an overview of indian financial system -ppt1 laast

8/8/2019 An Overview of Indian Financial System -Ppt1 Laast

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P07BA412- Merchant Banking

PREPARED BY MS.S.SANGEETHA, SENIOR LECTURER, KCTBS


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Financial System

What do you mean by theword Finance?



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Evolution of money



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Evolution of money



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Motives of money



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The term "finance" in

our simpleunderstanding is

equivalent to 'Money'



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Finance defn by The American Heritage Dictionary of the

English Language

The science of the management ofmoney and other assets.";

"The management of money,banking, investments, and credit";

"finances Monetary resources; funds,especially those of a government orcorporate body"

"The supplying of funds or capital."



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Another definition:

o"To provide or raise the

funds or capital for

o "To furnish credit to".



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"WordNet ,Princeton University " definesFinanceas

o "the commercial activity ofproviding funds and capital

o "the branch of economics that studies the

management of money andother assets

o "the management of money and

credit and banking andinvestments"



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Another defn:1: "obtain or provide

money for;

2: "sell or provide oncredit "



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All definitions listed above refer to finance as a Source of funding an activity.

Providing or securing finance results in

1. Financial Management,

2. Financial Services and

3. Financial Institutions.

Finance therefore represents the resourcesby way funds needed for a particular

activity. PREPARED BY MS.S.SANGEETHA, SENIOR LECTURER, KCTBS


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Finance goes withCommerce,

Business,

Banking etc.



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Types of Finance



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Personal Finance" - resourcesneeded personally by an individual forhis family and individual needs

"Corporate Finance" - resourcesneeded by a business organization tocarry on its functions intended for theachievement of its corporate goals

Finance "Funds" or "Capital.



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Requisites for FMCG?



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An Overview of Indian Financial System

Financial System

Financial Markets,

Financial Intermediation And

Financial Instruments / FinancialProducts.



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INDIAN FINANCIAL SYSTEM

Broad classification of sector

Corporate sector, Government and

Household sector

The economic developmentof a nation

progress



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Performance of these units lead to a

Surplus budget /

Deficit budget /Balanced budgetary situations.



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Sources of funds /Surplus Money

Users of funds /Deficit Money

Financial System

Sourcesthe

money

Lendsthe

money

Various institutions,

markets,

regulations and laws, practices,

money manager,

analysts,transactions and

claims and liabilities.

Intermediary



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Financial System

Seekers of

fundsMainlyBusiness firms,

Govt

Suppliers of

funds

Mainly households

Flow of financial services

Flow of funds (savings)

Income and Financial claims



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FINANCIAL MARKETSMarket - in which financial assets are

created or transferred.

In real transaction exchange of money

for real goods or services,

A financial transaction involves creationor transfer of a financial asset.



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Financial Assets or Financial Instrumentswhat ,when & how?

Represents aclaim to thepayment of asum of money

Sometime in thefuture and /orperiodic payment

Interest or dividend.

In the form of



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Types of markets



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Money MarketWholesale Debt market for Low-risk,

Highly-liquid,

Short-term Instrument.Period- a single day up to a year.

Dominated by

Government, Banks and

Financial Institutions



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Capital Market -

Finance

the long-terminvestments.

Period: over a year.



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Forex Market

Deals with - multicurrencyrequirements, which are met bythe exchange of currencies.

The transfer of funds takes placein this market- based on theexchange rate.

Integrated market across theglobe.



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Credit Market

Sale of short, medium and

long-term loans to corporateand individuals by banks,

FIs and NBFCs .



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Constituents of aFinancial System



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Financial System

Financial Assets Financial markets FinancialIntermediaries

Forex mkt Capital mkt Money mkt Credit mkt

Primary mkt

Secondary mkt

Money mktinstruments

Capital mktinstruments

Hybridinstruments



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How money is

Channelised?



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Instrument designing

Reach of financial assets to the ultimate investor

Collect adequate amount

Borrower Of Funds

Adequate information of the issue,

Issuer and the Security

Proper Channel

+



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Financial Intermediaries

(Wide Range Of Institutions)

FIs, Brokers, And Dealers

Reserve Bank Of India.

The Lender The Borrower

Transfer Of Funds.From

To



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.Important financial marketsintermediaries operations include

Investment Bankers,

Underwriters, Stock Exchanges, Registrars,Depositories, Custodians, Portfolio Managers,Mutual Funds, Financial Advertisers , Financial Consultants,

Primary Dealers, Satellite Dealers, Self Regulatory Organizations, Etc.



