TREASURY BILL INVESTMENT

Stockbrokers Malawi Limited (SML) is licensed by the Reserve bank of Malawi (RBM) to offer a broking service to Malawi Government treasury bills (T-bills) investors. T-bills of differing maturities currently offer the most attractive interest rates and enjoy numerous advantages over conventional time deposits.

T-bills markets are usually associated with complicated bidding and re-discount procedures which are both time consuming and technically specialised. SML offers to handle the administrative aspects of T-bill investment for you backed up by its strong experience in this market and offers two types of service: -

TREASURY MANAGEMENT SERVICES

T-bills are purchased on your behalf by SML Nominees Limited and subsequently handles all the administrative and technical aspects of T-bill ownership and trading. SML also ensures that uninvested funds are transferred to a call account until the next T-bill investment opportunity where funds are “in between” investments. Funds are therefore, continuously invested and income generating at all times.

Should you have other accounts with SML i.e. share and LRS trading accounts, your T-bill investment account is easily managed as an integral part of your portfolio management. Clients using our treasury management service enjoy greater benefits in terms of being able to trade their T-bills without prior reference to RBM regarding change of certificate registration. Furthermore, the service is confidential as in RBM’s register only SML Nominees Limited appears as the registered holder.

SECONDARY TRADING BROKING SERVICES

SML acts as agent in matching T-bill buyers and sellers in the secondary market. A buyer or seller, as the case may be, is located by SML who manages the movement of certificates and money on your behalf. SML acts as agents only and does not buy and sell T-bills to clients at a profit.

Both the above services are described in further detail in this document.

WHAT ARE TREASURY BILLS?

• T-bills are reputable, risk free discount financial instruments enabling the Malawi Government to raise short-term finance from the general public.
• Current high interest rates make T-bills an extremely attractive investment avenue. T-bill rates are usually significantly higher than bank deposits. Currently SML pays interest rates of 21% to 23% per annum net of commission charges.
• They are very liquid instruments and therefore, easily bought or sold at short notice.
• T-bill interest is currently subject to 20% withholding tax (unless you are withholding tax exempt) which ranks as an advanced payment of final tax. Foreign investors are deducted 15% border tax instead of the withholding tax. However if the foreign source is from a country with double taxation treaty with Malawi, tax is not deducted.
• T-bill investments are open to foreigners. Both interest and capital is remittable.

TREASURY MANAGEMENT

The following questions and answers explain
SML’s treasury management service

Who may participate?

• Any (both local and foreign) investor wishing to invest at least MK50,000 (+/- US$ 400) in T-bills on an ongoing basis in order to maximise their short-term returns may use SML’s treasury management service.
• Funds may be invested in T-bills on your behalf either through the primary market (directly from the Reserve Bank of Malawi (Government), or through the secondary market (from other holders of T-bills).
• SML has over 800 clients from all sectors of the Malawi economy. SML client T-bill portfolio exceeds MK2 billion and our service is well established and widely utilised.

What are the investment periods and when can one invest?

• RBM holds T-bill auctions fortnightly.
• Interest is payable on the maturity of each investment. Current investment periods are 63 days, 91 days, 182 days and 273 days. Interest and capital, upon maturity, are dealt with as per your request i.e. if you want a portion of the interest etc. to be transferred to your current account at a commercial bank or to your share trading account in SML’s books, there is no extra charge.
• SML can liquidate (sell) your investment, or any portion thereof, at any time. Conversely, you may be able to buy other clients’ investment at any time (assuming you do not want to buy T-bills directly from RBM).
• Upon maturity investments are automatically rolled over unless instruction is received from you and your application form indicates otherwise. If requested, T-bill proceeds are paid out by bank certified cheque.

How do you invest?

• An application form is completed (see attached) and sent to SML with a BANK CERTIFIED cheque made payable to SML NOMINEES LIMITED – CLIENT ACCOUNT. Where cheques are not bank certified, SML will deduct from the capital charges related to obtaining bank certification.
• SML does not guarantee T-bill investment upon receipt of client funds because T-bill investment is subject to acceptance of a bid by the Reserve Bank. SML bids competitively on behalf of its clients at each auction. Arrangement may be made for clients to submit their own bid but SML’s expertise ensures market competitive rates are obtained.
• Please note all cheques paid to SML NOMINEES LIMITED – CLIENT ACCOUNT must be restrictively crossed. This is for protection.
• For new clients, more information is required to open your account as part of ‘know your client’ principle which we use as best practice. Information required includes, but not restricted to: certified copy of registration of the company, physical address details and proof of the same, names and addresses of directors, bankers.

What documentation is involved?

• SML acts according to your instructions from the application form submitted with each investment tranche. Clients are requested to issue instructions in writing to SML to avoid misunderstandings.
• SML’s contract note details your T-bill investment, the amount of the interest receivable, any tax payable and the repayment date. It represents your entitlement to the T-bill stated. SML’s contract note is at all times supported by an underlying T-bill issued in SML Nominees Limited’s name.
• Every time an investment is made a contract note is sent to you as soon as possible for confirmation. This contract note is then supported by a monthly statement detailing all the cash movements on your account.

What are SML’s treasury management service charges?

• Commission for T-bill services are levied on the interest only on a percentage basis as advised from time to time. Commission rates are negotiable for large investments and are between 1 –2% deducted from the annualised T-bill yield. SML’s commission is deducted from the interest at the end of the investment.
• Interest rates quoted for T-bill investment are net of SML’s commission.

What happens on withdrawal of T-bill investment funds?

