NMIMS Global Access School for Continuing Education

Course: Financial Institutions and Markets

Internal Assignment for December 2022 Examination (Semester – IV)

Answer 1.
Introduction to Capital Markets
The Capital Market is a place where Companies can raise long-term capital, both debt and equity
based. As opposed to the money markets, which an enterprise can approach to fulfil its short-term
funding requirements, the Capital Market is accessed by enterprises looking for a very long tenure
funding requirement.
The Indian Capital Market can be sub-divided into two categories: the Primary market and the
Secondary market. When a transaction involves an investor purchases an instrument directly from
the issuer of the instrument, it is called as dealing in the primary market. Any further sale/ purchase
transactions entered by such investor for that instrument with any other person is called as dealing
in the secondary market. It can be understood as any issuance of shares or securities by a company
to investors is the primary market and any further sale/ purchase of such instruments among the
market participants is the secondary market.
In the recent past, due to the pandemic related relaxations in debt-finance mortgage payments,
interest rates, etc. the liquidity was moving out of the capital markets. However, since the resuming
of business as usual, the interest rates have started returning to the pre-pandemic levels. In response,
the excess funds parked in debt markets and other instruments is bound to return to the capital
markets. In order to tap into this huge source of funding, a company has various avenues as
discussed below.
Avenues for raising capital:
 Public Issue
Raising of funds via issues of shares, bonds or debentures to the public is known as public
issue. The Company needs to build a prospectus for the funds required, the proposed
application of the funds so raised, the number and price range for issue of shares/
debentures. The Company also needs to acquire the requisite permissions from SEBI, the
stock exchanges, Registrar of Companies, etc. Public issue can be of the following 2 types:
o Initial Public Offer (IPO)
When a company is proposing to offer its shares to the public for the very first time,
it is known as an initial public offer. This is mostly done in the process of getting
itself listed on any of the stock exchanges.
o Further Public Offer (FPO)
Any share issue offers made to the public at large beyond the IPO is called as a
further public offer. FPOs use the company’s existing goodwill and standing in the
market to raise further capital.

 Private Placement
When a company proposes to issue shares, but there is a restriction on the category of
persons eligible to apply for the shares, it is called an issue of shares by private placement.
This is usually done by allocating shares amongst a group of large banks, financial
institutions, etc. to limit the number of shareholders but still raise a significant amount of
capital.

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 Course: Financial Institutions and Markets
December 2022 Examination (Semester – IV)

 Rights Issue
Under a rights issue, the existing shareholders of a company are given an option to subscribe
to more shares of the company, usually at a lower than market price. The number of shares
which can be subscribed is directly proportional to the number of shares already held.

 Bonus Issue
In cases of companies which have an accumulated surplus in their books of accounts issue
bonus shares instead of distribution of dividends which would result in actual cash outflows
out of the company.

 Offer for Sale

An offer for sale is a sale of investments held by venture funds, mutual funds, etc. This is
done through an offer document as the securities are already listed.

 Issue of Indian Depository Receipt (IDR)

A foreign company, listed on a foreign stock exchange, can raise capital from Indian market
through IDRs and issuing shares which would be held in trust by a foreign custodian bank.
The IDRs would be traded on the stock exchange like any other listed security.
Conclusion
Of the above discussed avenues, a bonus issue is made out of the accumulated profits and free
reserves of the Company and hence does not facilitate any additional funds flowing into the
Company. Also, an Offer for Sale is made by institutional investors who are looking to sell their
investment. Issuance of IDRs are done by foreign companies. These features of bonus issue, offer
for sale and Issue of IDRs, made them unviable for the current scenario wherein the Company,
being an Indian Company, is looking to introduce fresh capital into the business for significant
expansion plans.
A Public Issue, Private Placement or a Rights Issue seems to be the best alternatives for the
Company.
If the Company feels that the current shareholders have the capability as well as willingness to
contribute the required capital for the retail outlets, the Company may opt for issuance of right
shares. Issuance of right shares ensures that the dilution of voting power of the current shareholders
is minimised. However, a rights issue is always offered at a discount. The Company must take into
consideration the impact of such discount on the market price of the shares as well as the
amortisation of such discount in the books of accounts.
If the Company wishes to raise capital as well as get a particular set of individuals/ institutions
interested in the business, the Company may choose the private placement route. Usually key
industry players, highly skilled individuals, industry experts are roped in using private placement
since now they have some skin in the game. The success of the business gets directly corelated to
their personal gains.

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 Course: Financial Institutions and Markets
December 2022 Examination (Semester – IV)
If the Company does not have any particular group of investors in mind and neither does it feel that
the existing pool of investors would be able to meet the capital required for proposed expansion, the
Company may choose to raise capital from the public at large. If the Company is an unlisted
company, it may undergo the process of introducing an IPO, else it may make an FPO.

