FUNCTIONS OF FINANCIAL MARKET

➢Provides facilities for interaction between the

investors and borrowers

➢Provides security to dealings in financial assets

➢Reduces the cost of transaction and information

Financial Unorganized Money
Market Chit funds, Nidhi’s, ,money lenders,
Indigenous bankers
Market
Money Market
Treasury bill

Organized Money Market Cash management

bills(CMBs)

Certificates of
Deposits (CDs)
Financial Market
Commercial papers
(CPs)

Equity
Primary Market

Debt
Capital Market
Equity
Secondary Market
Debt
Money Market
Money Market

Money Market is a subsection of the financial

market where short-term financial instruments are
traded. These instruments typically have high
liquidity and low risk, making them an attractive
option for investors looking for a safe place to park
their money for short periods of time.
Money Market

➢ Money market is the market from where

companies and government can borrow short
term funds(up to 1 year).

➢ Money market is regulated by RBI

The Money Market Instruments

➢ Treasury Bills

➢ Commercial Paper

➢ Certificate of Deposits

➢ Call Money, Notice Money & Term Money

➢ Repo & Tri-Party Repo

➢ TLTRO

➢ The Bill Rediscounting Scheme (BRS)

➢ Call Money

➢ Notice Money

➢ Term Money
Negotiated Dealing System

The Negotiated Dealing System, or NDS, is an electronic

trading platform operated by the Reserve Bank of India
(RBI) to facilitate the issuing and exchange of
government securities and other types of money market
instruments.
Negotiated Dealing System
Treasury bills are money market instruments issued by
the Government of India as a promissory note with
guaranteed repayment at a later date. Funds collected
through such tools are typically used to meet short term
requirements of the government, hence, to reduce the
overall fiscal deficit of a country.
Certificate of Deposit

A Certificate of Deposit or CD is a fixed-income financial

tool that is governed by the Reserve Bank of India and is
issued in a dematerialized form. It is a type of agreement
made between the depositors and the banks, wherein the
bank pays an interest on your investment.
❖ Certificate of deposit in India can be issued for a
minimum deposit of Rs. 1 lakh or in subsequent
multiples of it.
❖ Certificates of deposit are issued by the Scheduled
Commercial Banks (SCBs) and All-India Financial
Institutions. The Cooperative Banks and the Regional
Rural Banks(RRBs) are not eligible for issuing a CD.
❖ There is a term period of 3 months to 1 year for CDs
that are issued by SCBs.
❖ CDs in dematerialised forms can be transferred
through endorsement or delivery, similar to
dematerialised securities.
❖ There is no lock-in period for a certificate of deposit.
Commercial paper

Commercial paper is a short-term, unsecured debt

instrument that's issued by large corporations or
banks to meet short-term financial obligations, like
funding a new project.
Tri-party repo
A tri-party repo is a type of repurchase agreement (repo)
that involves a third party, called a tri-party agent (TPA), to
facilitate the transaction. The TPA acts as an intermediary
between the borrower and lender, performing services
such as:
✓ Collateral selection
✓ Payments and settlement
✓ Custody and management of collateral securities
The Bill Rediscounting Scheme (BRS)

The Bill Rediscounting Scheme (BRS) is a system that

allows financial institutions to rediscount unmatured bills
with other financial institutions. The Reserve Bank of India
(RBI) introduced the BRS to encourage disciplined credit
use and to provide liquidity to the banking system.
The Bill Rediscounting Scheme (BRS)

✓ Eligible commercial banks can rediscount trade

bills of up to 90 days tenor accepted by licensed
banks with the RBI.

✓ The minimum amount of a vailment under this

facility is Rupees one lakh and multiples thereof.
Money Market

Money Market is a subsection of the financial

market where short-term financial instruments are
traded. These instruments typically have high
liquidity and low risk, making them an attractive
option for investors looking for a safe place to park
their money for short periods of time.
 Chit funds
Unorganized Money
nidhis,,money lenders,
Market
Indigenous bankers

Treasury bill
Money Market

Cash management
bills(CMBs)
Organized Money
Market
Certificates of Deposits
(CDs)

Financial Financial Market Commercial papers

Market
(CPs)

Equity

Primary Market

Debt

Capital Market

Equity

Secondary Market

Debt
Capital Market

Capital market is a market from where

government and companies can raise long
term funds by issuing securities(equities &
debt).
Capital Market

Capital market include the stock market and the

bond market.

Regulatory authority: Securities and Exchange

Board of India(SEBI)
Classification of Capital Market

Primary Market

Secondary Market
Primary Market

Primary Market: is the market where securities

(share, bond, MF, option, future) are listed or
introduced new stocks and bonds to the public
for the first time.

In the primary market the security is purchased

directly from the issuer
Secondary Market

Secondary market is the financial market where

previously issued securities are bought and sold.

Secondary market is where investors trade among

themselves. An investor purchases a security
from another investor rather than the issuer.
Shares
Shares

✓ A share is a percentage of ownership in a

company or a financial asset. Investors who
hold shares in any company are known as
shareholders.

✓ In simple words, shares represent ownership of

a company.
Types of shares:
I- Preference shares
As the name suggests, this type of share gives certain preferential
rights as compared to other types of shares.

➢ They get first preference when it comes to the payout of

dividends, i. e. a share of the profit earned by the company

➢ When the company winds up, preference shareholders have

the first right in terms of getting repaid
Preference shares can be further classified as under:

➢ Cumulative or non cumulative

➢ Redeemable or irredeemable
➢ Participating or non- participating
➢ Convertible or non-convertible
Cumulative preference shares

Cumulative preference shares give the shareholder a right

to dividends that may have been missed in the past.
Dividends are paid by companies to reward shareholders.