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Financial markets intermediaries operations include

Investment Bankers, Underwriters - IFCI, IDBI, ICICI, AXIS, LIC etc. Registrars, Depositories, -NSDL (NSE), CDSL (BSE) Custodians,

Portfolio Managers- Kotak securities, Motilal Oswal Mutual Funds- Motilal oswal Financial Advertisers- pressman advertisers, sobhagya

advertising services

Financial Consultants=- India Investments, BIRLA

INSURANCE ADVISORY SERVICES LTD Primary Dealers, Satellite Dealers, Self Regulatory Organizations, Etc. NASDAQ



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Motilal Oswal It is a well diversified financial services firm offering a

range of financial products and services such asWealth Management, Broking & Distribution,Commodity Broking, Portfolio ManagementServices, Institutional Equities, Private Equity,Investment Banking Services and Principal

Strategies. They have diversified client base that includes retailcustomers (including High Net worth Individuals),mutual funds, foreign institutional investors,financial institutions and corporate clients.

They are headquartered in Mumbai and as of June30th, 2009, had a network spread over 555 citiesand towns comprising 1,308 Business Locationsoperated by their Business Partners and them. As atJune 30th, 2009, they had 5,57,373 registeredcustomers.



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What do you mean by Demat account?



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Demat Account in India Demat or Dematerialized account is to storestocks in electronics form. It is just like

opening a bank account to store your money.Now nobody is interested to keep shares in

physical forms and going for electronic basedfiling of shares.

This has changed the style of operation inmain Indian stock markets like BSE Sensex

(Bombay Stock Exchange Sensitive Index) andNifty (National Stock Exchange of India) andits brokers.



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Demat Account in India Depository :

Depository is responsible for keepingstocks of investors in electronics form.

There are two depositories in India, NSDL (National Securities Depository

Ltd) and

CDSL (Central Depository Services Ltd).



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Demat Account in India Depository Participants:

DPs are agents who connect depository

with Investors. It is like a bank branch

with which you can open a demataccount to buy or sell shares.



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Demat Account in India How to Open a Demat Account :Like opening a bank account approach a

depository participants to open an online

trading or demat account.

Most of the banks are DPs too.



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Demat Account in India

Documents Required

1. Photo Copy of PAN Card (Mandatory)

2. Two Passport size photos

3. Address ProofRationCard/Passport/Driving License/Voters

ID Card/BSNL Telephone/LIC Policy

4. Latest Bank Statement and photocopyof Bank Passbook



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Demat Account

Submision of Duly filled up info anddemat account opening form along with

above mentioned documents and willhave to pay a small account opening fee.

After submitting the application demat

account will become after few days.Once it is active one can start buyingand selling shares.



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Charges and FeesThere will be an annual account

maintenance fee and

transaction fee for the Demat accountand it will vary between DPs.



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There may be a fewintermediaries offering theirservices in more than one market

e.g. underwriter. However, the services offered by

them vary from one market to

another


Intermediary Market Role


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y

Stock Exchange Capital MarketSecondary Market tosecurities

InvestmentBankers Capital Market,Credit Market Corporate advisory services,Issue of securities

UnderwritersCapital Market,Money Market

Subscribe to unsubscribedportion of securities

Registrars,Depositories,Custodians

Capital Market

Issue securities to theinvestors on behalf of thecompany and handle sharetransfer activity

Primary DealersSatellite Dealers Money Market Market making ingovernment securities

Forex Dealers Forex MarketEnsure exchange incurrencies


Financial capacity for


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Financial capacity for

primary dealers

Eligibility Gain confidence in market

Depth & continuity

Service to soundest institutions only


ddi i l ifi i


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Additional specifications

Set aside separate fund to dealin Government securities

Separate legal entitywithseparate cap

Parent cos support



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Primary dealers net ownedfunds more than satellite

dealers



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Money MarketInstruments:



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Money market:

A market for short-term money and financialassets that are near substitutes formoney.

Period up to one year and

Nature near substitutes to money is used

to denote any financial asset which can bequickly converted into money withminimum transaction cost.



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Some important money market instruments :

1. Call/Notice Money2. Treasury Bills3. Term Money4. Certificate of Deposit5. Commercial Papers



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1. Call /Notice-Money Market "Call Money"- borrowed on a day and

repaid on the next working day,

(irrespective of the number ofintervening holidays)

"Notice Money - When money is

borrowed or lent for more than a dayand up to 14 days.

No collateral security



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2. Inter-Bank TermMoney

Inter-bank market -deposits of maturitybeyond 14 days is referred to as theterm money market.



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LIBOR

An interest rate at which banks canborrow funds, from other banks in theLondon interbank market.

The LIBOR is fixed on a daily basis bythe British Bankers' Association.



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How LIBOR is fixed?The LIBOR is derived from a filtered

world's most creditworthy banks'

average of the interbank deposit ratesfor larger loans

with maturities between overnight

and one full year.



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In India BIBOR/ MIBOR



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3. Treasury Bills Treasury Bills are short term (up to one

year) borrowing instruments of the uniongovernment.

It is a promise (IOU) by the Government topay a stated sum after expiry of the stated

period from the date of issue (14 /91 /182/364 days i.e. less than one year).

