SECURITY MARKET IN INDIA

SECURITY MARKET IN INDIA

  • Securities are financial instruments issued to raise funds via issue of bonds, debentures, mutual funds etc.
  • Security market is a component of the wider financial market where securities can be bought and sold on the basis of demand and supply
  • The primary function of the securities market is:
  1. To enable to flow of capital from those that have it to those that need it.
  2. To help in transfer of resources from those with idle resources to others who have a productive need for them.
  3. To provide channels for enhancing savings and investment in the economy.

 

DIFFERENCE BETWEEN DEBT AND EQUITY

 

BASIS DEBT EQUITY
Meaning Invest in loans. E.g. – Bonds, debentures. Invest in shares of the company.eg-shares.
Ownership NO, they are creditors of the company. YES, they have an ownership interest.
Risk Low risk High risk
Return Type Pay Interest  Share Dividends.
Nature Of Return Fixed and Regular Irregular (based on company performance)
Market Debt market Capital market
Claim During Liquidation First Claim Last Claim.
Tax Benefit Interest is tax deductible Dividend is not tax deductible.
Capital Gains Tax CGT is levied on the sale of equity Repayment of loans doesn’t attract CGT.
Convertibility Debt can be converted into equity. Equity can’t be converted into debt.
Attractive In slowdown period In Boom period.

 

TYPES OF FINANCIAL MARKETS

 

BASED ON TENURE

• MONEY MARKET

Maturity of less than one

year.

CAPITAL MARKET

Maturity of more than a year.

BASED ON FRESHNESS

• PRIMARY MARKET SECONDARY MARKET

BASED ON SETTLEMENT

•FUTURE MARKET Contract is made to buy/sell at specific price on a future date.

•SPOT MARKET-brough and sold for immediate delivery.

BASED ON ASSET

  • DEBT MARKET
  • EQUITY MARKET
  • COMMODITY MARKET • FOREIGN CURRENCY MARKET.

Important Terms Related To Financial Market

 

Money Market

 

The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of less than or equal to 365 days.
Capital Market

 

A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold.
Financial Market

 

A financial market is a market in which people  trade  financial  securities  and derivatives at low transaction costs.
Brokers

 

Broker is a registered member of a stock exchange who buys or sells shares/securities on his client’s behalf and charges a commission on the gross value of the deal – such brokers are also known as commission brokers. Brokers who offer services such as investment advice, clients’ portfolio planning, credit when a client is buying on margin other than their traditional commission job are known as full service brokers.
Jobbers

 

A jobber is a broker’s broker or one who specialises in specific securities catering to the need of other brokers. A jobber is located at a particular trading post on the floor of the stock exchange and does buying and selling for small price differences, called the spread. He has no contact with the investing public.
Market-Maker

 

Functions as an intermediary in the market ready to buy and sell securities. He simultaneously quotes two-way rates – like a jobber basically with the only difference that he quotes two-way rates, for buying and selling at the same time.

 

Important Terms Related To Security Market

 

Scrip share

 

A share given to the existing shareholders without any charge—also known as bonus share.
Kerb dealings

 

The transactions of stocks which take place outside the stock exchanges—unofcially and take place after the normal trading hours.
Spread

 

The difference between the buying and selling prices of a share is called spread. Higher the liquidity of a share lower its spread and vice versa.  Also known as Jobber’s Turn or Margin or Haircut.
Penny stocks

 

The share which remains low-priced at a stock exchange for a comparatively longer period.
Sweet share A share given to the employees of the company without any charge.
Rolling settlement

 

An important reform measure started in the Indian stock market in mid-2001 under which all commitments of sale and purchase result into payment/delivery at the end of the ‘X’ days later.
Badla

 

When the buyers want postponement of the transaction—in Western world called  contango.
Undha badla

 

When the sellers want postponement of the transaction—also known as the reverse badla or backwardation

 

PRIMARY AND SECONDARY MARKET

 

