OCR Financial Market Notes PDF

Notes Financial Market 1.0 Introduction& Structure of financial markets inIndia 1.1 What isa Financial Market? 1.2 Structure of Financial Market in India 2.0 Money Market 2.1What isa Money Market? 2.2 Money Market Instruments 2.2.1 Call/Notice Money 2.2.2 Treasury Bill...

Notes Financial Market 1.0 Introduction& Structure of financial markets inIndia 1.1 What isa Financial Market? 1.2 Structure of Financial Market in India 2.0 Money Market 2.1What isa Money Market? 2.2 Money Market Instruments 2.2.1 Call/Notice Money 2.2.2 Treasury Bill 2.2.3 Commercial Bill 2.2.4 Commercial Paper 2.2.5 Certificate of Deposit 2.2.6 Cash Management Bill 2.2.7 Money Market Mutual Funds Discount and Finance House ofIndia (DFHI) 3.0Capital Market 3.1What is a Capital Market? 3.2 Primary Market 3.2.1 What isa Primary Market? 3.2.2 Functions of Primary Market 3.2.3 Major Reforms in the Primary Market Post 1991 3.2.4 Issue Mechanism inPrimary Market 3.2.5 Public Issue 3.2.6 Right Issue 3.2.6 Bonus Issue 3.2.7 Private Placement 3.3Secondary Market 3.3.1 What is Secondary Market? 3.3.2 Functions of Secondary Market 3.3.3 Major Reforms in the Secondary Market Post 1991 3.3.4 Margin Trading 3.4 Stock Exchanges inIndia 3.4.1 National Stock Exchange  3.4.2 Bombay Stock Exchange 3.5Stock Inrlices 3.5.1 What isa Stock Index? 3.5.2 Types ofStock Indices 3.53 Importance of Stock Indices 3.5.4 Index Weightii g Mett›ods 3.5. a Mai ket Capitaliz ation Weiqi tint 3. 6 Classifi‹:atioi of Smacks 3.5C SENSEX Vs NIFTY 3.5.7 So ise InnovativeI nrIices inI nrJia 3.6 De|sository Receipts 3.G.1 What areDe\›ository Recei;sts? 3.6.2 Ai ierican Depositoiy Receipt (ADR) 3.G.3 fiIot›aI Detaository Recei}at (GDR) How areADRs/GDRs Issued by an Indian Company? 3.G.4Indian Depository Receipt (IDR) How are IDRs Issued bya Foreign Company? 3.7 M rite ml Frw rIs 3.7.1 WI at isa M ritual Fund? 3.7.2 I-li loiy cl Mrilrial L-rinds in India 3.7.3 Ofganizntional Struclure of Mutrinl Funds in India 3.74 Ty\›es of Mutual Funds Based on Maturity Period Based on Investment Objective Based on Risk Specialized Schemes 3.7.5 Exchange-traclec! Flinch (ETFs) 3.76 Real Estate lnvesti ietI Trusts (RE ITS) 3.7.7I nfrasti ucture Investment Trriels (lnvlTs) 3.7.8 Bhni at 22 3.8P articinatory Notes +0 DEBT MARKET A. 1 What isa Debt Market?.2 Goveinn em Secrii ivies Mai kev 4.3 C ortJoi ate B‹JI1(.) Mai key A. 3.1 Typ es of Bonds/ Deben\rtres 4.32 DeetJ DiSC(GUII Boi›cIs (D DBA) 4.3.3 Junk Bonds 4.3.4 Municipal Bonds 4.3.5 Inflation-indexed Bonds 4.4Masala Bonds 4.5External Commercial Borrowings  4.51 What is Extei nal Cun icercial Borrowing (ECB)? 4.5.2 Types ofECBs 5.3.3 Routes to access ECB ñ.5.4 ECB Framework.5 6 Minimum Average Maturity Period (MAMP) 4.6foreign Currency CoI1vei tible Bonds 4.b.1 What isa Foi ei¿n Chii encyC onvertihle Bond (f-CCB)? A.6.3 Major Drawbacks ofFCCBs 4.7FureiJn C ri reilcyE xClsaM¿eaI›Ie Bonrls A.7.1 What isa Foreign CurrencyE xchangeable Bones (FCEB}?.7.2 Diffei ence Ioetwee‹s FCCB SUCH FCEB 4.8BoMcf Incientriie 4.5 boiscl Yielrl 9 1 Ty{›es of Bond Yield 4.9.2 Yielrl Spreacl.9.3 YielrJ Curve 4.10 Tyler oT Risks in Rooms DERIVATIVES MARKET 5. 3 What isa Del ivative? 5.2H istory of rlci ivativesin I ndin 5.3 Tyt›es of Dei ivative Contracts 5. 3.1 Forwards 5.3.2 FLitui es 5 3 3 Options Types of Options 5. 3.4 Swaps 5.AM nrginin Del ivatives Trarli nrg 6.0 COMMODITY MARKET G. 1 What isa Coiwizsouity Mai ket? 6.2 History ofC oi«nsocIiIies Market G.3 Types ofCommodities FOREIGN EXCHANGE MARKET 7 1 What iS the' PUi eignE xcIian¿e Market? 7 2 E solution of +oi ex Ma kei inI ncIia 7 2 1 ReJ r›Ir lien of F0rexu IlJrlit\ 7.2.2 Evolution of India's Exchange Rate Policy 7.3 ForeignE xctsange Managensenl Act (FEMA), 1999 7.31 Introduction 7.32 Capital Account and Current Accor ntTransactions 7.3.3 Authorised Person under FEMA  7.3.4 Liberalised Remittance Scheme (LRS) 7.4What is an Exchange Rate? 7.4.1 Fixed Exchange Rate System 7.4.2 Advantages ofa Fixed Exchange Rate System 7.4.3 Disadvantages ofa Fixed Exchange Rate System 7.4.4 Floating Exchange Rate System 7.4.5 Advantages ofa Floating Exchange Rate System 7.4.6 Disadvantages ofa Floating Exchange Rate System 7.4.7 Managed Floating 7.5 Changes in the Value of Currency 7.5.1 Currency Appreciation 7.5.2 Currency Depreciation 7.5.3 Currency Devaluation 7.5.4 Currency Revaluation 7.6 Functions of Foreign Exchange Market 7.6.1 Transfer Function 7.6.2 Credit Function 7.6.3 Hedging Function 7.7 Purpose ofForeign Exchange Market 7.7.1 Currency Conversion 7.7.2 Currency Hedging 7.7.3 Currency Speculation 7.7.4 Currency Arbitrage 7.8 Currency Quotation 7.8.1 Base Currency and Quote Currency 7.8.2 Direct& Indirect Quotation 7.9 Spot Rate, Cross Rate,& Forward Rate 7.10 Instruments in the Forex Market 7.10.1 Spot Contracts 7.10.2 Forward Contracts 7.10.3 Options 7.10.4 Futures 7.10.5 Swaps 7.11 Foreign Exchange Risk/Exposure 7.12 Foreign Currency Accounts Held by Resident Individuals 7.12.1 What isa Foreign Currency Account? 7.12.2 Types ofForeign Currency Accounts 7.12.3 Foreign Currency Accounts Outside India 7.13 FX-Retail 7.14 Foreign Exchange Operations in Commercial Banks 7.14.1 Foreign Exchange Department 7.14.2 Letter of Credit  7 14.3 Nostro& Vostro Accounts 7.15 Cr›i rency Convertibility 7.15.1 What is Currency Convertibilily 7.1B.2 Current AccountC onvertibility 7.15.3 Capital Account Convertibility 7.16 Special Drawii g R igl Is ”/. 16. 1 What is aie SDRs*? 7 1C.2S DR Currency Basket 8.0 CREDIT RATING AGENCIES 8.1What isC i erlitR ating? 8.2 \Nhat isa Creclit Rati‹sg Agency? 8. C i erT itR mink A;jencies inI nrfia 8.3 1 CRISIL 8.?.2 CARE Ratings 8.?.3 ICRA Limited 8.3.4 India Ratings& Research 8.35 SMERA ñ.4 C rerJit Br‹re ari 1.0 Introduction& Structure of financial markets inIndia 1.1 What is a Financial Market? A financial market is an infrastructure that facilitates the trade of financial securities. Financial securities include currency, bonds, stocks, derivatives, commodities, forex etc. A financial market consists of individual investors, financial institutions and other intermediaries who are linked by formal trading rules and a communication network fortrading the various financial assets and credit instruments. 1.2 Structure of Financial Market inIndia A financial market consists of two major segments: (a) Money Market; and (b) Capital Market.  While the money market deals in short-term credit, the capital market handles the medium term and long-term credit. Apart from these two, the other types of financial markets operating in India are- a Forex Market Bond Market Derivatives Market Commodities Market 2.0Money Market 2.1What is a Money Market? The money market isa market forshort-term funds, which deals in financial assets whose period of maturity is up to one year. The money market does notdeal in cash or money as such but simply provides a market forcredit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. 2.2Money Market Instruments In 1985, the Chakravarty Committee first underlined the need todevelop money market instruments in India. In I987, the Working Group on theMoney Market (Chairman: Shri N. Vaghul) laid the blueprint for the institution of money markets. 2.2.1 Call/Notice Money When money is borrowed/lent fora day, it is known as call (overnight) money. When money is borrowed/lent for more thana day and up to 14 days, it is known as notice money. It primarily serves the purpose of balancing the short-term liquidity position of banks. No collateral money isrequired to cover these transactions. Ji" ' I I i.ii i’ i i..Ii ”’ i I  Call money can be utilised by banks to meet their CRR requirements. 2.2.2 Treasury Bill A treasury bill (T-bill) isa promissory note issued by the RBI on behalf of the Government, to meet theshort-term requirement of funds. T-bills are presently issued in three tenors, namely, 91 day, 182 day and 364 day. T-bills are zero coupon securities and pay no interest. Instead, they are issued ata discount and redeemed attheface value at maturity. For example,a 91 day Treasury bill of T100/- (face value) may be issued at say T 98.20, that is, ata discount of say, T1.80 and would be redeemed attheface value of T100/- 2.2.3 Commercial Bill A commercial bill isa written instrument containing an unconditional order signed by the maker, directing to pay a certain amount ofmoney toa panicular person or to bearer of the instrument. It is drawn by theseller to the buyer forthe value of goods delivered by him. They arecalled trade bills until accepted by commercial banks aher which they are called commercial bills. 