Merchant Banking and Venture Capital
Unit 1: Meaning, Scope and Innovations
Dr. Nandini Sharma
Faculty of Management and Commerce
Merchant Banking and Financial Services
Introduction – The Role of Financial Instruments
• Financial instruments are contracts representing monetary value, facilitating fund flow,
investment, and risk management.
• Innovative instruments evolve in response to changing investor needs, economic goals, and
regulatory support.
• They offer tailored exposure to asset classes, improve liquidity, and allow efficient capital
deployment.
• This presentation explores modern financial instruments emerging in India’s evolving
financial landscape.
• Sources: Guruswamy, SEBI Circulars, RBI Bulletins, NISM
Merchant Banking and Financial Services
Convertible Debentures and Preference Shares
• Convertible debentures are debt instruments that can be converted into equity shares after a
specified period.
• They provide interest income initially and potential capital gains later, offering dual benefits
to investors.
• Preference shares offer fixed dividend and priority over common equity in liquidation, with
optional convertibility.
• Companies use them for hybrid capital raising—balancing debt and equity characteristics.
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Zero Coupon Bonds and Deep Discount Bonds
• Zero Coupon Bonds are issued at a discount and redeemed at face value, without interim
interest payments.
• Deep Discount Bonds work similarly but with a longer maturity, often used by infrastructure
companies.
• These instruments appeal to long-term investors and institutions with predictable cash flow
needs.
• Used in sovereign, municipal, and PSU issuances to reduce periodic interest liability.
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Capital Protection Oriented Funds (CPOFs)
• CPOFs invest a major portion in fixed income instruments (e.g., bonds) and a small portion in
equities or derivatives.
• Their aim is to protect principal while offering moderate market-linked returns.
• These funds are SEBI-regulated and come with a specific lock-in period to optimize asset
allocation.
• Popular among conservative investors during volatile markets or near-retirement stage.
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Securitized Instruments and Pass-Through Certificates
• Securitization involves pooling assets (e.g., loans, receivables) and issuing marketable
securities backed by these assets.
• Pass-Through Certificates (PTCs) entitle holders to cash flows from the underlying asset pool.
• They help NBFCs and banks free up capital, improve liquidity, and reduce risk exposure.
• Example: Mortgage-backed securities and microfinance loan securitization.
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Derivatives – Futures, Options, and Swaps
• Derivatives derive value from underlying assets like stocks, commodities, or interest rates.
• Futures and options allow hedging, speculation, and portfolio diversification.
• Interest rate swaps and credit default swaps help manage interest/counterparty risk.
• Innovations include weather derivatives and carbon trading instruments in global markets.
• SEBI, RBI, and exchanges regulate these instruments with margin and exposure norms.
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Sovereign Gold Bonds and Bharat Bond ETF
• Sovereign Gold Bonds (SGBs) allow investment in gold with annual interest and redemption
at market-linked prices.
• They reduce gold import dependency and offer a safe alternative to physical gold.
• Bharat Bond ETF is India’s first corporate bond ETF investing in PSU bonds, offering low-cost
debt exposure.
• These instruments promote public participation in national asset development and formal
investment culture.
Merchant Banking and Financial Services
Green Bonds and Masala Bonds
• Green bonds raise funds for environmentally sustainable projects like solar energy, water
treatment, and EV infrastructure.
• Masala Bonds are rupee-denominated bonds issued outside India to raise foreign investment
without currency risk.
• They help Indian companies tap global capital markets while attracting ESG-conscious
investors.
• Regulated by SEBI and RBI with frameworks for disclosure, rating, and end-use verification.
Merchant Banking and Financial Services
Conclusion – Expanding the Investment Universe
• Innovative financial instruments empower issuers, investors, and policymakers to meet
diverse objectives.
• They address gaps in traditional financing, promote sustainability, and enhance market
liquidity.
• As India grows economically, these instruments will play a key role in deepening capital
markets and inclusion.
• Reflective Questions:
• - Have you invested in any innovative instrument like SGB or ETF?
• - Which innovation do you think should be scaled up in rural or MSME sectors?
THANK YOU