They are entitled to these before the holders of common

shares can receive dividends once more.
Redeemable or irredeemable preference shares

Redeemable preference shares are those preference shares that can

be bought back by the issuing company within its predetermined
maturity period.

Irredeemable preference shares are those preference shares that

cannot be bought back by the issuing company till the company is a
going concern and in existence.
Participating or non- participating preference shares

Participating preferred stock is a type of preferred stock that gives the

holder the right to receive dividends equal to the customarily
specified rate that preferred dividends are paid to preferred
shareholders, as well as an additional dividend based on some
predetermined condition.

As the name suggests, non-participating preference shareholders do

not have a share in the extra earnings or surplus assets during the
liquidation of a company. This type of share entitles its shareholders
to receive only the pre-fixed dividends.
Convertible or non-convertible preference shares

Convertible preference share; These shares can be readily

converted into equity shares.

Non-convertible; Though these types of preference shares

cannot be converted into common stock, they are still
prioritised over them.
II- Equity shares

➢ Equity shares are also known as ordinary shares.

The majority of shares issued by the company
are equity shares.
➢ This type of share is traded actively in the
secondary or stock market.
➢ These shareholders have voting rights in the
company meetings.
Initial Public Offering (IPO)

An initial public offering is when an

unlisted company makes a fresh issue of
securities for the first time to the public.
Bonds
Bonds are debt instruments issued by the debtors for
raising funds.

These are issued for specific period and carry fixed

rates of interest payable periodically.

Bonds are transferable and are traded in the secondary

market.
Bonds
A Bond is a form of debt raised by the issuer of the
bond.

Issuer of the bonds pays interest to the purchaser for

using his money.

Market value of the bond may be different form the

face value and keeps changing.
Yield on bonds

Current yield =Coupon interest/Current market price.

Yield on bonds

Current yield =coupon interest/current market price.

E.g. if face value of a bond is Rs 50, coupon rate is 8%

pa, and market price is Rs 40, then the current
yield=4/40=0.1 or 10%
Yield to Maturity(YTM) is that discount rate at which
all future cash flows equal the present market value.
Terms
Associated with
Bonds
Coupon Rate

A bond carries a specific rate of interest

which is also called the coupon rate.
Maturity

A bond is issued for a specified period. It is repaid

on maturity.
Redemption Value

The value which the bondholder gets on maturity is called redemption value.
Face Value

It is also known as par value and stated on the face of

the bond. It represents the amount borrowed by the
firm, which it promises to repay after a specified period
of time.

Place Value: Place value is defined as the digit

multiplied wherever it is placed, either by hundreds or
thousands.
Market Value

A bond may traded on stock exchange. Market

value is the price at which the bond is usually
bought or sold in market.

Market value may be different from the par value

or the redemption value.
Day count conventions

Interest payments are made based on the day count

method followed. Various day count conventions are used
in practice in the bond markets such as;

Actual/Actual: actual number of days are calculated

Actual/365: where even in case of a leap year, days in the

year would be considered as 365.
Day count conventions

Actual/360: where interest for a year is calculated assuming

there are 360 days in a year.

30/360: the days of the month are assumed at 30 for interest

calculation.
Types of Bonds
Types of Bonds

➢ Fixed Rate Bonds

➢ Floating Rate Bonds
➢ Zero Coupon Bonds
➢ Inflation Linked Bonds
➢ Perpetual Bonds
➢ Subordinated Bonds
➢ Corporate bonds
Types of Bonds

➢ Tax free bonds

➢ Public Sector bonds
➢ Municipal and Local authority bonds
➢ State Government bonds
➢ Central Government bonds
Inflation Linked Bonds

A are securities designed to help protect

investors from inflation. ILBs are indexed to
inflation so that the principal and interest
payments rise and fall with the rate of
inflation.
Perpetual Bonds

Perpetual bond, which is also known as a

perpetual or just a perp, is a bond with no
maturity date. Therefore, it may be treated
as equity, not as debt.
Zero Coupon Bonds

A zero coupon bond is a bond in which the

face value is repaid at the time of maturity.

It does not make periodic interest payments

or have so-called coupons, hence the term
zero coupon bond.
Subordinated Bonds

In finance, subordinated debt is debt which

ranks after other debts if a company falls into
liquidation or bankruptcy.
Optionality in Bonds

❖Callable Bonds

❖Puttable Bonds
Callable bonds

A callable bond is a type of bond that allows the

issuer of the bond to retain the privilege of
redeeming the bond at some point before the bond
reaches its date of maturity.
Puttable bonds

The holder of the puttable bond has the right, but not the
obligation, to demand early repayment of the principal.

Or

A Puttable Bond is a type of bond that provides the holder of a

bond (investor) the right, but not the obligation, to force the
issuer to redeem the bond before its maturity date.
Foreign Exchange

Foreign Exchange is the trading of one currency for

another.

For example, one can swap the U.S. dollar for the
Indian Rupees.

Foreign exchange transactions can take place on the

foreign exchange market, also known as the Forex
Market.
Foreign Exchange

➢ International Trade
➢ Globalization
➢ Cross border movement of manpower & capital
➢ Travel & tourism
➢ Investment Opportunities
FOREX Market Participants
FOREX Market Participants
FOREX Market Features
Foreign Exchange Dealers Association Of India (FEDAI)

Foreign Exchange Dealers Association of India is a non-

profit body established in 1958 by RBI. All public sector

banks, Private Banks, Foreign Banks and Cooperative

banks are its members.

Foreign Exchange Dealers Association Of India (FEDAI)

The functions of FEDAI are:

➢ Forming uniform rules

➢ Providing training to bankers; and

➢ Providing guidance and information from

time to time.
Foreign Exchange Management Act, (FEMA) 1999

FEMA, 1999 was enacted by the statute of the

parliament, and was brought into force w.e.f.
1.6.2000. The Act is applicable to all transactions in
foreign exchange, undertaken in India or by persons
resident in India.

