Indian Financial Market : Money and Capital

Indian Financial Market : Money and Capital

2020-06-09 18:56:05

• Indian Financial Market : Money and Capital
  • Money Market
    • Informal/ Unorganised Market
    • Organised Market
      • 1. Treasury Bills / Gov Securities
      • 2. Certificate of Deposit CD
      • 3. Commercial Paper CP
      • 4. Commercial Bills
      • 5. Call Money Aka Notice Money
      • 8. Cash Management Bills CMBs / Govt Security
    • Discount and Finance House of India DFHI
    • Reforms Made in the Indian Money Market :
  • Indian Capital Market
  • Primary Market
    • Government Bonds / G-Secs ^1
      • Various Types of G-Sec Instruments
  • Secondary Markets
    • Stock Market
      • BSE
      • NSE
      • The other 3 Stock Exchanges Are :
    • Over the Counter Market
  • Instruments of Capital Markets
  • Institutions / Players in Financial Markets
    • Development Finance Institutions DFIs:
    • Merchant Banks or Investment Banks
    • Venture Capitalists
    • Industrial Securities, Shares and Debentures
    • Infrastructure Finance Companies IFCs
  • Regulator of Capital Markets SEBI
    • Security Laws Amendment Act 2014
    • SEBI’s Role as Protector of Investors
  • Capital Market Reforms since 1991
    • Buyback
  • Depository Receipts
  • Foreign Direct Investment FDI
  • Foreign Institutional Investors FIIs
  • FPIs
  • Qualified Foreign Investor QFI
  • Participatory Notes
  • Clearing House
  • Commodity Exchanges
  • Spot Exchanges
  • Mutual Funds
  • Shares and Bonds
  • Debenture

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• Financial Market are places transaction b/w fund surplus and fund scarce individuals and groups take place. Basis of transaction is either Interest or dividend.

Money Market

• caters to short term requirements.
• demand of large amount for funds less than 1 yr. More than 1 yr is Capital Markets
• Done for working capital requirements, repayment of loans, consumption.
• trading in MM done over the counter ie directly b/w 2 parties w/o need of exchange/supervision

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• Secured transaction are with collateral and unsecured are without
• Primary dealers buy Gsecs directly from Gov for reselling, are market makers for Gsecs
• Trading si done on a discount rate which is determined by market and guided by availability of and demand for cash in day to day business.
  • Discount rate is decided by ‘repo rate’ issued by RBI.
• Chakravarti Committee 1985 for the first time underlined the need of an organised money market and Vaghul committee 1987 laid the blueprint for it.
• Inter-Bank market for deposits of maturity b/w 14 days to 3 months is called Term money market.

Informal/ Unorganised Market

• operates outside of RBI supervision
• They are recognised by the govt but are not regulated by them
• Unregulated Non Bank Financial Intermediaries ex chit funds, nidhis and loan companies.
• Indigenous Banker such as Shroffs of Gujarat, Marwari kayas, Chettiars.
• Money Lenders are most localised form of lenders and are divided b/w Professional and Non Professional.

Organised Market

• 8 instruments designed to be used by different categories of business and industrial firms.

1. Treasury Bills / Gov Securities

• managed by RBI, they are dated securities.
• present since independence but got organised since 1986.
• used in managing short term liquidity of govt, currently 3 types are issued by GOI 91-day, 182-day and 364-day.
• They are NOT issued by state gov.
• Min amount is Rs 25,000 and its multiples, pay no interest are Issued at a discount redeemed at par.
• also used as [[005 Monetary and Credit Policy#Market Stabilisation Bonds|Market Stabilization Scheme MSS]]
• Auctioned on the Negotiated Dealing System NDS and mem submit their bids electronically.

2. Certificate of Deposit CD

• Used by banks and issued to a depositor for a specified period ranging less than 1 year. Unsecured.
• issued by SCBs and FI’s ~ RRBs and Local Area Banks cannot issue CD’s.
• Negotiable Promissory note/ negotiable instrument, secured and short term.
  • Negotiable instrument means a signed document that promises a sum of payment to a specified person or the assignee.
• RBI has allows FIs to operate in it viz IFCI, IDBI, IRBI and Exim Bank.
  • FI’s can issue for 1yr -3 yrs.
• Issued at a discount
• Maturity is b/w 15 days - 1 year.
• Min deposit is 1 lkh and its multiples

3. Commercial Paper CP

• short term unsecured promissory note issued by top rated corporates (tangible net worth > 45cr), Primary dealers, Satellite dealers, and All India Fin Institutions.
• CP issuing corporates require a credit rating from credit rating agencies registered by RBI.
• Maturities b/w 7 days - 1 year, not beyond the date up to which credit rating of the issuer is valid.
• Issued in denominations of 5 lakh and thereof
• Issued at a discount
• Aimed to broaden investor participation in 2019 SEBI allowed listing of Commercial papers on stock exchanges.
• Primary dealers and All India financial Institutions were also permitted to issue CP ot meet short term funding requirement.
• Individuals, banking companies, other corporate bodies (registered or incorporated in India) and Unincorporated bodies, Non Resident Indians NRI and FIIs etc can invest in CPs.