2.2.4 Commercial Paper A commercial paper isa short-term, negotiable, unsecured debt instrument issued in the form ofa promissory note. CPs were introduced in 1990 toenable corporate borrowers to raise short- term funds. CPs can be issued by highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs), and all-India financial institutions (Fls). A CP can be issued forperiod ranging from7 days toone year. CP can be issued in denominations of Rs.5 lakh or multiples thereof. 2.2.5 Certificate of Deposit A certificate of deposit (CD) isa negotiable, unsecured money market instrument issued bya bank asa Usance Promissory Note against funds J' '-› i" I I' IIi. I’- i ”' -iIi^i'I. '.  deposited at the bank for a maturity period up to one year CDs can be issued by scheduled commercial banks, RRBs, small finance banks, and All India Financial Institutions. CDs shall be issued only in dematerialised form and held witha depository registered with SEBI. CDs shall be issued in minimum denomination of Rs.5 lakh and in multiples thereof. The tenor ofa CD at issuance shall not be less than7 days and shall not exceed1 year. 2.2.6 Cash Management Bill The Government, in consultation with the RBI, introduced the CMB in 20I0. CMBs areshort-term money market instruments that assist the government in meeting short-term cash flow mismatches. CMBs havea maturity of less than 91 days. 2.2.7 Money Market Mutual Funds Money Market Mutual Funds (MMMFs) were introduced in India in April 1991 to provide an additional short term investment avenue toinvestors and to bring money market instruments within the reach of individuals. MMMFs areallowed to invest in rated corporate bonds and debentures witha residual maturity of one year. The minimum lock-in period for units of MMMFs wasrelaxed from 30 days to 15 days inMay 1998. MMMFs, which were regulated under the guidelines issued by the RBI, have been brought under the purview of SEBI regulations since March 2000. Discount and Finance House ofIndia (DFHI) Pursuant to the Vaghul Working Group recommendation forsetting up an institution to provide enhanced liquidity to the money market instruments, the RBI set up the Discount and Finance House ofIndia (DFHI) jointly with public sector banks and the all-India financial institutions. DFHI was incorporated in March 19BB and it commenced operation in April 1988. J' i" '-› I I' i.II I’ - i ”' -i. I'. i^ i 'I  The main objective of this money market institution is to facilitate smoothening of the short-term liquidity imbalances by developing an active secondary market for the money market instruments. DFHI participates in transactions in all the market segments, it borrows and lends inthe call, notice and term money market, purchases and sells treasury bills sold at auctions, commercial bills, CDs and CPs. 3.0Capital Market 3.1What is a Capital Market? Capital Market Primary Market Seœndary Market Capital Market isa market dealing in long-term funds. It is an institutional arrangement forborrowing long-term funds and which provides facilities for marketing and trading of securities. It constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. It consists of two different segments namely primary and secondary market. J i" ' I I i.ii i’  The primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market; whereas the secondary market providesa place forpurchase and sale of existing securities and is often termed as stock market or stock exchange. 3.2 Primary Market 3.2.1 What is a Primary Market? PRII*IARY MARKET STOCK TRADER COMPANY Primary market is the market fordealing in new securities, that is, securities which were notissued previously and are offered to the investors for the first time. It consists of arrangements, which facilitate the procurement of long-term funds by companies by making fresh issue of shares and debentures. 3.2.2 Functions of Primary Market The primary market performsa “triple service function" — 1. Origination - It refers to the work ofinvestigation, analyzing and processing of new proposals by specialist agencies. 2. Underwriting — It isa process by which investment companies undertake guarantee that the issues would be sold by eliminating risk arising from uncertainty of public responses. 3. Distribution - Sale of securities to the ultimate investors is referred to as distribution. Success ofan issue is determined by final issue to investing issue. 3.2.3 Major Reforms inthePrimary Market Post 1991 1. Flls Permitted to Operate inthe Indian Market: Foreign institutional investors, including mutual funds and pension funds, were permitted to invest in both the equities and debt markets, including treasury bills and dated government securities. 2. Access toGlobal Funds Market: Access toglobal finance market was allowed to Indian companies and they could benefit from the lower cost of funds. They have been permitted to raise resources through issue of American Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Also, Indian companies can list their securities on foreign stock exchanges through ADR/GDR issues. 3. Abolition of Controller of Capital issues: The Capital Issues (Control) Act, 1947 governed capital issues in India. The capital issues control was administered by the Controller of Capital Issues (CCI). The Narasimham Committee (1991) had recommended theabolition of CCI and wanted SEBI toprotect investors and take over the regulatory function of CCI. 4. Credit Rating Agencies: Various credit rating agencies such as Credit Rating Information Services of India Ltd. (CRISIL — 1988), Investment Information and Credit Rating Agency ofIndia Ltd. (ICRA — 1991), Credit Analysis and Research Ltd. (CARE — 1993) and so on were setup tomeet theemerging needs ofcapital market. 5. Securities and Exchange Board of India (SEBI): SEBI was setup asa non-statutory body in 1988 and was madea statutory body in January 1992. SEBI has introduced various guidelines for capital issues in the primary market.  Merchant bankers, and other intermediaries such as mutual funds including UTI, portfolio managers, registrars to an issue, share transfer agents, underwriters, debenture trustees, bankers to an issue, custodian of securities, and venture capital funds — have been brought under the purview of SEBI. 3.2.4 Issue Mechanism inPrimary Market Iæues 3.2.5 Public Issue  BEA IntA VE ftlCK Initial (Primary Market) Shares An issue is calleda public issue when thecompany decides to raise funds from the public by issuing shares in the primary market to drive new investors for subscription. Types ofPuLilic Issue 1. Initial Public ONer (IPO): IPO isa process wherea private company decides to raise funds by issuing of shares to the general public for the first time. IPO is issued by an unlisted company. 2. Follow-On Public Offer (FPO): FPO is an additional offer that the company issues once it has already issued an IPO. FPO is issued bya listed company. 3. Offer for Sale Offer for sale (OFS) isa simpler method ofshare sale through the exchange platform for list ed companies. The mechanism was Tirst introduced by SEBI in 2012, to make it easier for promoters of publicly-traded companies to cut their holdings and comply with the minimum public shareholding norms. OFS is available to 200 top companies interms of market capitalisation.  Who are Anchor Investors? Anchor investor or cornerstone investor (as they are called globally) are institutional investors like sovereign wealth funds, mutual funds and pension funds, who are allotted sharesa. This is done toboost the popularity of the issue and thus provide confidence to potential IPO investors. Types ofIPO issue 1. Fixed Price Issue: Price at which the securities are offered and would be allotted is made known in advance tothe investors. 