Earlier Foreign Exchange Regulation Act 1973

(FERA, 1973) regulated the area of foreign
exchange, which had its origin from Defence of India
Rules 1935, and later on FERA 1947.
Foreign Exchange Management Act, (FEMA) 1999

The foreign exchange regulations have come a long way

since 1935, 1947 and 1973, and with the introduction of
a liberalized regime under FEMA 1999, there has been a
considerable relaxation in regulatory provisions related
to foreign exchange transactions.
Foreign Exchange Management Act, (FEMA) 1999

The objective of FEMA is to facilitate external trade and

payments and to promote the orderly development and
maintenance of foreign exchange markets in India, while
the objective of FERA was to conserve the foreign
exchange resources of the country and to ensure proper
utilisation thereof in the interests of the economic
development of the country.
American Depository Receipts

American Depository Receipts are Receipts or Certificates

issued by US Bank representing specified number of shares of
non-US Companies. defined as under:

➢ These are issued in capital market of USA alone.

➢ These represent securities of companies of other countries.
➢ These securities are traded in US market.
➢ The US Bank is depository in this case.
➢ ADR is the evidence of ownership of the underlying shares.
American Depository Receipts

Unsponsored ADRs
It is the arrangement initiated by US brokers. US Depository
banks create such ADRs. The depository has to Register ADRs
with SEC (Security Exchange Commission).

Sponsored ADRs
Issuing Company initiates the process. It promotes the
company’s ADRs in the USA. It chooses single Depository
bank. Registration with SEC is not compulsory. However,
unregistered ADRs are not listed in US exchanges.
Global Depository Receipts

Global Depository Receipt is a Dollar dominated instrument

with following features:

➢ Traded in Stock exchanges of Europe.

➢ Represents shares of other countries.
➢ Depository bank in Europe acquires these shares and
issues “Receipts” to investors.
➢ GDRs do-not carry voting rights.
➢ Dividend is paid in local currency and there is no
exchange risk for the issuing company.
Global Depository Receipts

➢ Issuing Co. collects proceeds in foreign currency

which can be used locally for meeting Foreign
exchange requirements of Import.
➢ GDRS are normally listed on “Luxembourg Exchange
“ and traded in OTC market London and private
placement in USA.
➢ It can be converted in underlying shares.
Indian Depository Receipts

Indian Depository Receipts are traded in local

exchanges and represent security of Overseas

Companies.
Currency Declaration Form

CDF is required to be submitted by the person on his

arrival to India at the Airport to the custom Authorities in
the following cases:

➢ If aggregate of Foreign Exchange including Foreign

currency/TCs exceeds USD 10000 or its equivalent.

➢ If aggregate value of currency notes (cash portion)

exceeds USD 5000 or its equivalent.

INTRODUCTION

The interconnectedness of financial markets refers to

the complex web of relationships and dependencies
between various financial assets, institutions, and
geographic regions. This connection often magnifies
market movements and can quickly transmit economic
shocks or benefits from one area to another.
INTRODUCTION

(a) Globalization: Increased trade and investment

flows between countries.
(b) Technology: Advanced communication and
trading technologies.
(c) Financial Innovation: Development of new
financial instruments that can be traded globally.
COMPONENTS

(a) Equity Markets: Share prices often influence and reflect the
broader economy.
(b) Forex Markets: Currency values affect international trade and
investment.
(c) Bond Markets: Influence interest rates, which in turn affect
other markets.
(d) Commodity Markets: Prices of commodities like oil have a
global impact.
(e) Derivative Markets: Allow hedging and speculation, influencing
other markets.
Real-world Examples

(a) 2008 Financial Crisis: Subprime mortgage crisis in the U.S. affected

global markets.

(b) Brexit: The U.K.'s decision to leave the EU impacted currencies,

equities, and bonds worldwide.

(c) COVID-19 Pandemic: Disruptions in one country affected global

supply chains and markets.

Regulatory Challenges

(a) Cross-border Regulation: Managing risk across jurisdictions.

(b) Transparency: Lack of transparency in some markets exacerbates

systemic risk.

(c) Coordination: Requirement for global regulatory coordination to

address interconnected risks.

The Asian Clearing Union (ACU)

The Asian Clearing Union (ACU), established in December

1974, is a payment arrangement designed to simplify and
facilitate the settlement of monetary transactions among its
member countries. The initial members included Bangladesh,
India, Iran, Nepal, Pakistan, and Sri Lanka. Later, Bhutan and
the Maldives also joined. The Reserve Bank of India serves as
the Union's agent.
The Asian Clearing Union (ACU)

Objectives

(a) Simplify Settlement: To simplify the process of payment and

settlement among member countries.
(b) Promote Trade: To encourage and expand intra- regional trade
among member states.
(c) Conserve Foreign Exchange: To conserve hard currency reserves
by netting transactions.
The Asian Clearing Union (ACU)

Mechanism

(a) Asian Clearing Union Special Drawing Rights (ACU-

SDRs): A synthetic currency used for settling payments.
(b) Clearing Period: Typically a two-month period during
which all transactions are netted.
(c) Netting Process: At the end of each clearing period, the
net debit or credit position of each country is determined.
(d) Settlement: Final settlements are made in a convertible
currency, usually U.S. dollars.
The Asian Clearing Union (ACU)

Benefits
(a) Reduced Transaction Costs: Streamlined process
lowers transaction costs.
(b) Enhanced Trade: Facilitates easier trade and financial
transactions among members.
(c) Forex Savings: Helps in saving valuable foreign
exchange reserves.
The Asian Clearing Union (ACU)

