MODULE 1

Meaning of Indian Financial System

The financial system is the main part of running the economy smoothly. financial system
provides the flow of finance in the economy. which leads to the development of the country
financial system show the strength of the country.
A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges, that permit the exchange of funds. Financial systems exist on firm, regional, and
global levels. Borrowers, lenders, and investors exchange current funds to finance projects, either
for consumption or productive investments, and to pursue a return on their financial assets. The
financial system also includes sets of rules and practices that borrowers and lenders use to decide
which projects get financed, who finances projects, and terms of financial deals.

Structure of Indian Financial System

Structure of Indian Financial System

The following are the four major components that comprise the Indian Financial System:
  Financial Institutions
 Financial Markets
 Financial Instruments/Assets/Securities
 Financial Services.

Financial Institutions
Financial institutions are the intermediaries who facilitate the smooth functioning of the
financial system by making investors and borrowers meet. They mobilize savings of the surplus
units and allocate them in productive activities promising a better rate of return. Structure of
Indian Financial System also provides services to entities (individual, business, government)
seeking advice on various issues ranging from restructuring to diversification plans. They
provide whole range Of services to the entities who want to raise funds from the markets or
elsewhere. The financial Institutions is very important for the function of a financial system

Types of Financial Institutions

Financial institutions can be classified into two categories

 Banking Institutions
 Non-Banking Financial Institutions

Financial Markets
Financial markets may be broadly classified as negotiated loan markets and open The
negotiated loan market is a market in which the lender and the borrower personally negotiate
the terms of the loan agreement, e.g. a businessman borrowing from a bank or from a small loan
company. On the other hand, the open market is an impersonal market in which standardized
securities are treated in large volumes. The stock market is an example of an open market. The
financial markets, in a nutshell, the credit markets catering to the various credit needs Of the
individuals, links and institutions. Credit is supplied both on a short as well as a long
On the basis of the credit requirement for short-term and long term purposes, financial markets
are divided into two categories
Types of the financial market

 Money Market
 Capital Market
Financial Instruments/ Assets/ Securities
This is an important component of the financial system. Financial instruments are monetary
contracts between parties. The products which are traded in a financial market are financial
assets, securities or other types of financial instruments. There is a wide range of securities in the
markets since the needs of investors and credit seekers are different. Financial instruments can be
real or virtual documents representing a legal agreement involving any kind of monetary value.
Equity-based financial instruments represent ownership of an asset. Debt-based financial
instruments represent a loan made by an investor to the owner of the asset.

Types of Financial Instruments

 Cash Instruments
 Derivative Instrument

Financial Services
It consists of services provided by Asset Management and Liability Management Companies.
They help to get the required funds and also make sure that they are efficiently invested. They
assist to determine the financing combination and extend their professional services up to the
stage of servicing of lenders.

Types of Financial Services

 Banking
 Wealth Management
 Mutual Funds
 Insurance

The Structure of Indian Financial System is about A financial system is a system that system
which allows the exchange of funds between investors, lenders, and borrowers. Indian Financial
systems operate at national and global levels. They consist of complex, closely related services,
markets, and institutions intended to provide an efficient and regular linkage between investors
and depositors.
 MODULE 2
Definition of 'Money Market'

Definition: Money market basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded. Money market has become a
component of the financial market for buying and selling of securities of short-term maturities,
of one year or less, such as treasury bills and commercial papers.

Over-the-counter trading is done in the money market and it is a wholesale process. It is used by
the participants as a way of borrowing and lending for the short term.
Description: Money market consists of negotiable instruments such as treasury bills,
commercial papers. and certificates of deposit. It is used by many participants, including
companies, to raise funds by selling commercial papers in the market. Money market is
considered a safe place to invest due to the high liquidity of securities.

It has certain risks which investors should be aware of, one of them being default on securities
such as commercial papers. Money market consists of various financial institutions and dealers,
who seek to borrow or loan securities. It is the best source to invest in liquid assets.

The money market is an unregulated and informal market and not structured like the capital
markets, where things are organised in a formal way. Money market gives lesser return to
investors who invest in it but provides a variety of products.

Withdrawing money from the money market is easier. Money markets are different from capital
markets as they are for a shorter period of time while capital markets are used for longer time
periods.

Meanwhile, a mortgage lender can create protection against a fallout risk by entering an
agreement with an agency or private conduit for operational, rather than mandatory, delivery of
the mortgage. In such an agreement, the mortgage originator effectively buys an option, which
gives the lender the right, but not the obligation, to deliver the mortgage. Against that, the private
conduit charges a fee for allowing optional delivery.

Organised and Unorganised Sectors

The organised sector of the money market consists of the Reserve Bank of India, commercial
banks, companies lending money, financial intermediaries such as the Life Insurance, Credit and
Investments Corporation of India, Unit Trust of India, Land Mortgage Banks, Cooperative
Banks, Insurance Companies etc. and call loan brokers, and stock brokers.

The unorganised sector of the money market is largely made up of indigenous bankers, money
lenders, traders, commission agents etc., some of whom combine money lending with trade and
other activities.

Generally speaking, these two sectors of the Indian money market — those institutions which
come directly or indirectly under the broad regulations of the Reserve Bank constitute the
organised sector, while the others which fall completely outside the purview of the central bank-
ing regulations, make up the unorganised sector.

The organised sector is mainly composed of the commercial banks, cooperative banks and dis-
count houses, acceptance houses and land mortgage banks. The unorganised sector is largely
outside the control of the Central Bank and is characterised by lack of uniformity in their
business dealings. In India, the indigenous bankers and money lenders, traders, are important
segment of unorganised money market.

The money market performs the following functions:

i. The basic function of money market is to facilitate adjustment of liquidity position of

commercial banks, business corporations and other non-bank financial institutions.

ii. It provides outlets to commercial banks, business corporations, non-bank financial concerns
and other investors for their short-term surplus funds.

iii. It provides short-term funds to the various borrowers such as businessmen, industrialists,
traders etc.

iv. Money market provides short-term funds even to the government institutions.

v. The money market constitutes a highly efficient mechanism for credit control. It serves as a
medium through which the Central Bank of the country exercises control on the creation of
credit.

vi. It enables businessmen to invest their temporary surplus for a short-period.

vii. It plays a vital role in the flow of funds to the most important uses.
 Capital Markets
Capital markets are venues where savings and investments are channeled between the suppliers
who have capital and those who are in need of capital. The entities who have capital include
retail and institutional investors while those who seek capital are businesses, governments, and
people.

Capital markets are composed of primary and secondary markets. The most common capital
markets are the stock market and the bond market.

Capital markets seek to improve transactional efficiencies. These markets bring those who hold
capital and those seeking capital together and provide a place where entities can exchange
securities.

 Capital markets refer to the places where savings and investments are moved between suppliers
of capital and those who are in need of capital.
 Capital markets consist of the primary market, where new securities are issued and sold, and the
secondary market, where already-issued securities are traded between investors.
 The most common capital markets are the stock market and the bond market.

Understanding Capital Markets

The term capital market broadly defines the place where various entities trade different financial
instruments. These venues may include the stock market, the bond market, and the currency and
foreign exchange markets. Most markets are concentrated in major financial centers including
New York, London, Singapore, and Hong Kong.

Capital markets are composed of the suppliers and users of funds. Suppliers include households
and the institutions serving them—pension funds, life insurance companies, charitable
foundations, and non-financial companies—that generate cash beyond their needs for
investment. Users of funds include home and motor vehicle purchasers, non-financial companies,
and governments financing infrastructure investment and operating expenses. 

Capital markets are used to sell financial products such as equities and debt securities. Equities
are stocks, which are ownership shares in a company. Debt securities, such as bonds, are interest-
bearing IOUs.

These markets are divided into two different categories: primary markets—where new equity
stock and bond issues are sold to investors—and secondary markets, which trade existing
securities. Capital markets are a crucial part of a functioning modern economy because they
move money from the people who have it to those who need it for productive use.
 PRIMARY MARKET

The Primary Market, also known as a New Issue Market, is where new securities are issued –
it is part of the capital market. Corporations, national and local governments, and other public
sector institutions can get financing through the sale of new stock or bond issues through the
primary market.

Put simply, the primary market creates new securities and offers them for sale to the public.

