Difference between IPO and FPO | 7 Key Differences

Difference between IPO and FPO

The IPOs and FPOs are utilised to arrange funds from the general public and there is a misconception that IPO and FPO are similar but there is some difference between IPO and FPO.

The companies raise long term funds from the capital market for their day to day operations, new project finance and expansion purpose. In order to raise public funds, the companies or government issue the securities like bonds, debentures or shares in the primary market. There are multiple types of issues through which the organisations float stocks/ shares in the capital market, IPO and FPO are some of those mechanisms of issuing stocks in the capital market.

This article will help you to understand, what does it mean by IPO and FPO and also the difference between IPO and FPO.

IPO and FPO:

An IPO (Initial Public Offering) refers to the issues of equity shares of any company for the first time in the capital market (stock exchange). In other words, whenever an unlisted company issues its fresh shares (stocks) first time for the investors to buy, it will be known as Initial Public Offering (IPO).

Thus we can say that to raise capital from the public investment a private company requires to issue the shares in the stock market so that it is easily available for investors to buy. Such issues are done in the primary market and such offering is called the initial public offerings. 

On the other hand, if a company which is already listed in the stock exchange issues the stocks second or subsequent time, it is known as Follow on Public Offering (FPO).

For instance, suppose a company which has already raised funds through initial public offering ie. the company has already diluted some proportion of equity (ownership) to raise funds from the general public. Further, if the company requires additional funds, it has to dilute an extra percentage of ownership and issue extra shares for sale, such second-time issuance of shares will be known as FPO.

The Follow on public offers can be of two types viz. Dilutive and Non-diluted public offerings.

Dilutive:

The Dilutive to investors means when the company’s board of directors agree to increase the number of floated shares in the capital market without affecting the valuation of the company. This leads to a reduction in the share price of the company, such an FPO is known as Dilutive FPO (or dilutive to investors). The company’s objective behind dilutive FPO is to raise funds for reducing debt or business expansion.

Non-dilutive:

The non-dilutive to investors occurs when the company’s largest shareholders such as directors, promoters or founders sell off their own privately held stocks in the market, such follow on public offering does not impact on the share price as the shares already exist only the number of shares available for the public increases. During non-dilutive FPO those shares are sold which are already in existence, hence also referred to as secondary market offerings.

IPO and FPO (Comparison Table):

BASS OF COMPARISONIPO FPO
MeaningAn IPO is the first time issues by an unlisted company.It is the second or subsequent times issues by an already listed company.
PricingThe prices of IPOs are fixed or having a price range.The prices of FPO is variable and determined by the market itself.
IssuerUnlistedListed
Risk More riskyComparatively less risky
PredictabilityLess predictablemore predictable
ObjectiveTo raise initial fundsTo enhance public investment
TypesEquity and Preference shares Dilutive and Non-dilutive public offering
ProfitabilityCould be more profitable than FPORelatively less profitable than IPO.

Difference between IPO and FPO:

Although both IPO and FPO sounds similar or slightly different from each other, however, there are some key differences which are explained below.

  • When it comes to comparison between IPO and FPO the first thing which comes in mind is that an FPO is more predictable and one can judge the risk involved, management, previous performance reports, strategic planning and other significant information about the company, on the other hand, an IPO is less predictable as the company is new in the market.
  • The price of an IPO is fixed or sometimes may carry, however, the price of FPO is determined by the market itself i.e. depends on the demand of shares is increasing or decreasing.
  • As the definition suggests, an IPO is the first-ever issue (sale) of a company’s shares for the general public to purchase, on the other hand, an FPO maybe the second or third (subsequent) issues of shares in the market.
  • Obviously, the company which is not listed in the stock exchange can issue an IPO, however, FPO can be issued by a listed company only.
  • An IPO is riskier as compared to FPO.
  • The share capital of the company will increase in case of IPO because it is the first time issue of shares whereas in case of FPO the value of share capital may or may not increase as it depends upon which types of FPO (Dilutive or Non-dilutive) is issued.
  • The main objective of IPO is to raise initial capital from the public whereas the FPO objective is to enhance the public investment in the company.
  • An IPO could be more profitable as compared to an FPO.