Inter Corporate Deposit Market

• unsecured loan extended by one corporate to another from fund surplus corporates to other corporates.
• [[005 Monetary and Credit Policy#Repo|Ready Forward Contracts REPOs]]
• sale and purchase agreement it is the rate at which RBI lends money to Banks.

4. Commercial Bills

• CBs are issued by All India Financial Institutions AIFIs, NBFCs, Merchant Banks, Cooperative Banks and Mutual Funds.
• bills of exchange b/w seller and buyer when they are accepted by banks are known as commercial bills.
• or else they are called trade bills.
• banks take commission for it.

5. Call Money Aka Notice Money

• borrowed or lent for 1 - 14 days and are also known as overnight borrowing market or money at call or Notice money or short money. Call money is overnight, Notice money is 2-14 days.
• does not require collateral but is done in goodwill or promissory notes. But borrowing could be done against security too.
• Done to even out day to day deficit and surplus.
• Interest rates glide with the repo rate and reall call rate revolves around current repo
• LIC, GIC, Mutual Funds, IDBI, UTI, NABARD can participate only as lenders whereas Schedule commercial banks, cooperative banks operate in this as both borrowers and lenders.
• borrower has to pay back immediately when demanded by lender

1. ![[#Mutual Funds]]
2. ![[005 Monetary and Credit Policy#1 Repo]] ![[005 Monetary and Credit Policy#2 Reverse Repo]]

8. Cash Management Bills CMBs / Govt Security

• Issued by Gov since 2009 to meet temporary cash flow mismatches of govt similar to T bills
• Non standard and discounted instruments issued for maturities less than 91 days and at a discount.

Discount and Finance House of India DFHI

• it was created in 1988 to develop a secondary market and trade to deal in money market instruments
• facilitate smoothening of short term liquidity, imbalances

LIBOR is London Inter Bank Rate decides the lending and borrowing rate of banks in UK

MIBOR is Mumbai Inter Bank Rate does the same job as LIBOR in the overnight money market.

Reforms Made in the Indian Money Market :

• Taken after recom from Sukhmoy Chakravarty Comm and Narsimhan Comm
• Deregulation of Interest Rate
• Money Market Mutual Fund MMMFs to sell units for corporates and individuals.
• DFHI was set up to impart liquidity in the money market
• LAF introduced to either absorb or inject money into the market
• Electronic trading for transparency
• Estd Clearing Corporation of India Ltd CCIL
• Dev new market instruments like CMBs

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Indian Capital Market

• Maturity more than 1 year. Its components are
  • Gov Securities
  • Industrial securities shares and debentures of companies
  • Development Financial Institutions DFIs -
  • Merchant Banks
  • Mutual Funds
  • Venture Capital Companies

Image unavailable in web version: Structure of Capital Market

Primary Market

• They are source of new securities. It is where companies, govt and other groups obtain financing through debt or equity based securities.
  • investors are able to purchase securities directly from the issuer.
  • primary market issues include IPO, Private placement, rights issue and preferred allotment. These are strictly regulated by the SEBI
• Underwriting groups facilitate primary markets ex investment banks.
• Once initial sale is complete further trading is done on the secondary market.
• Retail investors can invest in G-secs such as T-bills and Govt of India Debt bonds through their Demat accounts.

IPO : Process of offering shares of private corporation to public in a new stock issuance. Companies must meet SEBI requirements.

Private Placement : It is a sale of stock shares or bonds to pre selected investors and institutions rather than in the open market. It is an alternative to IPO to raise capital. - Investors could be HNIs, Banks, FIs, Mutual Funds, Insurance Companies and Pension funds. - One advantage is that of few regulatory requirements.

Rights Issue : It is an invitation to existing shareholders to purchase additional new shares in the company. Existing shareholders get securities called rights, they get shares at a discount to market price. - Cash strapped companies can turn to rights issues to raise money. - Shareholders have the right but not an obligation to buy new shares.