PRIMARY MARKET/ NEW ISSUE MARKET SECONDARY MARKET/ STOCK EXCHANGE
Here, issuers raise capital by issuing securities to investors for the first time. It facilitates trade in already-issued securities only.
The primary market creates financial assets. The secondary market makes the assets marketable.
Securities are sold by the company directly or through an intermediary. Company is not involved at all. Ownership of existing securities is exchanged between investors.
The primary market promotes capital formation directly- as the flow of funds is directly from savers to investors. This promotes capital formation indirectly by enhancing the liquidity of the shares.
Only buying of securities takes place here, securities can’t be sold here. Both buying and selling takes place here.
Prices are decided and determined by the company Prices are determined by the demand and supply of the security.
There is no fixed geographical location. Located at specified places.

 

INITIAL PUBLIC OFFER
  • IPO is the selling of securities to the public in the primary market.
  • Through an IPO, an unlisted company can get listed on the stock exchange.
  • It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.

 

ISSUERS IN THE INDIAN SECURITY MARKET
  • Issuers are organizations that raise money by issuing securities. They issue securities based on their need, their ability to service the securities.
  • Some of the common issuers in the Indian Securities Markets are:

 

  • A Mutual Funds
  • Central and State Govt.
  • Local Govt. and Municipalities
  • Financial Institutions and Banks
  • Public Sector Companies

 

STOCK EXCHANGE
  • A Stock Exchange is a marketplace, where financial securities issued by companies are bought and sold, after they have been issued in the primary market.
  • In India BSE and NSE are two main stock exchanges:

 

BOMBAY STOCK EXCHANGE (BSE) NATIONAL STOCK EXCHANGE (NSE)
It is Asia’s first stock exchange established in 1875 NSE is the biggest stock exchange in India established in 1992
The benchmark index for BSE is the Sensex. The benchmark index for the NSE is the Nifty
The BSE’s Sensex comprises of 30 companies NSE’s Nifty comprises of 50 companies

 

ROLE OF STOCK EXCHANGES
  • Providing Liquidity and Marketability for the securities which are traded.
  • Responsible for evaluation of stock prices- based on demand and supply of stock.
  • Safeguards investors- There is a proper checks and balance in the exchange.
  • Contributes to Economic Growth.
  • Acts as barometer for a country’s economy.
  • Broader range of investment avenues.
  • Providing Scope for Speculation within the provisions of law

 

COMMODITY TRADING
  • Commodity exchanges trade in futures contracts in commodities such as food, energy or metals
  • They are risky investment as their market is impacted by uncertainties such as unusual weather, epidemics, and disasters etc.

 

National Commodity And Derivatives Exchange Limited (NCDEX) ·         NCDEX is an online commodity exchange, dealing primarily in agricultural commodities in India under the regulatory authority of the SEBI.
 

NCDEX- AGRIDEX

  •          India’s first tradable agricultural commodities future index
  •          It tracks the performance of the 10 commodities traded on NCDEX platform.
  •          It will facilitate in hedging their commodity risk.
 

 

Multi Commodity Exchange (MCX)

 

  •         It is an online platform wherein commodities like gold, silver, lead, copper, zinc, crude oil, etc. are traded.
  •          It is the largest commodity futures exchange in India.
  •          Forward Markets Commission (FMC) was the regulator of MCX till 2015 after which FMC was merged with SEBI.

 

SPOT EXCHANGE/CASH/PHYSICAL MARKET
  • The spot market is a commodity/security market where goods are sold for cash and delivered immediately or within a short span of time. E.g.- Oil, coal etc.
  • Enables trading in a transparent way and better price discovery.
  • Trades are completed on spot.
  • It eliminates the scope of cartelization.

 

TYPES OF FOREIGN INVESTMENT

 

BASIS

 

FOREIGN DIRECT INVESTMENT FOREIGN PORTFOLIO INVESTOR FOREIGN INSTITUTIONAL INVESTORS
What? FDI is when a company takes controlling ownership in a business entity in another country. FPI is an investment by non-residents in Indian securities like shares, government bonds, etc.