2. Book Building Issue: There is no fixed price, buta price band or range. The lowest and the highest price is called ‘floor price’ and ‘cap price’ respectively. The gap between thefloor and cap price cannot be more than 2098. Types ofOffer Documents It is an offer document in case ofa public issue, which has all relevant details including price and number ofshares or convertible securities being 1. Prospectus offered. It is registered with RoC before the issue opens in case ofa fixed price issue and after the closure of the issue in case ofa book-built issue. It is an offer document used in case ofa book built Red Herring public issue. It contains all the relevant details except 2. Prospectus that of price or number ofshares being offered. It is tiled with RoC before the issue opens. It is an abridged version of offer document in public Abridged issue and is issued along with the application form of 3. Prospectus a public issue. It contains all the salient features from the prospectus. 3.2.6 Right Issue Through this mode, thecompany makes an offer to existing shareholders to buy additional shares inthe company ata discounted price (rights offer price) within J ‘° ' I i iii. i’ i ”’ i.i i''I !!  a prescribed period. It is not an obligation on the existing shareholders to avail the offer of right issue, they can decline to accept the offer, or they can renounce their right in favor of any other person. 3.2.6 Bonus Issue Bonus issue is one of the ways toraise capital, but it does notbring any fresh capital. Companies can distribute profit to existing shareholders by the way of fully paid bonus shares instead of paying thema dividend. It isa capitalization of free reserves. For example,a company may give one bonus share forevery five shares held. 3.2.7 Private Placement  Inprivate placement, the company issues its shares directly toa small selected group of investors. Here, investors generally fall under the category of insurance companies, banks, pension funds, and mutual funds. Types ofPrivate Placement I. Preferential Allotment: It isa kind of private placement which can be made only for equity share or forsecurities convertible into equity shares. 2. Qualified Institutional Placement (QIP): It isa type of private placement wherea listed company can issue shares to Qualified Institutional Buyers (QIBs). It was introduced in 2006 by SEBI. 3.3 Secondary Market 3.3.1 What isSecondary Market?  SECONDARY MARKET TRADER OTHER TR ADER Thesecondary market isa market forexisting securities, that is, those securities already issued and listed on the stock exchange. All sales after the initial sale of the security are sales in the secondary market. 3.3.2 Functions of Secondary Market I. Nexus between Savings and investments: Stock exchange providesa platform to savers to invest their money in those sectors and units which are favoured by the community atlarge. 2. Liquidity to Investors: It provides liquidity to the investors whereby investors can buy and sell their securities immediately inthe market. 3. Continuous Price Formation: A continuous change in demand and supply conditions result in continuous revaluation of assets, which completes the function of “price formation" in the stock exchange. 3.3.3 Major Reforms intheSecondary Market Post 1991 1. Setting up of National Stock Exchange (NSE): NSE was set up in November 1992 and started its operations in 1994; which has now developed intoa sophisticated, electronic market, which ranked  fourth in the world by equity trading volume 2. National Securities Clearing Corporation Ltd. (NSCL): It was incorporated in August 1995. It has started guaranteeing all trades in the NSE since July 1996. The NSCL is responsible for post-trade activities of the NSE. Clearing and settlement of trades and risk management areits central functions. 3. Over theCounter Exchange ofIndia (OTCEI): OTCEI was setin 1992. It was promoted bya consortium of leading financial institutions of India including UTI, ICICI,I DB I, IFCI, LIC and others. It is an electronic national stock exchange listing an entirely new set of companies which will not be listed on other stock exchanges. 4. Depository System: A major reform in the Indian Stock Market has been theintroduction of depository system since 1996. A depository is an organization which holds the securities of shareholders in electronic form, transfers securities between account holders, facilitates transfer of ownership without handling securities and facilitates their safekeeping. 2 depositories were setup - National Security Depository Limited (NSDL) in 1996; and Central Depository services Limited (CDSL) in 1999. 5. Mutual Funds: Emergence ofdiversified mutual funds is one of the most important developments of Indian capital market. Their main function is to mobilize the savings of general public and invest them in stock market securities. 6. Investor Protection: Under thepurview ofthe SEBI theCentral Government ofIndia set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. J ' ' I i i. ii i’ i ”’ i. i i ' ' I ! ’’  It tries to protect the interest of the small investors from frauds and malpractices in the capital market. 7.T + 2 Settlement: From 2003 thesettlement cycle has been further reduced to T+2. The trades accumulate overa trading cycle of one day, at the end of the day club together and position are netted, payment ofcash and delivery of securities settle the balance aher two working days. 3.3.4 Margin Trading Morgin Trading Buying Power Leverage Margin trading refers to borrowing money from the broker to purchase stock. The investor can buy stock by payinga margin on the actual value of investment. The margin can be given in the form of cash or shares as collateral depending upon theavailability with the respective investor.  To avail this facility, one has to placea request with the broker to opena Margin Trading Facility (MTF) Account. The broker specifiesa minimum balance that needs tobe maintained in the margin account, called minimum margin. Before initiatinga trade, an investor will have todeposita certain percent of the total traded value and the remaining will be funded by the broker. Example X wants to buy shares worth Rs.1,00,000/-. Assuming that the margin is 25%,X will be required to pay 25%, i.e., Rs.25000/- and balance Rs.75000/- will be funded by the broker. This 25% can also be in the form ofstocks collateral. 3.4 Stock Exchanges inIndia 3.4.1 National Stock Exchange NS The National Stock Exchange ofIndia Limited (NSE) was established in I992, based on the recommendations ofthePherwani Committee. NSE is headquartered in Mumbai. The exchange was incorporated in 1992 asa tax-paying company and was recognized asa stock exchange in 1993 under the Securities Contracts (Regulation) Act, 1956. NSE was the first dematerialized electronic exchange in the country. The derivatives segment in NSE commenced operations in June 2000. NSE operates on the National Exchange forAutomated Trading (NEAT) system, a fully automated screen based trading system, which adopts the principle of an order driven market. NIFTY 50,launched inApril 1996, is the benchmark index of NSE. NSE launched NSE EMERGE in 2012, as an initiative for small and medium- sized enterprises and startup companies from India. These companies can get  listed on NSE without an IPO. NSE Clearing Limited (formerly known as National Securities Clearing Corporation Limited), which is NSE's clearing corporation, was the first clearing corporation in India. 3.4.2 Bombay Stock Exchange The Bombay Stock Exchange (BSE) was established in 1875, as the Native Share and Stock Brokers' Association. BSE is the oldest stock exchange inAsia. BSE is headquartered in Mumbai. In1957, the BSE became thefirst stock exchange tobe recognized by the Indian Government under the Securities Contracts (Regulation) Act. BSE operates on the BSE On-Line Trading (BOLT),a screen-based automated trading platform. It was launched in 1995. SENSEX, launched in1986, is the benchmark index of BSE. Indian Clearing Corporation Limited (ICCL) is BSE's clearing corporation. It was launched in 2007. 3.5 Stock Indices 3.5.1 What is a Stock Index?  An Index is used to give information about the price movements ofproducts in the financial, commodities or any other markets. Financial indexes are constructed to measure price movements ofstocks, bonds, T-bills and other forms of investments. Stock market indexes are meant tocapture the overall behaviour of equity markets. A stock market index is created by selectinga group ofstocks that are representative of the whole market ora specified sector or segment ofthe market. The values of the grouped stocks are used tocalculate the value of the index. Any change in the price of the stocks leads toa change intheindex value. An index is thus, indicative of the changes in the market. An Index is calculated with reference toa base period and a base index value. 