All companies require capital for their operations. This capital (money) can be in the form of
equity or debt. Equity is the stock capital (share capital) of a company. Debt consists of all the
loans taken by the business.

In order to raise capital in the form of equity, a company can sell its shares to members of the
public. When shares are sold directly to the public, this is done via the primary market route.

The sale of securities in the primary market is usually done through an investment bank or
finance syndicate of securities dealers.

“The market where new securities are issued and sold directly by the issuer to investors. Any trading
after that takes place on the secondary market.”

Features of Primary Market

 It is the new issue market for the new long term capital.
 Here the securities are issued by company directly to the investors and not
through any intermediaries. 
 On receiving the money from the new issues, the company will issue the security
certificates to the investors.
 The amount obtained by the company after the new issues are utilized for
expansion of the present business or for setting up new ventures.
 External finance for longer term such as loans from financial institutions is not
included in primary market. There is an option called ‘going public’ in which the
borrowers in new issue market raise capital for converting private capital into
public capital. 

IPO

An initial public offering (IPO) refers to the process of offering shares of a private corporation to
the public in a new stock issuance. Public share issuance allows a company to raise capital from
public investors. The transition from a private to a public company can be an important time for
private investors to fully realize gains from their investment as it typically includes share
premiums for current private investors. Meanwhile, it also allows public investors to participate
in the offering.
A company planning an IPO will typically select an underwriter or underwriters. They will also
choose an exchange in which the shares will be issued and subsequently traded publicly.

Initial public offering is the process by which a private company can go public by sale of its
stocks to general public. It could be a new, young company or an old company which decides to
be listed on an exchange and hence goes public.

Companies can raise equity capital with the help of an IPO by issuing new shares to the public or
the existing shareholders can sell their shares to the public without raising any fresh capital.

Follow On Public Offer (FPO)

A follow-on public offering (FPO) is the issuance of shares to investors by a company listed on a
stock exchange. A follow-on offering is an issuance of additional shares made by a company
after an initial public offering (IPO). However, follow-on offerings are different than secondary
offerings.

Key Takeaways

 A follow-on public offer (FPO) is another issuance of shares after the initial public offering (IPO). 
 Companies usually announce FPOs to raise equity or reduce debt.
 The two main types of FPOs are dilutive—meaning new shares are added—and non-dilutive—
meaning existing private shares are sold publicly.
 An at-the-market offering (ATM) is a type of FPO by which a company can offer secondary public
shares on any given day, usually depending on the prevailing market price, to raise capital.

FPO, an acronym for Follow-on Public Offering, as the name suggests it is the public issue of
shares to investors at large, by a publicly listed company. The process is after an IPO; wherein
the company goes for a further issue of shares to the general public with a view to diversifying
their equity base. The shares are offered for sale by the company through an offer document
called prospectus. There is two type of Follow-on Public Offering:

 Dilutive offering
 Non-Dilutive offering

Types of Follow-On Public Offers

There are two main types of follow-on public offers. The first is dilutive to investors, as the
company’s Board of Directors agrees to increase the share float level or the number of shares
available. This kind of follow-on public offering seeks to raise money to reduce debt or expand
the business. Resulting in an increase in the number of shares outstanding.
The other type of follow-on public offer is non-dilutive. This approach is useful when directors
or substantial shareholders sell-off privately held shares. With a non-dilutive offer, all shares
sold are already in existence. Commonly referred to as a secondary market offering, there is no
benefit to the company or current shareholders. By paying attention to the identity of the sellers
on offerings, an investor can determine whether the offering will be dilutive or non-dilutive to
their holdings.

'New Fund Offer'

Definition: A new fund offer (NFO) is the first time subscription offer for a new scheme
launched by the asset management companies (AMCs). A new fund offer is launched in the
market to raise capital from the public in order to buy securities like shares, govt. bonds etc. from
the market.

Description: NFO is similar to the initial public offer (IPO) with an attempt to raise capital from
the market. NFOs are offered for a stipulated period. This means that the investors opting to
invest in these schemes at the offer price (in most cases the offer price is fixed at Rs 10) can do
so in this stipulated period only. After the NFO period, investors can take exposure in these
funds only at the prevailing NAV.

A New Fund Offer or NFO refers to the first subscription offering that is made to interested
parties for any new funds which are offered by investment companies. In theory, an NFO is akin
to an IPO or an initial public offering,that it is launched to raise funds. The NFO typically ensues
at the time when a new fund is being launched. It allows the launching company to raise capital
for purchasing securities. Mutual funds are the most common types of NFOs which are marketed
by investment companies.

Types of NFO

A New Fund Offer can be of two types-

 Open-ended funds: This fund is officially launched after the NFO ends. Investors can enter and
exit the fund at any time after the launch.
 Close-ended funds: A close-ended fund does not allow the entry and/or exit of investors after
the NFO period, until its maturity. This time period is typically 3-4 years from the launch date.
However, the investors may buy and sell the units of such a fund on the stock market in theory,
but the liquidity of such funds on the market tends to be low.
Book Building:

Every business organisation needs funds for its business activities. It can raise funds either
externally or through internal sources. When the companies want to go for the external sources,
they use various means for the same. Two of the most popular means to raise money are Initial
Public Offer (IPO) and Follow on Public Offer (FPO).

During the IPO or FPO, the company offers its shares to the public either at fixed price or offers
a price range, so that the investors can decide on the right price. The method of offering shares
by providing a price range is called book building method. This method provides an opportunity
to the market to discover price for the securities which are on offer.

Book Building may be defined as a process used by companies raising capital through Public
Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and
demand discovery. It is a mechanism where, during the period for which the book for the offer is
open, the bids are collected from investors at various prices, which are within the price band
specified by the issuer. The process is directed towards both the institutional investors as well as
the retail investors. The issue price is determined after the bid closure based on the demand
generated in the process.

Book Building vs. Fixed Price Method:

The main difference between the book building method and the fixed price method is that in the
former, the issue price to not decided initially. The investors have to bid for the shares within the
price range given. The issue price is fixed on the basis of demand and supply of the shares.

On the other hand, in the fixed price method, the price is decided right at the start. Investors
cannot choose the price. They have to buy the shares at the price decided by the company. In the
book building method, the demand is known every day during the offer period, but in fixed price
method, the demand is known only after the issue closes.

Book Building in India:

The introduction of book-building in India was done in 1995 following the recommendations of
an expert committee appointed by SEBI under Y.H. Malegam. The committee recommended and
SEBI accepted in November 1995 that the book-building route should be open to issuer
companies, subject to certain terms and conditions. In January 2000, SEBI came out with a
compendium of guidelines, circulars and instructions to merchant bankers relating to issue of
capital, including those on the book-building mechanism.

Book Building Process:

The principal intermediaries involved in a book building process are the companies, Book
Running Lead Manager (BRLM) and syndicate members are the intermediaries registered with
SEBI and eligible to act as underwriters. Syndicate members are appointed by the BRLM. The
book building process is undertaken basically to determine investor appetite for a share at a
particular price. It is undertaken before making a public offer and it helps determine the issue
price and the number of shares to be issued.

The following are the important points in book building process:

1. The Issuer who is planning an offer nominates lead merchant banker(s) as ‘book runners’.

2. The Issuer specifies the number of securities to be issued and the price band for the bids.

3. The Issuer also appoints syndicate members with whom orders are to be placed by the
investors.

4. The syndicate members put the orders into an ‘electronic book’. This process is called
‘bidding’ and is similar to open auction.

5. The book normally remains open for a period of 5 days.

6. Bids have to be entered within the specified price band.

7. Bids can be revised by the bidders before the book closes.

8. On the close of the book building period, the book runners evaluate the bids on the basis of the
demand at various price levels.

9. The book runners and the Issuer decide the final price at which the securities shall be issued.

10. Generally, the number of shares is fixed; the issue size gets frozen based on the final price
per share.

11. Allocation of securities is made to the successful bidders. The rest bidders get refund orders.

Understanding Rights Issues

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Sources of Finance

Rights Issue of Shares

A rights issue is one of the ways by which a company can raise equity share capital among the
various types of equity share capital sources available. These are slightly different from the
standard issue of shares. Right shares mean the shares where the existing shareholders have the
first right to subscribe the shares.
In layman terms, rights issue gives a right to the existing shareholders to purchase additional new
shares in the company. Rights shares are usually issued at a discount as compared to the
prevailing traded price in the market. The existing shareholders are allowed a prescribed time
limit/date within which need to exercise the right or the right will thereafter be forgone.