Answer 2
Introduction
Money market is a segment of the greater financial market which deals with short-term borrowing/
lending transactions. Short-term is generally construed to be a period less than or upto 365 days.
Money markets have been a crucial tool for entrepreneurs, banks and governments at large to
manage and maintain liquidity. Since their advent, money markets have been acting as the bridge
between the surplus funds sitting idle with the financial institutions and fund requirements of the
borrowers.

The Indian Money Market

The Indian money market scene is sub-divided into the organised sector and the unorganised sector.
The organised sector is overlooked by the RBI, which undertakes monetary operations in the money
market to manage liquidity in the banking system. The unorganised sector comprises of the Nidhi
companies and chit funds formed at local and co-operative society level, whereas the organised
sector involves dealings in call money, triparty repo, market repo, reverse repo, commercial papers,
certificate of deposits, treasury bills (T-bill), etc. The Indian money market has undergone
substantial changes in the past 5 years, from the demonetisation and introduction of GST to the
Covid pandemic, the volumes and rates have varied to a great degree. In a report published by the
RBI, titled “Changing Tides in the Indian Money Market” dated November 15, 2021, the RBI have
compiled data for the period from January 2016 to March 2021. The resulting chart, depicting the
movement of rates and volumes is as under:

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 Course: Financial Institutions and Markets
December 2022 Examination (Semester – IV)

The volatility faced in the money market during the pandemic has shifted the interest of market
participants away from the unsecured markets and towards the secured markets. With the bounce
back of the Indian economy, the money markets are bound to be on a rise again. The Indian money
market offers the following instruments for its participants:

 Treasury Bills (T-Bill)

T-bills are short-term debt instruments issued by the Government of India. T-bills in India
are usually for a period of 91 days or 364 days. The T-bill rate is used as the base-rate or
risk-free rate of return in most analysis. The Indian T-bill market is underdeveloped as
compared to its counterparts in UK and USA.

 Commercial Paper (CP)

CPs are issued by corporate borrowers in the form of a promissory note. CPs form part of
the unsecured segment of the money market. CPs are offered are a discounted price and
redeemed at face value, the difference being the interest element of the instrument. CPs
usually offer the highest returns in the money market.

 Money Market Mutual Funds (MMMFs)

MMMFs are debt-oriented mutual funds that lend to companies for short durations of upto 1
year. They manage risk by varying the maturity of lending to maintain an overall duration of
the portfolio. E.g., HDFC Money Market Fund is a MMMF which has a 5-year CAGR of
5.51% p.a.

 Market Repo
Market repo is the centralised borrowing/ lending system managed by The Clearing
Corporation of India Limited, which guarantees the settlement of all transactions
undertaken. This is a form of overnight borrowing, wherein the slight differences in the
settlement prices are the implicit overnight interest rates.

 Certificates of Deposit (CD)

A CD is a deposit into a bank for a fixed period of time carrying a predetermined rate of
interest. The difference between a CD and Fixed Deposit is that a CD is a negotiable
instrument. CDs have a minimum deposit amount of ₹ 1,00,000 and a tenue of atleast 7 days
but not more than 365 days.

 Call Money
Call money refers to the unsecured inter-bank lending and borrowing which is undertaken
between scheduled commercial banks, rural banks, co-operative banks, etc. These are
usually overnight borrowings/ lending to maintain liquidity and RBI norms of minimum
cash reserves.

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 Course: Financial Institutions and Markets
December 2022 Examination (Semester – IV)

Conclusion
The previous 5-years have seen a lot of volatility in the money markets. However, with the lifting of
pandemic restrictions and returning of business normalcy, there has been a steady rise in the interest
rates of debt-securities. Also, the recent developments in international business scenarios of news
regarding lay-offs in Amazon and Meta, have an impact of people diverting funds from equity-
markets to money-markets where risks are deemed to be lower.
For investors ready to invest in low-yield instruments but want a low risk or risk-free investment,
the Government of India T-bills are the appropriate investment avenue. Whereas investors having a
risk appetite and seeking higher returns may approach the Commercial Paper market, which provide
unsecured lending but higher rates of interest.
Investors which prefer not to get involved in details and nitty-gritties of the money markets but also
do not want to miss out on investment avenues in the money market, a Money Market Mutual Fund
may prove helpful since MMMFs are managed by experts and have a diversified portfolio. CDs are
also helpful for investors looking for a fixed income and ready to invest in lumpsum amounts.
Call money markets are generally accessed only by banks and such financial institutions, so a
common investor may not have access to such market segment.