Limitations
(a) Imbalances: Can lead to significant imbalances if
one country has a large trade surplus or deficit.
(b) Political Risks: Geopolitical tensions among
member countries can affect the smooth functioning.
(c) Limited Scope: Restricted to member countries,
thus limited in scope compared to global payment
systems.
INTRODUCTION

Merchant Banking refers to a blend of banking and

consultancy services that assist businesses and high-
net-worth individuals in complex financial matters. It
is distinct from retail and commercial banking and
includes a broad range of activities like underwriting,
advisory services, asset management, and corporate
finance.
INTRODUCTION

The regulations pertaining to merchant banking are

mainly stipulated under the SEBI (Merchant Bankers)
Regulations, 1992, which have been amended
periodically to meet the evolving market conditions.
ACTIVITIES OF MERCHANT BANKS
Issue Management

❖ Project Appraisal: Evaluating the feasibility of projects.

❖ Drafting of Prospectus: Assisting in drafting legal and
financial documents.
❖ Regulatory Approvals: Obtaining approvals from SEBI and
stock exchanges.
❖ Marketing Strategy: Designing issue advertisements and
publicity.
ACTIVITIES OF MERCHANT BANKS

Post-Issue Functions

❖ Allotment: Helping in the allocation of shares.

❖ Listing: Facilitating the listing of shares on stock exchanges.
❖ Refunds: Managing the refund of application money if
necessary.

Bankers to the Issue

✓ Handling collection of application money.
✓ Coordinating with registrars.
✓ Presenting consolidated reports on the subscription level.
ACTIVITIES OF MERCHANT BANKS

Mobilising Payment of Dividend Warrants/

Interest Warrants/Refund Order
❖ Ensuring that dividend or interest payments are made to the
correct beneficiaries on time.

Debenture Trustee

❖ Protecting the interest of debenture holders.

❖ Ensuring compliance with the covenants of the trust deed.
ACTIVITIES OF MERCHANT BANKS

Underwriting

❖ Committing to subscribe to the shares or debentures of a

company in case of under-subscription.

Monitoring Agency
❖ Keeping track of how the raised capital is being used by the
company.
KEY CODES OF CONDUCT AS PER SEBI REGULATIONS

The Securities and Exchange Board of India (SEBI) has

outlined several key codes of conduct for merchant
banks under Regulation 13 of the SEBI (Merchant
Bankers) Regulations, 1992. These codes serve to
uphold the ethical and professional standards in
merchant banking and protect the interests of investors.
KEY CODES OF CONDUCT AS PER SEBI REGULATIONS

Investor Protection
❖ Should make all efforts to protect the interest of investors.

Ethical and Professional Standards

❖ Should maintain high standards of integrity, dignity, and fairness
in the conduct of business.
❖ Should fulfill all obligations in a professional and ethical manner.

Non-discrimination
❖ Should not discriminate among clients.
KEY CODES OF CONDUCT AS PER SEBI REGULATIONS
Disclosure and Transparency

❖ Should ensure that the prospectus, letter of offer, etc., is available to

investors at the time of the issue.
❖ Should inform its clients of any penal action taken against it by SEBI.
❖ Should inform the board about any legal proceedings initiated against it.

Compliance and Governance

❖ Should abide by the rules of the "Securities and Exchange Board of India
Regulations, 2003.”
❖ Shall develop its own internal code of conduct to govern its internal
operations.
KEY CODES OF CONDUCT AS PER SEBI REGULATIONS
Capacity and Responsibility

❖ Should ensure that any person it employs should have the capacity to be a
merchant banker.
❖ Would be responsible for the acts of its employees and agents.
Topic: Derivatives

The term ‘Derivative’ stands for a contract whose

price is derived from or is dependent upon an
underlying asset.

The underlying asset could be a financial asset such

as currency, stock and market index, an interest-
bearing security or a physical commodity.
Topic: Derivatives and The Treasury
Derivatives are market products widely used by bank
treasuries. Treasury uses derivatives chiefly ;

➢ To manage risk, including ALM risks,

➢ To cater to the requirements of the clients and more
particularly the corporate
➢ customers, and
➢ To trade, i.e. to take a trading position in derivative
products. While cross currency derivatives existed for
long, Rupee derivatives are of fairly recent origin, and use
of certain derivative products is still regulated by RBI.
Topic: OTC Vs Exchange Traded Contracts
Derivatives & Its Types

➢ Future
➢ Forward
➢ Options
➢ Swaps
FUTURE

➢ A futures contract is an agreement between two parties to

buy or sell an asset at a certain time in future at a certain
price.

➢ These are basically exchange traded, standardized contracts.

➢ The exchange stands guarantee to all transactions and

counterparty risk is largely eliminated.
Future Contract

By purchasing the right to buy, an investor

expects to profit from an increase in the price

of the underlying asset. By purchasing the

right to sell, the investor expects to profit from

a decrease in the price of the underlying asset.

Future Contract

➢ Futures are also often used to hedge the price

movement of the underlying asset to help prevent
losses from unfavorable price changes.

➢ There are tradeable futures contracts for almost any

commodity imaginable, such as grain, livestock,
energy, currencies, and even securities.
Future Contract

Hedgers

These are businesses or individuals that use

futures contracts for protection against
volatile price movements in the underlying
commodity.
Future Contract

Speculators

Speculators are independent traders and

investors. Some trade using their own money and
some trade on behalf of clients or brokerage
firms. Speculators trade futures contracts just as
they would trade stocks or bonds.
Future Contract

The Clearing House

In practice, a clearing house is used to facilitate

futures (and all derivative) transactions by being
on the other side of all trades.