FPI is more liquid and less risky than FDI.

When a foreign company buys equity in a company through stock market.
Where they invest? Invests in physical assets Invests in financial assets Invests in financial assets
Ownership Active ownership is there in FDI FPI consists of passive ownership. No control of the company.
Nature Brings long term capital, knowledge, skills and technology Brings short term capital. Brings short term capital
 

AIM

Aim to increase enterprise capacity or productivity or change management control Aim to increase capital availability Aim to increase capital availability
Where they flow? In primary market In secondary market In secondary market
Scope of speculation Does not tend to be speculative Tends to be speculative Tends to be speculative
Entry and exit Relatively difficult Relatively easy Easy
What are they eligible for? Profits of the company Capital gains Capital gains
Reflected in In the capital account of balance of payment (BOP) In the capital account of BOP. In the capital account of BOP.

 

FOREIGN DIRECT INVESTMENT (FDI)
  • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA).
  • There are two routes for FDI –
  • Automatic route: FDI is allowed without prior approval by Government/ RBI.
  • Government route: With Govt. approval
  • Investment is permitted through government route only in the following cases:
  1. An entity situated in a country which shares a land border with India.
  2. Where the owner of investment into India is situated in or is a citizen of any such country.
  3. Any transfer of ownership of any FDI in an entity in India leading in beneficial ownership falling within the purview of the above restrictions.
  • The Foreign Investment Facilitation Portal (FIFP), administered by the Department for Promotion of Industry and Internal Trade (DPIIT) UNDER MINISTRY OF COMMERCE facilitates the single window clearance of applications which are through approval route.

 

 

 

 

SECTORS WHERE FDI IS BANNED:

 

  •         Retail Trading (except single brand product retailing)
  •         Atomic Energy;
  •          Lottery Gambling and Betting including casinos etc.;
  •          Chit fund;
  •          Nidhi Company;
  •         Agriculture and Plantations (Other than Tea Plantations);
  •         Real estate/construction of farm houses;
  •         Manufacturing of Cigars/tobacco

 

 

  • India (2019-20) received the maximum FDI equity inflow from:

 

CREDIT DEFAULT SWAP

CDS is a credit derivative that can be used to transfer credit risk from the investor exposed to the risk (called protection buyer) to an investor willing to take risk (called protection seller).

 

PROTECTION BUYERS PROTECTION SELLERS
Hedge their credit exposure by making periodic payments to the protection seller. Participate in credit risk without owning the asset.
Transfer risk without transferring the underlying asset. Diversify his/her portfolio.

 

SECURITISATION
  • Securitization is a process by which a company clubs its different financial assets/debts to form a consolidated financial instrument which is issued to investors.
  • In return, the investors in those securities get interest.
  • This helps them get liquid cash out of assets that otherwise would be stuck on their balance sheets.
  • Derivates are generated by the process of securitization.

 

DERIVATIVE

A derivative is a financial security with a value that is derived from an underlying asset like stocks, bonds, commodities, currencies, interest rates, and market indexes.

 

TYPES OF DERIVATIVES

  • FORWARD
  • FUTURE
  • OPTIONS
  • SWAPS

 

FORWARD CONTRACT FUTURE CONTRACT
In this, buyer agrees to buy the underlying asset at a future date on a price agreed upon today.  It obligates the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price
Risk of Default No risk of default.
Customized contract Standard contract
Not traded in the exchange Traded in the exchange
Low liquidity High liquidity
Physical or cash settlement Only cash
Unregulated Regulated

 

OPTIONS:

This contract grants the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. Two types of options:

  1. Call option– gives the holder the right to buy a stock
  2. Put option– gives the holder the right to sell a stock.

 

SWAP CONTRACT:

Swaps are derivative instruments that represent an agreement between two parties to exchange a series of cash flows over a specific period of time.