Preferred allotment :

Government Bonds / G-Secs ¹

• They are tradeable instruments issued by State or Central govt are short term or long term.
• Gsecs that have maturity less than 1 year are called T-bills and those more than that are called Bonds.
• State Govts only issue bonds where only centre can issue T-bills
• Bonds could be issued by municipalities, state govt or sovereign govts and could be fixed or floating rate bonds.
• Gsecs carry zero risk of default and are called the risk free gilt edged instruments.
• Not all G Secs are eligible to be SLR securities and might not be issued through RBI vis Oil Bonds, FCI bonds etc
• Dated securities have fixed maturity and fixed coupon rates payable half yearly but have different maturity dates. Dated G secs coupons or interest rate is paid on face value on half yearly basis. Tenure ranges from 5-40 yrs.
  • RBI’s Public Debt Office PDO acts as depository of Gsecs and deals with issue, interest payment and repayment of principal securities.

Various Types of G-Sec Instruments

• Fixed Rate Bonds : Coupon rate is fixed for the entire life of the bonds. Most bonds are this.
• Floating rate Bonds : have variable interest rate which might be capped or uncapped. The interest rate is re-set at a pre-announced intervals. For ex some interest rates are defined on average rate of yields at cut off prices of last 3 auctions of 182 day T-bills.
  • Some FRBs can also carry coupon that is decided by way of auction mechanism. Coupon payments are annual interest rate paid on bonds.
• Capital Indexed Bonds : Principal of them is linked to an accepted index of inflation to protect principal amt of investor from inflation.
• Inflation Indexed Bonds : IIBs have both their principle and coupon payments protected against inflation.
  • IIBs guarantee returns that are more than the inflation.
  • Inflation index used could be WPI, CPI etc.
  • Was launched to help increase financial savings instead of buying gold.
  • It was in 1997 that IIBs were issued for first time in India and it was called Capital Indexed Bonds CIBs.
• Bonds with Call/Put Options : Wherein issue can have option to buy back/ call option or investor can have option to sell the bond/ put option.
• Special Securities : Govt issues special securities of Fertiliser companies, FCI etc as compensation to these companies in lieu of cash subsidies that they provide.
  • They are usually long dated and have marginally higher yield than dated securities.
  • They are not eligible as SLR but can be used as collateral for market repo transactions.
  • Bank Recapitalisation Bonds to specific PSBs are not tranferable.
• STRIPS : Separate Trading of Registerd Interest and Principal of Securities. It separates the coupon payment and the final principal payment into separate securities. Are essentially Zero Coupon Bonds and created out of existing securities only.
• [[1.2 Inclusive Growth and Budgeting#Sovereign Gold Bond Scheme SGB |Sovereing Gold Bonds]]
• Savings Taxable Bonds
• State Development Loans SDLs : are dated state gov securities, SLR securities just like all other dated securities.
  • Interest is serviced half yearly and principal repaid after maturity.

Secondary Markets

• Secondary market is place where securities are traded among investors.
• There are 2 types of secondary markets one is Stock market other is Over the counter market.

Stock Market

2020-06-13 08:48:27

• trading of shares takes place in a stock exchange. It is a physically existing institution.
• In a stock market a floor is available for buyers and sellers, price is made available for trading along with updated information on listed companies.
• India has a total of 26 stock exchanges 7 at national and 19 at regional levels.
• stock means the capital raised by a corporation through sale of shares
• market cap is aggregate value of a corp shares at current prices

Importance

• smooth functioning of corporate orgs, raise long term loans
• raise savings among common people, attract foreign investment
• Number of shareholders limited to a Private Holding company is limited to a total of 200 and a min of 2.
• limited in a Public limited company means that the liability of the company is limited to the assets of this company during winding up and not on other companies of the group
• Rights issue is when the promoters of a company are first offered shares before an IPO.
• There are total of 5 stock exchanges in India.

Broker : Is a registered member who buys or sells shares/securities and charge commission on gross value of the deal aka commission brokers.

Jobber : Is a broker’s broker who specialises in specific securities aka ‘Taravaniwallah’ in BSE. He has a dedicated post on floor of stock exchange and buys and sells stocks for a small difference aka spread or Jobbers turn or Margin or Hair Cut. Every company with share capital of more than 3 Cr has to have one.

Market Maker : Functions as intermediary at market who quotes both selling and buying prices simultaneously at the same time. In OTCEI only money makers are allowed. In money market in India DFHI is the chief market maker.

