Introduction

The market of an economy where funds are transacted b/w fund surplus and fund deficit groups/individuals is known as Financial market. The motto of this transaction is interest/dividend/returns

Finance markets cater to short term funds and long term funds

Short term funds

Money markets/

Working capital markets

<1 year

Long term funds

Capital markets

> 1 year

They may be organized/institutionalized as well as unorganized/non-institutionalized

Money Markets

Capital markets

Equity/Equity Financing

Stock and Share are more or less synonymous
Stock refers to owning an unspecified number of shares in a company.
Shares is more specific, referring to how a company’s stoc is divided. Owning stock in a corporation means you own a specific number of shares.
Equity used to describe ownership in a company

Equity term used in Stock/Equity markets and non-markets as well
For example, for a house, equity is what you own which is a difference b/w what you owe and the value
In Stock/Equity markets,

If you are interested in ownership, dividends, profits - It is seen as Equity market perspective
If it is not in the view of ownership and for trading purposes - It is seen as Stock market perspective

Ordinary Shares

Preferential Shares with/without voting power

( locked-in shares such as those held by insiders, promoters and governments.)

Various methods of raising Capital (Equity mode)

Public Issue: It is the offer of shares/securities to new investors.

It can be further classified into:

Initial public offer (IPO): When an unlisted company makes either a fresh issue of shares or convertible securities or offers its existing shares or convertible securities for sale or both for the first time to the public.
Further public offer (FPO): when already listed company make the fresh issue of security.

Right Issue: when the issue of share is only to existing shareholders in proportion to shares held by them.
Composite Issue: wherein the allotment in both public issue and rights issue is proposed to be made simultaneously.
Bonus Issue: It is issued without any consideration based on the number of shares already held by shareholders.
Private Placement: When securities are issued to a select group of persons not exceeding 49, and which is neither a rights issue nor a public issue.

It is of three types:

Preferential allotment: when allotment of securities/shares is done on a preferential basis to a select group of investors.
Institutional Placement Programme (IPP): in which the offer, allocation and allotment of such securities is made only to qualified institutional buyers.

Qualified Institutional Placement (QIP)

It's an Indian innovation introduced by SEBI in 2006
QIP allows Indian listed company to issue securities to raise its capital from its domestic market without the need to submit any pre-issue filings to market regulators
Prior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and authorities that Indian companies were accessing international funding via issuing securities, such as American depository receipts (ADRs), in outside markets. This was seen as an undesirable export of the domestic equity market, so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets.
Qualified institutions such as mutual funds, domestic financial institutions such as banks and insurance companies, venture capital funds, foreign institutional investors

If economy is booming, equity finance returns are good and if economy is under recession, debt finance returns are goods

Booming economy means higher profits and higher dividend to share holders and promoters
While economy in recess, companies in loses. Hence fixed income of debt finance is better than loss making shares

No tax on share buy back

Debt/Debt Financing

Short term debt instruments:

Sold at discount, repurchased @Face Value
Repo and Reverse Repo rate {RBI introduced 1 and 3 year term repos in Feb 2020}
Govt- T-bills: [14 (only State)?], 91, 182, 364 and Cash Management Bills: upto 90 days
Companies- Commercial papers (they are unsecured), Promissory Notes
Banks and FI - Certificate of Deposits

Merchant[FI, banks, NBFC, SCB, Cooperatives, MF] to Bank- Commercial Bill [invoice sold @discount]

Ways and Means advances b/w RBI and Govt
Call Money market b/w Banks and FI for overnight
Notice Money b/w Banks and FI for 1-14 days

Long term

Loans, External Commercial Borrowings ECB
Dated securities (G-Sec)
Bonds (UK) = Debentures (US)

Cash Management Bills CMB	T-Bills	G Securities
Short Term upto 90days	Short Term [14 (only State)?], 91, 182, 364	Long term
Sold at discount, repurchased @Face Value	Sold at discount, repurchased @Face Value	Dated securities. Interest payable
Tradable	Tradable	Tradable
	FDI-NO, FII- Allowed from May 1, 2018	FDI-No, FII-Upto 30 billion dollars, NRIs allowed (upto 15%)
Only Central Govt	Only Central Govt	Both Central and State Govt
GOI discretionary	Under RBIs Ways and Means advances

Debt market in India amounts to about 67 per cent of GDP

Debentures/Bonds

A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer.
Both corporations and governments frequently issue this type of bond to secure capital.
Ex: G-Sec issued by Govt

Sells at a discounted price and pays interest at a rate and matured after some years

Face value
Coupon payment - annual interest paid

Ex: Sells a bond of face value 100 at 80/- at an interest rate of 8% for period of 5 years
Debenture Redemption Reserve (DRR)

Any Indian corporation that issues debentures must create a debenture redemption service in an effort to protect investors from the possibility of a company defaulting.

