MANAGEMENT OF MARKETABLE SECURITIES The cash and marketable securities are in fact two sides of the same coin.

The two are closely related and therefore, the cash management should take care of the investment in marketable securities. The marketable securities are the short term money market instruments that can easily be converted into cash. The firm can hold a minimum level of cash and can procure additional cash as and when required from the sales of the marketable securities. The cash balance earns no explicit returns and therefore, any cash balance in excess of minimum cash balance may be invested in the marketable securities, and the latter earns some return as well as provide opportunities to be converted easily with virtually no loss of time. Reasons for holding Marketable securities: a) Substitute for cash precautionary purposes as a cushion against unexpected shortage of bank credit (eg. OD) or other emergency cash outflows b) Temporary investment firms cash receipts rarely match its disbursement thus, to finance seasonal needs for cash and to meet known future financial requirements Factors that influencing the choice of marketable securities Some of the factors determining the selection of marketable securities are as follows : (1). Maturity : The length of time for which the excess cash is expected to be available should be matched with the maturity of the marketable securities. If the firm invests money for a period longer than the period of the cash availability, then the firm will be running risk of not getting cash when required, though it may be getting higher returns on these securities. In order to avoid any chance of financial distress, the firm should invest excess cash only for a period slightly shorter than the excess cash availability period. (2). Liquidity and Marketability : Liquidity refers to the ability to transform a security into cash. Should an unforeseen event require that a significant amount of cash be immediately available, then a sizeable portion of the portfolio might have been sold. The marketable securities, though by nature, are all marketable, still care must be taken that the selected investment must be easily, speedily and conveniently marketable. The marketability is an important consideration as sometimes, the cash realization may be required before the maturity date. The marketability feature also includes the time gap required for sale of securities and the transaction costs of sale. The liquidity varies from one type of securities to another. Greater liquidity implies faster speed at which securities can be converted into cash. The speed of convertibility into cash will ensure, first, the prompt cash and second, realization at current market price. (3). The Default risk : The risk associated with a loss in value of amount (principal) invested in marketable securities is probably the most important aspects of the selection process. The primary motive while selecting a marketable security is that the firm should be able to get back the cash when needed. The firm should select only those securities which have on risk of default of interest or the principal recovery. The financial manager should be ready to sacrifice even the higher returns. (4). Yield : Another selection criterion for marketable securities is the yield that is available on different assets. This criterion involves an evaluation of the risks and benefits inherent in different securities. If a given risk is assumed, such as lack of liquidity, a higher yield may be expected on the less liquid investments. Security investments that the firm can quickly converted into cash balance. 2 types of marketable securities 1. Private issue 2. Government issue 1. Marketable Securities Private Issue

Negotiable certificate of deposit (NCDs) A marketable receipts for funds that have been deposited in a bank for afixed period Commercial Paper A short term, unsecured promissory notes sold by large business to raise cash Bankers Acceptance A draft (order to pay) drawn on a specific bank by an exporter in order to obtain payment for goods shipped to a customer, who maintains an account with specific bank.

2. Marketable Securities-Government Issue Treasury Bills Lowest risk due to risk free. Mostly mature in 91-182 days with longer maturity suchas 9 months or 1 year. In denomination of RM1,000. Treasury notes US Treasury obligation with initial obligation with initial maturities between 1 to7 years