BSE

• Asia’s oldest stock exchange,
• Sensex most widely tracked benchmark index
• BOLT is online trading system
• listed companies are classified from A, B1, F, G, Z based on various parameters
• BSE SME for small and medium enterprises to raise funds. ^ff4c51
  • Min paid up capital of the company should not exceed Rs 25 crore.
  • SMEs exchanges are also known as Alternative Investment Markets in UK or Growth Enterprises Market in Hong Kong etc.
• Launched Shariah 50 index to attract investment from Arab/Eu coys
• Sensex : aka Sensitive index of 30 coys revised periodically based on their market cap has base of 1978-1979 is 100 and is regarded as barometer for IN stock market and economy.
• BSE 200, BSE 500 and National Index are some other index
• BSE Indo Next : to promote liquidity to the stocks of small enterprises SMEs launched in 2005 by BSE and FISE (Federation of Indian Stock Exchanges)
• Minimum paid up capital required is Rs 3 crore.

NSE

• formed in 1992 and has about half as many companies listed on it as BSE ie about 1600.
• formed to bring transparency and efficiency.
• played imp role in reforming IN securities market, bringing transparency, efficiency etc
• Nifty/Nifty 50 is its benchmark index
• NSE Emerge is [[#^ff4c51|BSE’s SME]] counterpart
• Some of its sponsors are IDBI, LIC, GIC and IDBI is its promotor
• Minimum paid up capital required is Rs 10 crore.

The other 3 Stock Exchanges Are :

• Metropolitan Stock Exchange
• United Stock Exchange of India USE - for trading financial instruments, deals in currency futures
• India International Exchange INX subsidiary of BSE; first international stock exchange in GIFT city
• Mutualisation : is when the ownership and management are same, demutualisation is when the ownership, management and trading rights are separated in a stock exchange.
• Securities and Contracts Regulation Act was amended that limited the representation of brokers in governing body to 25% and their holding to 49%.

Over the Counter Market

• It is a decentralised market in which market participants trade stocks, commodities, currencies etc b/w parties without a central exchange or broker.
• They do not have a physical location instead trading is done electronically.
• Over the Counter Exchange of India limitedv OTCEI was set up in 1989 in order to overcome problems such as lack of transparency and delays in settlement that was happening in older stock exchanges.

Instruments of Capital Markets

• The process of transfer of funds in the Capital markets is done through instruments, that are documents/certificates showing evidence of investments.

1. Debt Instruments
   • Used by both companies and govt to generate funds for capital intesive projects.
   • Can be obtained through primary or secondary market.
   • Does not imply ownership in the business.
   • Ex Sovereign bonds, State Govt bonds, Municipal bonds and Debentures or Industrial Loan or Corporate loan in private sector.
   • Vaious different types of Debt instruments are Redeemable, Non redeemable, Partially convertible, Fully Convertible. OFCD is a type of fully convertible debt instrument.
2. Equities/ common stock
   • Issued by companies that can be only obtained either in primary or secondary market.
   • Investment translates to ownership and thus they have certain rights and privileges in the country.
   • Risk involved is high and thus yields are higher
3. Preference Shares
   • It entitles the holder a fixed dividend and its payment takes priority over that of ordinary shares.
   • Even during bankruptcy they are paid before common stockholders.
4. Derivatives
   • They are financial contracts whose value is dependent on an underlying asset, group of assets or benchmarks.
   • Price of derivatives are driven by spot prices of the underlying.
   • Can be traded on stock exchange or over the counter. Since Securities Contract act has defined them as securities dervied from a debt instrument, share, loan wether secured or unsecured.
   • Commonly used to access certain markets and may be traded to hedge against risks.

Institutions / Players in Financial Markets

Development Finance Institutions DFIs:

• Provides long term credit. They can be categorised at All India or State level. They are :
• Term lending institutions ex IFCI, IDFC to extend long term finance.
• Refinancing Institutions like NABARD, SIDBI
• Sector specific Inst like HUDCO, EXIM
• Investment institutions like LIC, UTI etc

Merchant Banks or Investment Banks

• deals with companies to manage and underwrite issues,
• they advise corporate clients on fund raising aka Investment banks

Collective Investment Scheme CIS : does not include Mutual Funds and are regulated by SEBI

Alternative Investment Funds AIF are made to pool in investment in real estate, private equity and hedge funds.

Real Estate Investment Funds REITs

• raises funds for investment through an IPO
• min asset size permitted is Rs 500 cr and issue size of 250 crore.
• Regulated by SEBI.

