1 C1 Flashcards
What is a security?
A ‘Security’ means a certificate/document indicating that its holder is eligible to receive a certain amount of money at a particular time.
Types of security?
Equity: Share certificate
- Holder gets dividend from the profits of the company. If no profit, then no dividend.
- Company’s owners, proprietors
- Have last claim during liquidation.
- Attractive in boom period, since companies more likely to make profit.
Debt: Bond / Debenture
- Holder gets interest & principal irrespective of whether company makes profit or not.
- creditors of the company.
- first claim.
- Attractive in slow down period
Meaning of FINANCIAL / SECURITIES MARKET?
It is the place where buying and selling of securities takes place.
FINANCIAL / SECURITIES MARKET: TYPES?
It can be classified based on:
Tenure - 1. Money Market (<1 year maturity)
2. Capital Market (1 year/> maturity)
Freshness - 1. Primary Market (where new securities are issued for the first time). Helps a company /govt to connect with the investor. It has no separate physical existence but classified like this, for economic analysis.
2. Secondary Market (where the old securities are resold). It has physical existence such as Bombay Stock Exchange (BSE) at Dalal Street, Mumbai. Provides liquidity & confidence to investors to buy new securities in Primary Market. (compared to a scenario if there was no market to resale used cars)
Settlement -1. Future Market: Where parties write contract today to buy/sell something at specific price on a future date
2. Spot Market: if bought & sold for immediate delivery.
Asset - Depending on what asset is traded, market can be divided into Bond (Debt) market, Share (Equity) market, Gilt-Edged Securities Market, Foreign Currency Market, Commodity Market etc.
- if there was a supermall where all these products were available in one place it will be called “Universal Exchange”. SEBI permitted BSE & NSE to launch such thing (2018).
What are Debt instruments?
Creditors to company. First claim during liquidation. Assured interest irrespective of profit of company. These debt instruments can be classified into short-term vs long term.
Types of DEBT instruments?
Creditors to company. First claim during liquidation. Assured interest irrespective of profit of company. These debt instruments can be classified into short-term vs long term.
Short Term Debt Instruments
1 - issued by govt -
i) State govt’s treasury bills. But stopped since 2001.
ii) Union govt’s treasury bills (14, 91, 182 and 364 days) & Cash Management bills (CMB: upto 90 days, started in 2009).
iii) WMA (ways and means advances)
2 - issued by borrowers other than govt
i) Company
ii) Merchant to bank
iii) Banks/NBFCs
iv) Call money
v) Notice money
vi) LIBOR
vii) MIBOR
viii) CBLO
ix) Repo
x) TReDS
Long Term Debt Instruments
i) by companies
ii) other issuers
iii) other special purpose bonds
What are Short term debt instruments?
Tenure = less than 1 year. Usually ‘unsecured’ because not backed by any asset.
- Usually sold at discount and re-purchased at Face Value or Par Value. The difference between these two prices is the interest earned by investor.
- Another synonym for this process: “rediscount the bills.”
- They’re traded at Money Market and are (usually) ‘negotiable & transferable’ in nature i.e. lender can sell to 3rd party → 3rd party can demand money from borrower.
What is Near Money under short term debt instruments?
Asset that is highly liquid = can be readily converted into cash.
What is Way and means advance? WMA
Short term debt instruments → by Govt → WMA
- When Govt faces short term mismatch in receipt (income) and payment (Expenditure)
- RBI Lends money on short term (3 months). Not counted in fiscal deficit figure.
- Corona-crisis: ⬆mismatch in cashflow because
o ⬇Govt Income: Sales ⬇ GST, Govt gave extension in tax payment deadlines
o ⏫Expenses: free LPG, food, mask etc. - So, RBI ⏫WMA limits by 60% than before to help the Union (1.20lcr) and State Governments (₹51,560cr collectively).
- If upto 60% of ₹₹ borrowed = its WMA: loan interest = repo%
- If beyond 60% borrowed then called ‘Overdraft’: loan interest= repo+2%
What is Consolidated Sinking Fund (CSF) ?