Yield to Maturity

Return is amount received after maturity divided by purchase price
Bond yield is more if purchased price(bond price) is less
Bond yield is less if RBI reduces interest rates since if RBI reduces interests, companies prefer taking loans than issuing debt/bonds thereby increasing the demand of existing bonds which in turn gives less yield/returns
When economy is booming, investors invest in other products than Govt bonds and hence demand for bonds decreases and Bond Yield increases
Bond yield is more under booming period [Supply -demand gap]
Bond yield is more if foreign investors run away [Supply -demand gap]

Bond prices depends on

Bonds yield

Inverse relationship
If Bond prices increases, then bond yields decreases

Bonds are traded at discount rates
For example, A bond face value is 1000/- and trades at 950/-

Now implies that bond investor if purchases at 950/- will get 1000/- on maturity and the bond yield is 50/- or 5.25 percent

When bond prices increases let's say 975/-, the bond yield now is 25/- or 2.5 percent
Hence it is clear when bond price increases, bonds yield decreases

Prevailing interest rates

Inverse relation
If interest rates are increased, the returns on the newly issued bonds are greater than that of old bonds
Hence bond prices fall to match up to the increased interest rates

Bonds rating
Stock vs Bonds

When Stock/Equity markets are booming, investors generally move out of bonds and flock to booming stock market

Banks and Bonds

If Govt. Bonds Yields rises high, banks experiences losses
This is because, Banks especially PSBs park their funds (SLR provisions) in terms of bonds (G securities)
When bonds yield rises, bonds prices fall leading to loss of bank asset value

Yield Curve

Bond yield w.r.t time
Normally used for Govt bonds
If investors expect the economy to grow normally, yield curve is upward sloping (because the demand for bonds is less)

Bond Yield Inversion

Yield inversion happens when the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond
A yield inversion typically signals a recession.

There are two types of debentures as of 2016:

Convertible

Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period of time.
These types of bonds are the most attractive to investors because of the ability to convert, and they are most attractive to companies because of the low interest rate

Non-convertible

Non-convertible debentures are regular debentures that cannot be converted into equity of the issuing corporation.
To compensate, investors are rewarded with a higher interest rate when compared to convertible debentures.

Sovereign bonds are issued by Govt and can be issued in domestic or foreign currency

Convertible Bond

Debt to equity conversion at bondholders will
A convertible bond is a type of debt security that can be converted into a predetermined amount of the underlying company's equity at certain times during the bond's life, usually at the discretion of the bondholder.
Issued by companies for different reasons

to minimize negative investor interpretation of its corporate actions.
investors demand a security that optimally protect their principal on the downside but allows them to participate in the upside should the underlying company succeed

Foreign Currency Convertible Bond FCCB

A type of convertible bond issued in a currency different than the issuer's domestic currency.
I.e. Money being raised by the issuing company is in the form of a foreign currency

Alpine Convertible Bond

Issued by Indian companies exclusively to Swiss investors
It is a FCCB Foreign Currency Convertible Bond which means that these are issued in foreign currency

Convertible Notes

It is one form of short term debt that converts into equity (typically in the next finance round)
Investor would be loaning money to start up and in return receives equity in the company

Municipal Bonds

Inflation Indexed Bonds

[2013] by RBI to reduce gold consumption

Provides the investor a constant return irrespective of the level of inflation in the economy
Because of the inflation factor reducing the returns of investment in bonds and stocks, people often invest in Gold and Real Estate
To minimise this Inflation Indexed Bonds concept brought up.

Masala Bonds

Masala bonds are rupee denominated bonds to raise funds in Indian rupees in overseas markets
First masala bonds by International Finance Corporation (IFC), a member of the World Bank group, issues it in the international capital market

10 year off-shore rupee bonds

Offshore bonds means that are intended for those foreign investors who want to take exposure to Indian assets, yet constrained from doing it directly in the Indian market or prefer to do so from offshore locations

To raise funds for supporting infrastructure development initiatives in India
Settlement is done in US dollars because of the limited convertibility of rupee
The settlement of the bonds will be in US dollars but since they are pegged to the Indian currency -rupee-, investors will directly take the currency risk or exchange rate risks
As of now, it is being traded only at the London Stock Exchange