Mutual Funds invest in stock market securities, bonds etc

• Hedge Funds : similar to Mutual funds but more complex, regulated by SEBI under AIF. Hedging is the process by which businesses insulate themselves from risk of price change.
  • They are investible capital/ free floating capital that move very swiftly towards more profitable sectors of economy.
  • Move into the economy when there is naturally a boom time.

Venture Capitalists

• they invest public money
• Angel Investor - regulated by SEBI under AIF.
  • Invest only in companies incorporated in India
  • Be invested for at least 3 years in companies not older than 3 year
  • Corpus of Rs 10 cr w/ min investment of Rs 25 lakh
  • Should not have family connection with investee company

Industrial Securities, Shares and Debentures

• Private Equity is reverse of IPO, they take part in mgt of company Hundis
• Chit Funds are a type of savings scheme, governed by state and central laws
• Qualified Institutional Placement QIPs.
  • they are qualified to sell shares, debentures etc.
• NBFC
  • do not include institutions whose principal business is agriculture or Industrial activity
• External Commercial Borrowings ECB
  • are regulated by Dept of Economic Affairs and RBI.
  • Money from ECB is not to be invested in Stock markets and speculation in Real Estate
  • Borrowers can access ECBs through either ‘automatic routes’ and ‘approval route’ -> considered by RBI.
  • ECB has been liberalised recently
    • Eligible borrowers can raise upto $750 mil per financial year under automatic route.
    • List of eligible borrowers enlarged to include port trusts, units in SEZs, SIDBI etc
    • Public sector oil marketing coys can borrow upto $10 bil for working capital purposes with min average maturity period of 3 years.
• Credit Default Swap is insuring against debt default through a third party. Participants are commercial banks, primary dealers, NBFCs, Insurance companies and Mutual Funds.
  • It is a financial contract where a buyer of corporate or sovereign debt in form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds.
  • CDS is a financial derivative that allows investor to swap or offset their credit risk with that of another investor. A regular premium is paid similar to that of an insurance policy.

Infrastructure Finance Companies IFCs

• issue units and bonds for investment called Infrastructure debt Funds IDFs
• can either be a trust based IDF regulated by SEBI or a company based regulated by RBI.

Regulator of Capital Markets SEBI

• statutory body, estd 1988 to regulate and dev [[006 Finanacial Market - Money and Capital Market#Capital Market|Capital market]]
• [[006 Finanacial Market - Money and Capital Market#Capital Market|Capitals market]] is regulated by the SEBI they also regulate credit rating agencies.
• Steps taken by SEBI to strengthen market :
  • [[005 Banking System In India#^1303a6|Capital adequacy]] norms for brokers
  • Enforcing Corporate disclosures
  • Ban on insider trading
  • Code of conduct on credit rating agencies
  • Half directors on board of listed companies to be independent directors

Security Laws Amendment Act 2014

• counter fraudulent investment schemes ex Ponzi schemes and provides guidelines to form special fast trial courts

SEBI’s Role as Protector of Investors

• Set up Investor Protection Fund
• Register and regulate broker, merchant bankers etc
• monitor credit rating agencies, check frauds and unfair trading methods
• investor awareness and education protramme
• inspect and audit exchanges, Banning insider trading

Capital Market Reforms since 1991

• Electronic trade, Statutory status to SEBI
• Permit FIIs, setting up [[#^d76583|clearing houses]]
• compulsory dematerialisation of all share certificates, restriction of PNs
• [[#Security Laws Amendment Act 2014]]

Primary market is where new securities are traded, Secondary Market where primary dealers participate and sell to people.

Shares are of 2 types Preferred stocks and common stock. PS get priority in terms of dividend payment, proceeds of winding up payment etc

Derivatives derives its value from an underlying asset ex securities, shares, debt instruments etc.

Buyback

• of shares is done when company believes that current share price is undervalued. Reasons for buyback :
• Boosting share price
• Giving share-holders an attractive exit
• Putting unused cash to use
• Done by GOI for disinvestment proceedings
• Companies cannot borrow for buyback of shares. It reduces the number of shares that are in the market so each shareholder holds a larger percentage of ownership.

Anchor investor that are invited to subscribe to shares to boost the popularity of IPO however cannot sell their share for a period of 30 days.

Depository Receipts

• Global Depository Receipts GDRs : issued by Indian companies in foreign currency to raise equity. ^48902d
• American Depository Receipts allows the listing of foreign companies in American Stock Exchange viz NASDAQ etc Indian Depository Receipts IDRs are similar.
• IDRs allows Indian investors to invest in listed foreign companies. Denominated in Indian Rupees and issued by Domestic Depositories in India. Can be listed in any stock exchange.
• Anyone who can invest in an IPO can invest in IDRs.