Consolidated Sinking Fund (CSF) for State Govts’ repayment
Started in 1999. It has >₹1.25 lakh crore by 2019.
- Annually, State Government has to contribute money equal to 1-3% of its outstanding market loans to this fund. This fund is kept with RBI.
- CSF is a fund outside consolidated fund of the State and public account of the State.
- CSF meant to be used for only 1 purpose= repayment/redemption of loans taken by the State Government.
- 2020-May: RBI relaxed technical norms related to withdrawal of ₹₹ from CSF till 31/3/2021 to help the State Governments.
Name the short term debt instruments borrowed by borrowers other than the govt and what are they called?
Company
- Bill of Exchange, Hundi, Commercial Papers, Promissory Notes.
- Side note: Currency Note is a ‘Promissory Note’ issued by RBI Governor however, he’s not bound to pay any interest. He just promises to exchange it with other currency notes & coins of equal face value.
Merchant to bank - Commercial Bill.
Banks / NBFC - Certificate of Deposits
Call Money - It’s the interest rate when Financial Intermediaries (Banks/NonBanks) borrow for ONE DAY among themselves.
Notice Money - Same as above but for 2 to 14 days.
LIBOR - London Inter-bank Offered Rate (LIBOR) is the average interest rate at which banks in London give short term loans to each other.
It serves a benchmark, using which Global banks decide their call money /notice money rates.
MIBOR - Mumbai Inter-bank Offered Rate is the average interest rate at which banks in Mumbai give short term loans to each other.
It serves a benchmark, using which Indian banks decide their call money /notice money rates.
CBLO - Collateralized Borrowing and Lending Obligation.
Clearing Corporation of India Ltd (CCIL) helps Financial Intermediaries (FI) to get short term loans through this instrument.
Repo - Repo and Reverse Repo= Ref: Pillar#1A2: Monetary Policy handout.
TReDS -
Trade Receivables Electronic Discounting System (TReDS): an online mechanism. MSME sellers pledge their (unpaid) invoices made to corporates → MSME receive (short-term) finance from Banks and NBFCs.
(Full) Budget-2019: we’ll make amendments in Factoring Regulation Act, 2011 to allow all NBFCs to directly participate on the TReDS platform.
What are Long term debt instruments?
Tenure = 1 year/>. Further sub-division based on who is the Borrower
🕯🗃🗓🧔 What did Colonial era Govt. issue to borrow money?
Under Long Term Debt Instruments
- Coupon Bonds: Contain detachable coupons. Coupons are presented to the issuer to claim the interest. Therefore, bond interest rate is also called ‘coupon rate’.
- Zero Coupon Bonds: Are sold on discount and repurchased at face value, do not have any coupons.
- Bearer Bonds: Not linked to a PAN card, Aadhar card or passport, voter card or social security number. Anyone who presents it to the issuer, will get interest and principal. Usually issued during the war time.
💡🗃🗓🧔What did the Modern day Government issue to borrow money?
Under Long Term Debt Instruments
- Government securities, Dated securities, Sovereign bonds, Kisan Vikas Patra etc. (more in Pillar 1D: Financial inclusion lecture)
- Also called Gilt Edged securities because repayment
is assured by Government. (But then, they give lower interest rate because of low risk to the investor). - Global Credit Rating Agencies gives ‘rating’ to sovereign bonds. “AAA” is the best and highest given to US Treasury Bonds. India’s rating is ~“BAA” = moderate risk of default.
- World’s top three credit rating agencies- Fitch, Moody’s and Standard & Poor have pro- US/EU allegiance.
Critics allege these 3 agencies do not give adequate upgradation to the Govt bonds of India, China, Russia despite the economic growth. So, India has proposed the BRICS group to set up its own independent credit rating agency.
what are Bonds by Modern day Govt. to curb Gold Consumption?
Real Interest Rate = Nominal Interest minus Inflation.
- When Real Interest is negative, purchasing power ⏬ despite increase in money quantity in bank account. Then people prefer to park money in gold/real estate- which is not very beneficial to economy. So..
