Capital Market: Components & Functions of Capital Markets, Primary & Secondary Market Operations, Capital Market Instruments - Preference Shares, Equity Shares, Non-voting Shares, Convertible Cumulative Debentures (CCD), Fixed Deposits, Debentures and Bonds, Global Depository receipts, American Depository receipts, Global Debt Instruments, Role of SEBI in Capital Market.

1. Unit 3
3. Capital Market: Components & Functions of Capital
Markets, Primary & Secondary Market Operations, Capital
Market Instruments - Preference Shares, Equity Shares, Non-
voting Shares, Convertible Cumulative Debentures (CCD),
Fixed Deposits, Debentures and Bonds, Global Depository
receipts, American Depository receipts, Global Debt
Instruments, Role of SEBI in Capital Market

2. Global Debt Instruments
• A debt instrument is a tool an entity can
utilize to raise capital. It is a documented,
binding obligation that provides funds to an
entity in return for a promise from the
entity to repay a lender or investor in
accordance with terms of the contract. Debt
instruments are tools an individual,
government entity, or business entity can
utilize for the purpose of obtaining capital

3. Various types of international debt
instruments are:
• Euro Notes,
• Euro Commercial Paper,
• Medium Term Notes,
• Floating Rate Notes,
• Euro Bonds.

4. Euro Notes: Euro Notes are like promissory
notes issued by companies for obtaining
short term funds.
They are denominated in any currency other
than the currency of the country where they
are issued.
They represent a low-cost funding route.
The Euro notes carry three main cost
components: Underwriting fee, One time
management fee for structuring, pricing
and documentation; and Margin on the
notes themselves.

5. Euro Commercial Papers: Another form of short term debt
instrument that emerged during the mid-1980s came to be
known as Euro Commercial Paper.
It is a promissory note like the short term Euro notes
although it is different from Euro notes in some way.
ECP came up on the pattern of domestic market commercial
papers that had a beginning in the USA and then in
Canada.
The detailed feature of ECPs varies from one country to
another.
They involve market-based interest rates, LIBOR (London
Interbank Offered Rate).
The ECPs are issued either in interest-bearing form or in a
discounted form with interest built in the issue price itself.

6. Medium Term Note
A debt market instrument specifically a Note, which
mostly matures between 5 years to 10 years is
known as a Medium Term Note (MTN). And it is
issued by the Companies for a continuous period,
with varying maturities ranging from 5 years to 10
years. However, these days, government agencies,
institutions, banks, and countries also issue MTN.
Medium-Term Notes act as a continuous source of
finance for the companies. Although the duration
of MTN is not strictly from 5 years to 10 years.
And sometimes the duration can vary from 9
months to 30 long years as well.

7. Medium-Term Notes can be issued at a fixed
interest rate, floating interest rate, zero-coupon,
inverse floating rate, step-up/step down rate, etc,
although they are mostly issued at a fixed interest
rate. The interest rate can be compounding
monthly, quarterly, semi-annually, or annually,
depending on the issuing company. And the
coupon rate can also be in any currency
depending on the type of MTN.
Medium-Term Notes are mostly issued with two
options, i.e. call option (also known as a callable
note or redeemable note) and non-call option.

8. MTN with call option allows the companies to call
back the Notes before maturity. And companies in
order to take benefit of lower rates, call back the
higher rate MTN and later issues new MTN at
lower rates. Thus MTN with call option allows the
organizations to take advantage of lower interest
rates.
On the other hand, MTN with a non-call option
does not allow the companies to redeem the notes
before maturity. As a result, MTN with a call
option provides higher coupon rates in
comparison to MTN with the no-call option.

9. Floating Rate Notes (FRNs) are fixed income
securities that pay a coupon determined by a
reference rate which resets periodically. As the
reference rate resets, the payment received is
not fixed and fluctuates overtime. FRNs are in
demand among investors when it is expected
that interest rates will increase.
FRNs can be beneficial as they offer investors an
opportunity to earn higher coupon payments
should the reference rate rise. FRNs also offer
lower duration than fixed rate notes which
protects value in a rising rate environment.