3.5.2 Types ofStock Indices  Stock Indices Broad Market Indices Sectoral Indices Thematic Indices Strategy Indices Types of Indices Consist of largest most liquid and financially Broad Market sound companies on stock exchanges based on 1. Indices or Market- market capitalization E.g., NIFTY 50,NIFTY Cap Indices SmallCap 250, S&P BSE SENSEX, SENSEX, S&P BSE LargeCap Consist of companies ofone particular sector 2. Sectoral Indices like banking, IT, media, etc. E.g., NIFTY Bank Index, S&P BSE Energy Consist of companies that are tied to specific 3. Thematic indices investment themes like social, economic, digital, etc. E.g., NIFTY India Digital, S&P BSE PSU Indices tnat are based upona specified trading 4. Strategy Indices strategy E.g., NIFTY Alpha 50 Index, S&P BSE IPO, S&P BSE Low Volatility Index 3.5.3 Importance of Stock Indices 1. Sorting: Companies and their shares are classified into indices on the basis of key characteristics like size, industry, sector, etc. 2. Information Source: Stock indices act as an important information source about market sentiment. It givesa consolidated picture which gives an idea about broad outlook of the market. J i" ' I I i.ii i’  3. Representative: Broad market indices are representative of the entire market or economy which tells an investor how the market is performing. Specialized sector indices give information abouta particular sector/segment ofthe market. So, an index composed ofonly IT stocks will indicate how the IT industry is performing and investors sentiments regarding IT sector. 4. Benchmark forComparison: An index makes it easy fortheinvestor to compare performance ofa particular stock. Investor can see whether hisstock performed better than the benchmark index. 5. Reflect Investors' Sentiment: Indices reflect investors' sentiment regarding the entire market as well as specific sectors/industries. Understanding investors' sentiment is very imponant as when investors' sentiment is positive, stock market performs well and vice-versa. 6. Facilitates Passive Investment: Many investors prefer to invest in portfolio of securities resembling an index as it saves time, cost and efforts. These investors can invest in index funds or ETFs (exchange-traded funds) which tracka particular index. 3.5.4 Index Weighting Methods Index weighting determines how much weight each security will be assigned in the index, thereby impacting the index value. The most common weighting method is Market Capitalization Weighting. 3.5.5 Market Capitalization Weighting Market capitalization is the total market value ofa company's stock. This is calculated by multiplying the share price ofa stock with the total number ofstocks floated by the company. It thus takes into consideration both the size and the price of the stock. J ' i" '-› I I' i.II I’ - i ”' -i. I'. i^ i 'I  In an index using market-cap weightage, stocks are given weightage on the basis of their market capitalization in comparison with the total market capitalization of the index. For example, if stockA hasa market capitalization of Rs. 10,000 while the indeX that the stock is part of has a total m-cap ofRs. 1,00,000, then its weightage will be 10%. Similarly, another stock witha market-cap of Rs. 50,000, will havea weightage of 50%. The market capitalization weightage method gives more importance to companies with higher market cap. Free-Float Market Capitalization In India, most indices use free-float market capitalization. The free float method calculates market capitalization based on the number ofshares available on the exchanges forpublic trading rather than the total shares outstanding. Free float refers to the shares that can be publicly traded and are not restricted. 3.5.6 Classification of Stocks Market Capitalization Basis of Classification Dividend Payment Fundamentals Risk Price Trends Based on Market Capitalization Small Cap Stocks Mid Cap Stocks Large Cap Stocks  These arestocks of the They represent small They arestocks of medium-sized largest companies inthe size companies. companies. market. They offer investors the Min benefits These stocks have of acquiring stocks with good growth They arealso called blue- potential to grow potential as well as the stability ofa chip stocks. ra idl larger company. Mid-cap stocks also include baby blue They areless volatile and The prices of these chip stocks which are stocks of show less growth as stocks tend to be companies showing steady growth compared tosmall cap volatile. backed bya good track record. stocks. Based on Dividend Payment Income Stocks Growth Stocks These companies have high dividend-payout ratio as These arestocks that reinvest most of they have less reinvestment opportunities. their earnings in their business. These stocks provide regular and stable income to They provide long term capital gains to investors. investors. They do notpay orpay very less They arerelatively low—risk stocks. dividend. They areusually preferred by conservative, old-age They arecomparatively risky stocks. investors looking fora secondary source of income. Based on Fundamentals Overvalued Stocks Undervalued Stocks These arestocks which are trading above These arestocks which are trading below their intrinsic value (ortrue value), i.e., Share their intrinsic value (ortrue value), i.e., Share Price> Intrinsic Value. Price< Intrinsic Value. Generally, these shares have high PE Ratio Generally, these shares have low PE Ratio (price earnings ratio). (price earnings ratio). They arealso called value stocks. Based on Risk Blue-chip Stocks High-beta Stocks Blue-chip stocks are shares of very large and High beta stocks are supposed tobe riskier well-recognized companies witha long history but provide higher return; low-beta stocks of sound financial performance. pose less risk but also lower returns.  Based on Price Trends Cyclical Stocks Defensive stocks These stocks move with the economic cycle, i.e., These stocks are relatively unaffected they go up when theeconomy is doing good and by changes in the economy. perform poorly when theeconomy is down. These stocks tend to fluctuate more as economic They arecomparatively resistant to conditions change. economic changes. These stocks are preferred when theeconomy is These stocks are preferred when the booming. economic conditions are poor. Examples: stocks of companies Examples: stocks of companies belonging to belonging to food, beverages, cement, construction, steel, automobile sector. pharmaceuticals. insurance sector. 3.5.6 SENSEX Vs.NIFTY Basis SENSEX NIF TY What isit? Sensitive Index National Fifty Represents top 30 stocks of BSE Represents top 50 stocks of NSE Meaning by market capitalization by market capitalization Founded 19B6 1996 Method of Free-float market capitalization Free-float market capitalization Weightage weighted method weighted method Base Value 100 1000 Base Year 1978-79 1995 3.5.7 Some Innovative Indices in India 1. S&P BSE GREENEX TheS&PBSEGREENEX is designed to measure theperformance ofthe top 25 “green” companies interms ofgreenhouse gas (GHG) emissions, market cap and liquidity. No. of constituents: 25 Launch date: 22 Feb, 2012 2. S&P BSE CARBONEX J i" ' I I i.ii i’ i ”’ i.. I i i I  The S&P BSE CARBONEX, thefirst index of its kind in India, tracks the performance ofthe companies within the S&P BSE 100 index based on their commitment tomitigating risks arising from climate change. The index was created to address market demand for a sophisticated approach to portfolio management incorporating climate change risk and opportunity. No. of constituents: 100 Launch date: 30 Nov, 2012 3. S&P BSE 500 SHARIAH The S&P BSE 500Shariah index is designed to track the performance ofthe Shariah-compliant companies in the S&P BSE 500 index. No. of constituents: 271 Launch date:2 May, 2013 4. NIFTY100 ESG ESG stands forEnvironmental, Social and Governance. It uses NIFTY 100 as its universe. It includes securities that meet sustainability investing criteria. Companies engaged inthebusiness of tobacco, alcohol, controversial weapons and gambling operations shall be excluded. 