Cash-strapped companies can turn to rights issues to raise money when they really need it. In
these rights offerings, companies grant shareholders the right, but not the obligation, to buy new
shares at a discount to the current trading price. We explain how rights issues work and what
they mean for the company and its shareholders.

Defining a Rights Issue 

A rights issue is an invitation to existing shareholders to purchase additional new shares in the
company. This type of issue gives existing shareholders securities called rights. With the rights,
the shareholder can purchase new shares at a discount to the market price on a stated future date.
The company is giving shareholders a chance to increase their exposure to the stock at a discount
price.

Key Takeaways

 A rights issue is one way for a cash-strapped company to raise capital often to pay down debt.
 Shareholders can buy new shares at a discount for a certain period.
 With a rights issue, because more shares are issued to the market, the stock price is diluted and
will likely go down.

Until the date at which the new shares can be purchased, shareholders may trade the rights on the
market the same way that they would trade ordinary shares. The rights issued to a shareholder
have value, thus compensating current shareholders for the future dilution of their existing
shares' value. Dilution occurs because a rights offering spreads a company’s net profit over a
larger number of shares. Thus, the company’s earnings per share, or EPS, decreases as the
allocated earnings result in share dilution.

A rights issue is an offering of rights to the existing shareholders of a company that gives them
an opportunity to buy additional shares directly from the company at a discounted price rather
than buying them in the secondary market. The number of additional shares that can be bought
depends on the existing holdings of the shareowners.

Features of a Rights Issue

 Companies undertake a rights issue when they need cash for various objectives. The process
allows the company to raise money without incurring underwriting fees.
 A rights issue gives preferential treatment to existing shareholders, where they are given the
right (not obligation) to purchase shares at a lower price on or before a specified date.
 Existing shareholders also enjoy the right to trade with other interested market participants
until the date at which the new shares can be purchased. The rights are traded in a similar way
as normal equity shares.
  The number of additional shares that can be purchased by the shareholders is usually in
proportion to their existing shareholding.
 Existing shareholders can also choose to ignore the rights; however, if they do not purchase
additional shares, then their existing shareholding will be diluted post issue of additional shares.

Reasons for a Rights Issue

 When a company is planning an expansion of its operations, it may require a huge amount of
capital. Instead of opting for debt, they may like to go for equity to avoid fixed payments of
interest. To raise equity capital, a rights issue may be a faster way to achieve the objective.
 A project where debt/loan funding may not be available/suitable or expensive usually makes a
company raise capital through a rights issue.
 Companies looking to improve their debt to equity ratio or looking to buy a new company may
opt for funding via the same route.
 Sometimes troubled companies may issue shares to pay off debt in order to improve their
financial health.

What is a Private Placement?

As the name suggests, a “private placement” is a private alternative to issuing, or selling, a

publicly offered security as a means for raising capital. In a private placement, both the offering
and sale of debt or equity securities is made between a business, or issuer, and a select number of
investors. There may be as few as one investor for any issue. A private placement is a sale of
stock shares or bonds to pre-selected investors and institutions rather than on the open market. It
is an alternative to an initial public offering (IPO) for a company seeking to raise capital for
expansion.

Investors invited to participate in private placement programs include wealthy individual

investors, banks and other financial institutions, mutual funds, insurance companies, and pension
funds.

The three most important features that would classify a securities issue as a private placement
are:

1. The securities are not publicly offered

2. The securities are not required to be registered with the SEC
3. The investors are limited in number and must be “accredited”*

Companies, both public and private, issue in the private placement market for a variety of
reasons, including a desire to access long-term, fixed-rate capital, diversify financing sources,
add additional financing capacity beyond existing investors (banks, private equity, etc.) or, in the
case of privately held businesses, to maintain confidentiality.
Since private placements are offered only to a limited pool of accredited investors, they are
exempt from registering with the Securities and Exchange Commission (SEC). This affords the
issuer the opportunity to avoid certain costs associated with a public offering as well as allows
for more flexibility regarding structure and terms.  

"One of the key advantages of a private placement is its flexibility."

The most common type of private placement is long-term, fixed-rate senior debt, but there is
an endless array of structuring alternatives. One of the key advantages of a private placement is
its flexibility. Private placement debt securities are similar to bonds or bank loans and can either
be secured, meaning they are backed by collateral, or unsecured, where collateral is not required.
In addition to senior debt, other types of private placement debt issuances include:

 Subordinated Debt
 Term Loans
 Revolving Loans
 Asset Backed Loans
 Leases
 Shelf Issues

Traditionally, middle-market companies have issued debt in the private placement market
through two primary channels:

1. Directly with a private placement investor, such as a large insurance company or other
institutional investor
2. Through an agent (most often an investment bank) on a best efforts basis who solicits bids from
several potential investors - this is typically for larger transactions: $100MM+

A private placement issuance is a way for institutional investors to lend to companies in a similar
fashion as banks, with a “buy-and-hold” approach, and with no required trading or public
disclosures. Historically, insurance companies refer to investments as purchasing “notes,” while
banks make “loans.”

Bonus Issue?

A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional
shares to existing shareholders. A company may decide to distribute further shares as an
alternative to increasing the dividend payout. For example, a company may give one bonus share
for every five shares held.

Understanding Bonus Issue

Bonus issues are given to shareholders when companies are short of cash and shareholders
expect a regular income. Shareholders may sell the bonus shares and meet their liquidity needs.
Bonus shares may also be issued to restructure company reserves. Issuing bonus shares does not
involve cash flow. It increases the company’s share capital but not its net assets.
Bonus shares are issued according to each shareholder’s stake in the company. For example, a
three-for-two bonus issue entitles each shareholder three shares for every two they hold before
the issue. A shareholder with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500).

Bonus shares are not taxable. But the stockholder may have to pay capital gains tax, if she sells
them.

Key Takeaways

 A bonus issue of shares is stock issued by a company in lieu of cash dividends. Shareholders can
sell the shares to meet their liquidity needs.
 Bonus shares increase a company's share capital but not its net assets.

Advantages and Disadvantages of Issuing Bonus Shares

Companies low on cash may issue bonus shares rather than cash dividends as a method of
providing income to shareholders. Because issuing bonus shares increases the issued share
capital of the company, the company is perceived as being bigger than it really is, making it
more attractive to investors. In addition, increasing the number of outstanding shares decreases
the stock price, making the stock more affordable for retail investors.

However, issuing bonus shares takes more money from the cash reserve than issuing dividends
does. Also, because issuing bonus shares does not generate cash for the company, it could result
in a decline in the dividends per share in the future, which shareholders may not view favorably.
In addition, shareholders selling bonus shares to meet liquidity needs lowers shareholders'
percentage stake in the company, giving them less control over how the company is managed.

Buyback

A buyback, also known as a share repurchase, is when a company buys its own outstanding
shares to reduce the number of shares available on the open market. Companies buy back shares
for a number of reasons, such as to increase the value of remaining shares available by reducing
the supply or to prevent other shareholders from taking a controlling stake.

Understanding Buybacks

A buyback allows companies to invest in themselves. Reducing the number of shares outstanding
on the market increases the proportion of shares owned by investors. A company may feel its
shares are undervalued and do a buyback to provide investors with a return. And because the
company is bullish on its current operations, a buyback also boosts the proportion of earnings
that a share is allocated. This will raise the stock price if the same price-to-earnings (P/E) ratio is
maintained.

The share repurchase reduces the number of existing shares, making each worth a greater
percentage of the corporation. The stock’s EPS thus increases while the price-to-earnings
ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors
that the business has sufficient cash set aside for emergencies and a low probability of economic
troubles.

Another reason for a buyback is for compensation purposes. Companies often award their
employees and management with stock rewards and stock options. To make due on rewards and
options, companies buy back shares and issue them to employees and management. This helps
avoid the dilution of existing shareholders. 

Because share buybacks are carried out using a firm's retained earnings, the net economic effect
to investors would be the same as if those retained earnings were paid out as shareholder
dividends.