A clearing house is a financial institution formed

specifically to facilitate derivative transactions.
Types of Future Contract
➢ Agricultural Futures: These were the original futures
contracts available at markets like the Chicago
Mercantile Exchange. In addition to grain futures,
there are also tradable futures contracts in fibers
(such as cotton), lumber, milk, coffee, sugar, and even
livestock.

➢ Energy Futures: These provide exposure to the most

common fuels and energy products, such as crude oil
and natural gas.
Types of Future Contract
➢ Metal Futures: These contracts trade in industrial
metals, such as gold, steel, and copper.

➢ Currency Futures: These contracts provide exposure

to changes in the exchange rates and interest rates of
different national currencies.

➢ Financial Futures: Contracts that trade in the future

value of a security or index. For example, there are
futures for the S&P 500 and Nasdaq indexes. There
are also futures for debt products, such as Treasury
bonds.
Interest Rate Future

An interest rate future is a financial derivative that

allows exposure to changes in interest rates.
Interest rate futures price moves inversely to interest
rates. Investors can speculate on the direction of
interest rates with interest rate futures, or else use the
contracts to hedge against changes in rates.
Interest Rate Future

Interest rate futures are futures contracts based on

interest-bearing financial instruments. This futures
contract can be cash-settled or it can involve the
delivery of the underlying security. Like other
futures, this is an agreement for the long
position to receive the interest earned on a
notional amount and the short position to pay
this amount.
Forwards
➢ These are financial contracts that obligate the contracts’ buyers
to purchase an asset at a pre-agreed price on a specified future
date.

➢ However, forwards are more flexible contracts because the

parties can customize the underlying commodity as well as the
quantity of the commodity and the date of the transaction.
Forward Contract

➢ The Counterparties

➢ The Underline Assets

➢ The Forward Price

➢ The Expiration Dates

Forward Contract

➢ Asset: This is the underlying asset that is

specified in the contract.

➢ Expiration Date: The contract will need

an end date when the agreement is
settled and the asset is delivered and the
deliverer is paid.
Forward Contract

➢ Quantity: This is the size of the contract,

and will give the specific amount in units of
the asset being bought and sold.

➢ Price: The price that will be paid on the

maturation/expiration date must also be
specified. This will also include the currency
that payment will be rendered in.
Uses of Forward Contract

Forward contracts are mainly used

to hedge against potential losses. They enable
the participants to lock in a price in the future.
This guaranteed price can be very important,
especially in industries that commonly
experience significant volatility in prices.
Uses of Forward Contract

For example, in the oil industry, entering into a

forward contract to sell a specific number of barrels
of oil can be used to protect against potential
downward swings in oil prices. Forwards are also
commonly used to hedge against changes
in currency exchange rates when making large
international purchases.
Uses of Forward Contract

Forward contracts can also be used purely for

speculative purposes. This is less common than using
futures since forwards are created by two parties and
not available for trading on centralized exchanges. If
a speculator believes that the future spot price of an
asset will be higher than the forward price today, they
may enter into a long forward position. If the future
spot price is greater than the agreed-upon contract
price, they will profit.
Forward rate agreements (FRAs)
Forward rate agreements (FRAs) are over-the-counter
(OTC) contracts between parties that determine the rate of
interest to be paid on an agreed-upon date in the future.
The notional amount is not exchanged, but is a cash
amount based on the rate differentials and the notional
value of the contract.
A borrower might want to fix their borrowing costs today
by entering into an FRA.
Forward rate agreements (FRAs)
OPTIONS

Options give the buyer (holder) a right but

not an obligation to buy or sell an asset in
future.

Options are of two types - Calls and Puts.

Call Option

Call Option: Calls give the buyer the right but

not the obligation to buy a given quantity of
the underlying asset, at a given price on or
before a given future date.
Put Options

Puts give the buyer the right, but not the obligation
to sell a given quantity of the underlying asset at a
given price on or before a given date.
Call Option

A long call can be used to speculate on the price of

the underlying rising, since it has unlimited upside
potential but the maximum loss is the premium
(price) paid for the option.
Buying Call Option

Buyers are bullish on a stock and believe the share

price will rise above the strike price before the
option expires. If the investor's bullish outlook is
realized and the price increases above the strike
price, the investor can exercise the option, buy the
stock at the strike price, and immediately sell the
stock at the current market price for a profit.
Selling Call Option

Selling call options is known as writing a contract.

The writer receives the premium fee. In other
words, a buyer pays the premium to the writer (or
seller) of an option. The maximum profit is the
premium received when selling the option.
Put Option

A long put, therefore, is a short position in the

underlying security, since the put gains value as the
underlying's price falls (they have a negative
delta). Protective puts can be purchased as a sort
of insurance, providing a price floor for investors to
hedge their position
Buying Put Option

Since buyers of put options want the stock price to

decrease, the put option is profitable when the
underlying stock's price is below the strike price. If
the prevailing market price is less than the strike
price at expiry, the investor can exercise the put.
Selling Put Option

Selling put options is also known as writing a

contract. A put option writer believes the
underlying stock's price will stay the same or
increase over the life of the option, making them
bullish on the shares.
American vs. European Options

American options can be exercised at any time

between the date of purchase and the expiration
date. European options are different from
American options in that they can only be exercised
at the end of their lives on their expiration date.
Options Payoff
SWAPS
SWAPS
Swaps are derivative contracts that are traded
over-the-counter primarily between financial
institutions or businesses.

Since they are traded over-the-counter, the

terms of the swap contract are negotiated and
customised to the needs of both parties.
SWAPS

Swaps are private agreements between

two parties to exchange cash flows in the
future according to a prearranged formula.
SWAPS

The swaps usually involve the exchange of a

fixed cash flow for a floating cash flow.