Conclusion:

In a nutshell, an initial public offering (IPO) can be defined as when the company first time listed in the stock exchange and to be listed in stock exchange it has to issue securities (equity shares) in the capital market for public investment, moreover, if the same company again issue fresh shares in the stock market, such issues are known as FPO. The major difference between IPO and FPO lies is their definition itself. Hope you would have understood the basic differences between both.

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References: Investopedia Groww.in

Capital Market | Capital Market Instruments and Functions

capital market

The corporations, government entities or other financial institutions raise funds to fulfil their requirements of money through issuing/ selling securities to the general public. These securities can be equity or debt securities which the general investors buy for the sake of returns on their investments. One link is missing in the whole process that is a ‘marketplace’ where these securities are traded (brought or sold) between issuer and buyers.

Hence in this article, we will learn about the capital market, capital market instruments, functions of the capital market and much more.

Capital Market:

As we explained above the corporations fulfil their long term requirements of money by selling securities to the general public/ investors. The capital market is sometimes known as the stock market or stock exchange refers to the marketplace (or medium) where long term securities having maturity period more than one year are created/ sold by the companies or government and brought by the investors. Capital market also allows/ facilitates to buy or sell the existing securities among various (anonymous) investors.

The capital market in India is regulated under the Securities and Exchange Board of India (SEBI). It establishes a bridge between investors and companies for mobilisation of savings and better utilisation of surplus funds for economic growth and development.

The capital market can be classified into two types.

  1. Primary Market
  2. Secondary Market

The primary market is the marketplace where the securities are created/ issued by the issuer for the first time to the general public.

Whereas, Secondary market refers to the market where the already issued securities are bought and sold among the investors. The secondary market could be divided into two segments.

  • Spot Market
  • Future Market

See Also, Difference between Primary Market and Secondary Market

Capital Market Instruments:

The capital market instruments can be broadly classified into three categories viz

classification of capital market instruments

  1. Pure Instruments
  2. Hybrid Instruments
  3. Derivative Instruments

We will discuss all one by one in brief.

Pure instruments are those financial instruments which are created/ issued by the companies or government along with basic features only ie. there is not any enhancement in the characteristics of these instruments are known as Pure Instrument. Some examples of pure instruments are equity shares, preference shares, debentures and bonds.

However, those financial instruments which are formulated by combining the characteristics of equity, preference, debentures and bonds simultaneously are known as Hybrid Instruments. Convertible preferred shares, convertible debentures etc are examples of hybrid instruments.

Derivative instruments refer to those financial instruments which derive its value from other underlying financial instruments or variables. Futures and Options are few examples of derivative instruments.

capital market instruments

1) Equity Instruments:

The Equity instruments have been the most popular and preferred source of long term finance for businesses and corporations. It mainly contains Equity Shares (or common shares) and Preference shares (Preferred Stocks).

a) Equity Shares:

Equity shares or shares/ stocks also known as common stock or ordinary shares refers to the certain proportion of ownership of the issuing company. The companies issue the shares by diluting their ownership to the general public, in other words, the companies sell their specified percentage of ownership to the public to raise long term capital from the capital market. The shareholders of the company have rights for voting in the management of the company and entitled to reward dividend periodically (half-yearly or annually), however, it is not mandatory for the companies to declare dividend every year or half-year.

For more details,

Equity Shares | Pros and Cons of Equity Shares

b) Preference Shares:

Preference shares also known as Preferred Stocks are also equity of the company representing ownership of same having preferential rights to receive fixed dividend prior to the common stockholders, however, they don’t have voting rights during important affairs in the company. Moreover, at the time of liquidation, the preference shareholders are given priority over the ordinary shareholders. There are various types of preference shares offering other special rights lucrative benefits which a company can issue to attract the investors.