 

TYPES OF SWAP

  • CURRENCY SWAP
  • INTEREST RATE SWAP

 

PARTICIPATORY NOTES/ P-NOTES
  • P-notes are Offshore Derivative Instruments (ODIs) issued by registered Foreign Portfolio Investors (FPIs) to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly.
  • P-notes have Indian stocks as their underlying assets.
  • Though P-note holders have less stringent registration requirements, they have to go through a proper due diligence process of the Securities and Exchange Board of India (SEBI).
  • Concerns:

 

  • Entering of illegal money in Indian markets /Round Tripping through P-notes.
  • Anonymity by PN notes are a huge challenge to SEBI.

 

DEBT INSTRUMENTS- BONDS

 

BOND:

  • In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
  • The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them  interest (the coupon) or to repay the principal at a later date, termed the  maturity date.
  • Bonds are fixed income instrument that represents a loan made by an investor to a borrower.
  • These bonds have a maturity date and when once that is attained, the issuing company needs to pay back the amount to the investor along with a part of the profit.
  • Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.

 

TYPES OF BONDS DESCRIPTION
Fixed Interest Bonds
  •          Debt instruments which get consistent coupon rates throughout their tenure irrespective of alterations in market conditions.
Floating Interest Bonds
  •          These bonds incur coupon rates which are subject to market fluctuations and elastic within their tenures.
Perpetual Bonds/Consol Bonds
  •          Issuers do not have to return the principal amount to the purchaser. This investment type does not have any maturity period, and customers benefit from steady interest payments for perpetuity.
Zero Coupon Bonds
  •          Are sold on discount and repurchased at face value, rendering a profit at maturity. It pays no interest as such.
Bearer Bonds
  •          A bearer bond is a fixed-income security that is owned by the holder, or bearer, rather than by a registered owner.
Municipal Bonds
  •         A municipal bond or muni bond is a debt instrument issued by municipal corporations or associated bodies, state and local governments.
 

Inflation Indexed Bonds

  •         Are debt market securities offered by the government to protect the savings from inflation and offer positive real rates of returns. The principal and interest is linked to WPI/ CPI.
 

Sovereign Gold Bonds-

 

  •          SGB are gold denominated and are substitute for holding physical gold issued by the RBI on behalf of GOI.
  •          Help in reduction of the current account deficit and maintaining the balance of payments.
 

Negative Yield Bonds-

 

  •          Debt instruments that pay the investor a maturity amount lower than the purchase price of the bond.
  •          They attract investments during uncertain times as investors look to protect their capital from significant erosion.
 

Masala Bonds

 

  •          Introduced in India in 2014 by International Finance Corporation (IFC).
  •          They are bonds issued outside India by an Indian entity or corporate.
  •         Rupee denominated bonds.
  •          The risk goes directly to the investor.
 

 

 

Special Zero-Coupon Recapitalisation Bonds

  •          These are special types of bonds issued by the Central government specifically to a particular institution.
  •          Only those banks, whosoever is specified, can invest in them, nobody else.
  •          It is not tradable, nor transferable.
  •          It is limited only to a specific bank, and it is for a specified
  •          period.
  •          It is zero coupon, issued at par and will be paid at the end of the specified period.
  •          The issuance of these special bonds will not affect the fiscal deficit while at the same time provide much needed equity capital to the bank

 

What Are Bonds Yields?

  • The yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed — it changes with the price of the bond.

 

What Is Yield Curve ?

  • A yield curve is a graphical representation of yields for bonds (with an equal credit rating) over different time horizons. Typically, the term is used for government bonds — which come with the same sovereign guarantee. So the yield curve for US treasuries shows how yields change when the tenure (or the time for which one lends to the government) changes.

 

Yield Inversion?

  • Yield inversion happens when the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond.
  • A yield inversion typically portends a recession. An inverted yield curve shows that investors expect the future growth to fall sharply; in other words, the demand for money would be much lower than what it is today and hence the yields are also lower.