Foreign Direct Investment FDI

• investment by foreign firm into business operation etc of a local firm
• Horizontal, Vertical, Conglomerate are its types

Foreign Institutional Investors FIIs

• allowed to invest only in listed or to be listed entities and only thorugh stock exchanges.
• Can invest in IPOs this is not considered as FDI
• FDI in company less than 10% is called FII
• could be banks, insurance companies etc.

FPIs

• are are FIIs, Sub Accounts, QFIs etc clubbed together.
• Chandrashekhar committee was formed to rationalise or harmonize FPI investment
• are prohibited from investing in T Bills
• FII is termed as hot money because it can leave as fast as it comes. ![[#^c37d51]]
• Registered Foreign Portfolio Investors RFPIs : Existing portfolio investor class ie FIIs and QFIs registered with SEBI has been subsumed under it.

Qualified Foreign Investor QFI

• group, entity that is registered with the FATF or a country that is member of the International Organisation of Securities Commission IOSCO.
• They do not need to register with SEBI.
• Need to meet KYC norms to invest directly into Indian Mutual Funds.
• Objective of promoting QFIs was to curb rising current account deficit that is creating heavy drain of foreign exchange and objective of attracting more FIs.

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Corporate debt : aka a corporate bond is a type of debt security that is issued by a firm sold to investors.

• A pre decided amount of interest is paid on the debt.
• High quality corporate bonds are considered a safe and conservative investment.

Corporate Bonds : India deals with small size of unsecured borrowings mostly due to weakness in contract enforcement and lack of adequate information on the borrowers.

• CB market amounts to about 32% of total credit to corporate sector in India or 16% of GDP.
• Patil #committee and Khan #committee was made on Corporate Bonds.
• Major reforms were undertaken in Credit Default Swaps to enhance liquidity.

Recent initiatives undertaken on this are :

• Commercial banks permitted to issue Rupee denominated bonds overseas.
• Brokers registered with SEBI can undertake repo and reverse repo contracts in corporate debt securities. To make corporate bonds more fungible.
• Primary dealers can act as market makers for govt bonds.
• Corporate bonds rated BBB and above are declared as investment grade
• Electronic platform for repo operation in corporate bonds

Infrastructure Debt Funds IDFs : Investment vehicles for channelizing investment into infrastructure sector.

• They are sponsored by commercial banks and NBFCs in which domestic/offshore institutional investors specially insurance and pension funds can invest through units and bonds issued by the IDF.
• IDFs can be either set up as a Trust ie Mutual fund regulated by SEBI or Company ie NBFC regulated by RBI.
• IDF Mutual Funds are sponsored by banks and NBFCs whereas IDF Infrastructure Finance Companies are sponsored by banks and Infra Finance Companies.

Take out Financing :

• Banks give out loans for infrastructure funding for longer periods eg 10-15 years.

• However, after certain pre-specified time or milestone the loan is transferred to a different financial institution.

• This is done to ensure the projects gets long term funding and there is no asset liability match on the bank.

• FATF is intergovernmental organisation to combat money laundering. HQ in Paris.

• Sub Accounts are foreign corporates or individuals on whose behalf an FII investment is proposed to be made

• International Organisation of Securities Commission IOSCO : regulates the worlds securities and futures market. HQ in Madrid, IFSC - Gift city has become associate member of it.

• Sustainable Stock Exchanges SSE is a project of the UN as a learning platform for stock exchanges, investors, etc to adopt best practices and promote corporate sustainability.

Participatory Notes

• Derivative instrument issued in Foreign jurisdiction by SEBI registered FII against Indian securities that could be equity, debt, derivative or an index. Is a derivative instrument issued in foreign jurisdictions. Other FIIs who are not registered can then invest in it.
• Aka Overseas Derivative Instruments, Equity linked Notes, Capped Retunr Notes and Participating Return Notes.
• Investor in PN does not own the security but can still benefit from investing in it. It does not require KYC.

Reasons for the popularity of PNs

• Registration with SEBI not required.
• Provides anonymity to investor as KYC not required
• Preferred by large hedge funds
• Allows investors to gain exposure to local shares without incurring time and costs involved in investing directly.
• highly safe and lucrative routs to invest unaccounted/black and even illegal money back into the Indian market.