For detailed information: Types of Preference Shares

Difference between Equity shares and preference shares

2) Debt Instruments:

Debt instruments refer to the debt/ loans raise by the companies from the public/ investors by selling debt securities in the capital market. It imposes a financial obligation on the issuer after a stipulated period of time. That means the companies who issue debt security will be under obligation to repay the principal amount to the bearer of security on the maturity date, in addition, to pay a fixed rate of interest periodically. Some most popular forms of long term debt securities (Dated securities) are as follows.

a) Corporate or Government Bonds:

Bonds are the most popular debt instruments which a company or government issue to the public to fulfil their long term needs of funds and when it is issued by any government is called Government Bonds whereas if issued by the corporations is called Corporate Bonds. The Government bonds are known as the most secured debt instruments offering a fixed rate of interest and having a longer maturity period as it is guaranteed by the Government itself hence known Gilt Edged Securities.

b) Debentures:

Debentures are those debt instruments which are typically issued by the companies in order to raise funds from individuals. It also provides a fixed rate of interest and having a medium maturity period less than bonds. Moreover, there are several types of debentures which provide various additional features from the investors as well as issuers’ point of view.

For details read also, Types of Debentures

3) Hybrid Instruments:

When the characteristics of the two securities are combined together to provide additional value and flexibility to the investors, it is called a Hybrid instrument. Convertible Bonds or Debentures and Convertible Preference shares are the best examples of hybrid instruments. 

The convertible bonds or debentures have a special feature of convertibility ie. such bonds or debentures can be convertible to equity shares of the underlying company after a certain time period and the bearer can enjoy the benefits of equity share like voting rights and capital gain due to movement in share price, however, if the company underperforms they can suffer a loss as well.

Similarly, convertible preference shares can also convertible to equity shares of the underlying company to enjoy the advantages of common shares.

4) Derivative Instruments:

The derivative instruments are basically utilised to hedge the risk associated with financial security due to price movement of financial instruments in the stock market. However, sometimes investors use it for speculation purpose. It can be classified into two categories viz Exchange-traded and Over the Counter Derivatives. The exchange-traded derivatives are those instruments which are traded in the stock exchanges, on the other hand, OTC derivatives are those which are traded between two investors individually as per their mutual terms and conditions. Some examples of derivative instruments are as follows. 

  1. Forwards or Futures
  2. Options
  3. Swaps

For a detailed explanation, follow the link below.

What are Derivatives? Comprehensive Explanation

Functions of Capital Market:

functions of capital market

The capital market acts as an intermediary between corporations which require funds and the investors who have surplus funds. The money flows from the group with surplus funds to the deficit funds. Some other important functions of the capital market are explained below.

1) Mobilisation of funds:

The capital market provides opportunities to the general public and other financial institutions to mobilise their funds into various financial instruments such as shares, bonds, debentures as per their choice and requirements. There are no limitations on the minimum amount to be invested, anyone who wishes to invest their savings in the capital market/ stock market can park his funds as per his choice. Thus capital market facilitates mobilisation of savings.

2) Provide Liquidity:

Capital market not only provide mobilisation of savings but it provides liquidity as well. The financial securities are listed in the stock exchanges with all the details and can be easily purchased and sold any time among different investors.

The securities are created in the primary market and once it is issued, can be easily sold in the secondary market immediately.

3) Determine Price:

The capital market also determines prices of financial securities according to demand and supply theory. If the demand for any particular securities is high, the price will also increase, on the other hand, when the demand is decline the price of such securities will also decline. Hence the prices of securities are not fixed, it fluctuates and determined by the capital market itself. Thus the capital market also determines prices of issued securities.

4) Formation of Capital:

The capital market encourages the formation of long term capital for businesses, government and other financial institutions and other industries who are looking for capital funds. It spreads the information regarding various lucrative schemes and saving opportunities to individual and institutional investors which results in capital formation.

5) Hedge the Risks of Securities:

As the prices of financial securities are determined in the secondary market (stock market) based on demand and supply, therefore, the prices of securities unstable and fluctuating with respect to time. There are derivative instruments listed in the stock exchanges which provide insurance facility for the security to hedge the risk of loss due to price fluctuation.

6) Boost Economic growth and development:

The capital market arranges long term capital for emerging and established industries, businesses which speed up production and growth of the organisations due to which the rate of unemployment will decrease in the country. The government also raise funds from the capital market for various schemes and infrastructure development which facilitates economic and infrastructure development of the country.

7) Facilitates transactions at low cost:

The capital market facilitates transactions comparatively at a lower cost due to digital and internet. It provides quick news and information about new issues and other important news and reduces advertisement and marketing cost as well.