 

OTHER BONDS:

 

ISSUER BORROWING FROM IN CURRENCY CALLED AS
NON-CHINESE CHINA RENMINBI PANDA BONDS
NON- AUSTRALIAN AUSTRALIAN AUSTRALIAN DOLLAR KANGAROO BONDS
NON-INDIAN INDIA RUPEE MAHARAJA BONDS
INDIAN OR NON-INDIAN ON BEHALF OF INDIANS OUTSIDE INDIA RUPEE MASALA BONDS

 

INVESTMENT FUNDS

 

Basis Mutual Funds Real Estate Investment Trust (REITS)/ Infrastructure Investment Trust (INVIT)
 

MEANING

A mutual fund is an asset management company that brings together money from many people and invests it in stocks, bonds or other assets. Is like a mutual fund, which enables direct investment of small amounts of money in infrastructure/real estate to earn a small portion of the income as return.
Investment in Securities of listed entities Real estate property or infrastructure project.
Stock Securities Income generating projects.
Period Continuous buying and selling, relatively short period. Investments for long period of time say 10-15 years.
Exit Can be redeemed anytime, easy exit. On closure of scheme can be sold at stock exchange at quoted value.

 

 

 

 

 

 

 

 

Bharat Bond Electronic Traded Fund-

 

•          Aim- to create an additional source of funding for PSUs

•          First corporate Bond ETF in India.

•          Fixed maturity period.

•          No Lock in period.

Hedge Funds An investment company that invests its clients’ money in alternative investments to either beat the market or provide a hedge against unforeseen market changes.
 

 

 

Alternative Investment Funds

 

•          Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, define AIFs as any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).

•          AIF are classified as under by SEBI:

Ø  Category I– AIF which invest in areas Govt. considers economically and socially viable like Venture capital funds (Including Angel Funds), Social Venture Funds, Infrastructure funds. SEBI norms are lighter.

Ø  Category II– Private equity funds or debt funds

Ø  Category III –  AIF such as hedge funds or funds which trade with a view to make short term returns and take excessive risk. SEBI norms are much stricter.

Sovereign Wealth Fund

 

•          It is a State-owned investment fund, where in central bank/govt. park their surplus fund. Pooled/parked money is used for investment.

•          E.g. Singapore’s GIC sovereign wealth fund Etc.

 

VENTURE CAPITAL FUNDS
  • VCF is an investment fund that manages money from different investors seeking to provide capital in Startup and small and medium-size enterprises that have strong growth potential.
  • According to SEBI, VCF is a fund established in the form of a trust/company including a body corporate and registered with SEBI. The VCF will have dedicated pool of capital, raised in the specified manner and invested by following regulations of SEBI.
  • The objective of the venture capital financing is to invest in high-risk projects with the anticipation of high returns.

 

SOCIAL VENTURE FUND:
  • The National Innovation Council, in partnership with the Ministry of Micro, Small and Medium Enterprises (MSME), launched the India Inclusive Innovation Fund (IIIF), an impact investment fund that will invest in ventures catering to the country’s poor.
  • The Rs 500-crore fund, which will be registered under market regulator SEBI’s Alternative Investment Fund regulations as a Category –I venture capital fund, will invest in social ventures operating in areas such as healthcare, food, nutrition, agriculture, education and skill development, energy, financial inclusion, water, sanitation and employment generation.

 

Liquid Alternative Investments.

Funds which operate similarly to hedge funds but are regulated similarly to mutual funds are available and known as liquid alternative investments.

 

ANGEL INVESTORS VENTURE CAPITALIST
  •          Angel investor is an investor who provides financial backing to entrepreneurs for ‘starting their business’.
  •        Angel investors are usually found among an entrepreneur’s family and friends but they may be from outside also. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times – in exchange they may like owning share in the business or provide capital as loan.
  •          They are usually investing in the person rather than the viability of the business.
  •          Other than investible capital, these investors provide technical advices.
  •          They are focused on helping the business succeed, rather than reaping a huge profit from their investment.
  •          A venture capitalist (VC) is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake.
  •          This could be funding Startup ventures or supporting small companies that wish to expand but do not have access to equities markets.
  •          Venture capitalists are interested in profit of the company rather than in the person unlike angel investor.
  •          Venture capitalists are willing to risk investing in such companies because they can earn a massive return on their investments if these companies are a success.