Regulation of PNs and concerns surrounding it

• PN are market instruments that are created and traded overseas thus Indian regulators cannot ban issue of PNs.
• Regulator of the place where it is traded is can control it.
• Identity of ultimate beneficial is not known. They operate outside purview of SEBIs surveillance and cannot be real time monitored.

Clearing House

• is an organisation that guarantees all trade in case of buyers/sellers defaulting, carries out final settlement of all transactions on the stock exchange.
• It acts as a buyer to every seller and seller to every buyer this is called novation. ^d76583

Commodity Exchanges

• where commodity futures are traded ex edible oils, food grains, metals, spices etc. It plays a critical role in price discovery of the item
• They were regulated by the Forwards Market Commission but FMC was merged with SEBI for better regulation.
• Commodity trading similar to stock trading but commodities are actual physical goods.
• Futures : are traded on exchanges whereas Forwards are not. Futures are traded on commodity exchanges.
  • Options are a class of futures where the buyer or seller has the option to buy or not. Put Option is right to sell but not obligated to sell, Call is right but not obligation to buy.
• These prices undergo large degree of fluctuation reasons are crop failure, bad weather, demand supply imbalance etc.
• The main objective of these exchanges are to protect the participants from adverse movt in prices. It also provides hedging against price risk, production planning and price discovery.
• There are more than 90 commodities defined in the country and more than 20 commodity exchanges such as National Commodity and Derivative Exchange NCDEX, National Multi Commodity Exchange NMCE, Mulit Commodity Exchange MCX etc.
• Forwards market commission FMC used to regulate it till 2015. It was merged with SEBI.
• Depository holds securities in electronic form. National Securities Depository Limited NSDL is the first depository in India.
• Decoupling is having an autonomous response and not being entirely dependent on the global economy.
• Clause 49 mandates independent Board of Directors for listing in Indian stock exchange
• Power Exchanges trades with electricity through exchanges, it invites bids of buy and sell of day-ahead contracts

Spot Exchanges

• Electronic trading platforms that facilitate purchase and sale of a specific type of commodity including agricultural commodities, metals and bullion by providing spot delivery contracts.
• Spot Delivery contracts provide for delivery of securities and payment of the price of the securities on the same or next day.
• It is encorporated under the Companies Act 1956.
• There are 4 spot exchanges in India ie National Spot Exchange Ltd NSEL, NCDEX, Reliance Spot Exchange, Indian Bullion Spot Exchange Ltd.
• Advantages :
  • Efficient price determination
  • ensures tranparency in price discovery,
  • ensures participation in large numbers by farmers, traders etc,
  • brings some best practices in commodity trading like grading for quality
  • Counter party risk is avoided

Mutual Funds

• pool resource from individuals to invest in capital market and are managed by qualified persons with experience in investing in different asset classes ex shares, bonds, money market instruments like call money and other assets such as gold and property.
  • These qualified persons work for an asset management company AMC who themselves are managed by trustees. They both have a fiduciary responsibility.
• Regulated by the RBI and SEBI and have freedom to operate in the capital market too.
• A fund house of a distributor are qualified to sell mutual funds. They allot units of MF to investor at a fixed price based on the Net Asset Value.

NAV = Total Investments in a scheme / Total units issued to investors of the scheme

There are 3 types of schemes offered by MFs

1. Open ended mutual Funds have no time duration and can be purchased or redeemed at any time on demand.
2. Close ended : They issue units to investors only once when launching an offer called a New Fund Offer NFO. After that they are listed on stock exchanges and then traded on a daily basis. - only a fixed units are issues as IPO - price is determined by investor demand - are managed by fund houses for a limited number of years and at the end either the money is returned or scheme becomes open ended.
3. ETF or Exchange Traded Fund : They are a mix of open ended and close ended schemes and are listed and traded on a stock exchange on a daily basis. The price is very close to its NAV or the underlying asset ex Gold. - Exchange Traded Fund (ETF) are mutual funds listed and trade on stock exchanges like shares. They are bought and sold at prevailing market prices. - Bharat Bond ETF will allow retail investors to put money in gov bonds, easy and low cost access to bond markets and tax efficiency. Bond has fixed maturity of 3 and 10 yrs. - Gold ETF are open ended mutual funds schemes that closely track price of physical gold. NAV is calculated on that physical prices of gold prevailing on that day. - CPSE ETF : comprise top 10 blue chip PSUs listed in BSE and NSE. It was meant to be type of disinvestment managed by Goldman Sachs.