Conclusion:

Hope this article would be able to explain and understand the concept of the capital market, its instruments and functions. In a nutshell, a capital market is a platform for lenders and borrowers to fulfil their respective needs. It meets the people having surplus money and the people who require funds. The capital market has two segments, Primary market where the financial instruments are created first time and the secondary market where the existing instruments are bought and sold.

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References:

1) Wikipedia

2) investopedia

Money Market and Capital Market | All You Should Know

money market and capital market

The financial systems of a country comprised of four different types of financial markets viz Money Market, Capital Market, Commodity Market and Forex Market. Each market deals with separate financial instruments and fulfil different types of credit requirements of businesses. The corporates or government meet their short term or long term needs of funds by raising funds from the general public through these financial markets. 

In this article, we will focus on money market and capital market. we will further discuss the difference between money market and capital market as well.

Money Market and Capital Market:

Although both the money market and capital market are the market place which facilitates the businesses or government in raising funds from the general investors and where the various financial securities are traded among different investors. Let us first understand what does it meant by money market and capital market.

Money Market refers to the market place where the financial instruments having a short term (less than one year) maturity period are traded or sold to the investors. In other words, the money market is the marketplace through which the companies or government entities or other financial institutions meet their short term credit requirements. If the companies need capital for a short term period, they issue securities with short term maturity period in the money market.

Hence Money market deal with short term financial securities such as Treasury bills, commercial papers, certificate of deposits, bill of exchange, Repo (Repurchase agreement) etc. The money market is highly liquid in nature and hence carry less risk.

On the other hand, the capital market refers to the marketplace which caters long term credit requirements of the companies as well as government entities and where the long term (more than one year) securities such as equity shares, debentures, government or corporate bonds or preference shares are issued and traded among investors. The capital market is further classified into primary market and secondary market. The primary market deals with new issues of long term securities, however, in the secondary market these securities are traded among different investors.

Money Market vs Capital Market (Comparison Table):

BASIS OF COMPARISONMONEY MARKETCAPITAL MARKET
Meaning & DefinitionMoney Market refers to the market place where the financial instruments having a short term (less than one year) maturity period are traded or sold to the investors.Capital market refers to the marketplace which caters long term credit requirements of the companies as well as government entities and where the long term (more than one year) securities are issued and traded.
InstrumentsTreasury bills (T-Bills), commercial papers, certificate of deposit, promissory notes, bill of exchange, repurchase agreements (Repo), line of credit, bankers' acceptance etcGovernment or corporate bonds, equity and preferred stocks, debentures etc
ParticipantsCommercial banks, Central bank, primary dealers, mutual funds and other financial institutions.Stockbrokers, insurance companies, mutual funds companies, stock exchanges merchant and investment bankers, and other individual or institutional investors
LiquidityHighLess
Risk InvolvedLessMore
ReturnsLowHigh
PurposeCaters short term credits of companies, government and other financial institutions.Caters long term credits of companies, government and other financial institutions.
Functional MeritEnhances the supply of money (liquidity) in the economy.Stabilizes the economy due to stable and long term investments.

Difference between Money Market and Capital Market:

Now let us understand the key difference between money market and capital market. The money market and capital market can be distinguished based on various aspects as follows.

Meaning & Definition:

As we discussed above, in the money market, the financial instruments with less than one year of maturity period are issued and traded whereas in the capital market financial securities having the maturity period more than a year are issued and traded among investors.

Instruments:

The Treasury bills (T-Bills), commercial papers, certificate of deposit, promissory notes, bill of exchange, repurchase agreements (Repo), line of credit, bankers’ acceptance etc are some examples of money market instruments, on the other hand, government or corporate bonds, equity and preferred stocks, debentures etc are the examples of capital market instruments.

Participants:

Typically, commercial banks, Central bank, primary dealers, mutual funds and other financial institutions are main participants in the money market whereas stockbrokers, insurance companies, mutual funds companies, stock exchanges merchant and investment bankers, and other individual or institutional investors are major participants of the capital market.

Liquidity:

The money market provides high liquidity as it deals with the short term financial securities, on the other hand, the capital market caters medium or long term securities, hence comparatively less liquid market.

Risk Involved:

As the money market is a highly liquid market place, therefore when it comes to the risk factor, it is a less risky market, on the other hand, as the capital market deal with long term securities which includes equity shares/stocks whose price is determined by the stock market (demand & supply), hence it is riskier than the money market. However,  bonds or debentures being debt instruments, provide guaranteed returns as well.

