INDIAN FINANCIAL MARKETS -FIRST MODULE-KTU SYLLABUS-2020

1. INDIAN FINANCIAL
MARKETS
ASST.PROF AARATHY S
DEPARTMENT OF MBA
KVM COLLEGE OF ENGINEERING AND IT

2. FINANCIAL SYSTEM
• An institutional framework exists in a country to enable financial
transactions

3. FINANCIAL SYSTEM

4. FINANCIAL MARKET
Money market
A random course of financial institutions, bill brokers, money dealers, banks, etc., wherein
dealing on short-term financial tools are being settled is referred as Money Market. These markets
are also called wholesale markets.
Features
• It is short-term market funds.
• It’s maturity period up to one year.
• It trades with assets that can be transformed into cash easily.
• All the transactions take place through phone, email, text, etc.
• Broker not required for the transaction
• The components of a money market are the Commercial Banks, Non-banking financial companies
and Central Bank, etc.

5. EXAMPLES
Trade Credit
Commercial Paper
Certificate of Deposit
Treasury Bills
5 Types of Money Markets
Money market instruments have different securities, which can be utilized for short term borrowings. A few
types of market money are:
Call Money- It portrays a short term loan with maturities term starting from one day to fourteen days, and it can
be repaid on demand.
Treasury Bill- It is the oldest and traditional money market instrument and is practiced across the globe. The
instrument is declared by the Government and does not have to pay any interest. This is available at a discounted
rate at the time of issue.
Ready Forward Contract (Repo)-The word repo is acquired from the phrase “repurchase agreement”. It is an
agreement that specifies the sale and purchase of an asset. In India, this agreement is prepared between
different banks and sometimes between bank and RBI for short term loans.
Money Market Mutual Fund-This is the alternative name for liquid funds and are the lowest risk debt funds.
Interest Rate Swaps- This is the latest money market instruments in India. Here, two parties sign an agreement,
where one decides to pay a fixed rate of interest, and the other pays a floating rate of interest.

6. ----------------------------------------------------------------------------
Money Market Capital Market
Short term securities Long term securities
Circulating short term funds in economy(<1 year) Use funds for long term investments(longer term ,
number of years is possible)
Low risk Risky markets
Objective is to provide liquid cash for borrowers and
Fund providers for a small period of time and keeps a
Balance between supply and demand short term funds
Most of the investors used capital market as a
preserve for future( retirement/education etc)
Highly liquid Less liquid
Informal in nature Formal in nature
ROI is usually low ROI is comparatively high
Instruments involved are commercial banks, non-
financial institutions, central bank, chit funds etc.
Instruments involved are stock brokers, insurance
companies, commercial banks, under writers, etc.

7. CALL MONEY MARKETS
• Short-term, interest-paying loan from one to 14 days made by a financial institution to another
financial institution. Due to the short term nature of the loan, it does not feature regular
principal and interest payments, which longer-term loans do.
• The call money market is an important aspect when there is a surplus of funds in the Indian
equity market (mainly from banks) that are sold on a daily basis.
• The call money market, as an important element of the financial markets, has a few distinctive
features: Call currency is a chargeable asset for sleek financial services.
• Because it is essentially a "cell phone" industry, it is logistically simple when both mortgage
companies and borrowers manage it.
• The best thing is that it offers extra capital and contributes to the growth of a financial statement
as a debt restructuring tool.

8. COMMERCIAL PAPER MARKET
• Buying and selling of short-term debt instruments issued by corporations to rise fund for their operational needs.
• Commercial paper is an unsecured, short-term debt instrument issued by corporations, financial institutions, and
sometimes governments to raise funds for a short period, typically ranging from a few days to up to 270 days.
• These securities are typically used by companies to meet short-term obligations, such as payroll, accounts payable, and
other immediate expenses.
• They are considered a relatively low-risk investment option, especially when issued by well-established and financially
stable entities.
• Commercial paper is typically sold at a discount to its face value and does not pay periodic interest like bonds. Instead,
the investor earns a return by purchasing the commercial paper at a discount and receiving the face value when it
matures.
• For example, let's say you need $10,000 right now. You issue a commercial paper to an investor for $9,900 (a bit less
than what you need). Later, when the commercial paper matures, you'll pay back the investor $10,000.