Issued at a discount to the face value, and onmaturity the face value is paid to the

holder. The rate of discount and the corresponding

issue price are determined at each auction.


T Of T Bill


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Types Of Treasury Bills

There are different types of Treasurybills based on the maturity period andutility of the issuance like, ad-hoc

Treasury bills, 3 months, 12monthsTreasury bills etc. In India, at present,the Treasury Bills are the 91-days and364-days Treasury bills.


Benefits Of Investment In


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Treasury Bills

No tax deducted at source

Zero default risk being sovereign paper

Highly liquid money market instrument

Better returns especially in the short term

Transparency

Simplified settlement

High degree of tradability and activesecondary market facilitates meetingunplanned fund requirements.



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4. Certificate of Deposits Introduced during June 1989

Certificates of Deposit (CDs) is anegotiable money market instrumentand

Issued in dematerialised form or as aUsance Promissory Note, for fundsdeposited at a bank or other eligiblefinancial institution

For a specified time period.



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Guidelines - governed by the ReserveBank of India, as amended from time totime.

CDs can be issued by (i) scheduled commercial banks

excluding Regional Rural Banks (RRBs)

and Local Area Banks (LABs); and (ii) select all-India Financial Institutions

Certificate of Deposits



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Who can raise CD funds? RBIshort-term resources (umbrella limit fixed

by RBI).

Banks have the freedom to issue CDs depending

on their requirements. FI may issue CDs ( overall umbrella limit fixed by

RBI) i.e., issue of CD together with otherinstruments viz.,

Term deposits,

Commercial papers and

Intercorporate deposits

It should not exceed 100 % of its net ownedfunds, as per the latest audited balance sheet.



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5. Commercial Paper

CP is a note in evidence of the debtobligation of the issuer.

On issuing commercial paper the debtobligation is transformed into an

instrument. CP is thus an unsecured promissory

note privately placed with investors at a

discount rate to face valuedetermined by market forces.

CP is freely negotiable by endorsementand delivery.



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Criteria Condition

Tangible net worth of thecompany

not < Rs. 4 crores;

The working capital not < Rs. 4 crores;

The borrowal account ofthe company

classified as a Standard Assetby the financing bank(s).

The minimum maturity

period of CP

7 days.

The minimum creditrating

P-2 of CRISIL or suchequivalent rating by otheragencies.


Example


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Example

Large corporations with strongcredit ratings, such as GeneralElectric, issue commercial paper on

their own credit. Other largecorporations arrange for banks toissue commercial paper on their

behalf via commercial paper lines.



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Best Indian Banks 2009


Criteria Public Private Foreign Banks

Best bank B k f I di A i B k Ltd Citib k


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Best bank Bank of India Axis Bank Ltd Citibank

Priority SectorLending

PunjabNational Bank

The FederalBank Limited

ABN AMRO BankN.V. (Naamloze

vennootschap)(Public limited liabilitycorporation )

SME Financing State Bank ofIndia

ICICI BankLimited

HSBC

Asset quality State Bank ofHyderabad

The South IndianBank Ltd

HSBC

Global Business

Development

Bank of Baroda ICICI Bank Limited

Rural Reach State Bank of

India

Tamilnad

Mercantile Bank Ltd

Overall best Bank Bank of India



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Most of the above banks do not trade inthe US markets.

ICICI Bank Limited is listed on the NYSE

with ticker IBN. State Bank of India, Indias largest state

owned bank does not trade in the US.

The other Indian bank, HDFC Bank Ltd(HDB) did not win a award.



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State Bank of India

ICICI Bank

HDFC Bank

Punjab National Bank

Bank of India

Canara Bank

Bank of Baroda

Axis Bank Kotak Bank

Union Bank of India

Indian OverseasBank

IDBI Bank Limited

State Bank of PatialaIndian Bank

Power Finance Corp

Oriental Bank of

Commerce

Syndicate Bank

List of Indian banks in the global 500


Money mkt structure


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Money mkt structure

Organised Unorganised

RBI Commercial banks Development Banks Mutual Funds

Private MFsUTIForeign M/FCommercial

Bank MF

Co-operative

Banks

StateCentral

Public Sector

SBI &its subsidiariesNationalisedRegional

Rural Banks

Private Sector

Indian banksForeign banks

Indigenous bankers Money lenders

Scheduled Non scheduled



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(218) Scheduled commercial

banks including foreign banks

273 branches

Public sector (161) 28 banksIDBI Ltd

Non-scheduled banks

Regional rural banks RRBs(133) 14,700 branches

Nationalisedbanks (19 )34,000 branches

SBI group (8)14,000 branches

Four

Banks in India


Bank Of AmericaBank Of IndiaBarclays Bank PLC

Federal Bank India

HDFC Bank India

Axis Bank

SBI Commercial and


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Barclays Bank PLCCenturion Bank LtdCitibank N ACorporation BankDhanlakshmi Bank LtdDeutsche Bank IndiaExport-Import Bank Of