Returns on Investment:

As the money market is associated with short term financial securities, this means investors mobilize their funds for a short duration, therefore, the return on investment is also less, however, in the capital market, funds are parked for a longer duration by the investors, hence, returns are also higher than the money market.

Purpose:

Money market fulfils short term credits of corporates and other financial institutions and enhances the supply of money (liquidity) in the economy, while the capital market caters long term capital requirement of the corporations and stabilizes the economy due to stable and long term investments.

Conclusion:

Money market and capital market both are equally important components of the financial system, however, their role is slightly different from each other. In a nutshell, we can conclude that money market provides liquidity, less risk, less return and functions to provide short term credits whereas capital market offers comparatively less liquidity, relatively less risk and high returns.

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References:

1) Investopedia

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Primary Market | Meaning, Functions and Features

primary market

Working capital is the basic requirement of any company for its operation or expansion whether it is public or private, and raising funds from the general public is one of the most popular ways to arrange finance. The companies or government entities raise capital by issuing securities to the investors. The investors purchase those securities to invest their money to make returns which could be in the form of dividend or interest. Thus the issuing organisations meet their requirement of funds.

You would be thinking where these procedures are accomplished. So it is the Primary Market where all these sales and purchase of securities between issuer and investors are done. In this topic, we will understand the Primary Market in details.

Primary Market: 

Primary Market, also known as New Issue Market is the marketplace where the corporations or government entities first time sell the securities to the general public/ investors to raise capital and on the other hand, the investors buy those securities to mobilise their funds to earn a profit.”

The securities which are issued in the primary market for the first time could be debt instruments like government bonds, corporate bonds, debentures or Equity Shares of the companies. The primary market is regulated and governed by the Securities and Exchange Board of India (SEBI).

There are mainly three parties involved in the primary market during the issuance of new securities: The company/ issuer, underwriter and investors. The company which issues new securities, the underwriter who is responsible to determine the price of securities and evaluation of whole issuance process and lastly the investors who actually buy these securities.

Read Also, Difference between Debt and Equity Funds

Functions of Primary market:

There are three main functions of the primary market:

functions of primary market

  1. Organising of New Issues
  2. Underwriting of Securities
  3. Allocation of Securities

Organising of New Issues:

The primary market organises the process of issuing the new securities such as government bonds, corporate bonds, debentures, commercial bills and stocks of companies prior to the actual sale of these securities in the market. The issuing process includes investigation, analysis and assessment of new issues such as financial, legal, technical and regulatory viability of the project. The analysis also includes the pricing, method and types of new securities which ensures the success of new issues in future.

Underwriting of Securities:

Underwriting is one of the significant aspects when it comes to issuing new security in the market. There are various financial institutions such as merchant banks and investment banks or other private firms which provides underwriting services for the corporate or government bodies. These financial institutions make a bridge between issuer and investor which ensure better implementation of issuance of new securities.

Such institutions are also responsible to ensure maximum subscription of new issue otherwise they buy the remaining unsubscribed securities and further resell these securities to the real investors. These financial institutions have professionals who are expert in dealing with underwriting services. Therefore, the companies hire merchant bankers or investment banker for hassle-free issuance of new issues and to hedge the risk of unsold securities.

Allocation of Securities:

The new securities are sold to investors in the primary market. There are various dealers and breaker which are responsible for marketing and advertising of new issue. Distribution is the final and most crucial step of the issuing process of securities. Thus the primary market also facilitates the allocation of new securities.

Types of Issues in Primary Market:

A company can issue the securities in the following ways.

types of issues

  1. Public Issues
  2. Right Issues
  3. Bonus Issues
  4. Private Placement Issues 

1) Public Issues:

When a company or government organization issues/ offer the securities to new investors to become a shareholder of the company is called a Public Issue.

The public issue can be further classified into:

Initial public offer (IPO):

When a company which is not listed in the stock exchange offer fresh or existing securities or both for first time sale to the general public, it is known as an Initial Public Offer (IPO). This is the process of listing and trading the securities of any company in the stock exchange.

Further public offer (FPO):

When a company which is already listed in the stock exchange issues/sells its fresh securities to the investors will be known as FPO.