9. COMMERCIAL BILL MARKET
• In India, the commercial bill market is a place where businesses can borrow money for a short period, usually a few
months, by issuing a special type of document called a "commercial bill.".
Here's how it works:
• Issuance: A seller (usually a business or company) creates a commercial bill as a promise to pay a certain amount of
money to the holder of the bill on a specific future date.
• Discounting: The seller can choose to either hold the bill until maturity or sell it in the commercial bill market before
it matures. When sold before maturity, the bill is usually sold at a discount, meaning the buyer pays less than the
face value of the bill.
• Trading: Commercial bills can be bought and sold in the commercial bill market. This market is typically composed of
financial institutions, corporations, and sometimes individuals.
• Redemption: When the bill matures, the holder can redeem it for the full face value from the issuer.

10. For example:,
You create a commercial bill for ₹100,000 with a promise to pay
it back in 90 days. An investor buys this bill from you, but they
don't pay you the full ₹100,000. Instead, they might give you
₹99,000, keeping ₹1,000 as their profit when the bill matures.
When the 90 days pass, you repay the investor the full
₹100,000. They've made a small profit, and you've got the
money you needed right away.
This is how the commercial bill market works in India. It's a way
for businesses to get quick cash when they need it, and for
investors to earn a little extra by lending money for a short
time.

11. GILT EDGED SECURITY MARKETS
• Gilt-edged securities refer to high-grade bonds that some national governments and
private organizations issue in an effort to generate revenue.
• The issuing institutions typically boast strong track records of consistent earnings that
can cover dividend or interest payments.
• Gilt edged market is the market where buying and selling of government securities
takes place.
• This securities in this market are risk free as government issues these securities.
Therefore, it is the most liquid market which ensures guaranteed returns.

12. Gilt-edged securities, or simply "gilts," refer to high-quality debt instruments issued by governments or
reputable corporations.
These securities are considered to be among the safest and most reliable investments in the financial
markets, offering a lower risk profile and predictable returns.
Gilts are known for their low default risk, as they are issued by financially stable entities.
This low risk is often accompanied by a lower yield when compared to other investments. These securities
typically have a fixed interest rate, which is paid periodically to bondholders.
Gilt-edged securities play a crucial role in global financial markets, as they provide a benchmark for risk-free
investments.
They also offer a stable source of income for investors, facilitate long-term financial planning, and serve as a
significant source of capital for governments and corporations.

13. TYPES
GILT EDGED
SECURITIES
GOVERNMENT
BONDS
TREASURY BONDS SOVERIGN BONDS
CORPORATE
BONDS
INVESTMENT
GRADE
CORPORATE
BONDS
CONVERTIBLE
BONDS

14. ADVANTAGES ANF DISADVANTAGES

15. CERTIFICATES OF DEPOSITES
A certificate of deposit (CD) is a savings product that earns interest on a lump-sum deposit that's untouched for a
predetermined period of time.A
Certificate of Deposit or CD is a fixed-income financial instrument governed under the Reserve Bank and India (RBI) issued in a
dematerialized form. The amount at payout is assured from the beginning.
A CD can be issued by any All-India Financial Institution or Scheduled Commercial Bank. They are issued at a discount provided
on face value.
Like a fixed deposit (FD), a CD’s purpose is to denote in writing that you have deposited money in a bank for a fixed period and
that bank will pay you interest on it based on the amount and duration of your deposit.
There is no major difference between a certificate of deposit and a fixed deposit. They are one and the same. Fixed deposits
are even referred to as CDs or time deposits by certain banks. They come with the same term period, a minimum requirement
for a deposit, and high-interest rates compared to traditional savings accounts. One difference is that CDs are freely negotiable
while FDs are not.