IndiaGlobal Trust Bank LtdHongkong & Shanghai-Banking Corporation Ltd

ICICI Bank LtdIDBI Bank LtdIndusInd Bank LtdSyndicate Bank IndiaIDBIING Vysya Bank LtdJP Morgan Chase Bank

Punjab National BankStandard CharteredGrindlays Bank LtdState Bank Of IndiaState Bank Of IndoreCanara Bank IndiaReserve Bank Of IndiaBank Of Baroda

HDFC Bank India

Union Bank Of India

YES BANK India

State Bank Of Bikaner

& JaipurCeylon Bank

Catholic Syrian Bank

Dena Bank

Mizuho Corporate Bank

Indian Overseas Bank

Karnataka BankPunjab and Sind Bank

Kotak Mahindra Bank

State Bank of

Hyderabad

Karur vysya Bank

LimitedState Bank of Patiala

Oriental Bank of

CommerceState Bank of Travancore

SBI Commercial and

International Bank

Vijaya Bank

Tamilnad Mercantile

BankRatnakar Bank

Jammu and Kashmir

Bank

UCO Bank

Repco

DBS Bank Ltd.United Bank of India

State Bank of Mysore

http://business.mapsofindia.com/banks/icici-bank-branches/index.htmlhttp://business.mapsofindia.com/banks-in-india/state-bank-of-india.htmlhttp://business.mapsofindia.com/banks-in-india/deutsche-bank.html


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Scheduled banks

Scheduled banks are those banks which have beenincluded in the 2nd schedule of the Reserve bank ofIndia act of 1934.

The banks included in this schedule list should

fulfill two conditions.

1. The paid capital andcollected funds of bank

Should not be < Rs. 5lakhs

2. Any activity of the bank will not adversely affect theinterests of depositors.


Scheduled banks


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Scheduled banks

Every Scheduled bank enjoys thefollowing facilities.

Such bank becomes eligible fordebts/loans on bank rate from the RBI

2. Such bank automatically acquire themembership of clearing house.


The following are the Scheduled Banks in India(Public Sector)


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( )

1. State Bank of India

2. State Bank of Bikaner andJaipur

3. State Bank of Hyderabad

4. State Bank of Indore

5. State Bank of Mysore

6. State Bank of Patiala

7. State Bank of Saurashtra8. State Bank of Travancore

9. Andhra Bank

10. Allahabad Bank

11. Bank of Baroda12. Bank of India

13. Bank of Maharashtra

14. Canara Bank

15. Central Bank of India

16. Corporation Bank

17. Dena Bank18. Indian Overseas Bank19. Indian Bank20. Oriental Bank of Commerce21. Punjab National Bank22. Punjab and Sind Bank23. Syndicate Bank24. Union Bank of India

25. United Bank of India26. UCO Bank27. Vijaya Bank


Scheduled Banks in India
http://finance.indiamart.com/investment_in_india/indian_overseas_bank.html


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(Private Sector)

Vysya Bank Ltd Axis Bank Ltd

Indusind Bank Ltd

ICICI Banking Corporation Bank Ltd Global Trust Bank Ltd

HDFC Bank Ltd

Centurion Bank Ltd Bank of Punjab Ltd

IDBI Bank Ltd


Scheduled Foreign Banks in India


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Scheduled Foreign Banks in India

American Express Bank Ltd.

ANZ Gridlays Bank Plc. Bank of America NT & SA Bank of Tokyo Ltd. Banquc Nationale de Paris Barclays Bank Plc Citi Bank N.C. Deutsche Bank A.G.

Hongkong and Shanghai Banking Corporation Standard Chartered Bank. The Chase Manhattan Bank Ltd. Dresdner Bank AG.


Characteristics of MM


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Characteristics of MM Mkt for ST funds

Suits the reqt ofST funds borrowers

High liquid instruments

Tells about trends in liquidity & interest rates

Monetary & Fiscal mngt tool Players- RBI, Commercial Banks & Cos.

Subject to RBI Regulations

Provides funds at low transaction cost Encourages open mkt operations


Need for Money Market


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Coordinator b/w borrowers & lenders of STfunds

Provides transmission of funds surplusconcerns to concerns are short of funds

A device to the Govt tobalance its cash inflows& outflows




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A weapon to business firms to meet their STFunds

Creates a min rate of return on idle fund lying atthe disposal of corporate sector & banking sectors

A tool to finance managers inorder to utiliseSurplus funds to enhance the shareholderswealth


Money market instruments


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Money market instruments

Call moneyTreasury bills

Commercial paper

Certificate of Deposits

Commercial bills

Money mkt mutual funds (MMMF)


MMMF


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MMMF

A money market fund is amutual fund that invests

solely in money marketinstruments.


Types of Money Market Mutual Funds


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Types of Money Market Mutual Funds

Money market funds are of two types:

1. Institutional Money Market Mutual Funds:These funds are held by governments,institutional investors and businesses etc.