How Companies Perform a Buyback

Buybacks are carried out in two ways:

1. Shareholders might be presented with a tender offer, where they have the option to submit, or
tender, all or a portion of their shares within a given time frame at a premium to the current
market price. This premium compensates investors for tendering their shares rather than
holding onto them.
2. Companies buy back shares on the open market over an extended period of time and may even
have an outlined share repurchase program that purchases shares at certain times or at regular
intervals.

A company can fund its buyback by taking on debt, with cash on hand or with its cash flow from
operations.

An expanded share buyback is an increase in a company’s existing share repurchase plan. An

expanded share buyback accelerates a company’s share repurchase plan and leads to a faster
contraction of its share float. The market impact of an expanded share buyback depends on its
magnitude. A large, expanded buyback is likely to cause the share price to rise.

The buyback ratio considers the buyback dollars spent over the past year, divided by its market
capitalization at the beginning of the buyback period. The buyback ratio enables a comparison of
the potential impact of repurchases across different companies. It is also a good indicator of a
company’s ability to return value to its shareholders since companies that engage in regular
buybacks have historically outperformed the broad market.

The reasons for buy-back:

 To improve earnings per share;

 To improve return on capital, return on net worth and to enhance the long-term
shareholder value;
 To provide an additional exit route to shareholders when shares are under valued or are
thinly traded;
 To enhance consolidation of stake in the company;
  To prevent unwelcome takeover bids;
 To return surplus cash to shareholders;
 To achieve optimum capital structure;
 To support share price during periods of sluggish market conditions;
 To service the equity more efficiently.

Advantages of Buy Back:

 It is an alternative mode of reduction in capital without requiring approval of the

Court/CLB(NCLT),
 To improve the earnings per share;
 To improve return on capital, return on net worth and to enhance the long-term
shareholders value;
 To provide an additional exit route to shareholders when shares are undervalued or thinly
traded;
 To enhance consolidation of stake in the company.
 To prevent unwelcome takeover bids;
 To return surplus cash to shareholders;
 To achieve optimum capital structure;
 To support share price during periods of sluggish market condition;
 To serve the equity more efficiently.

Secondary Market
Also known as aftermarket, is the follow on of public offering in the market. It is the place where
stocks, bonds, options and futures, issued previously, are bought and sold. Simply put, it is a
marketplace where securities issued earlier, are sold and purchased.

Secondary markets include all stock exchanges where investors buy or sell their securities with
other investors. Because investors who deal with securities needed a place to exchange their
offerings for money, the stock exchange emerged. Today, it is highly sophisticated and uses
advanced technologies to provide real-time prices of any share.

Secondary markets provide the liquidity for investors and even for the economy as a whole. In
general, the higher the number of investors, the greater the liquidity for that market. It is also in
tune with the investors' preference for liquidity because most investors would not prefer to lock
up their funds for long periods of time and the secondary market gives them the platform to have
liquidity when they want it.

Besides the widely accepted definition of secondary markets, there also exists private secondary
markets that deal with the buying and selling of investor commitments to private equity funds. In
this market, the sellers not only sell their investments, but also the unfunded commitments, so
that buyers have the choice to take any stake in private equity companies.
The secondary market facilitates the liquidity and marketability of securities. For management of
company it serves as a monitoring and controlling channel by:

 Facilitating value buildup control activities and,

 Accumulates information with market capitalization

Secondary market provides real time valuation of securities on the basis of demand and supply.

Secondary market definition itself states that it is second-hand market, when previously issued
securities are bought and sold.

Types of Secondary Markets

There are two types of secondary markets:

Exchanges

It is a marketplace, wherein there is no direct contact between the buyer and the seller, like
NYSE or NASDAQ. There is no counterparty risk as an exchange is a guarantor. Also, heavy
regulations make it a safe place for investors to trade securities. However, investors face a
comparatively higher transaction cost due to exchange fees and commission.

Over-The-Counter (OTC) Markets

It is a decentralized place, where the market is made up of members trading among themselves.
Foreign exchange market (FOREX) is one such type of market. There is more competition
among the participants to get higher volume, so prices of security may vary from seller to seller.
Also, OTC markets suffer from counterparty risk as parties deal with each other directly.

Stock Exchange

The secondary tier of the capital market is what we call the stock market or the stock exchange.
The stock exchange is a virtual market where buyers and sellers trade in existing securities. It is a
market hosted by an institute or any such government body where shares, stocks, debentures,
bonds, futures, options, etc are traded.

A stock exchange is a meeting place for buyers and sellers. These can be brokers, agents,
individuals. The price of the commodity is decided by the rules of demand and supply. In India,
the most prominent stock exchange is the Bombay Stock Exchange. There are a total of twenty-
one stock exchanges in India.
Functions of the Stock Exchange

 Liquidity and Marketability: One of the main drawing factors of the stock exchange is that it
enables high liquidity. The securities can be sold at a moment’s notice and be converted to cash.
It is a continuous market and the investors can divest and reinvest with ease as per their wishes.
 Price Determination: In a secondary market, the only way to determine the price of securities in
via the rules of supply and demand. A stock exchange enables this process via constant
valuation of all the securities. Such prices of shares of various companies can be tracked via the
index we call the Sensex.
 Safety: The government strictly governs and regulates the stock exchanges. In the case of the
BSE, the Securities Board of India is the governing body. All transactions occur within the legal
framework. This provides the investor with assurances and a safe place to transact in securities.
 Contribution to the Economy: As we know the stock exchange deals in already-issued securities.
But these securities are continuously sold and resold and so on. This allows the funds to be
mobilized and channelized instead of sitting idle. This boosts the economy.
 Spreading of Equity: The stock exchange ensures wider ownership of securities. It actually
educates the public about the safety and the benefits of investing in the stock market. It ensures
a better quality of transactions and smooth functioning. The idea is to get more public investors
and spread the ownership of securities for the benefit of everyone.
 Speculation: One often hears that the stock exchange is a speculative market. And while this is
true, the speculation is kept within the legal framework. For the stake of liquidity and price
determination, a healthy dose of speculative trading is necessary, and the stock exchange
provides us with such a platform.

1. Economic Barometer:

A stock exchange is a reliable barometer to measure the economic condition of a country.

Every major change in country and economy is reflected in the prices of shares. The rise or fall
in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also
known as a pulse of economy or economic mirror which reflects the economic conditions of a
country.

2. Pricing of Securities:

The stock market helps to value the securities on the basis of demand and supply factors. The
securities of profitable and growth oriented companies are valued higher as there is more demand
for such securities. The valuation of securities is useful for investors, government and creditors.
The investors can know the value of their investment, the creditors can value the
creditworthiness and government can impose taxes on value of securities.

3. Safety of Transactions:

In stock market only the listed securities are traded and stock exchange authorities include the
companies names in the trade list only after verifying the soundness of company. The companies
which are listed they also have to operate within the strict rules and regulations. This ensures
safety of dealing through stock exchange.
4. Contributes to Economic Growth:

In stock exchange securities of various companies are bought and sold. This process of
disinvestment and reinvestment helps to invest in most productive investment proposal and this
leads to capital formation and economic growth.

5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating new issues,
better trading practices and by educating public about investment.

6. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange permits healthy
speculation of securities.

7. Liquidity:

The main function of stock market is to provide ready market for sale and purchase of securities.
The presence of stock exchange market gives assurance to investors that their investment can be
converted into cash whenever they want. The investors can invest in long term investment
projects without any hesitation, as because of stock exchange they can convert long term
investment into short term and medium term.

8. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are actively traded so
such companies can easily raise fresh capital from stock market. The general public hesitates to
invest in securities of loss making companies. So stock exchange facilitates allocation of
investor’s fund to profitable channels.

9. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various securities. These
attractive opportunities encourage people to save more and invest in securities of corporate
sector rather than investing in unproductive assets such as gold, silver, etc.

BSE

The Bombay Stock Exchange (Marathi: मुंबई रोखे बाजार) (BSE) is an Indian stock exchange located
at Dalal Street, Mumbai.