16. FEATURES OF CD
• CDs can be issued in India for a minimum deposit of ₹1 lakh and in subsequent
multiples of it.
• Scheduled Commercial Banks (SCBs) and All-India Financial Institutions are eligible
to issue a CD. Cooperative Banks and RRBs cannot issue a CD.
• CDs issued by SCBs have in term period anywhere between 3 months to a year.
• CDs issued by financial institutions have a term period ranging from 1–3 years.
• Similar to dematerialized securities, CDs in dematerialized forms are transferable
through means of endorsement or delivery.
• There is no lock-in required for a CD.
• One cannot issue a loan against a CD.
• A certificate of deposit is fully taxable under the Income Tax Act.
• A CD cannot be publicly traded.
• Banks are not permitted to buy back a CD before its maturity.

17. ADVANTAGES OF ISSUING CD IN INDIA
• A certificate of deposit or FD is not going to eat up your capital due to market volatility. It is a completely
secure financial instrument with an assured sum at maturity, similar to traditional insurance. The money you
put into your CD will continue to predictably increase and there is no risk of any loss. It is a very secure short to
mid-term investment.
Security:
• This benefit is what attracts most investors towards a CD. They offer larger rates of interest which can go as
high as 7.8% on the lump sum deposited than traditional savings accounts whose interest rates average around
4%.
High-Interest
Rate:
• You can opt for monthly payouts, annual payouts, or a lump sum withdrawal of your CD at maturity. You can
pick the duration and price you want to invest, although it has to fit certain parameters set by the bank.
Tailoring the CD to your needs helps you get the most from it.
Flexibility:
• When it comes to the market there are always brokerage costs for the delivery, buying and selling of shares.
There are usually no additional costs associated with a CD. You only pay what you invest with some banks.
Low to Minimum
Maintenance
Costs:

18. TREASURY BILL MARKETS
• Treasury bills, otherwise known as T-bills, are money market instruments issued by
the government of India. These bills are Reserve Bank of India-issued promissory
notes with a repayment guarantee and are categorized as short-term debt
instruments.
• Indian residents can invest in T-bills at a discounted price and get the higher face
value of the bill at the end of the maturity to make profits.
• Treasury bills and bonds are among the safest investment options you can choose
for yourself as they are backed by government creditworthiness.
• The profit potential could be low, but since T-bills are government securities, they
come with minimal risk too. Besides, these bills are extremely liquid with a
maximum maturity of only 364 days.

19. • The government of India issues treasury bills to meet short-term financial requirements
whenever there’s a fiscal deficit.
• T-bills act as a promissory note by the government with guaranteed repayment to the investors
at a later specified date.
• This money market instrument is issued to investors at a nominal or discounted price. Point to
note: there is a maturity period for each treasury bill, which could either be 14 days, 91 days,
182 days or 364 days. However, the minimum investment in a T-bill is ₹25,000, and in multiples
of ₹25,000 thereafter.

20. The government of India issues treasury bills to raise short-term funds to finance its various
expenditures (like infrastructure) and to manage its cash flow. By issuing treasury bills, the
government can borrow money from the public without resorting to more expensive forms of
borrowing, such as bank loans. Additionally, treasury bills help the government to control the
money supply in the economy and maintain liquidity in the financial system.
The Reserve Bank of India issues treasury bills on behalf of the government under its open
market operations (OMO) strategy for everyone to purchase. RBI does it to control inflation and
regulate borrowing/spending habits of consumers. Whenever there’s high inflation rates in the
country due to economic boom, the government issues high-value treasury bills to curb
excessive money supply.
Similarly, during times of slowdown, the government rolls out T-bills at a reduced circulation rate
and at discounted rates to divert investors’ resources to a desired sector, thereby boosting cash
flows to the stock market.

21. TYPES OF TREASURY BILL
• Treasury bill investments are categorized based on their tenure. Although the tenure remains constant, the
discount rate and face values change depending on the number of bids, RBI policy and requirements of funds.
These are the different types of treasury bills.
TYPE MINIMUM INVESTMENT
14-day treasury bill RS 100000
91-day treasury bill RS 25000
182-day treasury bill RS 25000
364-day treasury bill RS 25000

22. CAPITAL MARKETS
• A capital market is a financial market where long-term debt or equity-backed securities are bought
and sold.
• Suppliers are people/organizations with the capital to lend or invest. Banks and investors are
common examples. Securities Exchange Board of India (SEBI) governs the capital market in India.
• Unites entrepreneurial borrowers and savers
• Deals with long-term investments.
• Agents are required.
• It is controlled by government rules and regulations.
• Deals in both commercial and non-commercial securities.
• Foreign Investors.
EX:
Stocks
Bonds
Debentures
Euro issues ETC