Huge sum of money is parked in institutionalmoney funds.

2. Retail Money Market Mutual Funds:

Retail money market funds are used for parkingmoney temporarily. The investment portfolio ofmoney market funds comprises oftreasury bills,short term debts, tax free bonds etc.


Mutual funds (MFs)


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Mutual funds (MFs)They have been a significant source of

investment in both Government andcorporate securities. Mutual fund investment India has been for

decades the monopoly of the state with UTIbeing the key player, with invested fundsexceeding US$10 bn.

Others are The state-owned insurancecompanies

Mutual funds offered by Nationalized banks,

private and foreign companies. Foreign participation in Mutual fund

investment in India and AMC .


UTI


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UTIThe largest India mutual fund in the

country Set up by the government in 1964, Purpose to encourage small investors

in the equity market. UTIs extensive marketing network ofover 35,000 agents

Performance comparatively good thanSensex trend. However, the samecannot be said of all mutual funds inthe Mutual Fund Investment Indiascenario.



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In 1995, the RBI permitted privatesector institutions to set up MoneyMarket Mutual Funds (MMMFs).

They can invest in treasury bills,call and notice money,commercial paper, commercial

bills, certificates of deposit, anddated government securitieshaving unexpired maturity upto one

year.PREPARED BY MS.S.SANGEETHA, SENIOR LECTURER, KCTBS


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All Mutual Funds are allowed to applyfor firm allotment in public issues.

SEBI regulates the functioning of

mutual funds and it requires all MFs tobe established as trusts under theIndian Trusts Act.

The actual fund management activityshall be conducted from a separateasset management company (AMC).



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The minimum net worth of an AMC or its

affiliate Rs. 50 million to act as amanager in any other fund.

MFs can be penalized for defaults

including non-registration and failure toobserve rules set by their AMCs.

MFs dealing exclusively with moneymarket instruments have to be registeredwith RBI.

All other schemes floated by MFs arerequired to be registered with SEBI.


Sources of ST loans & credit


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Sources of ST loans & credit

Indigenous bankersTrade credit

Advances

A/cs receivable, factoring Deferred expense

Commercial Papers

Commercial Banks Public Deposits


The money market and the


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LowerInterest

rates

MoreCredit

HigherMoneySupply

EconomicGrowth

IncreasedDD

InflationSell Govtsecurities

Absorb

money

from

economy

y

financial world

To reducethe impact

Discourage

credit

HigherInterest

rates



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Modes of raising capital fromdomestic & foreign markets



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Raising of capital

Domestic Markets Foreign Markets

Modes of raising funds from domestic mkts

2 marketsMoney market; Capital market


Capital market structure


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Capital market structure

Govt securities

Primary Mkt

FinancialIntermediaries

SpecifiedFinancialInstitution

Debt marketEquity markets

Secondary Mkt

MBUnderwritersRegistrarsFIIs

Public

S/Es

NSEOTCEI

ICICI

IDBIIFCIGCILICUTI

MBMutual Funds

LeasingVCFactoring


Categories of capital


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g p

Long termcapital

Short termCapital

Foreign exchangeVentureCapital

Players in capital market

Cos issuing securities Financial intermediaries Investors

Components of capital mkt

Primary mkt Secondary market


International Financial Markets


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Money mkts/Exchange Mkts Creditmkts

Capital mkts Equitymkts

Exchange / Exchangerelated transactions

Deposit taking& lending

Issuance ofsecurities

Issuance ofIntl equities

Financial activities Come under the jurisdiction of

respective countryIntl transaction highly complex & require expertise inhandling

Financial mkt



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Capital Market Instruments The capital market generally consists of the

following long term period i.e., more thanone year period, financial instruments;

Equity segment Equity shares,Preference Shares, Convertible preference shares, Non-convertible preference shares etc andDebt Segment Debentures:Deep discount bonds etc



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Hybrid Instruments

Hybrid instruments have both the

features ofequity and debenture. Examples :

Convertible debentures, Warrants etc.


Mechanics & techniques of Forex Finance


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Finance

EnvtPrices

InflationRate

Exchange

Rates

Interestrates


Mechanics & techniques ofForex Finance


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Forex Finance Assets Mngt Cash mngt to intl cap budget at

home & abroad in domestic & fgn currencies

Liabilities Mngt borrowing relships &decisions in domestic & fgn currencies mkt ( ST&LT)

Exchange Risk mngt Measuring the effect ofexge rate , income & cash flows, managing therisk

Performance evaluation & control outsiders,Tax authorities & mngt


External financial mkt


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External financial mktMajor Compartments:

US JAPAN

GERMANY

SWITZERLAND

MINOR Compartments:

UKItaly

Spain

France

CanadaSweden

Finland

Australia

Denmark

Netherlands

Luxembourg

New Zealand


Functions- operational level


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Functions operational level

Raising forex finance

1. Official channels

2. Commercial channels- equity3. Commercial channels- debt

Managing forex finance




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OfficialChannels

Commercialchannels- Debt

Commercial

channels- Equity

Bilateral funding Arrangement

Multilateral financial Institutions

Euro Currency mkts

National financial mkts

Buyers / Suppliers Credit

Euro Equity issues

Off shore country Funds

Portfolio investments

FDI

A Japanese

company borrowing

U.S. dollars from

a bank in France is

using theEurocurrency

market.


