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Thursday, October 11, 2012

Short term corporate debentures

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Apart from the above money market instruments, certain other short-term instruments are also in vogue with investors. These include short-term corporate debentures, Bills of exchange and promissory notes.

Like CPs, short-term debentures are issued by corporate entities. However, unlike CPs, they represent additional funding for the corporate ie the funds borrowed by issuing short term debentures are over and above the funds available to the corporate from its consortium bankers. Normally, debenture issuance attracts stamp duty; but issuers get around this by issuing only a letter of allotment (LOA) with the promise of issuing a formal debenture later - however the debenture is never issued and the LOA itself is redeemed on maturity. These LOAs are freely tradable but transfers attract stamp duty.

Bills of exchange are promissory notes issued for commercial transactions involving exchange of goods and services. These bills form a part of a company's banking limits and are discounted by the banks. Banks in turn rediscount bills with each other.

 

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