Inflation Indexed Bonds
- RBI launched in 1997, 2013, 2018 to provide positive Real interest rate to household, thereby reducing the Gold consumption & Current account Deficit (CAD) & weakening of rupee against dollar
(else expensive crude oil ->petrol, diesel inflation.)
- e.g. Inflation Indexed National Savings Securities-Cumulative (IINSS-C) with Interest
Rate = CPI + 1.5% [and Principal also protected against inflation.] - Sovereign Gold Bond* 2015
- They’re denominated in gold grams. Annual interest 2.5-2.75% (depending on which year’s ‘batch’ you bought), and after 8 years you get the amount equivalent to prevailing gold prices at that time.
Types of Long term debt instruments by companies
1) Bonds (British Term), Debentures (American Term)
2) If the company has high risk of default on repayment, the Credit Rating Company will
mark it as Junk Bonds (“BB to D” Grade) e.g. IL&FS. Such company will have to offer a very high interest rate when issuing bonds next time.
3) Redeemable Bonds: will repay regular interest and will return principal on maturity.
4) Irredeemable Bonds: will pay only interest but no principal returned.
Sometimes issued by PSB to meet BASEL-capital requirements. Although in reality they offer ‘redemption’ after 5-10 years when holder has ‘option’ to redeem principal & exit. (Ref: Pillar1B2=Yes Bank AT1 Bonds)
5) Non convertible Bond/Debenture =can’t be converted into shares.
6) Hybrid instruments: Issued as “Bond” but can be converted into Share. E.g. Optionally Fully Convertible Debentures (OFCD).
Types of Long term debt instruments by other issuers
ULB - Urban Local Bodies Issue Municipal bonds to borrow money from public.
BRICS Bond - 2014- BRICS Nations had setup the New Development Bank (NDB, HQ: Shanghai, China). Later it launched BRICS Bonds to mobilize money for its infrastructure loans. Denomination: US Dollars
World Bank - 2018: launched world’s first Blockchain Offered New Debt Instrument called Bond-i. Sold in Australia using Ethereum blockchain technology. Tenure: 2 years @~2% interest. Denomination: Australian Dollars, hence also called “Kangaroo Bond”.
Masala Bonds: These rupee denominated bonds issued outside India, to borrow money for Indian companies. World Bank’s sister agency International Financial Corporation (IFC) launched ‘Masala Bonds’ to help Indian public sector and pvt sector companies.
Read other bonds - Panda, maharaja, kangaroo etc 1C handout - pg 123
1st Indian state to issue masala bonds?
2019-May: Kerala became the first state to issue Masala Bonds. Its Kerala Infrastructure Investment Fund Board (KIIFB) issued Masala Bond at the London Stock Exchange. Denomination: ₹ ₹ Total Size: ₹ 21.5 billion.
Tenure: 5 years. Masala Bonds are usually issued by institutions with AAA rating. Since KIIFB has BB rating, hence offered higher interest rate: ~9.7%
What are Green bonds, blue bonds, catastrophe bonds, social impact bonds?
Green bonds
For renewable energy, pollution control, environment friendly projects.
- World’s first Green Bond launched by World Bank (2007)
- India’s first Green Bond launched by Yes Bank (2015)
- BRICS Bank (New Development Bank) issued Yuan- denominated green Bonds (2016)
- Indian Renewable Energy Development Agency (IREDA) launched India’s first Masala Green Bond at London Stock Exchange (2018).
Blue Bond
A sub-type of green bond, where money borrowed for climate resilient water / marine / fisheries projects. E.g. 2018- Seychelles issued world’s first ‘Blue Bond,’ to expand its marine protected areas and fisheries sector.
Catastrophe Bond
- Govt / Insurance company issues such bond. Investor is promised with high annual interest rate.
- But, if a natural disaster happens, his principal will not be returned.
- If disaster doesn’t happen then principal will be returned.
Social Impact Bonds
2019-Feb: SIDBI issued ₹ 300 cr. worth Women’s Livelihood Bonds with the help of World Bank, UN Women org etc.