2) Right Issues:

When a company issues the securities only for its existing shareholders who hold a specific number of shares on a specific date (Record Date) declared by the issuer, such types of issues are known as Right Issue.

In other words, If an issuer offers the securities for sale to its existing shareholders but the condition is that shareholders must hold a specified number of shares on a specified date which is announced by the issuer itself.

3) Bonus Issues:

Sometimes the companies announce bonus shares instead of dividend to their shareholders for the particular financial year. Such issues of bonus shares are called Bonus Issues. In other words, when a company issues the securities to its existing shareholders provided as on a record date without any other conditions, it is known as bonus issues.

The bonus shares are issued as per a particular ratio (1:1, 1:2 or 1:3 etc) as on record date. It is a free reward of the company to its shareholders. 

4) Private Placement Issues:

When any company or government entity makes an issue of their securities to a specified group of investors, it is called a private placement. Moreover, the issue should be neither right issue nor public issue and the investors could be the individual investors or institutional investors. A private placement is much easier than the initial public offerings due to lesser regulatory formalities. 

Private placement of shares or convertible securities by an issuer can be of two types:

Preferential Allotment:

When a listed issuer issues equity shares or the securities which are convertible to equity shares, to a specified group of individuals, it is called a preferential allotment.

The issuer is required to comply with various provisions which inter-alia include pricing, disclosures in the notice, lock-in etc, in addition to the requirements specified in the Companies Act, 2013.

Qualified Institutional Placement (QIP):

When a listed company issues equity shares or other securities other than warrants which are convertible into equity shares like fully or partially convertible debentures to an especial set of institutions are called Qualified Institutional Placement.

The companies issue the securities to these Qualified Institutions Buyers for which such securities are convertible into equity shares. The qualified institutional buyers are those institutions which are expert to drive and evaluate the stock market. Some example of Qualified Institutional Investors are:

  • Scheduled Commercial banks
  • Mutual Funds
  • Foreign Institutional Investors (Registered with SEBI)
  • Insurance Companies
  • Pension Funds etc. 

Features of Primary Market:

  • Unlike the secondary market, there is no risk of loss due to price fluctuation in the primary market. The prices of securities are decided prior to an initial public offering (IPO).
  • The chances of manipulation in the price of securities are comparatively less than the secondary market. Therefore, a fair and transparent process of new issues is performed in the primary market.
  • The new issues floated in the primary market provided high liquidity as it can be easily sold in the secondary market.
  • The primary market is an important source of investment for the investor at a reasonable price as it is not influenced by the other manipulators in the market.
  • The primary market also facilitates the investors to diversify their savings into various other types of instruments and different industries as well.

Conclusion:

Hope this article would be able to explain the meaning and functions of the primary market. In a nutshell, from investors’ point of view a primary market is the market for the trading of new securities, on the other hand, from the company perspective, it the marketplace through which an organisation can raise funds from the general public by issuing new securities to the investors.

Recommended Articles:

Merchant Banking

Investment Banking vs Merchant Banking

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Equity Shares | Pros and Cons

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References: 1) Groww.in 2) Wikipedia primary market

 

What are Treasury Bills? Treasury Bills of India

treasury bills

The Government of India approaches to the financial market to raise funds from the general public by selling different types of government securities. Treasury bills  (T-Bills) are one of the instruments which are used for short term requirement of funds. The Government also raises funds from the market for a longer duration (up to 40 years) by using other instruments like Dated Security (Government Bonds) depending on the requirement of money.

Thus Government utilise different instruments to raise funds from the financial market.

There are various infrastructure projects, construction and development projects, Government schemes and various free scheme are performing across the country.

Due to this sometimes government may suffer a shortage of funds due to mismatch of cash flow or excessive expenditures, hence need to arrange funds.

What are Treasury Bills?

“Treasury bills (T-Bills) are the Government Securities defined as debt instruments through which Government raises the funds for the short term period less than one year.”

It is also called money market instruments as it is issued for a shorter period of time.

Treasury Bills can be issued by the Central Government only not by the State Governments. T Bills are issued with a maturity period of 91 days, 182 days and 364 days. Treasury bills are sold by the Reserve Bank of India (RBI) on the behalf of Government of India. 

