Financial Markets

Financial Markets

AMBRISH KUMAR KUSHWAHA Financial Management-1 INC Kanpur

Capital Markets 

They deal with securities with maturity period > 1 year CAPITAL MARKETS

PRIMARY MARKETS

SECONDARY MARKETS

Primary Markets 

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Helps companies in raising funds through issue of securities like shares and debentures. Governed by SEBI (Securities and Exchange Board of India). Methods of issuing securities in Primary Market: – Public Issue – Rights Issue – Bonus Issue – Private Placement – Bought-out Deals

Secondary Market 

Securities already issued in the primary market are traded in the secondary market. Provides liquidity to the securities held by the investors.

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Provides liquidity to the securities held by the investors.

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Operates through stock exchanges that regulate the trading activities in this market.

SEBI's function Regulating the stock exchanges and securities markets.  Prohibiting fraudulent and unfair trade practices  Promoting investor's education and training Powers:  to call for periodic returns of SE.  Power to call upon relevant information.  Power to amend bye-laws 

Government Securities Market 

Securities that are issued by the Central government, state governments and entities that are wholly owned by the government.

Stock Certificate: In case of stock issued by government, a stock certificate is given to the owner, which specifies that he is a registered holder in the book of Public Debt Office (PDO). It indicates the interest rate, interest due dates and face value of the stock. Transfer can take place only by means of a

Types of GOI 

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Promissory Notes: They are negotiable instruments payable to the order of the specified persons and transferable by endorsement. Bearer Bonds: They certify the bearer for entitlement to the specified sum along with interest payable by way of interest warrants. They are transferable by physical delivery.

Treasury Bills 

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Short-term promissory notes issued by the government to meet their short-term obligations. The RBI acts as an agent for issuing T-Bills. Subscribers: Banks, primary dealers, financial institutions, insurance companies, provident funds, NBFCs, FIIs and state governments. Issued for a minimum amount of Rs. 25,000 and in multiples of 25,000 thereof. Maturity Period: 91 days and 364 days

Public Sector Bonds    

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Bonds issued by public sector companies Secured in nature. Maturity Period: 5 to 7 years. Investors: Banks, Insurance Companies, Corporate, Provident Funds, Mutual Funds, Individuals. Interest income eligible for deduction under Section 80L of I.T. Act.

International Capital Markets Development attributed to following factors:  investors’ need to avoid taxes in their own country and  to ensure protection against depreciating home currencies.  emergence of new technologies in the area of financial services,  development and deregulation of financial markets

Equity Instruments GDR:  instruments which possess a number of underlying shares held by the custodian domestic bank of the company. 

The GDRs are traded on a foreign stock exchange, issued to the nonresident investors.

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The GDR’s are denominated in the foreign currency and the underlying shares are denominated in the local currency of the issuer.

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The GDR’s are considered as common equity of the company and are entitled to dividends and voting rights.

ADR : 

Is a dollar denominated negotiable certificate traded in the US-markets whose underlying securities are of non-US companies. - ADR Level-I :first step for an issuer to enter the US market, minimum disclosure required, need not comply with the American GAAP. Can trade only on the OTC market and not on any national stock exchange.

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-- ADR Level-II: significant disclosures to be made to the SEC, company allowed to list on AMEX, NYSE. – ADR Level-III :fresh capital can be raised company to be registered with the SEC and shall even follow US GAAP.

Euro Bonds These are the bonds that are issued outside the country of the currency in which it is denominated Features:  No with holding of tax on interest payments  These are in bearer form with coupon interest attached  Listed on stock exchanges though traded on the OTC market 

Foreign Bonds 

Bonds floated in the domestic markets denominated in the domestic currency by the non-resident.  Yankee Bonds Samurai Bonds Bulldog Bonds Shibosai Bonds

Yankee bonds These are US dollar denominated issues by the foreign borrowers in the US markets. Features  Regulated by the SEC. Requires more disclosure than that given by the prospectus.  Foreign borrower to adopt US accounting policies  Bonds sponsored by the underwriting syndicate  Requires SEC registration before the sale.  To be rated by the US credit rating agencies

Samurai Bonds Yen denominated bonds issued in the Japanese markets by the non- Japanese companies Features  Maturity: 3-20 years  Borrowers in order of priority sovereigns, supranational and their entities, high quality private corporations having some kind of Japanese trade links.

Bull Dog Bonds Sterling denominated foreign bonds floated in the UK market. Features:  Maturity 5 for short maturities 25 for long maturities.  Subscribed by the long-term institutional investors-pension funds, life insurance Co’s  Bonds offered by placing or offer for sale process will have to e listed on the London SE

Shibosai Bonds Privately placed bonds issued in the Japanese market Features  Offered to institutional investors, including banks  The issue’s eligibility, coupon rate, etc governed by the Japan’s MOF guidelines  Pricing done based on base rate and spread which depends on the rating of Co or country.

Forex Markets 

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Foreign Exchange Market: Deals with transactions in currencies other than one’s own currency. Exchange rate: The rate at which one currency can be converted into another currency Participants: – Exporters – Importers – Commercial Banks – Central Banks – Authorized Dealers and Money Changers – Brokers

Derivatives Market  

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Financial derivative is a product derived from the market of an underlying asset. Participants: – Hedgers – Speculators – Arbitrators Types of Derivatives: – Futures – Options Caps floors and Collars

Financial Institutions 

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Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India (IFCI ) Industrial Investment Bank of India (IIBI) Export and Import Bank of India State Financial Corporations State Industrial Development Corporations

Functions of RBI     

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Currency issuing authority Acts as banker the central and state governments Serves as banker’s bank Foreign exchange control authority Exercises monetary control through: – Bank Rate – Reserve requirements: CRR and Statutory liquidity ratio (SLR) – Open market operations Undertakes developmental activities

Non-Banking Financial Companies 

Investment Trusts or Investment Companies: Close ended organizations, having fixed amount of authorized capital -provides services through conserving and managing property for those who cannot manage their own funds.

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Mutual Benefit Funds or Nidis: Sources of their funds are share capital, deposits.

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Merchant Banks : Offers financial advice &

services for fees; -Services offered are management, marketing, underwriting of new issue, project promotion & finance, corporate advice, BOD, venture capital etc.

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Hire Purchase Finance Companies Lease Finance Companies Housing Finance Companies National Housing Bank : Wholly owned

by subsidary of RBI, -Aim is to promote housing finance Institution at local & regional levels, It refinance housing loans to scheduled commercial & co operative banks, housing finance companies etc. 

Venture Capital Funding Companies

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