Financial securities and derivatives

7/29/2019 Financial securities and derivatives

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Raga -1010635

Prakruthi-1010657Swati-1010663

Madhurya-1010671


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A financial instrument is a tradable asset of any kind;either cash, evidence of an ownership interest in anentity, or a contractual right to receive or deliver cashor another financial instrument.

Cash instruments are financial instruments whosevalue is determined directly by the markets. They canbe divided into securities, which are readilytransferable, and other cash instruments such as loansand deposits, where both borrower and lender have toagree on a transfer.

Derivative instruments are financial instrumentswhich derive their value from the value andcharacteristics of one or more underlying entities suchas an asset, index, or interest rate. They can be divided

into exchange-traded derivatives and over-the-counter (OTC) derivatives.
http://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Market


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Altering the terms of

issue in a novel way inorder to achieve the

predetermined purpose


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Different Type of Credit Control and Macro-level Liquidity Management

Matching Cash Flow Requirement of the Fund

Raiser

Satisfying other Objectives like RetainingManagement Control

More Effective Catering to the Needs of theInvestors

Better Treasury Managment


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Liquidity Adjustment Facility (LAF)

{Repo and Reverse Repo}

Collateralized Borrowing & LendingObligations (CBLO)

Market Stabilisation Scheme (MSS)

Perpetual Bonds or Innovative Bonds


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Repo and Reverse Repo as part of LAF since

2000

Designed to form the Interest Rate Platform

within which all short-term interest rates will lie

Together with CRR, it has become an effective

short-term liquidity management tool

Needed to manage the unexpected movementof funds into and out of the country due to

Hedge Funds and Others


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Introduced by CCIL in 2003A Wider Call Money Market

Participation by Pledging specified securitieswith CCIL

Participation by NBFCs and Corporate alsoapart from usual Call Money Market Players

One Day or more

Better Treasury Management by CorporateBetter Profitability of Banks

Cheaper Market than Call Money Market


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Launched in 2004 through an MOU between RBIand the Central Government

Part of a Longer Period Sterilisation of Market

Managing Liquidity Problems arising out ofForex Remittances

RBI to issue after consultation with Government

Sale of Treasury Bills and Dated Securitiesthrough Auction

Better Fiscal Accountability as they are issuedagainst cash maintained by the Government

with RBI


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Introduced in 2005

Issued by Scheduled Commercial Bankss

15 year Tenure with a Roll on forever at theoption of the Bank

Part of Tier I Capital of Banks

Enabling the Banks to meet Basel Norm

regarding Capital Adequacy Ratio

Insurance Companies are usually theinvestors


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Bonus Debenture

Zero Coupon Bonds

FCCB

Multiple Option Bonds

Infrastructure Bonds

Commercial Paper

Certificate of Deposit

Forex BackedInfrastructure Bonds

Shares with DifferentialVoting Rights

Bonus Preference Shares

Time Share

Plantation Share

ADR/GDR

Shares withDisproportionate VotingRights


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Rewarding Shareholder by better TreasuryManagement

Hindustan Lever tried it in early 2000s

Avoiding a Blown-up equity capital base

Did not enthuse the investors much

Concept did not catch the fancy of the

market


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Interest in the form of discount on the facevalue of bonds

Cross Border Investment

Taxation benefit

Better Treasury Management sincepostponing the payment of interest on

redemptionWhere convertibility alone is the

consideration, saving of interest


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Provisions of FEMA

Convertibility is the cream

Cross Border InvestmentGained Popularity Recently


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Reliance Industries pioneered it in India

Appealing to Different Requirements ofInvestors for Income Planning

Flexibility in Tax Planning of Investors

Payment of Interest is staggered with variedoptions

Became Popular and adopted forInfrastructure Bonds also


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short-term security

Rated instrument

Issued by listed companies

Short-term source of finance for corporates

Banks and other corporates invest

SBI-DFHI tried to create a secondary market, butfailed

Securities are held until maturity


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Banks allowed to issue COD by RBI since 1989though US banks were issuing since 1961

Tapping large deposits of corporates and HNI

Tenure is short-term for 3 months to one year

Held until maturity

SBI-DFHI buys the CODs

No secondary market exists as SBI-DFHI isnot able to accumulate sufficient CODs


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In 2009, For the First time RBI invested with aprivate fund

The UK Subsidiary of India InfrastructureFinance Company Ltd issued the bonds

The RBI used its foreign exchange reserve toinvest in the bonds

Indian firms operating in foreign countriescan augment the resources by issuing suchbonds


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A product for the M&A era

Lesser Dilution of management control

Each share carrying fraction of a voteShare issued at a discount

Dividend is more than the dividend on the

normal sharesTata Motors issued in 2008 (one tenth of vote,

305 against 340 per share and 5% moredividend)-Gujarat NRE Coke in the same year


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In 2003, Sun Pharmaceuticals issued bonuspreference shares

Better cash management

Better than bonus debentures as there is nocompulsion of payment of interest

Did not enthuse the shareholders like the

bonus equity sharesDid not catch the fancy of the market


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Property sharing for a certain number of daysper year

Used by Resorts in Tourist DestinationsSterling Group and a few other organisations

tapped the market well

Fancy ruled only for a few years


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Came out with big fanfare

Promised fantastic returns in the distantfuture

Many gullible investors were taken for a ride

Least Liquid instrument

Only a few firms have a token presence


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Instruments issued to foreign investors in lieuof the shares deposited with a custodian inthe home country

Mainly to get the instruments of Instrumentsof Indian companies listed in foreign bourses

Enhanced the image of Indian companies and

added a global perspectiveContributed to the volatility of Indian Market


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New Companies Bill is doing away withshares with differential voting rights

In its place, shares with superior voting rightsare being proposed

Helping the promoters to ward off hostiletake-overs

Lacking fairness


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Creating a hype

Not a proper study is made before theintroduction

ComplexityComplexity leads to lack of correction of

wrong steps

IT enabled financial system enables excesseswhich endanger the very survival of the firm

Short term growth for higher managerialremuneration


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Financial securities and derivatives