Established in 1875, the BSE (formerly known as Bombay Stock Exchange Ltd.)[4] is Asia's
first stock exchange.[5] The BSE is the world's 10th largest stock exchange with an overall market
capitalization of more than $2.2 trillion on as of April 2018.[
The Bombay stock exchange was founded by Premchand Roychand,[6] an influential
businessmen in 19th-century Bombay. He made a fortune in the stockbroking business and came
to be known as the Cotton King, the Bullion King or just the Big Bull. He was also the founder
of the Native Share and Stock Brokers Association, an institution that is now known as the BSE.
[7]

While BSE Ltd is now synonymous with Dalal Street, it was not always so. The first venue of
the earliest stock broker meetings in the 1850s was in rather natural environs—under banyan
trees—in front of the Town Hall, where Horniman Circle is now situated. A decade later, the
brokers moved their venue to another set of foliage, this time under banyan trees at the junction
of Meadows Street and what is now called Mahatma Gandhi Road. As the number of brokers
increased, they had to shift from place to place, but they always overflowed to the streets. At last,
in 1874, the brokers found a permanent place, and one that they could, quite literally, call their
own. The new place was, aptly, called Dalal Street (Brokers' Street).

The Bombay Stock Exchange is the oldest stock exchange in Asia.[8] Its history dates back to
1855, when 22 stockbrokers[9] would gather under banyan trees in front of Mumbai's Town Hall.
The location of these meetings changed many times to accommodate an increasing number of
brokers. The group eventually moved to Dalal Street in 1874 and became an official organization
known as "The Native Share & Stock Brokers Association" in 1875.

On August 31, 1957, the BSE became the first stock exchange to be recognized by the Indian
Government under the Securities Contracts Regulation Act. In 1980, the exchange moved to the
Phiroze Jeejeebhoy Towers at Dalal Street, Fort area. In 1986, it developed the S&P BSE
SENSEX index, giving the BSE a means to measure the overall performance of the exchange. In
2000, the BSE used this index to open its derivatives market, trading S&P BSE SENSEX futures
contracts. The development of S&P BSE SENSEX options along with equity derivatives
followed in 2001 and 2002, expanding the BSE's trading platform.

Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to an
electronic trading system developed by CMC Ltd. in 1995. It took the exchange only 50 days to
make this transition. This automated, screen-based trading platform called BSE On-Line Trading
(BOLT) had a capacity of 8 million orders per day. Now BSE has raised capital by issuing shares
and as on 3 May 2017 the BSE share which is traded in NSE only closed with Rs.999 .[10]

The BSE is also a Partner Exchange of the United Nations Sustainable Stock Exchange initiative,
joining in September 2012.[11]

BSE established India INX on 30 December 2016. India INX is the first international exchange
of India.[12]

BSE launches commodity derivatives contract in gold, silver.

 National Stock Exchange of India
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India,
located in Mumbai. The NSE was established in 1992 as the first dematerialized electronic
exchange in the country. NSE was the first exchange in the country to provide a modern, fully
automated screen-based electronic trading system which offered easy trading facility to the
investors spread across the length and breadth of the country. Vikram Limaye is Managing
Director & Chief Executive Officer of NSE.

National Stock Exchange has a total market capitalization of more than US$2.27 trillion, making
it the world's 11th-largest stock exchange as of April 2018.[1] NSE's flagship index, the NIFTY
50, the 50 stock index is used extensively by investors in India and around the world as a
barometer of the Indian capital markets. Nifty 50 index was launched in 1996 by the NSE.[2]
However, Vaidyanathan (2016) estimates that only about 4% of the Indian economy / GDP is
actually derived from the stock exchanges in India.[3]

Unlike countries like the United States where nearly 70% of the GDP is derived from larger
companies and the corporate sector, the corporate sector in India accounts for only 12-14% of the
national GDP (as of October 2016). Of these only 7,800 companies are listed of which only 4000
trade on the stock exchanges at BSE and NSE. Hence the stocks trading at the BSE and NSE
account for only around 4% of the Indian economy, which derives most of its income related
activity from the so-called unorganized sector and households.[3]

Economic Times estimated that as of April 2018, 60 million (6 crore) retail investors had
invested their savings in stocks in India, either through direct purchases of equities or through
mutual funds.[4] Earlier, the Bimal Jalan Committee report estimated that barely 1.3% of India's
population invested in the stock market, as compared to 27% in USA and 10% in China
 3
Money market instruments are securities that provide businesses, banks, and the government
with large amounts of low-cost capital for a short time. The period is overnight, a few days,
weeks, or even months, but always less than a year. The financial markets meet longer-term cash
needs.

Businesses need short-term cash because payments for goods and services sold might take
months. Without money market instruments, they'd have to wait until payments were received
for goods already sold. This would delay the purchases of the raw goods and slow down the
manufacturing of the finished product.

Businesses also use money market instruments to invest extra cash. It will earn a little interest
until it needs to pay its fixed operating costs. These include rent, utilities, and wages.

Money market instruments allow managers to get cash quickly when they need it. For that
reason, money market instruments must be very safe.

For example, the stock market is too risky. Prices might have fallen by the time the firm needs to
pay bills.

Money markets must also be easy to withdraw at a moment's notice. They can’t have large
transaction fees. Otherwise, the business would just keep extra cash in a safe. There is $883
billion in money market instruments issued throughout the world, according to the Bank for
International Settlements. 

Many of these instruments of the money market are part of the U.S. money supply. This includes
currency, check deposits, as well as money market funds, certificates of deposit, and savings
accounts. The size of the money supply affects interest rates, consequently influencing economic
growth.

Types of Money Market Instruments

Money market instruments are those instruments, which have a maturity period of less than one
year. The most active part of the money market is the market for overnight call and term money
between banks and institutions and repo transactions. Call Money / Repo are very short-term
Money Market products. The below mentioned instruments are normally termed as money
market instruments:

 Certificate of Deposit (CD)

 Commercial Paper (CP)
 Inter Bank Participation Certificates
 Inter Bank term Money
 Treasury Bills
 Bill Rediscounting
  Call/ Notice/ Term Mone

1] Treasury Bills

These are money market instruments issued by the Reserve bank of India (RBI) acting on the
behalf of the central government. These bills are issued when there is a shortage of funds, or
when the RBI wants to control the cash liquidity in the market.

The maturity of such bills, also known as Zero Coupon Bonds or is always one year or less than
one year. They are highly liquid instruments and are a very low-risk instrument. Treasury bills
are issued at a discount than the face value and are redeemed at par. The difference is the interest
received by the holder. which in this case will be known as ‘discount’.

Example: A treasury bill of 108 days face value 50,000/- will be issued at 45.,000/-. If the holder
holds it for the whole 108 days, he will be repaid Rs 50,000/- and so the difference, Rs. 5,000/-
will be the discount.

2] Commercial Paper

Commercial paper is a promissory note. It is a short term. uninsured debt instrument. These are
generally issued by large companies and corporations in need of quick short-term loans. The
funds could be required for working capital needs, or some seasonal changes, to meet expenses
of issue of shares etc.

Commercial papers have a maturity date of between 15 days to 1 year. They are also issued at a
discount and redeemed at par. They are highly liquid and easily transferable instruments of the
money market.

3] Commercial Bill

A commercial bill is essentially a bill of exchange. In a credit sale, the seller will draw a bill of
exchange. The buyer of the goods will accept such bill, and the bill becomes a trade bill which is
a marketable financial instrument.

The seller can then go to his bank and get the bill discounted. Here the bank will promise to pay
the amount if the buyer is unable to do so. And this way a trade bill becomes a commercial bill.
The general term for such bills is 30, 60, or 90 days. It is a negotiable instrument and is also self-
liquidating.

4] Call Money

At times even banks may need help with maintaining their funds. At such times they lean on
other commercial banks for a short-term loan. Such an instrument of the money market is known
as call money. One important factor is that this interbank transaction has no maturity date, it is
payable on demand.
Mostly banks depend on call money to main their cash liquidity ratio as per RBI guidelines. The
rate of interest on call money is known as call rates.

5] Certificate of Deposits

These are money market instruments issued only by commercial banks and financial institutions
(under the guidelines of the RBI). They are like a promissory note, but can also be issued in a
demat form. Their maturity is between 7 days to a year when issued by banks. When issued by
other financial institutes the maturity is between one to three years.

Certificates of Deposit are issued at discount. The return on them is the difference between the
said issue price and their higher face value. They are issued only in multiples of one lacs. They
are easily transferable and highly liquid.

CMM

The call money market is an essential part of the Indian Money Market, where the day-to-day
surplus funds (mostly of banks) are traded. The money market is a market for short-term
financial assets that are close substitutes of money. The most important feature of a money
market instrument is that it is liquid and can be turned into money quickly at low cost and
provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements
of borrowers.