The most popular types of swaps are interest

rate swaps, commodity swaps, and currency
swaps.
TYPES OF SWAPS

➢ Interest rate swaps

➢ Currency swaps
➢ Commodity swaps
➢ Debt-Equity swaps
➢ Credit Default swaps
➢ Total Revenue swaps
Interest rate swaps

The idea behind an interest rate swap is to switch

the cash flows from a fixed interest rate to a

floating interest rate.

In such a swap, Party A agrees to pay a fixed rate of

interest to Party B on a notional principal for a

specified period and on predetermined intervals.

Currency swaps

In a currency swap, both parties exchange

principal and interest payments on debt that is

denominated in different currencies agreed by

the parties.

Currency swaps can take place between

different countries.
Currency swaps Types

➢ Principle only Swaps

➢ Coupon only Swaps

➢ P+I Swaps
Principle Only Swaps

The borrower continues to pay interest in USD terms,

but has the benefit of using the principal amount in
home currency, without exchange risk.

The repayment takes place in domestic currency, at a

fixed rate of exchange, hence there is no exchange risk.
Coupon Only Swaps

The USD loan is utilized in the same currency, but interest on USD loan
is swapped into Rupee interest - the borrower has to pay interest in
Rupees at swap rate, principal repayment is as per original loan terms.
Such strategy is useful, if principal amount is hedged by using other
derivative instruments (e.g. options), or if the borrower prefers to
leave the position open, in anticipation of appreciation of paying
currency (If Rupee appreciates, USD borrows will effectively pay fewer
Rupees to settle the debt).
P+I Swaps

Without initial exchange - where the borrower has

eliminated the currency risk and interest rate risk
completely (zero risk) and will pay principal and
interest in domestic currency (Rupees) to settle the
foreign currency borrowing. The swap cost is included
in the rupee interest rate.
Developments In Indian Markets

The interest rate swaps (IRS) and forward rate

agreements (FRA) were first allowed by RBI in 1999.
Indian banks are permitted by RBI to enter into only
plain vanilla type interest rate swaps, i.e. without any
exotic structures.
Developments In Indian Markets

In order to overcome the possible conflicts of interest in

the benchmark setting process arising out of the
governance structure of the Fixed Income Money Market
and Derivative Association of India (FIMMDA and
Foreign Exchange Dealers' Association of India (FEDAI)
an independent body was to be formed, either separately or
jointly, by the FIMMDA and the FEDAI for administration of
the benchmarks.
Financial Benchmarks India Pvt Ltd (FBIL)

FBIL, an independent company, is a three-way joint venture

between Fixed Income, Money Market and Derivatives
Association of India, Foreign Exchange Dealers Association
of India and Indian Banks Association.
It was formed in December 2014 as a private limited
company under the Companies Act 2013. Its aim is to
develop and administer benchmarks relating to money
market, government securities and foreign exchange in
India.
Financial Benchmarks India Pvt Ltd (FBIL)

FBIL also announces the benchmark rates/matrix of

➢ Term MIBOR for three tenors of 14-day, 1-month and 3-
month
➢ FC-Rupee Options Volatilities for five tenors of 1-week, 1-
month, 3-month, 6- month and 12-month
➢ Certificates of Deposit (FBIL-CD), and
➢ Treasury Bills (FBIL-TBILL)
Factoring and Forfaiting

Besides the regular financing avenues from banks, the

exporters also have access to other avenues of
financing which also act as risk management products.
Factoring and forfaiting are the two products, which
allows the exporters to sell their book debts and raise
finance upfront.
Factoring

Factoring is defined as a continuing agreement

between a financial institution (known as “Factor”)
and the business concern (the exporter/seller) selling
goods or services to track customers on Open Account
Basis, whereby the factor purchases the clients' book
debts, either with or without recourse to the client and in
relation thereto controls the credit extended to the
customers and administers the sales ledger.
Advantages of Factoring

➢ Immediate financing up to 75-80% of the invoice value.

➢ No need for LC, thus saving costs for the importer.
➢ Credit check on importers/buyers.
➢ Sales ledger maintenance.
➢ Credit protection on all approved debtor limits.
➢ Advisory services for new areas, countries.
A factor provides different services, which can be described as
under:
➢ Debt Administration: Managing the sales ledger of the client,
saving his administrative cost of book keeping, invoicing, credit
control and debt collection. This would also include work of
following up for the debt collection.
➢ Credit Protection: As professionals, factors, will have the facility
for credit intelligence to enable them to assess credit risk and
advise their clients accordingly. The database on the individual
buyers built up over a period of time, by the factor could be used
by the client for a fee.
➢ Factor Financing: While in India financing is an essential activity
for a factor, in certain countries it may not be an essential service.
Generally, a factor will be willing to advance up to 75-80% of the
outstanding debts.
TYPES OF FACTORING

Factoring services are generally divided into

several categories, depending on various
factors like risk management, geograph- ical
boundaries, and services provided.
TYPES OF FACTORING

Based on Risk Management:

Recourse Factoring: In this case, the factor advances funds
to the client against their invoices, but if the invoices remain
unpaid by the buyer, the factor has the right to recover the
advanced amount from the client (seller).

Non-Recourse Factoring: Here, the factor assumes the credit

risk. If the buyer fails to pay, the factor absorbs the loss and
cannot recover the amount from the client (seller).
TYPES OF FACTORING

Based on Geographical Scope:

Domestic Factoring: Both the seller and the buyer are located
in the same country. The factor collects from domestic clients.

International (Cross-Border) Factoring: In this case, the seller

and the buyer are situated in different countries. Often, two
factors are involved—one in the seller’s country and another in
the buyer's country—to facilitate the transaction.
TYPES OF FACTORING
Additional Types:

Invoice Factoring: The factor simply buys the invoices from the
client, providing immediate cash. This is a straightforward cash
flow solution.