Euro


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Belgium

Denmark Germany

Greece

Spain

France Ireland

Italy Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom United States



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Recent market developments


7 Changing External


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Recent marketdevelopments

1.Deregulation &Globalisation

2.Securitisation &Disintermediation

3.Financial

innovation

4.FinancialEngineering

5.AssetsLiability mngt

6.Banking Prudencethro Capital Adequacy

7.Changing Externalfinancing patterns


Newsbit (August 7, 2009)


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( g )

Tata power plans Rs 29300 cr capex Rs. 9800 cr internal accurals

Rs 18000 cr debt

It has raised USD 335mn from sale ofGDRs



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Capital Market Instruments


Financial instruments


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Financial instruments

Financial assets

contractualright to receive cash in thefuture and

Financial liabilities contractual obligation to

deliver cash in the future



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Spot market:

The closing of the transaction andthe delivery of the goods takeplace simultaneously or within ashort-term time span prescribedby the specific market.Uncertainty about delivery from

the other party is very limited,otherwise no transaction wouldtake place.



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Forward market

transaction is closed in the present settlement and delivery of goods are in the

future.

The delivery date and the price aredetermined at the closing of thetransaction.

Due to lapse of time the risk one ofthe parties might not be able to deliver atthe settlement date is higher than in thespot market.



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Futures market:

Contract to buy specific quantities of acommodity or financial instrument at

a specified price with delivery set at aspecified time in the future.


Difference between forwards and futures

Forwards Futures


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Forwards Futures

Trading

method

Privately traded Exchange traded

Delivery Settlement Date Mark to MarketBasis

Players Hedgers To eliminate

the volatility of anasset's price,

and delivery of theasset or cashsettlement will

usually take place.

Speculators beton the direction inwhich an asset's

price will move, they

are usually closed outprior to maturity anddelivery usually never

happensPREPARED BY MS.S.SANGEETHA, SENIOR LECTURER, KCTBS

DEBENTURES


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Document creates a debt or

acknowledges it. Form certificate

Issued Company's Common Seal.

Issued number of lenders.

Issued the assets of the Company.

The date of repayment is specified

No voting rights

Permission from shareholders before

raising debt PREPARED BY MS.S.SANGEETHA, SENIOR LECTURER, KCTBS

Example


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Tata Motors, the Indian group that ownsLand Rover and Jaguar, has approachedshareholders to ask for permission to

raise a 1.5 billion war chest to use onfurther acquisitions.

(In business, a war chestis a stash ofmoney set aside to deal with unexpectedchanges in the business environment )


KINDS OF DEBENTURES


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(a) Bearer Debentures: Registered

Payable to the bearer.

Negotiable instruments Transferable by delivery.

A B C (bears the instruments)

Company is liable to payCompany enters deal


Calculations:Nominal amount deposited (N) + Interest for the period.


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Example: A deposit ofRs 1 million is made on

1st

March for 90 days, and interest paid on theamount is 15% , the maturity value is calculatedas follows:

MV = N x (1 +( i/100 x d/365)); where MV =Maturity value ; N=Nominal amount of the certificate (amount

deposited); i=interest paid on the amount deposited, as

indicated on the certificate (referred to as thecoupon rate).

d =period of the instrument in days referred to asthe tenure



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N = Rs 1,000,000

c = 15/100d = 90 days


Rs


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Rs

Nominal amount 1,000,000

Interest for period

(15% x Rs1,000,000 x 90/365)

36,986

MV 1,036,986


The proceeds of the sale are calculated as follows:

Proceeds = MV / [1 + (d/365 x i/100)]; where


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MV = maturity valued = remaining tenure in days

i =yield at which the instrument was

traded expressed as a fixedamount

If the Debenture is sold on 31 March@ of 14%, the

proceeds to the seller (the amount the buyer will pay) is:Proceeds = Rs 1,036,986 = Rs 1,013,658

[1 + (60/365 x 14/100)]


Proceeds = Rs 1036 986 / [1 + (60/365 x 14/100)]= Rs 1013 658


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where

MV = Rs.1036986

d = 60i = 14

The buyer will be the new holder, and he may present the Debenture tothe bank on redemption date to receive the maturity value ofRs1,036,986 or sell it in the secondary market prior to maturity.