 

 

ESG (ENVIRONMENT, SOCIAL AND GOVERNANCE) FUNDS
  • It is a kind of mutual fund. Its investing is used synonymously with sustainable investing or socially responsible investing.
  • While selecting a stock for investment, the ESG fund shortlists companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors.
  • The fund is regulated by Securities and Exchange Board of India (SEBI).
  • The first ESG mutual fund was launched by the State Bank of India – SBI Magnum Equity ESG Fund.

 

VIX- MEASURE OF MARKET VOLATILITY
  • VIX (Volatility index) is an index used to measure the near term volatility expectations of the markets.
  • Volatility signifies the rate and magnitude of change in the stock price or index value.
  • India VIX- was launched by National Stock Exchange (NSE) in 2010.
  • India VIX indicates the Indian market’s volatility from the investor’s perception.
  • Volatility and the value of India VIX move parallel. i.e. a spike in the VIX value means the market is expecting higher volatility in the near future and vice versa.

 

DEPOSITORY RECEIPTS
  • Depository Receipts are negotiable financial instrument issued by a company in a foreign jurisdiction.
  • It is a mechanism for raising funds by tapping foreign investors who otherwise may not be able to participate in the domestic market.

 

TYPES OF DEPOSITORY RECEIPTS:

 

PARAMETERS GLOBAL DEPOSITORY RECEIPT (GDR) INDIAN DEPOSITORY RECEIPT(IDR) AMERICAN DEPOSITORY RECEIPT(ADR)
Negotiability GDR is negotiable all over the world. IDR is negotiable only within India. An American depositary receipt (ADR) is a certificate issued by a U.S. bank that represents shares in foreign stock. ADRs are denominated in U.S. dollars
Issued in European countries India America
Purpose Helps companies to acquire resources all over the world. To help the foreign companies to acquire the resources of India. ADRs represent an easy, liquid way for U.S. investors to own foreign stocks.
Listed in A GDR is listed in LSE An IDR will be listed in NSE. ADR is listed on American stock exchanges.
Application GDR will be applied by companies all over the world including India. The Indian companies will not apply for Indian Depository Receipt. The companies located in foreign countries can get registered on American Stock Exchange.

 