Advantages of Mutual Funds

• Better long term returns ie more than 10 years as compared to FD, PPF etc.
• Diversification of portfolio, good investment management services
• Liquidity, strong govt backed regulatory help
• professional service and low cost for all the benefits.

SEBI classified it into 5 broad categories Debt, Equity, Hybrid and solution oriented(childrens, retirement fund).

Shares and Bonds

• Share is certificate of ownership, it can be split if the price is too high
• Bond is a debt instrument, interest could be fixed or floating

Debenture

• non-secured investment/unsecured debt/due/borrowing etc issued against good will and reputation.
• Unseured means no collateral is required.
• Convertible debenture can be converted into equity.
• Non-Convertible - https://cleartax.in/s/non-convertible-debentures-ncd
• Partly convertible

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• Bear is believing market will go down and Bull is when it will go up. Bear increases the no of shares in the stock market whereas bull creates a scarcity.

• Blue chip are stocks of most valuable companies

• Largecap, Midcap or Small cap limits are not laid down statutorily

• Retail Investor is someone subscribes to share less than Rs 2 lakh in an IPO. A price discount is done to attract them.

• Negotiated Dealing Settlement NDS is an electronic platform to facilitate dealing in G Secs and Money Market instrument

• Short selling is done when an investor who does not own the security sells it in hope of the price getting down and then purchases it at lower price

• Minimum Public Shareholding MPS norm mandates 25% min public shareholding

• Sweat Equity is large amount of shares that are issued to Directors for their contribution

• Insider Trading

• Gilt is bond issued Central Bank viz RBI on behalf of Gov

• Short selling : Sale of share that is not owned. Shares are borrowed believing that it will decrease in valueu7

• Book Building : provision by SEBI that allows IPOs in which individual investors are reserved and allotted shares by the company.

• Scrip share : shares given to existing shareholders without any charge aka bonus share.

• Rolling Settlement : was reform where payment and delivery of security occurs at the end of X days.

• Badla : When buyers want postponement of the transaction aka Contango.

• Undha Badla : when sellers want postponement of the transaction aka backwardation

• 2 depositories in India are NSDL and CDSL

• Kerb dealings : buying and selling of stock that takes place outside the stock exchanges unofficially after normal trading hours.

• NSCC : National Securities Clearing Corporation is a pSU that takes counter party risk of all transactions done in NSE.

• Authorised Capital : limits upto which shares can be issued by a company aka nominal or registered capital. ![[Pasted image 20220312132610.png]] ![[Pasted image 20220312132634.png]]

• Issued capital : is the amt sought by a company to be raised by issuing shares which cannot exceed authorised capital of the company.

• Subscribed Capital : amt actutally been paid by the shareholders or have been committed by them for contribution.

• Paid up Capital : is part of authorised capital that has actually been paid by the shareholders. This may happen when all shares of authorised capital has not been issued.

• Greenshoe option : Is an over allotment of shares where company issuing IPO grants the underwriter right to sell more shares than initially planned usually 15% and aka over allotment provision.

• Screen Based Trading : trading stock in electronic medium

• OFCDs are Optionally Fully Convertible Debentures : Option is there for debenture holders who wish to convert them into shares after the expiry of a period fixed by the company aka lock in period. This should be done only when there is high likely of a profit or when share prices are likely to rise.

  • Companies Act was amended which gives SEBI undisputed jurisdiction over any investment scheme involving more than 50 investors whether company is listed or unlisted.

• Par value (face value) implies the value at which a share is originally recorded in the balance sheet as equity capital. It is the value of single common share that has been set by any corporations charter.

  • SEBI guidelines require all new companies to offer their shares to public at par. However, existing company with a track record of at least 5 years of consistent profitability are allowed to issue share at a premium.

• Foreign Financial Investment is FPIs and FIIs their investment is regulated by SEBI while ceilings on such investments are maintained by RBI. Ex Hedge funds, Foreign Mutual Fund, Sovereing Wealth Funds, Pension funds etc.

  • Sebi has allowed direct overseas listing of Indian companies;
  • KYC requirement has been relaxed;
  • Foreign entities allowed to participate in commodity derivatives;
  • NRIs allowed to invest through FPI route etc.
  • FPIs allowed in Alternate Investment Funds, Real Estate Investment Trusts REITs and InvITs.
  • SEBI has divided FPIs into 3 categories Category I : govt entities investing in Indian security market. Category II : FIs, MFs duly regulated in countries of their origin. Category III : FIs that do not fall in above 2 categories. ^c37d51

Development Impact Bonds DIBS and Social Impact Bonds SIBS

Footnotes

1. https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79#1 ↩