TYPES OF MARKETABLE SECURITIES/ Marketable Security Alternatives There are many types of marketable securities available in the financial market. These are all money market instruments and are liquid and can be used by a firm for its better management of excess cash. Some of these are : (a). Bank Deposits : All the commercial banks are offering short term deposits schemes at varying rate of interest depending upon the deposit period. A firm having excess cash can make a deposit for even a short period of few days only. These deposits provide full safety, facility of pre-mature retirement and a comfortable return. (b). Inter-corporate Deposits : A firm having excess cash can maker a deposit with other firms also. When a company makes a deposit with another company, such deposit is known as inter-corporate deposit. These deposits are usually for a period of three months to one year. Higher rate of interest is an important characteristic of these deposits. However, these are generally unsecured and the lack of safety is the main deficiency of this type of short term investment. (c). Bill Discounting : A firm having excess cash can also discount the bills of other firms in the same way as the commercial banks do. On the bill maturity date, the firm will get the money. However, bill discounting as the marketable securities is subject to 2 constraints: (i). The safety of this investment depends upon the credit rating of the acceptor of the bill, and (ii). Usually, the pre-mature retirement of the bill is not available. (d). Treasury Bills : The treasury bills or T-Bills are the bills issued by the Reserve Bank of India for different maturity periods. These bills are highly safe investment and are easily marketable. These treasury bills usually have a very low level of yield and that too in the form of different purchase price and selling price as there is no interest payable on these bills. (e) Negotiable Certificates of Deposit (CDs) Negotiable certificates of deposits are negotiable instruments representing specific cash deposits in banks having varying maturities and yields based on size, maturity and prevailing money market conditions. These are marketable receipts for funds that have been deposited in a bank for a fixed period of time. The deposited funds earn a fixed rate of interest. A secondary market exists for the CDs. While CDs may be issued in either registered or bearer form, the latter facilitates transactions in the secondary market and, thus, is the most common. The default risk is that of the bank failure, a possibility that is low in most cases. (f) Commercial Paper

It refers to short-term unsecured promissory note sold by large business firms to raise cash. As they are unsecured, the issuing side of the market is dominated by large companies which typically maintain sound credit ratings. Commercial papers (CPs) can be sold either directly or through dealers. (g) Repurchase (Repo) Agreements These are legal contracts that involve the actual sale of securities by a borrower to the lender with a commitment on the part of the former to repurchase the securities at the current price plus a stated interest charge. There are two major reasons why a firm with excess cash prefers to buy repurchase agreements rather than a marketable security. First, the original maturities of the instrument being sold can, in effect, be adjusted to suit the particular needs of the investing firm. Therefore, funds available for a very short period, that is, one/two days can be employed to earn a return. Closely related to the first is the second reason, namely, since the contract price of the securities that make up the arrangement is fixed for the duration of the transaction, the firm buying the repurchase agreement is protected against market fluctuations throughout the contract period. This makes it a sound alternative investment for funds that are surplus for only short period. (h) Units The units of mutual funds offer a reasonably convenient alternative avenue for investing surplus liquidity as 1) there is a very active secondary market for them, 2) the income from units is tax-exempt up to a specified amount and, the units appreciate in a fairly predictable manner. (i)Bills Discounting Surplus funds may be deployed to purchase/discount bills. Bills of exchange are drawn by seller (drawer) on the buyer (drawee) for the value of goods delivered to him. During the pendency of the bill, if the seller is in need of funds, he may get it discounted. On maturity, the bill should be presented to the drawee for payment. A bill of exchange is a self-liquidating instrument (j)Money Market Mutual Funds/Liquid Funds Money Market Mutual Funds/Liquid Funds are professionally managed portfolios of marketable securities. They provide instant liquidity. Due to high liquidity, competitive yields and low transactions, these funds have achieved significant growth in size and popularity in recent years. CASH MANAGEMENT PRACTICES IN INDIA Cash management in India presents a daunting task in light of the huge number of clearing houses (1,056) and bank branches (more than 75,000). The main features of cash management practices in India are: 1) Collection methods, 2) Payment mechanisms, and 3) Electronic banking 1) Collection Methods Collection services provided by banks use their own branches and their correspondent banks network as well as country-wide arrangements with couriers and coordinators. There are two broad categories of collection products offered by banks in India: local collection and upcountry collection/outstation clearing. Local collection is used for cheques deposited with the bank/its correspondent bank in the location on which it is drawn. Compared with outstation cheque collections, local collection funds are realised faster. Outstation clearing is used when the location where the cheque is deposited with the bank is different from the location on which it is drawn. Banks offer two types of outstation cheque collection products: one for cheques drawn on a correspondent bank location and the other for cheques drawn on locations that are not covered by the correspondent bank. In the case of the former, the typical clearing period of the cheque is relatively faster, and the risk involved (loss of cheques in transit) is also much lower.