5. S&P BSE Bharat 22 It is designed to measure theperformance of 22 select companies disinvested by the central government of India. Number ofConstituents: 22 Launch date: 10 August, 2017 India VIX Index It was launched by NSE in 2008. It isa measure ofmarket's expectation of volatility over the near term. It isa volatility index based on the NIFTY Index Option prices. It uses thecomputation methodology ofCBOE (Chicago Board Options Exchange). J i" ' I I i.ii i’ i ”’ i.. I i i I  6. CriSidEx It was launched on 3rd February 2018 by thethen Finance Minister, Mr. Arun Jaitley. It is India's first sentimental index forsmall and micro enterprises (SMEs). It was jointly developed by CRISIL and SlDBl, hence the name CriSidEx. Some Important Indices of Other Countries Country Major Indices Dow Jones lnaustrial Average NASDAQ Composite 1. USA S&P 500 2. UK FTSE 100 3. Hong Kong Hang Seng 4. Japan Nikkei 225 5. South Korea KOSPI KOSDAQ (tor small companies) 6. Germany DAX-30 7. France CAC 40 8. China SSE Composite Index 3.6 Depository Receipts 3.6.1 What areDepository Receipts? A depository receipt isa negotiable certificate instrument issued bya bank representing shares ina foreign company traded ona local stock exchange. It is an instrument which allows companies to raise capital in foreign markets. The depository receipt gives investors the opportunity to hold shares in the equity of foreign countries and gives them an alternative to trading on an international market. 3.6.2 American Depository Receipt (ADR) An ADR isa certified negotiable instrument issued by an American bank representinga number ofshares ofa foreign company which can be traded on an American stock exchange. J' i" '-› I I' i.II I’ - i ”' -i. I'. i^ i 'I '' '  ADRs arepriced in U.S. dollars. The ADR was firstly created in 1927 by J.P. Morgan. Inorder to begin offering ADRs,a U.S. bank must purchase shares ona foreign exchange. The bank holds the stock as inventory and issues an ADR fordomestic trading. Types ofADRs: Sponsored ADRs: The bank issues the sponsored ADRs onbehalf of the foreign company where thelegal arrangement exists between thetwo parties. Unsponsored ADRs: Unsponsored ADRs aretheshares that are traded on the over-the-counter market (OTC). 3.6.3 Global Depository Receipt (GDR) A global depositary receipt (GDR) isa certificate issued bya bank that represents shares ina foreign stock on two or more global markets. GDRs helps foreign companies totrade in any country's stock market, other than the U.S. stock market. GDRs arepriced in the local currency of the exchanges where theshares are traded. Suppose an Indian company which has issued ADRs in the American market wishes tofurther extend it to other developed and advanced countries such as in Europe, then the company can sell these ADRs tothepublic of Europe and the same would be named as GDR. How areADRs/GDRs Issued by an Indian Company?  Overseas Depository An Indian company issues equity shares in the name oftheoverseas bank. These shares are deposited witha domestic custodian bank who acts as an agent ofoverseas depository bank. The Indian custodian bank holds physical possession of equity shares. The overseas depository bank issues ADRs/GDRs in foreign currency to foreign investors. 3.6.4 Indian Depository Receipt (IDR) An IDR is in Indian rupees and is created bya domestic depository (custodian of securities registered with SEBI). It is issued against the underlying equity of the company toenable foreign companies toraise funds from the Indian securities Markets. The Ministry of Corporate Affairs had prescribed the Companies (Issue of Indian Depository Receipts) Rules in2004. The rules for IDRs were operationalized by SEBI in2006. lDRs opened attheBombay Stock Exchange and National Stock Exchange on June II,2010.  Standard Chartered PLC became thefirst global company tofile for an issue of lDRs in India in 2010. The minimum size of an IDR issue should not be less than Rs. 50 crores. Eligibility Criteria The eligibility criteria given under IDR Rules and Guidelines are as under: The foreign issuing company shall have pre-issue paid-up capital and free reserves of at least US$ 500 million and a minimum average market capitalization (during the last3 years) in its home country of at least US$ 100 million; havea continuous trading record or history on a stock exchange in its home country forat least three immediately preceding years; havea track record of distributable profits for at least three out of immediately preceding five years; be listed in its home country and not been prohibited to issue securities by any Regulatory Body and hasa good track record with respect to compliance with securities market regulations in its home country. How are lDRs Issued bya Foreign Company?  Shares Deposited Forei n Com an The Issuing Company, which is incorporated outside India, delivers equity shares to the Overseas Custodian. The Overseas Custodian Bank orders the Domestic Depository to issue depository receipts in respect of shares held. The Domestic Depository issues depository receipts to investors in India. Foreign shares begin trading in Indian exchanges in the form of IDRs. 3.7 Mutual Funds 3.7.1 What is a Mutual Fund?  Passed back tothe investors Pool their money together INVESTORS HOW MUTUAL RETURNS FUN DS WORK FUND MANAGERS Secrii”ities sricis as stocks, bonds, "” Choose& invest in securities gold, etc generate retui-ns sECURITIES A mutual fund isa financial intermediary in the capital market that pools collective investments in form of units from retail and corporate investors and maintainsa portfolio of various schemes which invest those collective investments in equity and debt instruments on behalf of investors. The purpose of mutual funds is to provide liquidity and higher returns with optimum degree ofsafety to investors at minimum risk. 3.7.2 History of Mutual Funds inIndia The mutual fund industry was established in India in the year 1963 with the setting up of the Unit Trust of India (UTI) by an act of parliament. The main objective of setting up of UTI was to attract small investors to invest in the stock market. The history of mutual funds in India can be divided into4 phases: I. Phase 1(1964-87): The era of mutual funds began with the establishment of the Unit Trust of India (UTI) in 1963.  Unit Scheme 1964, more popularly known as US-64 was thefirst scheme launched by UTI. It was an open-ended scheme. 2. Phase 2(1987-92): In this phase, other public sector mutual funds set up. The first non-UTI mutual fund was SBI Mutual Fund, which was established in 1987. 3. Phase 3(1992-97): This phase marked theentry of private sector mutual funds. The first private sector MF was Kothari Pioneer, established in 1993 (now merged with Franklin Templeton). The first mutual fund regulations came in 1993, which were replaced by SEBI (Mutual Fund) Regulations 1996. 4. Phase 4(beyond 1997): The UTIAct of1963 was repealed in2003 and UTI was divided into2 separate entities: 1. Specified Undertaking of Unit Trust of India (suuTi) 2. UTI Mutual Fund 3.7.3 Organizational Structure of Mutual Funds inIndia  A mutual fund is set up in form ofa trust, which hasa Sponsor, trustees, Asset Management Company (AMC) anda Custodian. The Trust is established bya sponsor who is likea promoter ofa company. The trustees ofa mutual fund hold its property forthe benefit of the unitholders. The sponsor or, if so, authorized by the trust deed, shall appoint an AMC, which has been approved by SEBI. The AMC approved by SEBI manages thefunds by making investments in various types of securities. The custodian, who is required to be registered with SEBI, holds the securities of various schemes ofthefund in its custody. 3.7.4 Types ofMutual Funds Based on Maturity Period  Matur“cy Perlod Open-ended Closed-ended Interval Schemes Schemes %hemes 1. Open-ended Schemes: Open ended funds are always open toinvestment and redemptions, hence, the name open ended funds. Open ended funds are the most common form of investment in mutual funds in India. These funds do not have any lock-in period or maturities. 