RBI has allowed the Non-Banking Finance Companies (NBFCs) to sell the Masala Bond to foreign investors abroad
Union Minister of Road Transport & Highways and Shipping launched the NHAI Masala Bond issue at the London Stock Exchange
Asian Development Bank ADB's Masala Bonds are dual listed on both Luxembourg exchange and India INX

Green Bonds

Green bond is raised to fund ‘green’ projects like renewable energy, emission reductions et They can attract environmentally-conscious investors who may not otherwise invest.
First Green Bond was issued by World Bank in 2007.
Issuer of a green bond publicly states that capital is being raised to fund ‘green’ p ects,
Green bonds are issued by multilateral agencies such as the World Bank, corporations, government agencies and municipalities.
The first green bond in India was issued by Yes Bank in 2015.
Masala green bonds have also been issued by Indian entities
India INX has listed Indian Railways Finance Corporation's (IRFC) first green bond on its global securities market (GSM)
Rural Electrification Corporation’s first green bond has opened for trading at the Londo Stock Exchange. It is a Climate Bonds Initiative certified green bond
India is the second largest green bond market among the emerging economies in the world after China
SEBI issued green bonds requirements for Indian issuers in 2016 and laid out categories for considering debt security as Green bonds or Green Debt Securities

Renewable and sustainable energy
Clean transportation
Sustainable water, waste management, land use
Climate change adoption
Energy efficiency
Biodiversity conservation

Blue Bonds

It is a type of green bond which specifically invests in climate resilient water management and water infrastructure

Development Impact Bond (DIB)

They are outcome based bond, under which donor pay back private investors investment with interest, if the service providers achieve pre-determined targets.
Ex: United States Agency for International Development (USAID) launched Rajasthan Development Impact Bond to reduce maternal and neo-natal deaths in Rajasthan
Educational Development Impact Bond by British Asian Trust

British Asian Trust created a 10-million-dollar Education Development Impact Bond (EDIB) for India
The focus is to improve literacy and numeracy learning levels for over 200,000 primary school students from marginalized communities in Delhi, Gujarat and Rajasthan.

Elephant Bonds

Sovereign bonds issued for a period of 25 years in which people declaring undisclosed income will be bound to invest 50 per cent
It is used only for financing infrastructure projects
In proposal now

Sovereign Gold Bonds

These are Govt. securities issued denominated in grams of Gold
Issued by RBI
They are substitutes for holding physical gold.
Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
Gold bonds are tradable on the stock exchange and can be held in both physical and dematerialised form
Importance

It will indirectly reduce the current account deficit by curtailing the demand through gold import
They carry a fixed interest rate of 2.50% per annum
Investments in such bonds by banks will be counted in calculation in SLR (Statutory Liquidity Ratio).

Eligibility

Only resident Indians can invest in SGBs for a minimum of 1 g and maximum of 500 grams per year.

Interest is taxable but not the capital gains tax

Derivatives

Derive value from underlying asset
The derivatives market is the financial market for derivatives, financial instruments like futures, contracts or options, which are derived from other forms of assets.
The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives.

The derivative itself is a contract between two or more parties based upon the asset or assets and its value is determined by fluctuations in the underlying asset

Derivates types are defined based on the underlying assets

Commodities
Physical Asset - Ex: Loans on Houses
Financial Asset - Debt, Equity, Cash (currency)
Other Derivatives

Derivatives can be used for hedging, or insuring against risk on an asset
Derivatives can also be used for speculation in betting on the future price of an asset or in circumventing exchange rate issues

Different types of derivative instruments are:

Forward Contract

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date at a price agreed today.
Unlike standard futures contracts, a forward contract can be customized to any commodity, amount and delivery date.
A forward contract settlement can occur on a cash or delivery basis.
Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments

Futures

Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price.

Option

An option is a financial derivative wherein one party sells its contract to another party, wherein the selling party offers the buyer the right, but not the obligation, to buy or sell a security at a predetermined price and date.
SEBI recently allowed options trading in selected commodities, including farm produce.
India's first Commodity Option "Gold Option" - Introduced in MCX Multi Commodity Exchange
India's first Agro Commodity Option "Guar Seed Option" - Introduced in National Commodity and Derivatives Exchange Ltd.

Guar - goru chikkudu

It is a rain-fed legume crop whose processed gum is used in the food and fracking industry.
India accounts for 80-85% of the total global guar production.