SOME TERMS RELATED TO SECURITY MARKET
  • SOCIAL STOCK EXCHANGE– A SSE is a platform where social enterprises can raise funds from the public under the regulatory ambit of SEBI.
  • OPERATION TWIST– RBI’s simultaneous sales and purchases of government securities, sale of short-term securities to buy long-term government debt instruments, to bring long term yields lower.
  • Under this mechanism, the short-term securities are transitioned into long-term securities.
  • Operation Twist was first used in 1961 by the US Federal Reserve (central bank) as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
  • Impact– people can avail long-term loans (such as buying houses, cars or financing projects) at lower rates. This will lead to a boost in consumption and spending in the economy which in turn will revive the growth.
  • PUBLIC CREDIT REGISTRY
  • PCR is a database of credit information for India that is accessible to all stakeholders.
  • Helps banks in credit assessment and pricing and making risk-based provisioning.
  • Y M Deosthalee committee suggested PCR.
  • INSIDER TRADING- It is a malpractice where trade of securities is done based on non-public information/confidential information. It is illegal.
  • UNDERWRITER- An individual or an institution who undertakes the risk associated with investment/loan in lieu of a premium.
  • HEDGING- It is a financial strategy for risk management to offset/minimize/reduce the losses in investments due to adverse price movements.
  • DATED SECURITIES – Long term securities or bonds of the government that carries a fixed or floating coupon (interest rate). Securities are issued by the government (centre or state) for mobilizing funds. The interest payment is fixed and is a percentage of the face value of the security. Interest is paid at regular intervals (usually half-yearly). The tenor of dated securities can be up to 30 years. But the most common tenure is five year and ten year.
  • GILT EDGED SECURITIES– Government securities are instruments issued by the government to borrow money from the market. They are also known as gilts or gilt edged securities. “Government security” means a security created and issued by the Government. They have zero income default. There is high rate of return. There is cent per cent liquidity.
  • Short term government securities are Treasury bills. They have a maturity of less than one year. There are three main treasury bills in India – 91 day, 182 day and 364 day.
  • Long term government securities are known as government bonds or dated securities. They have a maturity period of five years, ten years, fifteen years etc.
  • SOVEREIGN BONDS – A sovereign bond is a specific debt instrument issued by the government. They can be denominated in both foreign and domestic currency. Just like other bonds, these also promise to pay the buyer a certain amount of interest for a stipulated number of years and repay the face value on maturity. The Yield of the bonds are dependent on primarily 3 factors:
  1. Creditworthiness– the issuing countries’ perceived ability to repay their debts; this can be obtained from rating agencies
  2. Country risk– external/internal factors like unrest and wars tend to jeopardize a country’s ability to pay off their debts
  3. Exchange rates– in cases where bonds are issued in foreign currency, fluctuations in exchange rate may lead to increased pay out pressure on the issuing government
  • REDEEMABLE BOND – A callable bond, also known as a redeemable bond, is a bond that the issuer may redeem before it reaches the stated maturity date. A callable bond allows the issuing company to pay off their debt early.
  • SOCIAL IMPACT BONDS – A Social Impact Bond is also called pay-for-success bond or pay-for-success financing. A Social Impact Bond is basically a contract with public sector authority where it pays for better social outcomes. It is a form of outcome-based contracting. It aims at improving social outcomes for a specific group of citizens.

 

Authorised Capital It is the maximum number of shares a company is legally allowed to issue
Issued Capital Shares that have actually been issued by the company to the shareholders.
Subscribed Capital A portion of the authorized capital that potential shareholders have agreed to purchase from the company’s treasury.
Paid Up Capital Portion of the subscribed capital for which the company has received payment from the subscribers.

 

REGULATORS

 

 

SEBI:

•          Statutory body established in accordance with SEBI Act, 1992.

•          To protect the interests of investors, regulate the market.

•          It is a quasi-legislative and quasi-judicial body

•          SEBI Act grants wide discretion to SEBI for subordinate legislation.

 

 

Financial Stability And Development Council (FSDC)

 

•          It is a non-statutory apex council under the Ministry of Finance.

•          The Raghuram Rajan committee (2008) on financial sector reforms proposed the creation of FSDC.

•          Composition- It is chaired by finance minister.

•          Members are:

Ø  Chairperson of IBBI

Ø  Heads of all Financial Sector Regulators – RBI, SEBI, PFRDA & IRDA

Ø  Minister of State for the Department of Economic Affairs

Ø  Secretary of Finance, DEA, Revenue Secretary etc.

Ø  Chief Economic Adviser

 

 

 

 

Financial Action Task Force (FATF)

 

•          Inter-governmental body established in 1989 during G7 summit.

•          To set standards and promote implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

•          Secretariat: OECD headquarters in Paris.

•          India became member in 2010.

•          FATF has two list:

Ø  Grey List: Countries that are considered safe haven for supporting terror funding and money laundering. EX: Pakistan

Ø  Black List: Countries known as Non-Cooperative Countries or Territories (NCCTs) are put here. These countries support terror funding and money laundering activities. EX: Iran, North Korea

Financial Stability Board •          Brainchild of G20. FSB promotes international financial stability by coordinating national financial authorities and international standard-setting bodies.

 

International Organisation Of Securities Commissions (IOSCO)

 

•          An international body that brings together the world’s securities regulators.

•          IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation.

•          It works with the G20 and the Financial Stability Board (FSB) on the regulatory reform globally.