The loans are of short-term duration varying from 1 to 14 days, are traded in call money market.
The money that is lent for one day in this market is known as "Call Money", and if it exceeds
one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to
Money lent for 15 days or more in the Inter Bank Market.

Participants

Participants in the call money market are banks and related entities specified by the RBI.
Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land
Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice
money market both as borrowers and lenders. As per the new regulations, Payment Banks are
also allowed to participate in CMM as both lenders and borrowers.

Banks are the dominant participants in the CMM and hence it is often known as interbank call
money market. Surplus banks will give loans to other banks. Deficit banks that need funds will
purchase it.

Functioning of the Call Money Market

Loans are availed through auction/negotiation. The auction is made on interest rate.  Highest
bidder (who is ready to give higher interest rate) can avail the loan. Average interest rate in the
call market is called call rate. Dealing in call money is done through the electronic trading
platform called Negotiated Trading System (NDS). This call money rate is an important variable
for the RBI to assess the liquidity situation in the economy. The CMM is known as the most
sensitive segment of the financial system.

Since the participants are banks, the call money rate tells about the overall liquidity position in
the economy. Higher call rate indicates liquidity stress in the economy. In this case, the RBI may
follow up with liquidity support measures by through its monetary policy instruments – cutting
CRR or allowing more repos. Hence, the call money rate is taken as the operating target of
monetary policy.

TREASURY BILL

When the government is going to the financial market to raise money, it can do it by issuing two
types of debt instruments – treasury bills and government bonds. Treasury bills are issued when
the government need money for a shorter period while bonds are issued when it need debt for
more than say five years.

Treasury bills; generally shortened as T-bills, have a maximum maturity of a 364 days. Hence,
they are categorized as money market instruments (money market deals with funds with a
maturity of less than one year).

Treasury bills are presently issued in three maturities, namely, 91 day, 182 day and 364 day.
Treasury bills are zero coupon securities and pay no interest. Rather, they are issued at a discount
(at a reduced amount) and redeemed (given back money) at the face value at maturity. For
example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that is,
at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-.  This means
that you can get a hundred-rupee treasury bill at a lower price and can get Rupees hundred at
maturity.

The return to the investors is the difference between the maturity value or the face value (that is
Rs.100) and the issue price. The Reserve Bank of India conducts auctions usually every
Wednesday to issue T-bills. The rational is that since their maturity is lower, it is more
convenient to avoid intra period interest payments.

Treasury bills are usually held by financial institutions including banks. They have a very
important role in the financial market beyond investment instruments. Banks give treasury bills
to the RBI to get money under repo. Similarly, they can keep it as part of SLR.

REPURCHASE AGREEMENT

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a
form of short-term borrowing, mainly in government securities. The dealer sells the underlying
security to investors and buys them back shortly afterwards, usually the following day, at a
slightly higher price.
The repo market is an important source of funds for large financial institutions in the non-
depository banking sector, which has grown to rival the traditional depository banking sector in
size. Large institutional investors such as money market mutual funds lend money to financial
institutions such as investment banks, either in exchange for (or secured by) collateral, such as
Treasury bonds and mortgage-backed securities held by the borrower financial institutions. An
estimated $1 trillion per day in collateral value is transacted in the U.S. repo markets.[1][2]

In 2007-2008, a run on the repo market, in which funding for investment banks was either
unavailable or at very high interest rates, was a key aspect of the subprime mortgage crisis that
led to the Great Recession.[3] During September 2019, the U.S. Federal Reserve intervened in the
role of investor to provide funds in the repo markets, when overnight lending rates jumped due to
a series of technical factors that had limited the supply of funds available.[1][4][2]

Bankers Acceptances

A bankers acceptance (BA, aka bill of exchange) is a commercial bank draft requiring the bank
to pay the holder of the instrument a specified amount on a specified date, which is typically 90
days from the date of issue, but can range from 1 to 180 days. The bankers acceptance is issued
at a discount, and paid in full when it becomes due—the difference between the value at maturity
and the value when issued is the interest. If the bankers acceptance is presented for payment
before the due date, then the amount paid is less by the amount of the interest that would have
been earned if held to maturity.

A bankers acceptance is used for international trade as means of ensuring payment. For instance,
if an importer wants to import a product from a foreign country, he will often get a letter of credit
from his bank and send it to the exporter. The letter of credit is a document issued by a bank
that guarantees the payment of the importer's draft for a specified amount and time. Thus, the
exporter can rely on the bank's credit rather than the importer's. The exporter presents the
shipping documents and the letter of credit to his domestic bank, which pays for the letter of
credit at a discount, because the exporter's bank won't receive the money from the importer's
bank until later. The exporter's domestic bank then sends a time draft to the importer's bank,
which then stamps it "accepted" and, thus, converting the time draft into a bankers acceptance.
This negotiable instrument is backed by the importer's promise to pay, the imported goods, and
the bank's guarantee of payment.

commercial Paper

Imagine this scenario to get an idea of what a commercial paper is; You had lunch in a restaurant
and the bill is ₹900, you give ₹2000 note but the cashier does not have a chance to give back. He
gives you a paper and writes on it, “We are to give Mr. You ₹1100 in cash or either You can
have a meal worth ₹1100 from one of our branches within the one-month duration.” He signs it
and issues a stamp of the restaurant on it. Should you accept it? Definitely.

This was just an example to give you an idea of what commercial papers are. Commercial papers
are usually issued at a high value. It is unsecured money market instrument issued in the form of
a promissory note and transferable between Primary Dealers (PDs) and the All-India Financial
Institutions (FIs).

Individuals, banking companies, other corporate bodies (registered or incorporated in India) and
unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs)
etc. can invest in Commercial Papers. However, investment by FIIs would be within the limits
set for them by Securities and Exchange Board of India (SEBI) from time-to-time.

Commercial Papers emerged as a source of short-term finance in India in the early nineties. As
we discussed, Primary Dealers (PDs) and the All-India Financial Institutions (FIs) issue
commercial papers which is an unsecured promissory note to raise funds for a short period of 90
days to 364 days.

The money raised by the commercial paper is generally very large. It is generally issued by one
firm to another business firms, insurance companies, pension funds and banks. Its regulation
comes under the purview of the Reserve Bank of India (RBI). As the RBI does not want to risk
the funds, only the firms having good credit rating can issue the commercial paper.

Merits of Commercial Paper

i. Technically, it provides more funds compared to other sources. The cost of commercial paper to
the issuing firm is lower than the cost of commercial bank loans.
ii. It is in freely transferable nature, therefore it has high liquidity also a wide range of maturity
provide more flexibility.
iii. A commercial paper is highly secure and does not contain any restrictive condition.
iv. Companies can save their extra funds on commercial paper and also earn some good return on
the same.
v. Commercial papers produce a continuing source of funds. This is because their maturity can be
tailored to suit the needs of issuing firm. Again, commercial paper that matures can be repaid by
the new commercial paper.

CERTIFICATE OF DEPOSITE

A certificate of deposit is an agreement to deposit money for a fixed period with a bank that will
pay you interest. You can choose to invest for three months, six months, one year, or five years.
You will receive a higher interest rate for the longer time commitment. You promise to leave all
the money, plus the interest, with the bank for the entire term.

In effect, you are lending the bank your money in return for interest. The CD is a promissory
note that the bank issues you. That's how banks acquire the cash they need to make loans. The
interest you receive is less than the pay earns for lending it out. That's how banks earn a profit.
But you earn a higher interest rate than you would for an interest-bearing checking account. That
because you can't withdraw the funds for the agreed-upon time. 
Three Advantages

There are three advantages of CDs. First, your funds are safe. The Federal Deposit
Insurance Corporation insures CDs up to $250,000. The federal government guarantees
you will never lose your principal. For that reason, they have less risk than bonds, stocks,
or other more volatile investments.

Second, they offer higher interest rates than interest-bearing checking and savings
account. They also offer higher interest rates than other safe investments, such as money-
market accounts or money market funds.

You can shop around for the best rate. Small banks will offer better rates because they
need the funds. Online-only banks will offer higher rates than brick and mortar banks
because their costs are lower. In addition, you would find higher-than-usual rates if you
deposit sizable amount of cash in the form of Jumbo CDs.