- These bonds will be offered to High Net worth Individuals (HNI), Impact Investors (rich people interested in ‘indirect’ social service) etc. They’ll earn 3% annual interest rate for tenure of 5 years.
- Money thus collected → SIDBI → Micro Finance Institutes (MFI) → loaned to individual women entrepreneurs in sectors like food processing, agriculture, services etc.
What are electoral bonds, when can they be issued and who can buy?
Announce in Budget 2017 → Notified by Dept. of Economic Affairs, Finance Ministry.
Only SBI can issue at present, and in multiples of Rs.1,000, Rs.10,000, Rs.1,00,000, Rs.10,00,000 and Rs.1,00,00,000.
- When? For ten days at the start of each quarter. (January, April, July and October).
However, during Lok Sabha election year, can sell for another 30 days. - Who can buy? Only an Indian Citizen or Company registered in India → deposit money in their bank account → use that ₹₹to buy Electoral Bond, after giving certain KYC- documents. So, Electoral Bond can’t be bought anonymously or directly with cash.
- Electoral Bonds can be donated only to a political party registered under Representation of the People Act 1951 and which has secured 1% /> votes polled in last Lok Sabha or Vidhan Sabha elections.
validity of electoral bonds?
Only 15 days from date of purchase. Within that time, buyer must donate, and political party must deposit in its SBI (current) bank account. No interest payable.
characteristics and benefits of electoral bonds?
Characteristics of electoral bonds?
○ Paper / Physical format (not DEMAT / electronic format).
○ Bearer instrument (Donor or Recipient’s name not mentioned),
○ Promissory Note (promises to transfer money in bank account)
○ Interest Free banking instrument (zero interest payable to anyone).
○ Can’t sell it to third party, can’t pledge it for loans.
Benefits of electoral bonds?
○ Transparency in political funding.
○ Reducing influence of cash and black money in election
○ Confidentiality to donor because he can give to any political party without his wife, staff, CA, Lawyers, journalists, local goons etc. knowing the name of recipient political party.
What are equity instruments?
- Equity holders are called owners / proprietors of the company.
- If company makes profit → they get dividend. They’ve last claim during liquidation.
Features of the following keywords:
Ordinary shares
Preferential Shares
Sweet Equity
Penny stocks
Blue Chip stocks
Venture capital funds (VCF)
Angel Investors
Corporate Strategic Investor
RGESS Started in 2012
Share Pledging
OS - have voting power in the meetings of shareholders. Last claim during liquidation.
Preferential Shares
During liquidation, these investors will be given
money before the ordinary shareholders. Further subtypes:i) with voting power ii) without voting power.
Shares given @discount to directors & employees for their value addition to company [Amount is regulated under Companies Act]
Shares whose market price remain excessively low compared to its face value. Such pathetic companies give zero or little dividend.
Shares of a nationally recognized, well-established and financially sound company with a history of generating good dividend.
Professional firms helping startup companies with seed capital. (could be debt / equity / hybrid).
Angel Investor: Rich person helping startup companies out of his hobby, passion, profit motive or time pass. e.g Ratan Tata in Urban Ladder app. (could be debt / equity / hybrid).
Invests in startup company with goal of acquiring the company or its technology at later date.
Rajiv Gandhi Equity Savings Scheme= Govt gives income tax benefit to people who invest in the share market for the first time. Discontinued by Budget-2017.
When promoter of a company e.g. Mukesh A. of Reliance or Subhash Chandra of Zeegroup pledges his shares as collateral to borrow loans from a bank / NBFC.
❓ What does ‘Venture Capital’ mean? (Asked in UPSC-Pre-2014)
A. A short-term capital provided to industries
B. A long-term start-up capital provided to new entrepreneurs
C. Funds provided to industries at times of incurring losses
D. Funds provided for replacement and renovation of industries
B
An individual investor who invests in the e-project usually during an early stage is (UPSC-IES-2020)
A) corporate strategic investor B) founder capital
C) angel investor D) venture capital
C
What is face value and premium value?
Share have printed price on the certificate called Face Value or Par Value.
If they’re sold at higher price than face value, it’s called “Premium Value”- that usually happens when investor is confident of getting high dividend/return on his investment.