The RBI sells treasury bills and investors purchase it to park their excess funds to earn interest with no risk.

For instance, a T bill of face value Rs 10,000/- with maturity date 91 days (say) will be sold at just Rs 9,500/-, thus the investor will get discount of Rs 500/- while purchasing a T bill. Further, on date of maturity, he will entitle to redeem the whole amount (10,000/-).

T bills don’t offer coupon (interest rate) instead are sold on discount price on face value. That’s why it is also known as ‘Zero-Coupon Bond’.

Since T bills are secured by the government of India itself, hence there is no risk of defaults. Therefore, it is also known as ‘Guilt Edged Security’ instruments. Thus we can say treasury bills are one of the safest instrument while it comes to investment.

Key Takeaways:

  1. Treasury bills (T bills) are the Government securities issued by the Central Government of India only.
  2. Maturity Period of T bills are either 91 days, 182 days or 364 days.
  3. T bills offer zero-coupon, this means issued at discount on face value.
  4. T bills are backed up by the Government of India hence carry no risks.

Features of Treasury Bills:

Government securities like treasury bills laid down the following benefits.

  • Offers fixed returns along with shorter tenure such as 91 days, 182 days and 364 days.
  • Provide sovereign guarantee, means credit guaranteed by the Government of India.
  • No TDS is deducted like fixed deposits, taxes applicable as per individual’s income tax slab at the end of the financial year.
  • Interest rates can be bid through participating in an auction conducted by RBI on Wednesday of every week.
  • Also facilitates Non-comparative bidding if any don’t want to compete in the auction.

Process of issuing T-Bills:

treasury bills of India
Treasury Bills (Image credit Wikipedia)

Government securities are issued through an auction organised by the Reserve Bank of India at E- KUBER which is a Core Banking Solution (CBS) platform of RBI.

The financial institutions such as commercial banks, primary dealers, scheduled urban cooperative banks (UCBs) Insurance companies and provident funds which maintain a current account and securities account (SGL account) with RBI are eligible to participate in the auction.

All other NonEKUBER can also participate in primary bidding but through commercial banks and primary dealers only. For this, they have to open a Gilt Account with scheduled commercial and primary dealers.

A Gilt Account is a non-materialistic account maintained with commercial banks or primary dealers.

The RBI organises the auction for issuance of treasury bills with tenure 91 days, 182 days, 364 days on every Wednesday and results of the auction is declared at a certain time, for T Bills it is 1:30 PM.

Further, settlement of auctioned T bills is done on the next working day of the trading day. The RBI announces the schedule of issuance of treasury bills for the upcoming quarter at last week of previous months and releases the issue details by press release on its official website every week.

How to buy Treasury Bills?

The simplest way to buy or invest in government securities like T- bills or government bonds is Zerodha Broking Ltd, an online brokerage services.

Though one can also trade in G-sec through your depository banks by a Demat account, this mode of investment is still not popular in retail investors.

Here are a few easy steps to buy T bills through Zerodha.

Step 1: Open a Demat and trading account with Zerodha which is linked to your bank accounts.

Step 2: Zerodha offers non-competitive bidding to their clients. One can place order whatever amount you wish to invest, however, keep in mind, the minimum amount you’ll have to invest in T bills is Rs 10,000/- and one can place an order in multiple of ten thousand as well.

Step 3: Place order whatever amount you wish to invest (minimum 10,000/-) from Monday to Tuesday through your Zerodha account and funds will be deducted from your trading a/c and further on a successful allotment, treasury bills will be credited to your Demat account.

Step 4: All Payment regarding your government securities (interest rates or coupon in case of bonds) will be credited to your bank account on time to time.

Conclusion:

So we have understood all about treasury bills, how T Bills are issued? and how anyone can buy T bills easily using Zerodha trading account.

In a nutshell, government securities like treasury bills are one of the popular, safest, optimum returns and shorter tenure instrument through which any small or professional investor can park their spare funds and earn good returns with gilt-edged security. Treasury bills are the most popular mode of investment in the United States, however, in India, it is still not so preferred.

Related Article:

You must also read the following article.

Types of Government securities in India

What are Debentures?

Types of Debentures.

Difference between Bonds and Debentures

Difference between Debt and Equity Funds

 

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