The collection proceeds can be made available to the customer on either a cleared funds or guaranteed basis (i.e. cheque-discounting) depending on the corporates cashflow requirements. Value-added services such as cheque pick-ups, customised management information reporting, data-entry of deposit-slip information and so on are also provided. Bulk Collection is offered by banks for processing high-volume collections such as cheque collection for initial public offerings (IPOs), utility bill collections for telephone, electricity, cellular service providers and so on through timely clearing of instruments together with strong reconciliation and reporting. Post-dated Cheque (PDC) Management solutions are critical for non-banking finance companies that collect PDCs from their retail and auto-loan disbursement customers. Electronic Clearing ServiceDebit Scheme of the RBI enables corporates typically utility or insurance companies to collect the proceeds of small value large-volume payments from their customers. Cheque Truncation removes the need for much of the physical handling and movement of paper-based payment instruments as only the electronic image of the instrument is transmitted through the clearing system. 2) Payment Mechanism Currently payments are significantly paper-based through cash/cheques/demand drafts. The key mechanisms available to customers in India are illustrated below: Payment mechanism Features Cheque Currently the most prevalent mode of payment. The customers account is debited only when a cheque is presented in clearing by the Cheque payable at par A cheque that can be redeemed at par at any of the locations where the bank has a branch. The customers account is debited Customers or pay order A pre-funded payment instrument issued by a bank, i.e. the customers account is debited up front, and is typically payable at all locations where the bank has branches. Demand draft A pre-funded out-station pay order, which is drawn on a location where the bank does not have its own branch, but has a tie-up with a correspondent bank. The customers account is debited upfront. Real-time gross A domestic electronic payment mechanism for funds settlement (RTGS) transfer (credit-push). The beneficiarys bank is required to credit the proceeds of an inward RTGS transaction to the beneficiarys account, or return the funds, within two hours of receipt of the payment notification. Participation by banks in RTGS customer payments is currently voluntary. Electronic Funds Transfer An electronic payment mode for same-day inter- and intra(EFT) city funds transfer (credit-push). It is mandatory for all bank branches, in 16 large metros in India, directly involved in clearing, to participate in RBIs EFT System for inward EFT. Special Electronic Funds Transfer (SEFT) An electronic payment mode for same-day inter- and intracity funds transfer (credit-push). This is an extension of RBIs EFT system, but participation in SEFT is voluntary for banks, and only networked branches are allowed to participate. Thus, location coverage is wider than EFT, but not all banks participate in SEFT. ECS (credit) is an electronic mode of payment which is

Electronic Clearing

Service (ECS) Credit

Interest/Dividend warrants

designed for large-volume payments. The ECS scheme is operational in some 46 cities and all banks directly participating in clearing have to process inward ECS. The ECS settlement cycle is four days; much longer than for RTGS, EFT or SEFT These are paper-based payment instruments that are required to be pre-funded (based on applicable regulations) and are used for large-volume interest and dividend payments

The migration from paper-based to electronic modes of payment has been relatively slow and gradual. Corporate are realising the potential of cost-savings in processing electronic payments as these are conducive to system-integration with the clients internal systems. Payment Outsourcing Corporates and financial institutions are increasingly outsourcing payment-processing to banks. Payment outsourcing products eliminate manual processing and the overhead costs associated with preparing, verifying and signing/dispatching individual cheques. Banks facilitate the interfacing of corporates back-office payment system with the banks electronic banking platforms. 3) Electronic Banking Banks offer sophisticated electronic banking delivery channels. They not only allow customers to access account-balance information in real-time but also enable them to initiate transactions for payments, interaccount transfers, deposit placements and so on. Corporates have access to extensive management information reports. The internet banking offerings also allow corporate to access their accounts with the banks from different countries.