Full-Service Factoring: Beyond simply purchasing the invoices,

the factor takes over credit control, collections, and sales
accounting functions, allowing the client to focus on core business
activities.
TYPES OF FACTORING

Spot Factoring: Unlike a contractual agreement, spot factoring

involves the factor buying individual invoices on a one-off basis.

Reverse Factoring: Also known as "supply chain finance," in

reverse factoring, a buyer approves their suppliers' invoices for
financing by a factor.
Forfaiting

Another product for financing of export receivables is

Forfaiting. It can be defined as a mechanism for financing
by discounting of export receivables, without recourse to
the exporter/seller, for a medium term, on a fixed rate
basis, for the full value of the contract/invoice.

In another words, forfaiting is the purchase by the

financer, of medium term export claims on the buyers,
without recourse to the exporters. It is a source of finance
and not a type of credit insurance, as such no other costs,
other than financing costs are involved in the transaction.
Forfaiting

Forfaiting is a form of export financing where an

exporter sells their medium to long-term receivables or
promissory notes to a financial institution, known as a
"forfaiter." This arrangement allows the exporter to
receive immediate cash and offload the risks associated
with non-payment by the importer, including country and
currency risks.
Forfaiting

➢ Takes away political and commercial risks associated with

export receivables.
➢ Makes available 100% finance against the invoice drawn.
➢ Without recourse facility.
➢ Freedom from credit administration, and follow-up.
➢ Cost saving on export credit insurance, besides related
paperwork.
➢ Fixed rate financing, freedom from movement of interest
rates for the tenor of the bill.
Factoring vs Forfaiting
1) Factoring is a short-term transaction, whereas Forfaiting is a medium- to
long-term transaction.
2) Factoring can be done with or without recourse, although forfaiting is
usually done without recourse.
3) Factoring is applicable to both foreign and domestic transactions, but
forfaiting is applicable to only international transactions.
4) Factoring is appropriate for ongoing open account sales that are not
backed by LCs or accepted by bills of exchange, whereas forfaiting is
appropriate for one-time transactions that are backed by LCs or approved by
bills of exchange.
5) Factoring necessitates a continuing arrangement between the factor and
the customer, in which all sales are routed via the factor, but forfaiting does
not necessitate the seller routing other business through the forfaiter. Deals
are closed transaction by transaction.
Factoring vs Forfaiting
Trade Receivables Discounting System

TReDS, is an electronic platform in India for facilitating

the financing of trade receivables of micro, small, and
medium enterprises (MSMEs) through multiple financiers.
TReDS aims to address the critical issue of delayed
payments to MSMEs by providing a mechanism for
auctioning trade receivables, thereby enabling these
enterprises to receive their dues in a timely manner.
CRITERIA TO SET UP AND OPERATE TREDS

Financial Criteria

Minimum Paid-up Equity Capital: TReDS shall have a

minimum paid-up equity capital of Rs. 25 crores.

Shareholding Limit: Entities other than promoters cannot hold

more than 10% of the equity capital in TReDS.

Financial Strength: The overall financial robustness of the entity

and its promoters will be critically assessed.
Venture Capital
Venture Capital

It refers to that capital and knowledge which are

given for the formation and setting up of companies,
especially to those who possess any new
methodologies or technology.
Venture Capital

It is not merely a way of acquiring funds into a new

firm but also a parallel support of the skills required
to set up the firm, devising its marketing strategy,
organizing, and its management as well.
Venture Capital Stages

The financing pattern of venture capital typically follows

through a series of funding rounds starting from pre-seed,
seed, Series A, B, C, and sometimes D rounds, each stage
representing a different level of company maturity and
investor risk tolerance.
Process of Venture Capital

Venture capital financing is a structured process

involving various stages from deal origination to exit
plans.
Process of Venture Capital
Process of Venture Capital

Deal Origination

❖ Objective: Identify potential investment opportunities

❖ Method: Referral system through business partners, parent
organizations, and networks
❖ Outcome: Accumulation of potential deals for investment
Process of Venture Capital

Screening
❖Objective: Shortlist investment opportunities
❖Method: Criteria-based filtering (e.g., market scope, technology,
investment size, location, stage of financing)
❖Outcome: A reduced list of projects for detailed evaluation
❖Interaction: Entrepreneurs may provide profiles or engage in
face-to-face discussions
Process of Venture Capital

Evaluation
❖ Objective: Conduct in-depth analysis of shortlisted opportunities
❖ Method: Examination of project profiles, entrepreneur track
records, and future prospects
❖ Outcome: Identification of the project and entrepreneur capabilities
❖ Qualities Considered: Entrepreneurial skills, technical
competence, experience, and market acumen
❖ Risk Assessment: Risk management study to assess the viability
Process of Venture Capital
Deal Negotiation

❖ Objective: Formulate mutual terms and conditions for investment

❖ Method: Both parties negotiate factors such as investment amount,

profit sharing, and rights

❖ Outcome: A mutually beneficial agreement

Process of Venture Capital

Post-Investment Activity

❖ Objective: Ongoing involvement and monitoring

❖ Method: The venture capitalist usually gets board representation but

generally does not engage in daily operations

❖ Outcome: Ensuring that the business progresses according to the plan

Process of Venture Capital

Exit Plan

Objective: Formalize an exit strategy to achieve returns on investment

Method: Depending on the investment nature, various exit strategies

like IPOs, acquisitions, or share buy-back are considered

Outcome: Maximization of profits and minimization of losses for the

venture capitalist
REGULATORY ASPECTS OF VENTURE CAPITAL FUNDS
REGULATORY ASPECTS OF VENTURE CAPITAL FUNDS

Venture Capital Funds (VCFs) in India are regulated primarily by

the Securities and Exchange Board of India (SEBI) under the SEBI

(Venture Capital Funds) Regulations, 1996. These regulations set

forth various conditions and criteria that VCFs must adhere to for

their formation, operation, and investment activities.

