Amrita School of Business

Working Capital Management Assignment -1

Treasury Bills

Submitted To: Prof: Sukumaran B.

Submitted by: Divya Gopakumar 11 Epru Thejesh Sujith K. Unnikrishnan K. 13 42 43

Date: 13/03/2012

Treasury Bills Introduction

Treasury Bills are money market instruments to finance the short term requirements of the Government. 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. Treasury bills are considered to be short-term, as the period of maturity is one year or less Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000 there on. Treasury bills are different from treasury notes and treasury bonds in that they offer the shortest term. Treasury notes mature between one and ten years, while treasury bonds mature in more than 10 years.

Types of Treasury Bills

In India, there are two types of treasury bills viz. (I) ordinary or regular and (ii) ad hoc known as ad hocs ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be bought and sold at any time and they have secondary market also. On the other hand ad hocs are always issued in favor of the RBI only. They are not sold through tender or auction. On the basis of periodicity there are three types of treasury bills issued in India: 91-day T-Bills 182-day T-Bills 364-day T-Bills

Purchase of Treasury Bills

Primary Market - Once the allotment process in the primary auction is finalized, the successful participants are advised of the consideration amounts that they need to pay to the Government on settlement day. The settlement cycle for dated security auction is T+1, whereas for that of Treasury bill auction is T+2. On the settlement date, the fund

accounts of the participants are debited by their respective consideration amounts and their securities accounts (SGL accounts) are credited with the amount of securities that they were allotted.

Secondary Market - The transactions relating to Government securities are settled through the members securities / current accounts maintained with the RBI, with delivery of securities and payment of funds being done on a net basis. The Clearing Corporation of India Limited (CCIL) guarantees settlement of trades on the settlement date by becoming a central counter-party to every trade through the process of novation, i.e., it becomes seller to the buyer and buyer to the seller. All outright secondary market transactions in Government Securities are settled on T+1 basis. However, in case of repo transactions in Government securities, the market participants will have the choice of settling the first leg on T+0 basis or T+1 basis as per their requirement.

Treasury Bill An Effective Tool for Cash Management

T-Bills are short term investments which can be helpful for meeting working capital Management. Funds which are kept in current accounts can be deployed in T-Bills to maximize returns, because banks does not pay any interest on fixed deposit of less than 15 days, or balances maintained in current account, whereas T-Bills can be purchased for any number of days depending on the requirements. Every week there is a T-Bill auction, the company can purchase T-Bill of different maturities as per requirements so as to match with the respective cash outflows. When liquidity in economy is tight, the returns on T-Bill are much higher as compared to bank deposits even for long term. Besides, better yields and availability for very short tenors, another important advantage of T-Bills over bank deposits is that surplus cash can be invested depending upon the staggered requirements. T-Bills can also be used as a hedging tool.

Importance of Treasury Bills Safety: Investments in TBs are highly safe since the payment of interest and repayment of
principal are assured by the Government. They carry zero default risk since they are issued by the RBI for and on behalf of the Central Government. Liquidity: Investments in TBs are also highly liquid because they can be converted into cash at any time at the option of the inverts. Ideal Short-Term Investment: Idle cash can be profitably invested for very short periods in TBs. TBs are available throughout the week at specified rates. Financial institutions can employ their surplus funds on any day. The yield on TBs is also assured. Ideal Fund Management: Fund managers of financial institutions build portfolio of TBs in such a way that the dates of maturities of TBs may be matched with the dates of payment on their liabilities like deposits of short term maturities. Thus, TBs help financial managers it manage the funds effectively and profitably. Statutory Liquidity Requirement: As per the RBI directives, commercial banks have to maintain SLR (Statutory Liquidity Ratio) and for measuring this ratio investments in TBs are taken into account. TBs are eligible securities for SLR purposes. Moreover, to maintain CRR (Cash Reserve Ratio). TBs are very helpful. They can be readily converted into cash and thereby CRR can be maintained.

Defects of Treasury Bills

Low Yield: The yield form TBs is the lowest. Long term Government securities fetch more interest and hence subscriptions for TBs are on the decline in recent times. Absence of Competitive Bids: Though TBs are sold through auction in order to ensure market rates for the investors, in actual practice, competitive bids are competitive bids are conspicuously absent. The RBI is compelled to accept these non-competitive bids. Hence adequate return is not available. Absence of Active Trading: Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs is adversely affected.