2. Closed-ended Schemes: A closed ended mutual fund scheme is where your investment is locked in fora specified period of time. You can subscribe to close ended schemes only during the new fund offer period (NFO) and redeem theunits only after the lock in period or the tenure of the scheme is over. 3. Interval Schemes: Interval schemes provide the features of both open-ended and closed-ended schemes. They areopen forsale or redemption during predetermined intervals. Based on Investment Objective  Objective Tax-saving Capital Balanced Funds Liquid Funds Protection Pension Funds Funds Funds 1. Growth Funds: Growth funds are equity-oriented funds. The main objective of growth funds is capital appreciation over the medium tolong term. These schemes aregood forinvestors havinga long-term outlook seeking appreciation overa period. 2. Income Funds: Income funds are debt-oriented funds. The purpose of income funds is to provide safety of investments along with regular incomes to investors. These schemes invest largely in income-bearing instruments like bonds, debentures, government securities, and commercial papers. 3. Balanced Funds: These arehybrid funds. The aim of balanced scheme is to provide both capital appreciation and regular income. They divide their investment between equity shares and fixed interest debt instruments in sucha ratio that the portfolio is balanced. 4. Liquid Funds: Liquid Funds aredebt funds which invest in securities witha residual maturity up to 91 days.  Liquid funds invest in debt and money market instruments such as certificate of deposits, commercial papers, treasury bills, etc. They aim atprovidinga high degree ofliquidity to investors and are considered one of the safest funds among mutual fund categories. 5. Tax-saving Funds: Tax-savings funds provide special tax benefits to investors. These areclosed-ended funds and investments havea lock-in-period of at least3 years. 6. Capital Protection Funds: Capital protection funds invest meticulously in fixed income options and equity. These areclosed-ended hybrid mutual fund schemes witha clear focus on debt to achieve capital protection. A significant portion of the corpus is invested in high-rated fixed-income securities to earn assured returns, and the rest of the money is invested in equity to earn additional returns. 7. Pension Funds: Pension funds allow investors to savea certain portion of their income for their retirement. These funds offera regular source otfinance after one retires. Based on Risk Risk Medium-risk Low-risk Funds High-risk Funds Funds 1. Low-risk Funds: J i" ' I I i.ii i’  Low-risk mutual funds are those investment options that carry minimal risk and a stable return assurance. These funds are alwaysa step ahead ofinflation. They investa major chunk oftheir assets in debt instruments. 2. Medium-risk Funds: Moderate risk mutual funds are funds that invest in equity and debt instruments. The hybrid portfolio construction helps the funds generate inflation-beating returns in the medium term. These funds are less risky than pure equity tunds and slightly more risky than pure debt funds. 3. High-risk Funds: High-risk mutual funds refer to funds that have excellent potential and the ability to provide high returns. However, these funds are very volatile in nature and come with high risks. Hence, these funds are suitable for high-risk appetite individuals who are willing to invest in risky assets. Specialized Schemes Types of Specialized Mutual Funds It isa scheme ofa mutual fund which has been Money Market or setup with the objective of investing exciusiveTy in Liquid Schemes money market instruments. These funds invest in government securities which have negligible default risk. This ensures 2. Gilt Funds preservation of investors' capital along with moderate return. It isa mutual fund scheme that invests in 3. Index Funds securities in the same proportion as an index ot securities. They arepassive investments. Exchange-traded They arelike index funds, but they are traded like 4. Funds (ETFs) stocks on stock exchanges unlike index funds.  These areschemes which invest in the securities Sector Specific 5. of only those sectors as specified in the offer schemes documents. It meansa mutual fund that invests primarily in Fund ofFunds 6. other securities of the same mutual funds or other Schemes mutual funds. Gold Exchange- It meansa mutual fund scheme that invests 7. traded Funds primarily in gold or gold related instruments. (Gold ETFs) Real Estate It meansa mutual fund that invests directly or 8. Mutual Fund indirectly in real estate assets or other permissible Scheme assets in accordance with MF regulations 1996. It isa mutual fund scheme that invests primarily in the debt securities or securitized debt instrument Infrastructure of infrastructure companies or infrastructure 9. Debt Fund capital companies or infrastructure projects or Scheme special purposes or special purpose vehicles which are created forthe purpose offacilitating or promoting investment in infrastructure Equity Linked It is open-ended scheme witha statutory lock in 10. Saving Scheme period of3 years. This scheme offers tax benefits (ELSS) to the investors 11. Offshore Funds They invest in foreign markets and corporations. 3.7.5 Exchange-traded Funds (ETFs) An exchange-traded fund (ETF) isa type of pooled investment security that operates much likea mutual fund. Typically, ETFs will tracka particular index, sector, commodity, or other asset, but unlike mutual funds, ETFs canbe purchased or sold ona stock exchange thesame way thata regular stock can. An ETF is called an exchange-traded fund because it's traded on an exchange just like stocks are. The price of an ETF's shares will change throughout the trading day as the shares are bought and sold on the market. 3.7.6 Real Estate Investment Trusts (REITs)  Investor purchase shores Buy income generating properties lnvestor earn dividend& Earns rental income price appreciation REITs are setup as trusts under the provisions of the Indian Trusts Act, 1882. REITs are mutual fund like institutions that enable investors to invest in the real estate sector by pooling small sums ofmoney from multitude of individual investors for directly investing in real estate properties. REIT companies listed on the Indian stock exchanges are monitored and regulated by SEBI. A REIT is required to allocate 90% of its income as dividends to its investors. 3.7.7 Infrastructure Investment Trusts (InvlTs) An Infrastructure Investment Trust (InvlTs) is likea mutual fund, which enables direct investment of small amounts ofmoney from investors in infrastructure to earna small portion of the income as return. lnvlTs work like mutual funds or real estate investment trusts (REITs) in features. InvlTs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector. InvlTs can be established as trusts and registered with SEBI. 3.7.8 Bharat 22 Bharat 22 is an ETF that will track the performance of 22 stocks, including three private sector stocks and 19 public sector units (PSUs) listed in the S&P BSE Bharat 22 Index.  The ETF unit representsa slice of the fund, issued units are listed on exchanges foranyone tobuy orsell at the quoted price. The Bharat-22 ETF spans sixsectors, such as basic materials, energy, finance, FMCG, industrials and utilities. Besides public sector banks, miners, construction companies, and energy majors, the ETF will also include some ofthegovernment's holdings in SUUTI (Specified Undertaking of Unit Trust of India). The Bharat 22 ETF will be managed by ICICI Prudential AMC while Asia Index will be the index provider. The scheme was launched by the Government ofIndia to fulfill its disinvestment target in PSUs. SEBI Classification of Mutual Fund Schemes SEBI issueda circular on 6th October 2017, in which it categorized mutual fund schemes into5 broad categories. These5 broad categories are further divided into 36 subcategories. The schemes arebroadly classified in the following groups: 1. Equity Schemes 2. Debt Schemes 3. Hybrid Schemes 4. Solution Oriented Schemes - For Retirement and Children J i" ' I I i.ii i’  5. Other Schemes — Index Funds& ETFs and Fund ofFunds Association of Mutual Funds inIndia (AMFI) A M£ "I AMFI is the association of all the Asset Management Companies ofSEBI registered mutual funds in India It was incorporated on August 22, 1995, asa non-profit organisation. AMFI is dedicated to developing the Indian Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas witha view to protecting and promoting the interests of mutual funds and their unit holders. 