Financial Markets – 02
Types of treasury bills:
- 91 day treasury bill (i.e. its period of maturity is 91 days)
- 182 days treasury bill
- 364 day treasury bill
- 14 day (intermediate TBs)
- 14 day (auction able TBs)
Only the first 3 varieties are used in India.
Certificate of Deposits:
It is a negotiable certificate issued by a bank to depositors of funds which remain in deposit for a specified period. It is issued by Financial Institutions like all banks except Local banks and RRB & NBFC and it is issued for a specific Purpose. It requires minimum investment amount is Rs.1 lakh and can be invested in multiples of 1 lakh only. It has fixed maturity date, interest rate, and Restrict access to funds until the maturity date of investment.
Commercial paper: It is an instrument with corporate houses for raising short term funds. It is issued by corporate companies to raise money. Minimum of Rs.5lakhs and further multiples of Rs.5lakhs. It is unsecured, short term debt instrument, like promissory note.
Promissory note (P-notes) is nothing but it contains a written promise by issuer to pay sum of money to payee/buyer at a specified future date. It is easily traded in market.
Commercial bill: it is a bill drawn from one merchant firm on another. It is issued by All India financial Institutions, NBFCs, Scheduled commercial banks, cooperative banks, mutual funds etc.
Way and mean Advances: RBI gives temporary loan facilities to the centre and state government as a banker to government. This temporary loan facility is called way and mean advances. (ie) for temporary mismatches in the Receipt and payment of the government.
Capital market is divided into securities market and financial institutions or funds broadly.
Securities means a certificate document indicating that its holder is eligible to receive a certain amount of money at a particular time. It is a document giving title property or claim on income which may be lodged. This could be an Equity and Debt. It is income yielding and traded in the stock exchange or secondary market. The essential characteristic of a security is that it is saleable. Securities can be issued by the government known as gilt edged security or by corporate securities (share, debentures or bonds). The market where securities are traded is known as securities market. The securities market is regulated by government by SEBI.
The corporate securities can be divided as Primary market and secondary market.
A primary market issues new securities on an exchange for companies, governments and other groups to obtain financing through debt-based or equity-based securities. The firms raising the funds could be a new company or already existing company with raising new funds or going public i.e. becoming a public limited company.
Methods/ Instruments for rising funds in primary market:
- Initial public offering (IPO): Initial public offering is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.
- Follow on public offering (FPO): A follow-on public offering (FPO) is the issuance of shares to investors by a company listed on a stock exchange. A follow-on offering is an issuance of additional shares made by a company after an initial public offering (IPO). Companies usually announce FPOs to raise equity or reduce debt.
- Public issue: it is open to all the citizens of India.
- Rights Issue: Company issues more shares but gives First right to Existing shareholders to buy them, if they refuse then offered to outsiders. It is often transferrable, allowing holders to sell them in open market.
- Private placement: it means the issue is placed privately with few financial institutions or individuals and not with the general public.
- Equity – Share certificate / Shares: It is the residual value of a company’s assets after all outside liabilities, except to shareholders have been allowed for is Equity. Shareholder gets dividend from the profits of the company. Equity holders called owners, proprietors of the company. The equity holders have last priority in claim during liquidation.
- Stock: it is a form of fixed interest security. It is also known as share or equity.
- Bond: it is a form of fixed interest security issued by government, companies, banks or other institutions. It does not always carry fixed interest. Stock holders are owners of the company whereas bondholders are lenders to the company.
- Debentures: these are unsecured, long term corporate bonds. The debenture holders are not protected by collateral but they have the right to claim repayment.
Debt Holder gets interest & Principal irrespective of whether company makes profit or not. Debt holders are creditors of the company. Debt holder has 1st priority in claim during liquidation. For e.g. when a corporation is liquidated, its creditor paid in a particular order including secured creditor/bond holder gets, 1st priority, then unsecured creditors and the stock holder has last priority in this order.