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 Course: Financial Institutions and Markets
December 2022 Examination (Semester – IV)

Answer 3a.
Introduction
Insurance agreements where the insured amount becomes payable on the demise of a specified
person or upon attainment of a certain age by such specified person is known as life insurance. Life
insurance is usually taken by a person who has people financially dependent on him/her. In case of
an untimely death the insured amount acts as a financial cushion for the people dependent on the
person insured. In case of attainment of a certain age, the pay-out helps the insured person who may
no longer have a job.
Insurance policies available in market
 Term Plan
A term plan is the pure form of an insurance policy. The insured amount becomes payable in
case of demise of the person insured during the term covered by the policy. In case the
person outlives the term period, no amount is payable. This type of policy offers higher sum
assured at lower premiums.

 Endowment Plan
Endowment plans combine insurance coverage with savings. Of the premiums paid, a
portion is allocated towards insurance premiums while the rest is invested by the insurance
company. Upon end of the coverage period i.e., on maturity the person insured receives
maturity benefits.

 Whole life policy

These types of policy offer a far longer period of coverage as compared to term plans,
sometimes even upto 100 years. The premium amounts are higher on such plans. Upon
death the nominee receives the claim amount or upon completion of coverage period,
maturity benefits are received.

 Money-back policy
Money back plan is a unique type of life insurance policy, wherein a percentage of the sum
assured is paid back to the insured on periodic intervals as survival benefit. Money back
plans are also eligible to receive the bonuses declared by the company from time to time.
This way, policyholder can meet short-term financial goals.

 Unit-linked insurance policy (ULIP)

A ULIP is an instrument that combines life insurance with investment plans. The premiums
paid towards a ULIP is partly applied towards premium for an insurance policy whereas the
rest is invested into pre-determined specified plans. This market exposure elevates both the
rate of return upon maturity as well as the risk profile of the policy. The pay out on maturity
will depend upon the market values of the invested securities on day of maturity.

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 Course: Financial Institutions and Markets
December 2022 Examination (Semester – IV)
Market Participants
The insurance market is mostly run by the insurance companies, the reinsurers and the agents.
Insurance companies like the Life Insurance Corporation of India, due to their nationalised status
and scores of mergers, are the key players. The reinsurance business is largely dominated by the
General Insurance Corporation of India, being the only public company in this segment. The
success of life insurance network in India must be contributed mainly towards the vast network of
agents, at 3.2% penetration, India ranks 10th in global life insurance market as per report published
by Benori Knowledge.

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 Course: Financial Institutions and Markets
December 2022 Examination (Semester – IV)

Answer 3b.
Raising capital is one of the most fundamental requirements of running and growing an enterprise.
The capital market has been approached in a number of ways by a long list of entrepreneurs to
pique interest of the market in their business and obtain funding. Huge businesses or enterprises
which have achieved some standing in their respective markets or have a stable customer base have
the privilege to approach the public for funds via IPOs, FPOs, etc. However, for budding business
ideas and start-ups which are able to envisage market disruptive ideas, but unable to project a
reliable enough profit generation timeline need to look elsewhere.
Another skill which new entrepreneurs lack are managerial skills. They may have ground-breaking
ideas and expertise in their niche areas but don’t have in-depth knowledge regarding how a business
is run.
Investment/ funding of a new start-up company is divided into three steps/ phases as follows:
1) Early-Stage Financing
Early-stage capital is venture capital provided to set up initial operation and basic
production. It supports product development, marketing, commercial manufacturing, and
sales. This level of funding is mostly utilised towards developing an idea into an early-stage
product.

2) Start-up Stage Financing

This stage is the beginning of activity phase. In this stage the investor finances the
production activity even if the commercial success or flop of the product/service is not yet
known. The level of financial contributions and risk is high.

3) Later Stage Financing

Once the business starts expanding, the focus of the company remains on increasing its
presence and operations. Most tech-based start-up businesses are low margin operations
which need high volumes to be profitable. Such rapid expansion needs more funds, which
are provided by venture capitalists. This stage is usually followed by IPOs, which is the exit
strategy for the venture capitalists.

Conclusion
A venture capitalist is a person that invests in such new business ideas. The investment pertains not
only to financial support but also managerial support and networking amongst market participants.
They also have knowledge of competition and ever-changing dynamics in the market. Securing a
venture capital investment can define the difference between success and closure of a business.
Venture capitalism follows the idea of high-risk business with potential of huge growth in the long
run since new and innovative methods require time to mature and start yielding profits. Also,
venture capitalists have participation in management activities and decision making, this ensures
their consent is taken for all major decisions.

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