10. FRNs present risk if interest rates decrease,
which would result in lower coupon
payments. All payments on FRNs are
subject to the creditworthiness of the
issuer.
• Different types of Floating Rate Notes

11. Floored Floating Rate Notes
• provide a minimum payment to the note
holder if yields stay low. With a Floored
Rate, an investor receives coupon
payments that are the greater of the
reference rate and the minimum yield. If the
reference rate is below the coupon floor, the
investor would receive a coupon equal to
the coupon floor. If the reference rate is
above the coupon floor, the investor would
receive the reference rate.

12. Callable Capped Floating Rate Notes
• allow the issuer to redeem the notes at par at a
predetermined time. Callable Capped Floating Rate Notes
outperform non-callable Capped Floating Rate Notes if the
reference rate remains below the cap and the note is not
call
Collared Floating Rate Notes
• offer a minimum and a maximum coupon payment
throughout the term of the notes. When the reference rate
is below the “floor” rate, the investor receives that floored
coupon payment. If the reference rate rises above the
capped rate for that period, the investor receives the
capped rate. When the reference rate is between that cap
and floor, the investor receives the reference rate.

13. Fixed to Floating Rate Notes
pay a fixed rate for the initial period, then switches to a
floating rate for the remaining term of the note. The
coupon payments on the note are structured to pay an
enhanced coupon as long as the reference rate does not
rise above the coupon cap
CMS Participation Notes
are securities where the coupon is based upon a term swap
reference rate called a Constant Maturity Swap.
The coupon rate is determined by the current level of the
reference rate multiplied by a percentage. The rate is reset
periodically and therefore the coupon will reflect changes
in the term swap rate.

14. EUROBONDS
They are defined as bonds that are outside the
control of the country in whose currency they are
denominated.
The euro bond market is global and involves a
range of currencies, although dollars and euros
are the most used.
The reason for the name “euro bond” is that
historically they were dollar-denominated bonds
raised on the European market as opposed to
the US.

15. For example, the Walt Disney Company, despite
being a US firm, raised $100m on the euro
markets – ie, outside the US – with its first euro
bond issue in 1981
Eurobonds are normally repaid after five to 15
years and are worth $10m or more.
Governments and large firms with excellent
credit ratings.
Examples include Cadbury Schweppes (€
1,200m in 2004) and Volkswagen (34trn
Turkish lira, also in 2004).

16. ADVANTAGES OF EUROBONDS
They are useful because they create a liability in a
foreign currency to match against a foreign
currency asset.
Disney issued eurobonds in 1992 to finance the
launch of Disneyland Paris.
Without this matching effect, the company would
have faced the risk that a declining euro would
have reduced the dollar value of its overseas
investment.

17. Eurobonds are often cheaper than a foreign currency bank
loan because they can be sold on by the investor, who will
accept a lower yield for this greater liquidity.
They are also highly flexible.
Most are fixed rate but they can be floating or linked to the
success of the business. Issues aren’t normally
advertised because they are “placed” with institutional
investors, which reduces costs.
Firms can use the eurobond market to raise debt in dollars
or euros and then apply a currency swap.
For example, in 1984 Disney issued €80m of eurobonds and
swapped them into yen to act as a hedge to the yen
revenue from its Japanese operations.

18. Role of SEBI in Capital Market
The Securities Exchange Board of India (SEBI)
regulates the functions of the Securities Market in
India.
It was set up in 1988 but didn’t have any legal
status until May 1992, when it was granted
powers to legally enforce its control over the
financial market intermediaries.
With the bloom of the scale of actions in the
financial markets, there were a lot of malpractices
taking place.