Related keyword: Price Earnings Ratio (P/E Ratio)
Under methods of issuing Shares, what do the following mean?
Initial public offer (IPO)
Follow on public offer (FPO)
Pvt Placements (not imp)
IPO
Company hires an underwriter (usually, a merchant bank, investment bank) for a fee.
Underwriter drafts Red Herring Prospectus for SEBI approval.
Then, Underwriter invites application from public & sells them shares at face value or higher. If less people subscribe → then underwriter will buy the unsold shares by himself.
FPO
If company had already issued shares previously, and now again issuing more shares to obtain more capital→ it is called FPO.
Rights issue: Company issues additional shares but
gives first right to existing shareholders to buy them, if they refuse then offered to outsiders.
Pvt P: not inviting applications from retail investors (aam-aadmi) but for Qualified institutional buyers (QIB) or selected buyers
What was the world largest IPO?
2019: Saudi Arabia’s public sector oil company Aramco issued world largest IPO worth >$25 billion. It was listed at Riyadh’s Tadawul Stock Exchange.
ES20 about IPOs?
ES20: No of IPO-issuing Companies have declined: 134 (2017) → 103 (2018) → 47 (2019).
Which indicates problems like
protectionism, NPA, slowdown in consumer demand, preventing some of the companies from expanding further. Although the total amount of ₹₹ raised has increased.
What is ADR and GDR?
A non-American company wants to mobilize money from American share market but does not want to go through the lengthy & complex process of registration with the American sharemarket regulator.
- Then such non-American company gives its shares to an American bank.
- Based on those (non-American) shares, the American bank will issue American Depositary Receipts (ADR) & sell them to American investors.
Denomination: USD.
- Global Depositary Receipt (GDR): Same as above, but when single bank issues receipts
for investors in multiple countries. Denomination: usually USD or Euro.
What is issued when a Non Indian company deposits shares in an Indian bank?
Issues Bharat / Indian depositary receipt (IDR) (in ₹) in Indian Sharemarket
Atmanirbhar Reforms in ADR/GDR/Bharat DR?
Indian company - wants to acquire capital from abroad, via ADR/GDR - Before and after - allowed
Indian company - wants to acquire capital from abroad by directly listing its shares in a foreign stock exchange - Before Not allowed by Indian authorities,
✅now it’s allowed
Foreign company - wants to acquire capital from India, via BharatDR/iDR - Before/After - ✅Allowed
Foreign company - wants to acquire capital from India by directly listing its shares in Indian stock exchange - Before/After - Not allowed by Indian authorities
Before:
Direct listing by the Indian companies on foreign/overseas stock exchanges was not permitted. (due to danger of money laundering, China/ISI mischief etc.)
So Indian companies had to use ADR/GDR type mechanisms, But, relatively difficult to attract investors in through ADR/GDR routes, nowadays. (compared to directly listing shares.)
After ATMANIRBHAR: Indian public companies allowed to directly list their shares in foreign nations stock exchanges. → Foreign capital/dollars can be attracted towards India → factory expansion, jobs⏫ → economic revival.
What is initial coin offering? 🔗🥏
Company wants investors’ money for launching new cryptocurrency, or service/app related to an existing cryptocurrency.
Then, it’ll issue Initial Coin Offering (ICO) → Investor subscribes to it, and receives ‘tokens’ (and not SHARES). Investors can use the ‘tokens’ to buy companies coins/services or may sell it to a third party.
RBI has cautioned Indians not to invest in such instruments, because of the dangers (Handout Pillar#1A-1: Bitcoins.)
What is Share market or Stock Exchange?
Shares are issued through IPO @Primary market. Then, they can be resold at secondary market, commonly known as Share market or Stock Exchange or Bourses.
What is World’s Oldest and Asia’s Oldest Stock market?
World’s Oldest: Amsterdam Stock exchange, Netherlands (1602)
Asia’s Oldest: Bombay Stock Exchange (BSE: 1875)
India’s stock exchange chronology?
BSE - Ahmedabad - Kolkata - NSE (early 90s)