REGULATORY ASPECTS OF VENTURE CAPITAL FUNDS
REGULATORY ASPECTS OF VENTURE CAPITAL FUNDS

Formation and Registration

Eligibility Criteria: The sponsor must have a sound financial track

record for at least five years.

Minimum Commitment: Sponsors are required to contribute a

minimum of 2.5% of the corpus or Rs. 5 crore, whichever is less.

Registration: Mandatory registration with SEBI and payment of

requisite fees.
REGULATORY ASPECTS OF VENTURE CAPITAL FUNDS

Investment Criteria

Investment Cap: A VCF can invest a maximum of 25% of its corpus in

one venture capital undertaking.

Qualified Investments: At least 66.67% of the investible funds must be

invested in unlisted equity shares or equity- linked instruments.

REGULATORY ASPECTS OF VENTURE CAPITAL FUNDS

Disclosure and Reporting

Offer Document: The offer document must contain explicit

details about the risk factors, the fund strategy, targeted sectors,
etc.
Periodic Reporting: Quarterly reports must be submitted to SEBI
and annual audited reports to the investors.
REGULATORY ASPECTS OF VENTURE CAPITAL FUNDS

Fund Management

Fit and Proper Criteria: The fund manager must meet SEBI's 'fit
and proper' criteria.

Management Fee: Disclosed in the offer document and approved

by 75% of the investors by value of their investment in the VCF.
MODE OF VENTURE CAPITAL FUNDS
ADVANTAGES & DISADVANTAGES OF VENTURE CAPITAL FUNDS
Lease Financing
Lease financing is a popular medium and long-term

financing option in which the owner of an asset grant

another person the right to use the asset in exchange

for a periodic payment.

Lease Financing

The asset’s owner is known as the lessor, and the user

is known as the lessee. A contract is to be made
between the lessor and the lessee regarding the terms
and conditions of the lease. After the lease period is
over, the asset goes back to the lessor (the owner).
Features of Lease Financing

➢The Contract: There are essentially two parties to

a contract of lease financing, namely the owner
and the user.

➢Assets: The assets, property to be leased are the

subject matter lease financing contract.

➢Lease Period: The basic lease period during which

the lease is non-cancelable.

➢Rental Payments: The lessee pays to the lessor for

the lease transaction is the lease rental.
Features of Lease Financing

➢Maintain: Provision for the payment of the costs of

maintenance and repair, taxes, insurance, and other
expenses appertaining to the asset leased.

➢Term of Lease: The term of the lease is the period for

which the agreement of lease remains in operation.

➢Ownership: During the lease period, ownership of

the assets is being kept with the lessor, and its use is
allowed to the lessee.
Features of Lease Financing

➢Terminating: At the end of the period, the contract

may be terminated.

➢Renew or Purchase: An option to renew the lease or

to purchase the assets at the end of the basic period.

➢Default: The lessee may be liable for all future

payments at once, receiving title to the asset in

exchange.
Types of Lease

➢Based on Nature.

• Operating lease.

• Financial lease.

➢Based on the Method of Lease.

• Direct lease.

• Sale & Leaseback.

• Leverage lease.
Operating Lease
An operating lease is a cancellable
contractual agreement whereby the lessee
agrees to make periodic payments to the
lessor to obtain an asset set’s services.
Financial Lease

A financial (or capital) lease is a longer-

term lease than an operating lease that is

non-cancelable and obligates the lessee to

make payments for the use of an asset over

a predetermined period of time.

Financial Lease
Direct Lease

Under direct leasing, a firm acquires the

right to use an asset from the manufacture
directly.

The ownership of the asset leased out

remains with the manufacture itself.
Sale & Leaseback

Under the sale & leaseback arrangement,

the firm sells an asset that it owns and
then leases to the same asset back from the
buyer.

This way, the lessee gets the assets for use,

and at the same time, it gets cash.
Leveraged Lease

Leveraged lease is the same as the direct

lease, except that a third party, the lender,
is involved in addition to the lessee &
lessor. The lender partly finances the
purchase of the asset to be leased; the
lessor turns to be a borrower.
Income Tax implications of lease
HIRE PURCHASE

Hire purchase is a method of financing an asset where

the buyer obtains possession and usage of the asset but
does not own it until the final payment is made. This
arrangement has significant implications for both buyers
and sellers and is regulated by various laws and
guidelines.
HIRE PURCHASE

In India, the Hire Purchase agreement is a complex

legal instrument that is primarily governed by the Hire
Purchase Act of 1972. However, its roots lie in older
legal frameworks, specifically the Indian Contract Act,
1872, and the Sale of Goods Act, 1930.
Legal Elements of HIRE PURCHASE

The Hire Purchase agreement is not a

straightforward contract of sale. Instead, it's a
contract of bailment coupled with an option to
purchase. The hirer has the right to use the goods but
does not become the legal owner until all the terms
of the agreement have been met.
Legal Elements of HIRE PURCHASE

❖Bailment: The 'bailment' aspect of the hire purchase is governed by

Chapter IX of the Indian Contract Act, 1872. Under this, the hirer
receives possession and use of the asset but not ownership. This is
relevant for a variety of consumer goods like cars, computers, and
household appliances.
❖Sale: Though not immediately executed, the sale aspect is covered
under the Sale of Goods Act, 1930. It comes into play once the hirer
exercises the option to purchase and makes the final payment,
thereby transferring ownership from the seller to the buyer.
Hire Purchase Act, 1972
This act is the most comprehensive legal framework for
regulating hire purchase transactions in India. It lays down
the guidelines for forming hire purchase contracts and
outlines the rights and obligations for both parties
involved.