3.B Participatory Notes What areParticipatory Notes? Participatory notes also referred to as P-Notes, are financial instruments required by investors or hedge funds to invest in Indian securities without having to register with SEBI. SEBI permitted Foreign Institutional Investors (Flls) to register and participate in the Indian stock market in 1992. P-Notes area unique invention started in 2000 by SEBI toenable foreign corporates and high networth investors enter the Indian market without having to go through the process of registering as FIIs. How do Participatory Notes Work? Participatory notes are offshore derivative instruments with shares as underlying assets. J i" ' I I i.ii i’  Brokers and foreign institutional investors registered with the SEBI issue the participatory notes and invest on behalf of the foreign investors. Brokers must report their participatory note issuance status to the regulatory board each quarter. Regulatory Issues SEBI has no jurisdiction over participatory note trading. Although FIIs must register with SEBI, the participatory notes trading among FIIs are not recorded. This practice may lead to the P-Notes being used formoney laundering or other illegal activity. 4.0 DEBT MARKET 4.1 What is a Debt Market? Debt market isa market forissuance, trading and settlement of different types ot fixed income securities. Investments indebt securities typically involve less risk than equity investments and oWera lower potential return on investment. Bonds arethemost common form of debt investment. Bonds areissued by corporations or by the government to raise capital for their operations and generally carrya fixed interest rate. 4.2 Government Securities Market G-Sec market is the most dominant part of the Indian debt market. It comprises securities issued by central government or state governments. They can be short term (called treasury bills) or long term (called Government bonds ordated securities). Central govt issues both T-Bills as well as dated securities (or bonds) whereas state governments issues only dated securities (or bonds) which are called State Development Loans (SDLs). They carry practically zero default risk and hence are also called risk-free or gilt- edged securities. Ji" ' I I i.ii i’ i i..Ii ”’ i I  Dated G-Secs: They carrya fixed or floating coupon (interest rate) which is paid on the face value on half yearly basis. Their tenor (orterm) ranges from5 years to 40 years. 4.3 Corporate Bond Market A corporate bond isa debt instrument issued bya company, distinct from one issued bya government or government agency. When companies want toexpand operations or fund new business ventures, they often turn to the corporate bond market to borrow money. Unlike equities, ownership of corporate bonds does notsignify an ownership interest in the company that has issued the bond. Instead, the company pays the investora rate of interest overa period of time and repays the principal at the maturity date established at the time of the bond's issue. Indian Corporate Bond Market Indian corporate bond market has been ’small’ in size despite policy push through recommendations ofvarious high-level committees, and many structural reforms. Specifically, it is saddled with supply as well as demand side issues such as: crowding out by issuance of G-Secs, private placement, persistent inflation higher interest rates, information asymmetry, absence ofbroad investor base, etc. 4.3.1 Types ofBondsI Debentures Secured Vs Unsecured Bonds Secured Bonds Unsecured Bonds Bonds carryinga charge on the assets of Unsecured bonds do notcarry any specific the issuer company arecalled secured charge on the assets ofthe issuer company  bonds. The help reduce the risk oT debt butaresecured by the general credit of the investors. company. Convertible Vs Non-convertible Bonds Convertible Bonds Non- convertible Bonds A convertible bond is one whose full face value (i.e. fully- convertible bond) ora part of face value (i.e. partly- A non-convertible bond, on the convertible bond) is convertible into another type of other hand, does notprovide security such as equity share atthe option of the any such conversion option. bondholder. Convertible bonds are an attractive option for investors due It is redeemed by repayment as tothe possibility of realising long-term capital gain on per the terms and conditions conversion. specified in the issue document. Coupon Vs Zero Coupon Bonds Coupon Bonds Zero Coupon Bonds Coupon bonds pay interest periodically at the Zero coupon bonds are issued ata discount pre specified rate of interest. to its lace value. The annual rate at which the interest is paid is A zero coupon bond fetches no periodic known as thecoupon rate or simply the interest and is redeemed attheface value at coupon maturity. The dates on which the interest payments are made, are known as thecoupon due dates Callable Vs Putable Bonds Callable Bond Putable Bond A catlable bond is one which gives the A putable bond, on the other hand, gives the issuer (or borrower) an option to redeem investor or bondholder the option to redeem the thebond atany time aftera fixed initial bond atany time aftera fixed initial period. period. Usually, the bondholder will exercise the option Usually, the borrower will redeem the when market interest rate goes above thecoupon bond when themarket interest rate falls rate so that he can reinvest his money somewhere below the coupon rate. else ata better rate. Fixed Rate Vs Floating Rate Bonds Fixed Rate Bond Floating Rate Bond  In case offixed rate bonds, they paya fixed In case offloating rate bonds, the interest rates interest rate throughout their tenure, i.e., till are a certain rate above some benchmark or maturity. reference rate. Perpetual Vs Redeemable Bonds Perpetual Bond Redeemable Bond A perpetual bond is one which is Redeemable bonds, on the other hand, havea irredeemable, i.e., which does nothavea fixed life and are redeemed after that fixed redemption. period. 4.3.2 Deep Discount Bonds (DDBs) A deep-discount bond isa bond that sells ata discount (ora value which is significantly lesser than par). Also, the bond is zero-coupon or hasa coupon rate significantly less than the prevailing rates of fixed-income securities witha similar risk profile. A deep discount bond will typically havea market price of 20% or more below its face value. 4.3.3 Junk Bonds They arehigh risk high return bonds which offera high coupon rate. They have high credit or default risk and havea very low credit rating. Generally, speculators like to trade in such bonds. 4.3.4 Municipal Bonds Municipal bonds areissued by local bodies like municipal corporations to raise money forpublic projects, such as to construct roads, bridges, schools or other infrastructure, and are repaid from returns generated by such projects or tax revenue. They arevery popular in developed countries such as USA butare notvery popular in India. So far eight local bodies in India have raised Rs 3,390 crore via municipal bonds. By 2024, fifty cities are expected to issue municipal bonds. 4.3.5 Inflation-indexed Bonds  They arebonds inwhich the coupon payments and maturity payments aretied to a general price index. In these types of bonds, the par value of the bond is adjusted in the light of price index (or rate of inflation) and then the coupon rate is calculated on the adjusted par value. 4.4 Masala Bonds Masala bonds arebonds issued outside India but denominated inIndian Rupees, rather than the local currency. They aredebt instruments which help to raise money in local currency from foreign investors. The rupee denominated bond is an attempt to shield issuers from currency risk and instead transfer the risk to investors buying these bonds. Masala Bonds were introduced in India by the International Finance Corporation (IFC) in 2014. The first Masala bond was issued by the IFC in November 2014, to fund infrastructure projects in India. In July 2016 HDFC raised 3,000 crore rupees from Masala bonds and thereby became thefirst Indian company toissue masala bonds. The maturity period is three years forthe bonds raised to the rupee equivalent of 50 million dollars ina financial year, and five years forthe bonds raised above the rupee equivalent of 50 million dollars ina financial year. In 2019, Kerala Infrastructure Investment Fund Board (KIIFB) became thefirst entity in India to list Masala Bonds on theLondon Stock Exchange. 