23. Types of Capital Market
The Capital Market instrument involves both the auction market and dealer market. It is classified into two sections:
Primary market: It is the new issue market, where companies issue shares for the first time through an Initial Public
Offering (IPO). Once the IPO is successful, the shares of the company get listed on the stock exchange. Money in the
primary market is raised through private placement, rights issues, and prospectus. The money is raised for the growth
and expansion of the company. Here, fresh contracts are given to the people for the subscription purpose
Secondary market: It is a market for trading listed shares and securities. A stock exchange is usually the
marketplace for buying and selling securities. In India, the major stock exchanges are National Stock Exchange (NSE)
and the Bombay Stock Exchange (BSE) and a majority of equity trading and investments take place on these two
exchanges. NSE and BSE are perfect examples of secondary markets. The securities that have already been issued are
exchanged among investors.

24. CAPITAL MARKET - INSTRUMENTS
• Instruments of capital market are the certificates or documents that act as evidence of investment.
There are a number of instruments traded in the capital market, here are the most common ones:
• SHARES/STOCKS
• BONDS
• EXCHANGE-TRADED FUNDS
• DERIVATIVES
• CURRENCY

25. The market consists majorly of five types of instruments:
• Stocks
Stocks represent ownership of a company. Each share is a part of the ownership of the company. Shares trade on the stock
exchange, and the share price depends on market demand and supply. The person holding shares of a company is the
shareholder. Shareholders receive dividends. Also, in the case of equity shares, they have voting powers and can vote for
important decisions in the annual general meeting of the company. During liquidation, they get a share of the assets
after the liabilities are paid off.
• Bonds
Bonds are debt securities that trade on the stock exchange. Companies and firms issue bonds to raise money for the
growth and expansion of the company. Bonds are debt instruments, hence bondholders receive interest. At the end of the
maturity period, the company pays back the principal amount along with interest.
• Exchange-Traded Funds
Exchange-traded funds are a collection of investors’ financial resources used to purchase a variety of capital market
instruments, including shares, debt securities like bonds, and derivatives.
• Derivatives
Derivatives are the instruments of the capital market that derive their values from the underlying assets. These assets
include currency, bonds, stocks, etc.
• Currency
Foreign markets represent currency as a financial instrument. Spot, outright forwards and currency swap are the three
types of currency agreements.

26. CAPITAL MARKET REFORMS
• Capital market liberalization is one such capital market reform that is adopted
by various countries to strengthen their economy. A capital market is a place
that handles the buying and selling of the securities. This is the ideal place
where both the governments and companies can raise their funds.

27. CAPITAL MARKET REFORMS IN INDIA
Establishment of SEBI
Establishment of Creditors Rating Agencies
Increasing of Merchant Banking Activities
Candid Performance of Indian Economy
Rising Electronic Transactions
Growing Mutual Fund Industry
Growing Stock Exchanges
Investor's Protection
Growth of Derivative Transactions
Insurance Sector Reforms
Commodity Trading

28. ESTABLISHMENT OF SEBI
The Securities & Exchange Board of India (SEBI) was established in 1988.
It got a legal status in 1992. It was primarily set up to regulate the activities of the merchant banks, to work as a
promoter of the stock exchange
activities ,to control the operations of mutual funds & to act as a regulatory authority of new issue activities of
companies. The main objective of SEBI is , "to protect the interest of investors in securities market for matters
connected therewith or incidental thereto."
The main functions of SEBI are:-
• To regulate the business of the stock market & other securities market.
• To promote & regulate the self-regulatory organizations.
• To prohibit fraudulent & unfair trade practices in securities market.
• To promote awareness among investors & training of intermediaries about safety ofSecurity market.
• To prohibit insider trading in shares market.
• To regulate huge acquisition of shares & takeover of companies.