(b) Registered Debentures:


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Registered holder name appears both

on the debentures & Register of DebentureHolders

Transfer Re registration of Debenturesis warranted

Not negotiable instruments. Contains a commitment to pay the

principal sum & interest.PREPARED BY MS.S.SANGEETHA, SENIOR LECTURER, KCTBS


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Company

A

Principal &Interest

B

RER

EGISTERTH

ENAME

Maintainslist of

debentureholdersName in theRegister

Trans

fers

Registers the Namein debenturecertificate &

companys register

Recorded the change in the registration

Lends Amt

(c) Secured Debentures:


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Based on Asset

"bonds" and "debentures

In USA,

BOND is a long term contractwhich is secured,

Debentures is an unsecured one.

In India?

(d) Unsecured / Naked Debentures


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Without any charge on assetsare insecured or nakeddebentures.

The holders are like unsecuredcreditors and may see the

company for the recovery of debt.

(e) Redeemable Debentures:


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( )

Normally debentures areissued on the condition that

they shall be redeemed after acertain period.

They can however, bereissued after redemption.

(f) Perpetual Debentures:


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When debentures areirredeemable they arecalled perpetual.

Perpetual Debenturescannot be issued in Indiaat present.

(g) Convertible Debentures:


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If an option is given to convertdebentures into equity shares at thestated rate of exchange after aspecified period, they are called

convertible debentures.

Convertible Debentures have become

very popular in India. On conversion theholders cease to be lenders and becomeowners.

(g) Convertible Debentures:


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Example:

JM AB raise a debenture loan with anominal value not to exceed Swedishkrona 154,000,000 by issuing amaximum of 700,000 convertibledebentures, transferable as specifiedbelow, and with a term from June 15,

2007 through June 14, 2011

(h) Participating Debentures:


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They are unsecured corporate debt

securities

Participates in the profits of the company.

Interest or repayment of the debt wholeor in part dependent on

dividends to the shareholders,

fluctuations in the price of the company'sshares

the company's financial results and position.

(i) Convertible Debentures with options:


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They are a derivative of convertible

debentures with an embeddedoption

Flexibility issuer & the investorto exit from the terms of the issue.

The coupon rate is specified at thetime of issue.

(j) Third Party Convertible Debentures:

All th i t t b ib


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Allows the investor to subscribe

to the equity of third firm at apreferential price ( the market

price)

Interest rate is < than puredebt on account of theconversion option.

(k) Convertible-Debentures Redeemable at a Premium:


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(k) Convertible-Debentures Redeemable at a Premium:

Convertible Debentures areissued at face valuewith 'a putoption entitling investors to sell

the bond to the issuer at apremium.

Similar to convertible debenturesbut embody less risk.

(I) Debt-Equity Swaps:


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( ) q y p Debt-Equity Swaps are an offer from an

issuer of debt to swap it for equity.The instrument is quite risky for the

investor because the anticipated capital

appreciation may not materialise.

A firm may be in financial trouble and adebt/equity swap could help avoidbankruptcy, or the company may wantto change capital structure to takeadvantage of current stock valuation.

(m) Deep discount Bonds:


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Long term funds requirements of the issuer Investors doesnt expects immediate returns and

Can be sold with a long maturity of25-30 yearsat a deep discount on the face value ofdebentures.

Example:

IDBI deep discount bonds for Rs 1 lakhrepayable after 25 yearswere sold at a discountprice of Rs. 2,700.

(n) Zero-Coupon Convertible Note:


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A zero-coupon convertible note

converted into shares.

If choice is exercised investors forego all

accured and unpaid interest. Liquid Yield Option Notes (LYONs), one

variety of these securities, have bothA conversion feature

a put option allowing the holder to sell the bondsback to the issuer.

(o) Secured Premium Notes (SPN)with Detachable Warrants:


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SPN which is issued along with adetachable warrant,

Redeemable after a notice period,

say 4 to 7years.The warrants attached to it ensures

the holder the right to apply and getallotted equity shares; provided theSPN is fully paid.


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No interest will be paid for an invested amount

lock-in period. Option to sell back it to the company at par value

after the lock in period.

If the holder exercises this option, no interest/

premiumwill be paid on redemption. If SPN holder holds repayment of the principal

amount + additional amount of interest/ premiumon redemption in installments as decided by the

company. The conversion of detachable warrants into equity

shares done within the time limit notified bythe company.

(p) Floating Rate Bonds:


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The rate on the floating Rate Bond is linked to abenchmark interest rate like the prime rate inUSA or LIBOR in eurocurrency market. If ratesare fixed:

When rates are fixed, they are likely to beinequitable to the borrower when interestrates fall subsequently, and the samebonds are likely to be inequitable to the

lender when interest rates risesubsequently

Floating rate notes

Floating rate notes (FRNs) are bonds that have


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g ( )a variable coupon, equal to a money market

reference rate, like LIBOR or federal funds rate,plus a spread. The spread is a rate that remainsconstant.

