PRESENTATION

ON
FINANCIAL INSTRUMENTS
IN INDIA
 Financial Instrument - a legally enforceable agreement
between two or more parties, expressing a contractual right
or a right to the payment of money.

 A document which has a monetary value or is evidence

of a monetary transaction.

 Several financial instruments are available in the Indian

money market. Examples include cash and cash
equivalents, but also securities such as bonds and stocks
which have value and may be traded in exchange for
money.
Cheque - is a document/instrument (usually a piece of paper) that
orders a payment of money.

 It is a negotiable instrument instructing a financial institution to pay

a specific amount of a specific currency from a specified transactional
account held in the drawer's name with that institution.

 Drawer, the person or entity who makes the cheque

 Payee, the recipient of the money
 Drawee, the bank or other financial institution where the cheque can
be presented for payment.
Amount, the currency amount
Bill of exchange (1933) - an unconditional order in writing
addressed by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on demand or at
fixed or determinable future time a sum certain in money to order or
to bearer.

 It is essentially an order made by one person to another to pay

money to a third person.

 A bill of exchange requires three parties—the drawer, the drawee,

and the payee.

.
 CHEQUE BILL OF EXCHANGE

• It is drawn on a banker. • It may be drawn on any party or

individual.

• It does not require acceptance • It must be accepted by the

by the drawee drawee before he can be made
liable to pay the bill.

• Days of grace are not allowed • Three days of grace are always
to a banker
allowed to the drawee

• Stamp duty has to be paid on

•  No stamp duty is payable on
checks bill of exchange
 
A promissory note – is a negotiable instrument wherein one
party (the maker or issuer) makes an unconditional promise in
writing to pay a sum of money to the other (the payee), either at a
fixed or determinable future time or on demand of the payee, under
specific terms.

 Bank note is frequently referred to as a promissory note, a

promissory note made by a bank and payable to bearer on demand.
BILLS OF EXCHANGE PROMISSORY NOTE

• It is an order to pay • It is promise to pay

• There are three parties, the • There are only two parties the
drawer, the drawee, and the drawer, and the payee
payee

• It must be accepted • There is no necessity of

acceptance

• The drawer is not primarily

• The maker is primarily liable
liable
Equity shares – shares traded in the stock market. Equity shares are
ordinary shares and do not have any preferential right.

 Equity Shares are regarded as high return high risk instruments.

 These do not carry any fixed rate of return and there is no maturity
period.

 The company may or may not declare dividend on equity shares.

Preference shares - These carry a preferential right to dividends over

the equity shareholders.

 Preference Shares carry a fixed rate of dividends.

 Now all preference shares in India are `redeemable’, i.e. they have a
fixed maturity period.
Debenture- a long-term Debt Instrument issued by governments and
big institutions for the purpose of raising funds.

 The company has an obligation to pay interest and the principal

amount on the due dates regardless of its profitability position.

 They have a fixed maturity and pay a fixed or a floating rate of

interest during their lifetime.

 The debenture holders are not members of the company and do not
have any say in the management of the company.
Call Money Market - The loans made in this market are of a short
term nature – overnight to a fortnight. This is mostly inter-bank market.

 The rate of interest is market driven and depends on the liquidity

position in the banking system. 

Travellers Cheque - A cheque issued to the traveling public by a

bank for a fixed amount without requiring any letter of identification.
Bonds: is a debt security, in which the authorized issuer owes the
holders a debt and, depending on the terms of the bond, is obliged to pay
interest (the coupon) and/or to repay the principal at a later date, termed
maturity.

 A bond is a formal contract to repay borrowed money with interest at

fixed intervals.

 Thus a bond is like a loan: the issuer is the borrower (debtor), the
holder is the lender (creditor), and the coupon is the interest. Bonds
provide the borrower with external funds to finance long-term
investments, or, in the case of government bonds, to finance current
expenditure.
Treasury bills - Treasury Bills are money market instruments to
finance the short term requirements of the Government of India. They
are short-term instruments issued by the Reserve Bank of India.

 These are discounted securities and thus are issued at a discount to

face value.

 They are one of the safest money market instruments because they
are risk free, but the returns from this instrument are not very large.

 They have 3-month, 6-month and 1-year maturity periods.

 The buy value is set by a bidding process in auctions.

Government Securities - In India G- Secs are issued by the
Central Government , State Governments and Semi Government
Authorities such as  municipalities, port trusts, state electricity boards
and public sector corporations.

 The Central and State Governments raise money through these

securities to finance the creation of new infrastructure as well as to
meet their current cash needs.  Since these are issued by the
government, the risk of default is minimal.

 These securities may have maturities ranging from five to twenty

years.   These are fixed income securities, which pay interest every six
months. 

 The G -secs are primarily bought by the institutional investors. The

biggest investors are commercial banks who invest in G-Secs to meet
the regulatory requirement to maintain a certain percentage of Statutory
Liquidity Ratio (SLR) as well as an investment vehicle.
Commercial Paper - Commercial papers are promissory notes
that are unsecured and issued by companies and financial
institutions.

 They are issued for financing of inventories, accounts receivables,

and settling short-term liabilities or loans.

 Commercial papers were first issued in the Indian money market

in 1990.

 They are issued at a discounted rate of their face value.

 They have a fixed maturity of 1 to 270 days.

 Commercial papers yield higher returns than T-bills.

Certificate of Deposit - A certificate of deposit is a promissory
note issued by a bank.

 The certificate of deposit was first introduced to the money

market of India in 1989

 It is a time deposit that restricts holders from withdrawing funds

on demand. 

 A savings certificate entitling the bearer to receive interest.

 It has a maturity date, a fixed rate of interest and a fixed value.

 It usually has a term between 3 months and 5 years.

Letter Of Credit - A letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct
amount.

 In the event that the buyer is unable to make payment on the

purchase, the bank will be required to cover the full or remaining
amount of the purchase.

Bank draft - A type of check where the payment is guaranteed to

be available by issuing bank.

 Banks will review the bank draft requester's account to see if

sufficient funds are available for the check to clear.

 Once it has been confirmed that sufficient funds are available, the
bank effectively sets aside the funds from the person's account to be
given out when the bank draft is used
Banker's Acceptance - a short-term investment plan created by
a company or firm with a guarantee from a bank. It is a guarantee
from the bank that a buyer will pay the seller at a future date.

 A good credit rating is required by the company or firm drawing

the bill.

 Companies use the acceptance as a time draft for financing

imports, exports and other trade

 The terms for these instruments are usually 90 days, but this
period can vary between 30 and 180 days.
Debit card- An electronic card issued by a bank which allows
bank clients access to their account to withdraw cash or pay for goods
and services.

 debit cards are used widely for telephone and Internet purchases.

 The major benefits to this type of card are convenience and security.
Credit card - a card that may be used repeatedly to borrow money
or buy products and services on credit.

 Card issued to users as a system of payment. It allows its holder to

buy goods and services based on the holder's promise to pay for these
goods and services.