29. ESTABLISHMENT OF CREDITORS RATING
AGENCIES
• Mainly the credit rating agencies are Three.
• The Investment Information & Credit Rating Agency of India Limited (ICRA - 1991) The Credit Rating
Information Services of India Limited (CRISIL - 1988) & Credit Analysis and Research Limited (CARE)
were set up in order to assess the financial health of different financial institutions & agencies related to
the stock market activities.
• It is a helpful for the investors also in evaluating the risk of their investments
INCREASING OF MERCHANT BANKING ACTIVITIES
• Many Indian & foreign commercial banks have set up their MBD (Merchant Banking Divisions) in the
last few years.
• MBD provide financial services such as consultancy services, underwriting facilities, issue
organizing, etc. It has proved as a helping hand to factors related to the capital market.

30. CANDID PERFORMANCE OF INDIAN ECONOMY
• In the last few years, Indian economy is growing at a good speed. Because of inflow of Foreign Institutional
Investments (FII) heavily increased.
• The massive entry of FIIs in the Indian capital market has given better appreciation for the Indian investors in recent
times.
• Similarly many new companies are emerging on the horizon of the Indian capital market to raise capital for their
expansions.
RISING ELECTRONIC TRANSACTIONS
• Due to Technology Up gradation. The online transaction with more paper work is reduced.
• Now paperless transactions are increasing at a rapidly.
• It saves money, time & energy of investors. Thus it has made investing safer & hassle free encouraging more
people to join the capital market

31. GROWING MUTUAL FUND INDUSTRY
• It has helped to the capital market to grow. Public sector banks, financial institutions, foreign banks &
joint mutual funds between the Indian & foreign firms have launched many new Mutual funds.
• A big diversification in terms of maturity, schemes etc. has taken place in mutual funds in India. It has
given a wide option for the common investors to enter the capital market.
GROWING STOCK EXCHANGES
• Growing Stock Exchanges : The No. of various Stock Exchanges in India are increasing. Initially the BSE
was the main exchange, but now after the setting up of the NSE &the OTCEI, stock exchanges have
spread across the country.
• Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges

32. PRIMARY MARKETS
• In a Primary Market, securities are created for the first time for investors to purchase. New securities
are issued in this market through a stock exchange, enabling the government as well as companies to
raise capital.
• For a transaction taking place in this market, there are three entities involved. It would include a
company, investors, and an underwriter. A company issues security in a primary market as an initial
public offering (IPO), and the sale price of such a new issue is determined by a concerned underwriter,
which may or may not be a financial institution.

33. FUNCTIONS OF PRIMARY MARKET ISSUES
1. New Issue Offer
The primary market organizes offer of a new issue which had not been traded on any other exchange earlier. Due to this
reason, it is also called a New Issue Market. Organizing new issue offers involves a detailed assessment of project viability,
among other factors. The financial arrangements for the purpose include considerations of promoters’ equity, liquidity
ratio, debt-equity ratio and requirement of foreign exchange.
2. Underwriting Services
Underwriting is an essential aspect while offering a new issue. An underwriter’s role in a primary marketplace includes
purchasing unsold shares if it cannot manage to sell the required number of shares to the public. A financial institution may
act as an underwriter, earning a commission on underwriting. Investors rely on underwriters for determining whether
undertaking the risk would be worth its returns. It may so happen that an underwriter ends up buying all the IPO issue, and
subsequently selling it to investors.
3. Distribution of New Issue
A new issue is also distributed in a primary marketing sphere. Such distribution is initiated with a new prospectus issue. It
invites the public at large to buy a new issue and provides detailed information on the company, issue, and involved
underwriters.

34. METHOD OF RISING FUND FOR PRIMARY MARKET
• Corporates may raise capital in the primary market by way of an initial public offer, rights issue or
private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary
market.
• The primary market enables companies, government, and other institutions to raise funds through the
sale of equity and debt-related securities. Public sector institutions raise funds through bond issues.
While, the corporations raise capital through the issue and sale of new stock through an initial public
offering (IPO).
• Furthermore, the other ways to raise funds in a primary market is through Further Public Offer or
Follow on Offer or FPO, Private placement, Preferential issue, Qualified institutional placement, Rights
issue and Bonus issue.