Three Disadvantages

CDs have three disadvantages. The main disadvantage is that your money is tied up for
the life of the certificate. You pay a penalty if you need to withdraw your money before
the term is up. However, there are several types of CDs that provide a certain amount of
flexibility, so don't forget to ask your bank about options.

The second disadvantage is that you could miss out on investment opportunities that
occur while your money is tied up. For example, you run the risk that interest rates will
go up on other products during your term. If it looks like interest rates are rising, you can
get a no-penalty CD. It allows you to get your money back without charge any time after
the first six days. They pay more than a money market, but less than a regular CD.
(Source: "Certificates of Deposit," Ally Bank.)

The third problem is that CDs don't pay enough to keep up with the rate of inflation. If
you only invest in CDs, you'll lose your standard of living over time. The best way to
keep ahead of inflation is with stock investing, but that is risky. You could lose your total
investment. You could get a slightly higher return without risk with Treasury Inflation
Protected Securities or I-Bonds. Their disadvantage is that you'll lose money if there is
deflation.

Commercial Bill Market

Bills of exchange are negotiable instruments, drawn by the seller (drawer) of the goods on the
buyer (drawee) of the goods for the value of the goods delivered. These bills are known as trade
bills. Trade bills are called commercial bills when they are accepted by commercial banks. If the
bill is payable at a future date and the seller needs money during the currency of the bill, he may
approach his bank to discount the bill. The maturity proceeds or face value of a discounted bill
from the drawee is received by the bank. If the bank needs funds during the currency of bill, it
can rediscount the bill that has been already discounted by it in the commercial bill rediscount
market at the available market discount rate. The RBI introduced the Bills Market scheme
(BMS) in 1952 and the scheme was later modified into the New Bills Market Scheme (NBMS)
in 1970. Under the scheme, commercial banks can rediscount the bills, which were originally
discounted by them, with approved institutions.

With the intention of reducing paper movements and in a bid to facilitate multiple rediscounting,
the RBI introduced an instrument called Derivative Usance Promissory Notes (DUPN).
Consequently, the need for the physical transfer of bills has been waived and the bank that
originally discounts the bills only draws DUPN. These DUPNs are sold to investors in
convenient lots of maturities (from 15 days up to 90 days) on the basis of genuine trade bills,
discounted by the discounting bank.

Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. It
enhances he liability to make payment in a fixed date when goods are bought on credit.
According to the Indian Negotiable Instruments Act, 1881, bill or exchange is a written
instrument containing an unconditional order, signed by the maker, directing to pay a certain
amount of money only to a particular person, or to the bearer of the instrument. Bills of exchange
are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) or the value of the
goods delivered to him. Such bills are called trade bills. When trade bills are accepted by
commercial banks, they are called commercial bills. The bank discounts this bill by keeping a
certain margin and credits the proceeds. Banks, when in need of money, can also get such bills
rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity
period of the bills varies from 30 days, 60 days or 90 days, depending on the credit extended in
the industry.

Shares

A share in the share capital of the company, including stock, is the definition of the term ‘Share’.
This is in accordance with Section 2(84) of the Companies Act, 2013. In other words, a share is a
measure of the interest in the company’s assets held by a shareholder. In this article, we will look
at the different types of shares like preferential and equity shares. Further, we will understand
certain definitions and regulations surrounding them.

The Memorandum and Articles of Association of the company prescribe the rights and
obligations of shareholders. Further, a shareholder must have certain contractual and other rights
as per the provisions of the Companies Act, 2013.

Section 44 of the Companies Act, 2013, states that shares or debentures or other interests of any
member in a company are movable properties. Also, they are transferable in the manner
prescribed in the Articles of the company. Further, Section 45 of the Act mandates the
numbering of every share. This number is distinctive. However, if a person is a holder of the
beneficial interest in the share, then this rule does not apply (example: share in the records of a
depository).
Types of Shares

There are also different types of shares available within a company:

 Preference shares: Preference shares have preferential rights to dividends if a business closes.
Preference shares do not have voting rights available, except in specific situations.
 Equity shares: Equity shares do not have preferential rights. Instead, they receive payment from
dividends and repayment of capital after preference shares' claims were settled. The specific
rate of return is decided by the board members and directors. Equity shares are often used to
raise money for the company and are referred to as the owner's funds. It is possible that an
equity share will not pay any dividends if the business does not profit. While preference
shareholders get a fixed rate, equity shareholders may receive varying payments each year.
Equity shareholders are often owners of the company and have regular voting rights available.
They may also be subject to things like deferred shares or founder's shares.
 Cumulative preference share: A cumulative preference shareholder does not receive payment
when a profit is not made. However, cumulative shares may be paid through unpaid dividends.
A cumulative preference shareholder is only paid after other shareholders have been paid. If no
funds remain, then they will not receive a payment that year.
 Non-cumulative preference shares: Non-cumulative preference shareholders have preferential
shareholder rights and receive a fixed dividend payment. However, they are only paid if profits
remain. If no profits left, the owed amount is not carried over to the following years.
 Redeemable preference shares: Any capital collected from selling shares is not paid to a
shareholder. But, any capital raised through preference shares can be paid to the shareholder at
the end of the period. There may be time limits on these redeemable shares, which sometimes
exceed 10 years or more.
 Participating/Non-participating preference shares: These shares are paid through a combination
of profits and fixed rates. Once all profits have been paid to shareholders, any extra money is
divided equally among these shareholders.
 Convertible preference shares: Convertible preference shares can be converted into equity
shares at a preset time. All conversions must be approved based on the regulations set in the
company Articles of Incorporation.

Debenture

The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means to borrow or
loan. Debentures are written instruments of debt that companies issue under their common seal.
They are similar to a loan certificate.

Debentures are issued to the public as a contract of repayment of money borrowed from them.
These debentures are for a fixed period and a fixed interest rate that can be payable yearly or
half-yearly. Debentures are also offered to the public at large, like equity shares. Debentures are
actually the most common way for large companies to borrow money.

Let us look at some important features of debentures that make them unique,

 Debentures are instruments of debt, which means that debenture holders become creditors of
the company
  They are a certificate of debt, with the date of redemption and amount of repayment
mentioned on it. This certificate is issued under the company seal and is known as a Debenture
Deed
 Debentures have a fixed rate of interest, and such interest amount is payable yearly or half-
yearly
 Debenture holders do not get any voting rights. This is because they are not instruments of
equity, so debenture holders are not owners of the company, only creditors
 The interest payable to these debenture holders is a charge against the profits of the company.
So these payments have to be made even in case of a loss.

Advantages of Debentures

 One of the biggest advantages of debentures is that the company can get its required funds
without diluting equity. Since debentures are a form of debt, the equity of the company remains
unchanged.
 Interest to be paid on debentures is a charge against profit for the company. But this also means
it is a tax-deductible expense and is useful while tax planning
 Debentures encourage long-term planning and funding. And compared to other forms of lending
debentures tend to be cheaper.
 Debenture holders bear very little risk since the loan is secured and the interest is payable even
in the case of a loss to the company
 At times of inflation, debentures are the preferred instrument to raise funds since they have a
fixed rate of interest

Disadvantages of Debentures

 The interest payable to debenture holders is a financial burden for the company. It is payable
even in the event of a loss
 While issuing debentures help a company trade on equity, it also makes it to dependent on
debt. A skewed Debt-Equity Ratio is not good for the financial health of a company
 Redemption of debentures is a significant cash outflow for the company which can imbalance its
liquidity
 During a depression, when profits are declining, debentures can prove to be very expensive due
to their fixed interest rate

Types of Debentures

There are various types of debentures that a company can issue, based on security, tenure,
convertibility etc. Let us take a look at some of these types of debentures.

