Merchant Banking & Financial services

Topic:Capital Market InstrumentsPresented By-Sneha NayakMBA(D2F-01)

ISBS

Example:

CAPITAL MARKETThe term capital market refers to the institutional

arrangements for facilitating the borrowing and lending of long-term funds.

According to P.K.Dhar, ”This is not a market for capital goods;rather it is a market for raising and advancing money capital for investment purposes.

The market where investment instruments like bonds, equities and mortgages are traded.

Functions:Allocate Functions:Capital market allows for channelization of savings of innumerable

investors in various productive avenues of investments.The market attracts new investors who are willing to make new funds available to business.

Liquidity Function: It provides a means whereby buyers and sellers can exchange securities at

mutually satisfactory prices.This allows better liquidity for the securities that are traded.

Other Functions:1.Indicative Function:A capital market acts as a barometer showing not

only the progress of a company,but also of the economy as a whole through share price movements.

2.Savings & Investment function:Capital market provides a means of quickly converting long term investment into liquid funds,thereby generating confidence among investors and speeding up the process of savings and investment.

3.Transfer Function:Capital market facilitates the transfer of existing assets-tangible and intangible-among individual economic units or groups.

4.Merger Function:Capital market encourages voluntary take-over mechanism to put the management of inefficient companies into more competent hands.

Importance:Capital market serves as a reliable guide to the performance and

financial position of company.

Continuous valuation of companies as reflected in the share price and the implied possibility of merger and takeovers.

Stock market promotes growth through the creation of liquidity.

Stock market at times helps companies to obtain equity finance in the absence of loans from money market.

Capital Market InstrumentsPreference SharesEquity SharesNon-Voting SharesConvertible-Cum-DebenturesFixed DepositsWarrantsDebenturesBonds

Preference SharePreference shares are those which carry

-A preferential right as to the payment of dividend during the lifetime of the company

-A preferential right as to the return of capital when the company is winding up.

These shares carry a right of dividend at a fixed rate before any dividend can be paid on equity shares.

The fixed rate of dividend payable is declared at the time of the issue of such shares

Classification Of Preference Shares1.Cumulative Preference Shares2.Non-Cumulative Shares3.Convertible Preference Shares4.Redeemable Preference Shares5.Ir-redeemable Preference Shares6.Cumulative Convertible Preference Shares(CCPS)

Cumulative & Non-CumulativeThe holder of Cumulative preference shares are entitled

to recover the arrears of preference dividend before any dividend is paid on equity shares.

In case of Non-Cumulative preference shares,the dividend does not accumulate.If there is no profit or inadequate profit in the company in a particular year,the company does not pay it.

Convertible Preference Shares:The convertibility feature makes the preference share a more attractive investment security.

Redeemable Preference Shares:If there is a provision in the Articles of Association,redeemable preference shares can be issued.

Ir-redeemable Preference Shares:This type of shares is not redeemable except on occasions like winding up of business.In India,this type of shares was permitted till 15th June-1988.Introduction to Section 80A of Companies Act-1956 put an end to it

Cumulative Convertible Preference Shares:This concept was introduced by the government in 1984.This preference share gives a regular return of 10% from 3 years to 5 years and then converted into equity as per the agreement.

Equity SharesAn equity share, commonly referred to as ordinary share

also represents the form of fractional or part ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights.

Classification Of Equity ShareBlue Chip Shares(Large & well established Companies)Growth Shares(Fair Position with Average growth)Income Shares(Fair positions with limited growth

opportunities)Defensive Shares(Relatively unaffected of ups and

downs)Speculative Shares(Tend to fluctuate because of

speculative trading)

Non-Voting SharesNon Voting shares carry no voting rights.They carry

additional dividends instead of voting rights.The idea was discussed in 1987 but implemented by the

Finance Ministry in the year 1994.These share holders have right to participate in the

bonus issue.They can also be listed and traded in stock exchange.

All rights and bonus share for the non voting shares have to be issued in the form of non-voting shares only.

Fixed DepositsIt is an investment option offered by the Financial institution

or NBFC’s that earns a fixed rate of return over a period of time.The return are usually higher than the Bank’s FD,therefore these are considered s bit risky.

When companies require money,they can offer deposits at attractive rate of interest to common public.Corporate Deposits are governed as per Sec 58A of Companies Act,however these are ‘’unsecured’’ loans.Companies that offer Fixed deposits are (NBFC),Manufacturing Companies,Housing Finance Companies,Financial Institutions.

WarrantsIt is a bearer document of title to buy specified number

of equity shares at a specified price.

Warrants are generally offered to make the bond or preferred stock offering more attractive.

The investor can sell the warrants separately and they can be traded in the market.

Classification of Warrants1.Traditional:The writer of traditional warrant is also

the issuer of the instrument.Warrants are issues in a such a way that the bonds look more attractive,and also the interest rate is reduced in order to sell the bond issue.

2.Equity warrants:a.Callable-Right to buy securities b.Putable-Right to sell securities3.Basket Warrants:It mirrors the performance of the

industry.Eg:Industry level

Detachable warrants:The warrant portion of the security can be detached from the debenture and traded separately.

DebenturesAccording to Companies Act 1956-‘’Debenture includes

stock,bonds and any other securities of company,whether constituting a charge on the assets of the company or not’’

Debentures are generally issued by the private sector companies as a long-term promissory note for raising loan capital.

Classification of Debentures1.Secured or Unsecured Debenture:It is secured by a lien on the company’s specific assets.In

case of default,the trustee can take hold of the specific asset on behalf of the debenture holders.

2.Fully Convertible DebenturesThis type of debenture is converted into equity shares of

the company on expiry of specific period.The conversion is carried out according to guidelines issued by SEBI.

Partly Convertible debenture:This Debenture consists of 2 parts:Convertible and Non-

Convertible.The Convertible portion can be converted into shares

after a specific period.Non-Convertible debentures do not confer any option on

the holder to convert the debentures into equity shares and are redeemed at the expiry of the specific period.

Cumulative/Non-Cumulative Debenture.Cumulative Debentures are those for which interest is

not paid during the tenure,but the interest gets accumulated and such amount is paid on the date of maturity,whereas normally debentures are non-cumulative and interest is paid generally annually during the tenure and the principle is paid at the end of the tenure at the time of redemption

BondsA bond is a debt security,in which the authorized issue

owes the holder a debt and is obliged to repay the principal and interest at a later date,termed maturity.

Bonds are issued by public authorities,credit institutions,companies and supranational institutions in primary markets.

The most common process of issuing bonds is through underwriting.

Types of BondsGovernment BondsCorporate BondsZero Coupon BondsTax Saving Bonds