35. TYPES OF PRIMARY MARKETS
1. Public issue: The public issue is one of the most common methods of issuing securities to the public. The company
enters the capital market to raise money from kinds of investors. Here, the securities are offered for sale to new investors.
The new investor becomes the shareholder of the issuing company.
2. Initial Public Offer: As the name suggests, it is a fresh issue of equity shares or convertible securities by an unlisted
company. These securities are traded previously or offered for sale to the general public. After the process of listing, the
company’s share is traded on the stock exchange. The investor can buy and sell securities after listing in the secondary
market.
3. Further Public Offer or Follow on Offer or FPO.: When a listed company on the stock exchange announces fresh issues of
shares to the general public. The listed company does this to raise additional funds.
4. Private placement: Private placements mean that when a company offers its securities to a small group of people. The
securities may be bonds, stocks, or other securities. The investors can be either individual or institution or both.
5. Preferential issue: The preferential issue is one of the quickest methods for a company to raise capital for their business.
Here, both listed and unlisted companies can issue shares. Usually, these companies issue shares to a particular group of
investors.
The preferential issue is neither a public issue nor a rights issue. In the preferential allotment, the preference shareholders
receive dividends before the ordinary shareholders receive it.

36. 6. Qualified institutional placement: It is another type of private placement. Here, the listed company
issues equity shares or debentures (partly or wholly convertible) or any other security not including
warrants.
These securities are convertible in nature. Qualified institutional buyer (QIB) purchases these
securities.
QIBs are investors who have requisite financial knowledge and expertise to invest in the
capital market. Some of the QIBs are –
Foreign institutional investors who are registered with SEBI.
• Alternate investment funds
• Foreign venture capital investors
• Mutual funds
• Public financial institutions
• Insurers
• Scheduled commercial banks
• Pension funds
Comparatively, qualified institutional allotment is simpler than the preferential allotment. The
reason is they do not attract any standard regulations like submitting pre-issue filings with SEBI.
Thus, the process becomes much more comfortable and less time-consuming.

37. 7. Rights issue: This is another type of issue in the primary market. Here, the company issues shares to its existing
shareholders by offering them to purchase more. The issue of securities is at a predetermined price.
In a rights issue, the investors have a choice of buying shares at a discount price within a specific period. It
enhances the control of the existing shareholders of the company. It helps the company to raise funds without
any additional costs.
8. Bonus issue: When a company issues fully paid additional shares to its existing shareholders for free. The
company issues shares from its free reserves or securities premium account. These shares are a gift for its current
shareholders. However, the issuance of bonus shares does not require fresh capital.

38. PUBLIC ISSUE GLOBAL MARKETS
• Capital can be raised through private placement of shares, public issue, right issue etc. Public issue
means raising funds from public. Promoters of the Company may have plans for the Company, which
may require infusion of money. The main purpose of the public issue, amongst others, is to raise money
through public and get its shares listed at any of the recognized stock exchanges in India.
• Entry norms for the Public Issue are governed by the SEBI Guidelines, SEBI (Disclosure for Investor and
Protection) Guidelines, 2000. SEBI, keeping in view the objective of greater transparency, investor
protection and development of capital market, has from time to time amended the entry norms for
Companies to come out with the public issue. Entry norms are categorized into the following:
• Unlisted Companies
• Listed Companies

39. ADVANTAGES OF PUBLIC ISSUE
• Money non-refundable except in the case of winding up or buy back of shares.
• No financial burden i.e. no fixed rate of interest payable. However, in order to
service the equity, dividend may be paid.
• Enhance shareholders’ value if the Company performs well.
• Greater Transferability.
• Trading & Listing of securities at stock exchanges.
• Better liquidity of securities.
• Helps building reputation of promoters, Company & its products/services,
provided the Company performs well.