 Secured Debentures: These are debentures that are secured against an asset/assets of the
company. This means a charge is created on such an asset in case of default in repayment of
such debentures. So in case, the company does not have enough funds to repay such
debentures, the said asset will be sold to pay such a loan. The charge may be fixed, i.e. against a
specific assets/assets or floating, i.e. against all assets of the firm.
 Unsecured Debentures: These are not secured by any charge against the assets of the company,
neither fixed nor floating. Normally such kinds of debentures are not issued by companies in
India.
 Redeemable Debentures: These debentures are payable at the expiry of their term. Which
means at the end of a specified period they are payable, either in the lump sum or in
installments over a time period. Such debentures can be redeemable at par, premium or at a
discount.
 Irredeemable Debentures: Such debentures are perpetual in nature. There is no fixed date at
which they become payable. They are redeemable when the company goes into the liquidation
process. Or they can be redeemable after an unspecified long time interval.
 Fully Convertible Debentures: These shares can be converted to equity shares at the option of
the debenture holder. So if he wishes then after a specified time interval all his shares will be
converted to equity shares and he will become a shareholder.
 Partly Convertible Debentures: Here the holders of such debentures are given the option to
partially convert their debentures to shares. If he opts for the conversion, he will be both a
creditor and a shareholder of the company.
 Non-Convertible Debentures: As the name suggests such debentures do not have an option to
be converted to shares or any kind of equity. These debentures will remain so till their maturity,
no conversion will take place.
 4
Development Banks?

Development banks are those which have been set up mainly to provide infrastructure facilities
for the industrial growth of the country. They provide financial assistance for both public and
private sector industries.

Objectives of Development Banks

The main objectives of the development banks are

1. to promote industrial growth,

2. to develop backward areas,

3. to create more employment opportunities,

4. to generate more exports and encourage import substitution,

5. to encourage modernisation and improvement in technology,

6. to promote more self employment projects,

7. to revive sick units,

8. to improve the management of large industries by providing training,

9. to remove regional disparities or regional imbalance,

10. to promote science and technology in new areas by providing risk capital,

11. to improve capital market in the country.

Development Banks in India

Working capital requirements are provided by commercial banks, indigenous bankers, co-
operative banks, money lenders, etc. The money market provides short-term funds which mean
working capital requirements.

The long term requirements of business concerns are provided by industrial banks, and the
various long term lending institutions which are created by government. In India these long term
lending institutions are collectively referred as development banks. They are:

1. Industrial Finance Corporation of India (IFCI), 1948

2. Industrial Credit and Investment Corporation of India (ICICI), 1955
 3. Industrial Development of Bank of India (IDBI), 1964
4. State Finance Corporation (SFC), 1951
5. Small Industries Development Bank of India (SIDBI), 1990
6. Export Import Bank (EXIM)
7. Small Industries Development Corporation (SIDCO)
8. National Bank for Agriculture and Rural Development (NABARD).

In addition to these institutions, there are also institutions such as Life Insurance Corporation of
India, General Insurance Corporation of India, National Housing Bank, Unit Trust of India, etc.,
which are providing investment funds.

Meaning of Commercial Banks:

A commercial bank is a financial institution which performs the functions of accepting deposits
from the general public and giving loans for investment with the aim of earning profit.

In fact, commercial banks, as their name suggests, axe profit-seeking institutions, i.e., they do
banking business to earn profit.

They generally finance trade and commerce with short-term loans. They charge high rate of
interest from the borrowers but pay much less rate of Interest to their depositors with the result
that the difference between the two rates of interest becomes the main source of profit of the
banks. Most of the Indian joint stock Banks are Commercial Banks such as Punjab National
Bank, Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.

1. It accepts deposits:

A commercial bank accepts deposits in the form of current, savings and fixed deposits. It collects
the surplus balances of the Individuals, firms and finances the temporary needs of commercial
transactions. The first task is, therefore, the collection of the savings of the public. The bank does
this by accepting deposits from its customers. Deposits are the lifeline of banks.

Deposits are of three types as under:

(i) Current account deposits:

ADVERTISEMENTS:

Such deposits are payable on demand and are, therefore, called demand deposits. These can be
withdrawn by the depositors any number of times depending upon the balance in the account.
The bank does not pay any Interest on these deposits but provides cheque facilities. These
accounts are generally maintained by businessmen and Industrialists who receive and make
business payments of large amounts through cheques.

(ii) Fixed deposits (Time deposits):

Fixed deposits have a fixed period of maturity and are referred to as time deposits. These are
deposits for a fixed term, i.e., period of time ranging from a few days to a few years. These are
neither payable on demand nor they enjoy cheque facilities.

They can be withdrawn only after the maturity of the specified fixed period. They carry higher
rate of interest. They are not treated as a part of money supply Recurring deposit in which a
regular deposit of an agreed sum is made is also a variant of fixed deposits.

(iii) Savings account deposits:

These are deposits whose main objective is to save. Savings account is most suitable for
individual households. They combine the features of both current account and fixed deposits.
They are payable on demand and also withdraw able by cheque. But bank gives this facility with
some restrictions, e.g., a bank may allow four or five cheques in a month. Interest paid on
savings account deposits in lesser than that of fixed deposit.

2. It gives loans and advances:

ADVERTISEMENTS:

The second major function of a commercial bank is to give loans and advances particularly to
businessmen and entrepreneurs and thereby earn interest. This is, in fact, the main source of
income of the bank. A bank keeps a certain portion of the deposits with itself as reserve and
gives (lends) the balance to the borrowers as loans and advances in the form of cash credit,
demand loans, short-run loans, overdraft as explained under.

(i) Cash Credit:

An eligible borrower is first sanctioned a credit limit and within that limit he is allowed to
withdraw a certain amount on a given security. The withdrawing power depends upon the
borrower’s current assets, the stock statement of which is submitted by him to the bank as the
basis of security. Interest is charged by the bank on the drawn or utilised portion of credit (loan).

(ii) Demand Loans:

ADVERTISEMENTS:

A loan which can be recalled on demand is called demand loan. There is no stated maturity. The
entire loan amount is paid in lump sum by crediting it to the loan account of the borrower. Those
like security brokers whose credit needs fluctuate generally, take such loans on personal security
and financial assets.

(iii) Short-term Loans:

Short-term loans are given against some security as personal loans to finance working capital or
as priority sector advances. The entire amount is repaid either in one instalment or in a number of
instalments over the period of loan.

3. Discounting bills of exchange or bundles:

A bill of exchange represents a promise to pay a fixed amount of money at a specific point of
time in future. It can also be encashed earlier through discounting process of a commercial bank.
Alternatively, a bill of exchange is a document acknowledging an amount of money owed in
consideration of goods received. It is a paper asset signed by the debtor and the creditor for a
fixed amount payable on a fixed date. It works like this.

Suppose, A buys goods from B, he may not pay B immediately but instead give B a bill of
exchange stating the amount of money owed and the time when A will settle the debt. Suppose,
B wants the money immediately, he will present the bill of exchange (Hundi) to the bank for
discounting. The bank will deduct the commission and pay to B the present value of the bill.
When the bill matures after specified period, the bank will get payment from A.

4. Overdraft facility:

An overdraft is an advance given by allowing a customer keeping current account to overdraw

his current account up to an agreed limit. It is a facility to a depositor for overdrawing the
amount than the balance amount in his account.

In other words, depositors of current account make arrangement with the banks that in case a
cheque has been drawn by them which are not covered by the deposit, then the bank should grant
overdraft and honour the cheque. The security for overdraft is generally financial assets like
shares, debentures, life insurance policies of the account holder, etc.

5. Agency functions of the bank:

The bank acts as an agent of its customers and gets commission for performing agency
functions as under:

(i) Transfer of funds:

It provides facility for cheap and easy remittance of funds from place-to-place through demand
drafts, mail transfers, telegraphic transfers, etc.

(ii) Collection of funds:

It collects funds through cheques, bills, bundles and demand drafts on behalf of its customers.

(iii) Payments of various items:

It makes payment of taxes. Insurance premium, bills, etc. as per the directions of its customers.
(iv) Purchase and sale of shares and securities:

It buys sells and keeps in safe custody securities and shares on behalf of its customers.

(v) Collection of dividends, interest on shares and debentures is made on behalf of its customers.

(iv) Acts as Trustee and Executor of property of its customers on advice of its customers.

(vii) Letters of References:

It gives information about economic position of its customers to traders and provides similar
information about other traders to its customers.

6. Performing general utility services:

The banks provide many general utility services, some of which are as under:

(i) Traveller’s cheques .The banks issue traveler’s cheques and gift cheques.

(ii) Locker facility. The customers can keep their ornaments and important documents in lockers
for safe custody.

(iii) Underwriting securities issued by government, public or private bodies.

(iv) Purchase and sale of foreign exchange (currency).