Future Vs Option

Under a Future, an investor is obligated to buy or sell (as the case maybe) within the time frame while under options, he has the option not to buy or sell

Options underlying foreign currency derivatives and interest rate derivates are not tradable over the exchange

Call Option

A Call is an options contract that gives the buyer the right to buy the underlying asset at the strike price at any time up to the expiration date

Put Option

A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.

Offshore Derivatives Instruments (ODIs) / Overseas Derivative Instruments

ODIs are investment vehicles used by overseas investors for an exposure in Indian equities or equity derivatives.
Overseas Derivative Instruments that have Indian stocks as their underlying assets
About 6% of the total foreign investment in Indian stocks and equity instruments is from P-Notes.
These investors are not registered with SEBI, either because they do not want to, or due to regulatory restrictions.
These investors approach a foreign institutional investor (FII), who is already registered with SEBI.
The FII makes purchases on behalf of those investors and the FII's affiliate issues them ODIs.
P-Notes/Participatory Notes are a type of offshore/overseas derivative instruments (ODIs)

Spot market

The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery.
It contrasts with a futures market, in which delivery is due at a later date

Investment

Sovereign Wealth fund

Pool of money derived from Country reserves set aside for investment purposes to benefit economy and its citizens
The funding for a sovereign wealth fund comes from central bank reserves that accumulate as a result of budget and trade surpluses, and from revenue generated from the exports of natural resources.

Mutual Funds

Portfolio Fund manager
Buys Shares/Debt bonds of different companies based on portfolio and shares dividend to customer depending on the net returns
Types - Based on risk of return - Growth (80% Equity, 20% debt), Balance (50:50), Fixed income (80% Debt, 20% equity)

Based on nat e of portfolio - Equity, Debt, Real Estate, Energy, Steel

Hedge fund

In need of more returns than Mutual funds, hedge funds are alternate investments on high risk securities/options
Careful b/w hedge funds and hedging
For HNI High Net worth individuals

Alternative Investment Funds AIF

It refers to any privately pooled investment fund (Indian/foreign sources) i n form of a trust or a company or a body corporate or limited liability partnership which do not come jurisdiction of any regulatory agency in India.
AIFs have been defined in Regulation 2(1)(b) of SEBI (Alternate Investment Fund) Regulations 2012
Its definition include hedge funds, private funds, venture capital funds (angel funds)
Categories

Venture Capital Funds

Angel Investor Funds

PIPE (Private Investment in Public Equity ) Funds
Private Equity Fund
Debt Funds
Infrastructure Equity Fund
Real Estate Fund
SME Fund
Social Venture Funds
Strategy Fund (Residual Category, including all varieties of funds such as hedge funds, if any).

Types

Category I

Mainly invests in start- ups, SME's or any other sector which Govt. considers economically and socially viable.

Category II

These include Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator
NIIF is a Category II Alternate Investment Fund

Category III

Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator.

Real Estate Investment Trusts REITs

Can be invested on finished/soon to finished rent generating assets
Minimum 2 lakhs per applicant
Fund Manager
SEBI regulates
Rents as returns
For HNI high Net worth individuals
Units can be traded over exchange

Infrastructure Investment Trusts

Investment on infra projects of atleast net worth 10 crores
Minimum 10 lakhs per applicant
Fund Manager
SEBI regulates
Rents, toll, user fee as returns
For HNI high Net worth individuals
Units can be traded over exchange

Exchange Traded Funds

Exchange Traded Funds are index funds that offer the security of a fund and liquidity of stock (disinvestment)

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index

Accumulation of shares of group of CPSU's forming a portfolio and raising capital together by issuing units
Net returns of companies in the group will be passed onto investors
These units are traded on exchange and hence are called Exchange Traded Funds
GOI issued ETF comprising shares of 10 PSU's (first ETF)

Bharat 22

Second Exchange Traded Fund
Comprise 22 stocks including those of central public sector enterprises (CPSEs), public sector banks and Private sector (in which there are GOI’s holdings under the Spec fied Undertaking of Unit Trust of India (SUUTI) )
This will have a diversified portfolio of companies from six sectors (Basic Materials, Energy, Finance, FMCG, Industrials and Utilities) with a 20% cap on each sector and a 15% cap on each stock.

Bond Exchange Traded Funds

Safety , liquidity (tradability on exchange) and predictable tax efficient returns

Bharat Bond ETF

First country's corporate bond ETF
It will comprise a basket of bonds issued by the CPSEs, CPSUs, CPFIs, and other government organisations
Initially rated as AAA bonds

Impact Investment

It is the investments made into businesses with the aim to make a measurable social, economic and environmental impact while also generating a range of returns, from profit to publicity.

Finance Markets