities whose maturity time is
less than a year are termed as ‘short term investments’.

Marketable Securities
Marketable securities are investments that are highly liquid, meaning that they can be
quickly sold in the secondary financial markets in large amounts for cash. A company
might invest in these types of securities as a way to preserve cash for unanticipated
events.

Criteria for Selecting Marketable Securities:

The variables that need to be considered while purchasing marketable securities include
safety, marketability, yield & maturity.

•Likelihood of getting back the same no. of rupees intially

invested(Principal amount)
Safety •High degree of safety is must if the security has to be seriously
considerd
•Treasury bills have a high safety if held to maturity

Marketability •Ability to convert security into cash at a short notice without

incurring a loss

or Liquidity •A Security could be safe if held to maturity but this does not imply
that it will be sold without loss before maturity

•It is the interest and/or appreciation of principal provided by the

security
•Yiels id calculated by 2 ways; Bond equivalent Yield & Effective
Yield annual Yield
•Loss can be incurred if a marketable security is sold prior to
maturity and the level of interest rate has increased later.(Interest
Rate Risk)

•Refers to life of the security

Maturity •Time before which principal amount becomes due.
•Treasury bills have orignal lives of 91. 182 or 364 days

Figure 2 Marketable Securities Selection Criteria

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Marketable Securities Portfolio

In selecting securities for the various portfolio segments, the portfolio manager tries to
match alternative money market instruments with the specific needs relating to each
segment, after taking into account the above variables. In short the composition of the firms
marketable securities account is determined while keeping in mind the trade-off that exists
between risk and return.

The firm’s portfolio of short term marketable securities can be divided into 3 segments
depending on its usage.

Free Cash
Segment

Ready Cash
Segment

Controllable
Cash
Segment

Figure 3 Marketable Securities Segmentation

1. Ready Cash Segment

They act as a reserve for the company’s cash account. Unless a firms cash inflows
are always greater than or equal to cash outflows each day, the firm would probably
need to cash in some securities from time to time. One major requirement of these
securities is instant liquidity. These securities may have to be liquidated on a short
notice. They are intended to provide the first line of defence against unforeseen
operating needs of the firm.

2. Controllable Cash Segment

They are required to meet the firm’s knowable or controllable outflows about which
the firm knows quite in advance. This includes dividends, tax payments, loans
coming due, interest payments etc.

3. Free Cash Segment

This is an amount of firm’s marketable securities that are set aside to service neither
the cash account nor the controllable outflows. It is basically extra cash that the firm
has simply invested short term as the firm has no immediate use of these funds.

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Common Marketable Securities

1. Treasury Bills
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 maximize 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 treasury bills auction, 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 are that
the surplus cash can be invested depending upon the staggered requirements.

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.

There are different types of Treasury bills based on the maturity period and utility of
the issuance like, ad-hoc Treasury bills, 3 months, 6 months and 12months Treasury
bills etc. In India, at present, the Treasury Bills are issued for the following tenor’s
91-days, 182-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 tradability and active secondary market facilitates meeting

unplanned fund requirements.

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2. Certificates of Deposits
Certificates of Deposits are virtually a risk free option. They are issued in
denominations of 0.5Mn and have a maturity ranging from 30 days to 3 years. They
are unsecured negotiable instruments and are issued in bearer form. Both
commercial banks and financial institutions can issue CDs however financial
institutions can issue ones having a maturity of at least one year. Banks issue CDs
during a period of limited liquidity at a relatively higher interest rate usually when
there is a high credit demand but a poor growth of deposit.

Unlike fixed deposits, CDs are transferrable & tradable. They can be issued to
companies, trusts, associates, individuals and others and like other time deposits,
are also a subject to SLR & CRR.

As there is more incentive to hold CDs till the time of its maturity, secondary market
for CDs has not evolved as an active market.

3. Commercial Paper
They are short term, unsecured promissory notes generally issued by finance
companies with sound financial position and a high credit rating. Initially they were
issued for 90 days but now the period has been relaxed to anything between 15 days
to 1 year. It can be issued in denomination of Rs. 5 lakhs or in multiples thereof.

Commercial papers are issued at a discount which is determined by the money

market forces. In order to broaden the secondary market base of commercial
papers, primary dealers and satellite dealers were also allowed to issue commercial
papers.

4. Inter-Corporate Deposits
It is an unsecured loan offered by one company to another. This allows the
corporate with excess funds to invest their surplus by way of lending to other
corporate. They are highly risky as they are unsecured.

5. Ready Forwards or Repos or Buyback

This is one of the most extensively used money market instrument usually deployed
to meet temporary cash requirement. Usually banks or other organizations enter
into ready forward transactions to fund their short term requirements.

Under this arrangement, the seller sells particular securities to the buyer with the
agreement to repurchase the same securities at a mutually predetermined future
date and at a prefixed future price. Likewise the buyer purchases the same securities
with the promise to resell them to the seller at a mutually agreed future price and
date. The difference in the price adds to the income of the company.

6. Bills of Exchange
They are promissory notes issued for commercial transactions involving goods and
services. These bills form a part of companies banking limits and are discounted by
the bank which in turn rediscounts the bills with each other.

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7. Bill Discounting
It is a widely used source of short term finance in the Indian corporate sector. In this
the bank buys the bill from the customer before it is due and credits the value of the
bill after a discount charge to the customer’s account. The transaction is practically
an advance against the security of the bill and the discount represents the interest
on the advance from the date of purchase of the bill until it is due for payment. It is
better than inter-corporate deposits because of its self-liquidating nature. However
they involve a credit risk unless bills are a genuine trade and backed by a letter of
credit.

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 Cash & Marketable Securities Management

List of Illustrations
Figure 1 Collection Float Timeline ............................................................................................. 3
Figure 2 Marketable Securities Selection Criteria ................................................................... 13
Figure 3 Marketable Securities Segmentation ........................................................................ 14

Bibliography
Horne, J. C., & John M. Wachowicz, J. (2010). Fundamentals of Financial Management.
Pearson Prentice Hall.

RBI. (n.d.). Electronic Clearing Service. Retrieved from RBI:

http://www.rbi.org.in/scripts/ECSUserView.aspx?Id=20

RBI. (n.d.). NEFT - FAQ. Retrieved from RBI:

http://www.rbi.org.in/scripts/FAQView.aspx?Id=60

RBI. (n.d.). RTGS System - FAQ. Retrieved from RBI:

http://www.rbi.org.in/scripts/FAQView.aspx?Id=65

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