Almost all FRNs have quarterly coupons, i.e. they

pay out interest every three months, thoughcounter examples do exist.

At the beginning of each coupon period, thecoupon is calculated by taking the fixing of the

reference rate for that day and adding thespread.

A typical coupon would look like 3 months USDLIBOR +0.20%.

Zero-interest Fully Convertible Debentures (Fcds)

Th i t i i t t f ll tibl


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The investors in zero-interest fully convertible

debentures will not be paid any interest.However, there is a notified period after whichfully paid FCDs will be automatically andcompulsorily converted into shares.

There is a lock-in period upto which no interestwill be paid. Conversion is allowed only for fullypaid FCDs. In the event of the company going forrights issue prior to the allotment of equityresulting from the conversion of equity sharesinto FCDs, FCD holders shall be offeredsecurities as may be determined by the company.

Secured Zero-interest Partly Convertible Debentures(PCDs) With Detachable And

Separately Tradeable Warrants:


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This instrument has two parts: A and B.

Part A is convertible into equity shares at afixed amount on the date of allotment.

Part B is non-convertible, to be redeemed

at par at the end of a specific period fromthe date of allotment.

Part B will carry a detachable andseparately tradeable warrant which will

provide an option to the warrant holder toreceive equity shares for every warrantheld at a price as worked out by the

company

FULLY CONVERTIBLE DEBENTURES(FCDs) WITH INTEREST (OPTIONAL)


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This instrument does not yieldinterest in the initial period of say,6 months.

After this period option is given tothe holder of FCDs to apply forequity at a "premium" for which

no additional amount needs to bepaid.

INCOME BONDS:


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Here interest is paid only when cash

flows are adequate. Income Bonds are like cumulative

preference shares on which the fixed

dividend is not paid if there is noprofit in a year, but is carried forwardand paid in the following year.

On Income Bonds, there is nodefault if interest is not paid.

ASSET-BACKED SECURITIES:


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FirmsHP/ lease

financiers

Credit

rating

SPV Investors/ public

Receive loans submitting Collateral Securities

and pays interestThree years maturity Period

Provides loans based on Collateral Securities

Three years maturity Period

Submits documents gets immediate funds

Converts into shares

Gets credit rated from rating

Agency

Purchases the

Shares

Receives dividend

from

SPV for three years

Receives int from Financiers

JUNK BONDS:

J k B d i hi h i k hi h i ld b d t


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Junk Bond is a high risk, high yield bond to

finance either a leveraged buyout (LBO), amerger of a company in financial distress.Coupon rates range from 16 to 25 per cent.

Old line established companies which wereinefficient and financed conservatively wereobjects of take over and restructuring.

To finance such take-over, high yield bonds

were sold. Attractive deals were put togetherestablishing their feasibility in terms ofadequacy of cash flows to meet interestpayments.

JUNK BONDS:


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Michael Milken (the JUNK BOND KING) of DrexelBuraham Lambert was the real developer of themarket.

The junk bond market was tarnished by the fines($ 650 million) levied in 1989 on the investmentbanking firm Drexel Burnham Lambert forvarious Securities Law violations and thus was

forced into bankruptcy in 1990 and theindictment of Milken in 1990 on charges of fraud$ 600 million fines and penalties.

SEBI GUIDELINES FOR DEBENTURES

F ll C ibl D b (FCD)


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Fully Convertible Debentures (FCD):

SEBI restricts theConversion period 36 months.

Credit rating is required if the conversion after 18months.

Conversionbeyond 36 months is permissible only if theconversion is made optional with "put" and "call" option. Itmay be noted that an option is merely an instrument that

gives its owner the right to buy or sell shares of a companywithin a specified period of time.

Options are a derivative instrument which have a

beneficial impact all round

SEBI GUIDELINES FOR DEBENTURES


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They stabilise share price by reducing its volatility andprovide a hedge against risk for the investor.

They are likely to be popular in this country.

Premium on Conversion of Debentures:Premium on conversion has to be predetermined andstated in the prospectus.

The company is free to determine the rate of interestpayable.

Conversion Option:


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Any conversion in part or whole of thedebenture will be optional at the hands ofthe debenture holder, if the conversion takesplace at or after 18 months from the dateof allotment butbefore 36 months.

Usance


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Commercial Paper should be issued for aminimum period of three months andmaximum of one year (with effect fromOctober 1993).

No grace period is allowed for paymentand if the maturity date falls on a holiday itshould be paid on the previous working

day.

Every issue of commercial paper is treated asa fresh issue.

ConclusionI I di k t i l t d b R b k f I di


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In India money market is regulated by Reserve bank of India

and Securities Exchange Board of India (SEBI)regulates capital

market.

Capital market primary market & secondary market. Primary mkt:

Initial offer to the public

Secondary market: All secondary market transactions secondary market. Secondary market equity markets and the debt markets. In the secondary market transactions BSE and NSE