40. DISADVANTAGES OF PUBLIC ISSUE
• Time consuming process.
• Expensive.
• Several legal formalities.
• Involvement of many intermediaries.
• Transparency requirements and public disclosure of information may lead to lack of privacy.
• Continuous compliance of provisions of listing agreement and other legal requirements.
• Constant scrutiny of performance by investors.
• May lead to takeover of the company
• Securities of the Company may be made subjective to speculative attacks

41. AMERICAN DEPOSITORY RECEIPT
• American Depositary Receipts (ADR) are negotiable security instruments that are issued by a US bank that represent
a specific number of shares in a foreign company that is traded in US financial markets.
• ADRs pay dividends in US dollars and trade like regular shares of stock. Companies can now purchase stocks of
foreign companies in bulk and reissue them on the US market.
• ADRs are listed on the NYSE, NASDAQ, AMEX and can be sold over-the-counter. Before the introduction of ADRs in
1927, investors in the US faced numerous hurdles when attempting to invest in stocks of foreign companies.
• American investors could purchase the shares on international exchanges only, and that meant dealing with currency
exchange rates and regulatory differences in foreign jurisdictions.
• They needed to familiarize themselves with different rules and risks related to investing in companies without a US
presence.
• However, with ADRs, investors can diversify their portfolio by investing in foreign companies without having to open
a foreign brokerage account.

42. HOW ADR WORKS…..
• Investors willing to invest in American Depositary Receipts can purchase them from brokers or dealers.
• The brokers and dealers obtain ADRs by buying already-issued ADRs in the US financial markets or by
creating a new ADR. Already-issued ADR can be obtained from the NASDAQ or NYSE.
• Creating a new ADR involves buying the stocks of the foreign company in the issuer’s home market and
depositing the acquired shares in a depository bank in the overseas market.
• The bank then issues ADRs that are equal to the value of the shares deposited with the bank, and the
dealer/broker takes the ADR to US financial markets to sell them.
• The decision to create an ADR depends on the pricing, availability, and demand.
• Investors who purchase the ADRs are paid dividends in US dollars.
• The foreign bank pays dividends in the native currency, and the dealer/broker distributes the dividends in US
dollars after factoring in currency conversion costs and foreign taxes.
• Such a practice makes it easy for US investors to invest in a foreign company without worrying about
currency exchange rates.
• The US banks that deal with ADRs require the foreign companies to furnish them with their financial
information, which investors use to determine the company’s financial health.

43. Foreign
company

44. TYPES OF ADR
1. Sponsored ADR
• For a sponsored ADR, the foreign company issuing shares to the public enters into an agreement
with a US depositary bank to sell its shares in US markets.
• The US bank is responsible for recordkeeping, sale, and distribution of shares to the public,
distribution of dividends, etc. Sponsored ADRs can be listed on the US stock exchanges.
2. Non-Sponsored ADR
• A non-sponsored ADR is created by brokers/dealers without the cooperation of the foreign company
issuing the shares.
• Non-sponsored ADRs are traded in US over-the-counter markets without requiring registration with
the Securities and Exchange Commission (SEC).
• Before 2008, any brokers and dealers trading in ADRs were required to submit a written application
before being allowed to trade in the US.
• The 2008 SEC amendment provided an exemption to foreign issuers that met certain regulatory
conditions. Non-sponsored ADRs are only traded on over-the-counter markets.

45. LEVELS OF ADR
Sponsored level I Sponsored level II Sponsored level III
Level I is the lowest level at which
sponsored ADRs can be issued
The company must file a registration
statement with the SEC.
It is the highest and most prestigious
level that a foreign company can sponsor.
Most common level for foreign
companies that do not qualify for other
levels or that do not want their
securities listed on US exchanges.
Level II ADRs have more requirements from
the SEC than Level I, and the company gets
an opportunity to establish a higher
trading presence on the US stock markets.
A foreign company at this level can float a
public offering of ADRs to raise capital
from American investors through US
exchanges. Level III ADRs attract stricter
regulations from the SEC.
It is subject to the least reporting
requirements with the Securities and
Exchange Commission, and they are
only traded over the counter.
The company must file Form-20-F in
accordance with the GAAP or IFRS
standards. Form 20-F is the equivalent of
Form-10-K, which is submitted by US
publicly traded companies.
The company must file Form F-1
(prospectus) and Form 20-F (annual
reports) in accordance with GAAP or IFRS
standards.
Level I can be upgraded to Level II when
the company is ready to sell through US
exchanges.
If the issuer fails to comply with these
requirements, it may be delisted or
downgraded to Level I.
Any materials distributed to shareholders
in the issuer’s home country must be
submitted to the SEC as Form 6-K.