4.5External Commercial Borrowings 4.5.1 What isExternal Commercial Borrowing (ECB)? External Commercial Borrowings (ECBs) are loans in India made bynon- resident lenders inforeign currency to Indian borrowers. They areused widely in India to facilitate access toforeign money by Indian corporations and PSUs (public sector undertakings). ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window ofmultilateral financial Institutions such as International Finance Corporation, Asian Development Bank, etc. ECBs cannot be used forinvestment in stock market or speculation in real estate. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank ofIndia, monitors and regulates ECB guidelines and policies. ECBs havea minimum average maturity of3 years. 4.5.2 Types ofECBs ECBs canberaised in any of the following forms: Loans Issue of non-convertible, optionally convertible or partially convertible preference shares/debentures Buyers' credit Suppliers' credit Foreign Currency Convertible Bonds (FCCBs) Foreign Currency EXchangeable Bonds (FCEBs) 5.3.3 Routes to access ECB ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route. ECB Routes Automatic Route Approval Route Automatic Route Approval Route Under Automatic Route, the AD Category-I Bank Under Approval Route, prospective examines the case and gives the approval. Entities borrowers send in their requests to the wanting to raise ECB under the automatic route RBI through their AD Category-I Banks may approach an AD Category-I Bank with their forexamination. Such cases are proposal along witha duly filled Form ECB. Under considered based on macroeconomic the ECB Policy Liberalisation Measures, RBI has situation and merits of the specific increased the automatic route limit from USD proposals, keeping in view the overall 750 million or equivalent to USD 1.5 billion or guidelines. equivalent. 4.5.4 ECB Framework Prior to 2019, the ECB framework comprised the following three tracks: Medium term foreign currency denominated ECB with Minimum Average TrackI Maturity (MAM) of3/5years. Track II Long term foreign currency denominated ECB with MAM of 10 years. Track III Indian Rupee denominated ECB with MAM of 3/5 years. In 2019, the RBI released the New ECB Framework. Some salient features of the new framework are as under: Merging of Tracks: Merging ofTracksI and II as “Foreign Currency denominated ECB” and merging ofTrack III and Rupee Denominated Bonds framework as “Rupee Denominated ECB”. Minimum Average Maturity Period (MAMP): MAMP will be 3 years forall ECBs. However, forECB raised from foreign equity holder and utilised for specific purposes, the MAMP would be5 years. ECB Framework INR Sr.No. Parameters FCY denominated ECB denominated ECB Currency of Any freely convenible Foreign Indian Rupee Borrowing Currency (INR) li Forms ofECB Loans including bank loans; Loans including floating/ fixed rate notes/ bonds/ bank loans; debentures (other than fully and floating/ fixed rate compulsorily convertible notes/bonds/ instruments); Trade credits beyond debentures/ 3 years; FCCBs: FCEBs and preference shares Financial Lease. (other than fully and compulsorily convertible instruments); Trade credits  beyond3 years; and Financial Lease. Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations. a) All entities eligible to raise FCY ECB; and b) Registered All entities eligible to receive FDI. entities engaged Further, the following entities are in micro-finance Eligible also eligible to raise ECB are as activities, viz., Borrowers follows: Port Trusts; Units in registered Not for SEZ: SIDBI, and EXIM Bank of Profit companies, lndia registered societies/trusts/ cooperatives and Non-Government Organisations. lv Recognised The lender should be resident of Lenders FATF orIOSCO compliant country, including on transfer of ECB. However, a) Multilateral and Regional Financial Institutions where India isa member country will also be considered as recognised lenders; b) Individuals as lenders can only be permitted if they are foreign equity holders or forsubscription to bonds/debentures listed abroad; and c) Foreign branches/ subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs  and FCEBs). Foreign branches/ subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market- makers/traders forRupee denominated Bonds issued overseas. However, underwriting by foreign branches/subsidiaries of Indian banks forissuances by Indian banks will not be allowed. 4.5.6 Minimum Average Maturity Period (MAMP) Minimum Average Maturity Period (MAMP) is defined as weighted average of all disbursements taking each disbursement individually and its period of retention by the borrower forthe purpose of ECBs. MAMP for ECB will be 3 years. Category MAMP ECB raised by manufacturing companies up to USD 50 (a) 1 year million or its equivalent per financial year. ECB raised from foreign equity holder forworking (b) capital purposes, general corporate purposes or for 5 years repayment ofRupee loans ECB raised for (i) working capital purposes or general (c) corporate purposes (ii) on-lending by NBFCs for 10 years working capital purposes or general corporate purposes ECB raised for (i) repayment ofRupee loans availed (d) domestically for capital expenditure (ii) on-lending by 7 years NBFCs for thesame purpose ECB raised for (i) repayment ofRupee loans availed domestically for purposes other than capita! (e) 10 years expenditure (ii) on-lending by NBFCs forthesame purpose End-uses (Negative list) The negative list, for which the ECB proceeds cannot be utilised, would include the following: Real estate activities J i" ' I I i. i i i’ i ”’ i.. I i i I  Investment in capital market Equity investment Working capital purposes, except in case of ECB mentioned at (b)and (c) above General corporate purposes, except in case of ECB mentioned at (b)and (c) above Repayment ofRupee loans, except in case ofECB mentioned at(d) and (e) above On-lending to entities for the above activities, except in case ofECB raised by NBFCs asgiven at (c), (d) and (e) above 4.6 Foreign Currency Convertible Bonds 4.6.1 What is a Foreign Currency Convertible Bond (FCCB)? A foreign currency convertible bond (FCCB) isa type of convertible bond issued ina currency different than the issuer's domestic currency. The money being raised by the issuing company is in the form ofa foreign currency. A convertible bond isa mix betweena debt and equity instrument. It acts likea bond by making regular coupon and principal payments, butthese bonds also give the bondholder the option to convert the bond into stock. It enables the firms to raise funds from the market. 4.6.2 Benefits Ohered by FCCBs To theIssuer: The coupon rates on FCCB's aregenerally lower than traditional bank interest rates, reducing the cost of debt financing. If converted, the company is able to reduce its debt asa result of foreign currency convertible bonds and thus gains additional, much-needed equity capital. If there isa favourable move in the exchange rate, the company may benefit froma reduction in the cost of debt. To the bondholders: An assured minimum fixed rate of return. J i" ' I I i. i i i’ i ”’ i.. I i i I  Investors can participate in any price appreciation in the issuer's stock upon conversion. Flexibility in choosing to enter the capital market or receivinga stable stream of income through bond payments (coupons). It isa unique dual advantage ofequity and debt that the investor gets through foreign currency convertible bonds. 4.6.3 Major Drawbacks ofFCCBs If the stock market is ina negative cycle, the demand forforeign currency convertible bonds decreases. If the issuing company's currency does notperform well compared tothe bondholder's domestic currency, the principal and coupon payments will become more costly. Foreign currency convertible bonds aresubject to exchange rate risk and credit risk. The issuing company may bankrupt, following which the repayment offace value at maturity will no longer be plausible. 4.7 Foreign Currency Exchangeable Bonds 4.7.L What is a Foreign Currency Exchangeable Bond (FCEB)? A Foreign Currency Exchangeable Bond (FCEB) meansa bond expressed in foreign currency. The principal and interest in respect of FCEB is payable in foreign currency. An FCEB involves three parties: the issuer company theoffered company (OC) investor FCEBs carry an option f