• Funds may only be withdrawn on the investment’s maturity date unless the investment is sold prior to maturity.
• There is no penalty on the withdrawal of funds (which is subject to SML finding a purchaser or seller, as the case may be). However, SML deducts the full commission originally charged from the proceeds of the sale and charges an additional secondary market trading commission.
• It is stressed that should a T-bill investment be sold on your behalf the risks and rewards of such a sale are subject to market conditions and are borne by yourself in full. SML does not guarantee the interest rate on the T-bill contract note where your T-bill is sold prior to maturity. The interest rate quoted on SML’s contract note is guaranteed to be earned only where the investment is held to maturity.
• SML only issues RESTRICTIVELY CROSSED CHEQUES i.e. made to A/C PAYEE ONLY. This is for your protection.

What are the risks of investing in T-bills?

• There is always a chance that SML’s bid on your behalf will not be accepted. Client funds are automatically transferred to call account if a bid is unsuccessful and SML re-bids at the next auction.
• T-bill investment is risk free i.e. the Government is very unlikely to default its debt.
• The risk of interest rate movements whilst funds await T-bill investment lay solely with the client.
• The risks and rewards of selling a T-bill in the secondary market prior to maturity lay solely with the client.

What are the taxation implications of T-bill investment?

• The certificate/contract note SML issues must be retained for taxation purposes.
• T-bill interest is taxable dependant upon the tax status of the investor.
• Clients who are bank interest and T-bill withholding tax exempt are requested to submit a copy of their exemption certificate to SML to avoid payment of withholding tax when their funds are placed on call or invested.

What happens to my money “in – between” investments?

• SML ensures client funds are deposited on call with a reputable financial institution “in between” T-bill or share investments. Usually the interest is higher than the normal call deposit rate because of SML ability to negotiate with financial institutions given the volumes.

Can I invest in T-bills using foreign exchange?

• RBM currently allows purchase of T-bills after foreign exchange is converted into Malawi Kwacha. Conversely upon maturity, the proceeds are then converted back into foreign currency and remitted if applicable.
• SML handles all of the administrative aspects of the above on your behalf for no extra charge. This is includes shopping around for a better exchange rate from the local banks.
• SML registers foreign T-bill investments with the Exchange Control authorities on your behalf and keeps relevant documentation in order that both capital and interest is remittable.
• T-bill investment risks (exchange availability and exchange rate risk) lay solely with the client.

Is there anything else I should know?

• SML only issues contract notes to clients when written confirmation of successful bid is received from RBM. This means there is usually a delay in receiving contract notes.
• It is not possible for SML to issue clients with the underlying T-bill certificate because T-bills are issued in multiples of 1000 by RBM. SML’s software permits investment to the nearest tambala, thus any portion of the T-bill is tradable.

SECONDARY MARKET TRADING

What is the background to secondary market trading?

In accordance with the Finance Act (Cap 37.01) and the Government Stock and Bonds Regulations made under section 30 of the Act T-bills and Local Registered Stocks (LRS) are transferable or tradable financial instruments.

Who may participate?

This service is offered by SML for those clients wishing to actively trade T-bills in the secondary market and who have Malawi Government T-bill certificates in their possession.

How can SML help?

SML offers to, on an agent only basis, match buyers and sellers of T-bills in the secondary market. Bid and offer prices offered by clients are displayed on a prices board in SML’s premises and printed periodically in the press.

What are the advantage of secondary market and dealing with SML?

The advantages of using SML as follows: -

• Discounting and purchase of T-bills is not dependant upon the RBM. Liquidity requirements may therefore, be met immediately by the market depending on market supply and demand.
• The T-bill secondary market provides an efficient, flexible forum for effective cash resource management.
• Whether you are a buyer or a seller, SML ensures maximisation of your return by ensuring a competitive price is obtained by using its extensive database of clients and potential financial market investors.

What are the terms and conditions of secondary trading?

T-bill certificates are “registered” documents i.e. the holder of the certificate becomes entitled to receive the proceeds of the bill upon maturity and RBM records ownership in its ledgers. Measures to control the physical security of T-bill certificates should therefore be implemented stringently.

T-bill certificates are transferable on delivery after endorsement on the back of the certificate and upon filling a secondary market form.

The consideration in respect of the transfer of T-bills is based on the yield or discount to the face value as freely negotiated between two parties, the buyer and seller (or by SML acting as agent).

T-bills are transferable in multiple of MK1,000. The nominal value of a T-bill is transferable in whole and not in part. T-bills are not transferable 15 days prior to maturity date. During this period T-bills should be handed into RBM for redemption.

All T-bill secondary market trades are confirmed by SML with RBM and the relevant counterparties.

Why use SML’s services?

• SML’s cash management provides flexibility, efficiency and superior rates of return.
• SML keeps a pulse on all investment opportunities and recommends applicable investment on an ongoing basis. As an SML client you will always be kept up to date on the general investment environment.
• SML’s treasury management clients are able to trade T-bills and take advantage of secondary market trading opportunities with ease. There are therefore, no complicated transfer procedures or worries about physical movements of T-bill certificates.
• SML’s services are both simple and administratively effective using computer software specially designed for the purpose.
• SML’s T-bill services are open to both corporate and individual clients, local and foreign investors. For foreign investors, SML handles all foreign exchange (by ensuring you get the best exchange rate) and related documentation to enable both the capital and interest to be repatriated at the end of the investment period if applicable.
• If you are an active share market trader, SML’s T-bill service complements cash investment when funds are “between” investments.
• SML distributes to its clients reports that summarises the investment climate, share and investment activity and relevant macro and micro economic information. This information is invaluable to running your business.