46. GLOBAL DEPOSITORY RECEIPT

47. GDR
• global depositary receipt is a tradable financial security.
• It is a certificate that represents shares in a foreign company and trades
on two or more global stock exchanges.
• GDRs typically trade on American stock exchanges as well as Eurozone or
Asian exchanges.
• GDRs and their dividends are priced in the local currency of the exchanges
where the GDRs are traded.
• GDRs represent an easy way for U.S. and international investors to own
foreign stocks.

48. UNDERSTANDING GLOBAL DEPOSITARY RECEIPTS (GDRS)
• A global depositary receipt is a type of bank certificate that represents shares of stock in
an international company. The shares underlying the GDR remain on deposit with a
depositary bank or custodial institution.
• While shares of an international company trade as domestic shares in the country where
the company is located, global investors located elsewhere can invest in those shares
through GDRs.
• Using GDRs, companies can raise capital from investors in countries around the world. For
those investors, the GDRs will be denominated in their home country currencies. Since
GDRs are negotiable certificates, they trade in multiple markets and can provide arbitrage
opportunities to investors.
• GDRs are generally referred to as European Depositary Receipts, or EDRs, when European
investors wish to trade locally the shares of companies located outside of Europe.

49. EXAMPLE OF A GDR
• A U.S.-based company that wants its stock to be listed on the London and Hong Kong Stock
Exchanges can accomplish this via a GDR.
• The U.S.-based company enters into a depositary receipt agreement with the respective foreign
depositary banks.
• In turn, these banks package and issue shares to their respective stock exchanges. These
activities follow the regulatory compliance regulations for both of the countries.

50. CHARACTERISTICS OF GDR
• Conversion ratio: The conversion ratio is the number of shares of the underlying
company that are represented by each GDR. This ratio can vary from one GDR to
another, and it may be adjusted over time to reflect changes in the underlying shares.
• Denomination: GDRs can be denominated in different currencies, such as U.S. dollars,
euros, or pounds sterling. The currency used for a GDR may impact its price and the
risks associated with the investment, such as currency risk, as the price of its shares
overseas are priced in local currency.
• Sponsorship: GDRs are issued by depository banks, and the specific bank that sponsors
a GDR may vary from one GDR to another. Different banks may have different
reputations, financial strength, and other characteristics that could impact the risks and
potential returns of a GDR.
• Fees: GDRs may also vary in terms of the fees that are charged for issuing, trading, or
holding the GDRs. These fees can impact the overall cost and potential returns of an
investment in a GDR.

51. ADVANTAGES OF GDR
• GDRs help international companies reach a broader, more diverse audience of potential
investors.
• They can potentially increase share liquidity.
• Companies can conduct an efficient and cost-effective private offering.
• Shares listed on major global exchanges can increase the status or legitimacy of an
otherwise unknown foreign company.
• For investors, GDRs provide the opportunity to diversify portfolios internationally.
• GDRs are more convenient and less expensive than opening foreign brokerage accounts
and purchasing stocks in foreign markets.
• Investors don't have to pay cross-border custody or safekeeping charges.
• GDRs trade, clear, and settle according to the investor's domestic process and procedures.
• U.S. holders of GDRs realize any dividends and capital gains in U.S. dollars.

52. DISADVANTAGES
• GDRs may have significant administrative fees.
• Dividend payments are net of currency conversion expenses and foreign taxes.
• The depositary bank automatically withholds the amount necessary to cover expenses and
foreign taxes.
• U.S. investors may need to seek a credit from the Internal Revenue Service (IRS) or a refund
from the foreign government's taxing authority to avoid double taxation on capital gains
realized.
• GDRs have the potential to have low liquidity, making them difficult to sell.
• In addition to liquidity risk, they can have currency risk and political risk.
• This means that the value of GDR could fluctuate according to actual events in the foreign
county, such as recession, financial collapse, or political upheaval.

53. PROS AND CONS
PROS CONS
Easy to track and trade More complex taxation
Denominated in local currency Limited selection of companies offering GDRs
Regulated by local exchanges Investors exposed indirectly to currency and geopolitical
risk
Offers international portfolio diversification Potential lack of liquidity

54. THANK YOU 