19. Role of SEBI in Capital Market
Practices like a false issue, delay in delivery, violation
of rules and regulations of stock exchanges are on a
rise.
In order to curb these malpractices, the Govt. of India
decided to set up a regulatory body known as the
Securities Exchange Board of India (SEBI).
Section 11 of the Act lays down the functions of
the Board that clearly illustrate “it shall be the
duty of the board to protect the interests of
investors in securities and to promote the
development of, and to regulate the securities
market, by such measures as it thinks fit”.

20. The roles and objectives of SEBI are
• Regulation of the activities of the stock market
• Protecting the rights of investors
• Ensuring the safety of the investments.
• To prevent malpractices and fraudulent activities.
• To develop a code of conduct for the
intermediaries such as brokers, mutual fund
sellers etc.

21. 1. New Measures of Risk Management:
Investments in Capital Markets are exposed to
various risks. Though some are systematic risks,
others happen as result of unsystematic market
activities.
• Measures to reduce Price Volatility:
Volatility is the fluctuation of price movements. It
is the rate of up or down movement of the stock
price. Volatility is regarded as a negative factor for
the markets as it represents uncertainty and risk.
After the introduction of Index futures trading in
2000, there was a relative reduction in the
volatility of the prices.

22. 1. New Measures of Risk Management:
Circuit Breakers: Circuit breakers were
introduced to reduce large sell-offs and panic
selling. Sometimes it is also called a “collar”.
If an Index or a particular stock rises or falls a
certain percentage of 10%, 15% or 20%, trading
is halted by the exchange in that stock or index
for a certain period of time to curb the panic and
check for market manipulations.

23. 2. Investor Awareness Campaign: To make the
markets more secure for the investors, SEBI
introduced the Investor Awareness Campaign by
making an official site for this.
3. Investigations: In case of any violation of the
rules and regulations of the SEBI Act 1992, the
investigation is carried out by SEBI.

24. 4. T + 2 Settlement Cycle: Currently in the
Indian Capital market, the settlement cycle is in
the “T+2” cycle. Here, ‘T’ means the trading day
and the ‘T+2’ settlement means the settlement
and delivery of the shares takes place in the 2nd
trading day after the trade takes place
5. Ban on Insider Trading: Individuals
possessing confidential information of a
particular company can use the information to
unethically profit from the stock markets. SEBI
has made it clear and mandatory to restrict all
kinds of insider trading in the Indian Capital
Markets.

25. In the past few months, during and after COVID-19
lockdown times, there have been some key
instrumental measures that have been taken by
SEBI, such as:
1. Introduction of UPI and Application
through online interface for Public Issue of
Debt Securities
SEBI, in its circular dated November 23, 2020
announced the introduction of Unified Payments
Interface [“UPI”] Mechanism and application
through online interface for public issue of debt
securities.

26. This system has already been in existence for issue
of public shares since January, 2019 but is now
made available for public debt securities through
this circular issued by SEBI under Section 11 of
the Act.
The said mechanism is in addition to an already
existing specified mode under Application
Supported by Blocked Amount [“ASBA”].
It would be available for securities opening up for
issuance from January 1, 2021 for applications up
to a limit of 2 lacs.
The concerned entities include National Payments
Corporation of India [“NPCI”], UPI and the
Sponsor Bank.

27. Increased Efficiency of E-Voting
mechanisms for Meetings
The Companies Act, 2013 mandates a company to
provide e-voting facility to the shareholders.
Section 108 of The Companies Act,
2013 along with Rule 20 of the Companies
(Management & Administration) Rules,
2014 provide for such a facility.
Additionally, regulation 44 of the SEBI
(Listing and Obligatory Disclosure
Requirement) Regulations, 2015 also
contains provision to this regard.

28. Increased Efficiency of E-Voting mechanisms
for Meetings
On Dec 09, 2020, SEBI released a circular directing
the listed entities to provide e-voting facility to its
shareholders.
The mechanism called for a system wherein the
shareholders will have an option to forecast their
votes directly through their Dematerialized
[“DEMAT”] accounts with the depositories which’ll
forward their votes to the E-voting service
providers [“ESP”].

29. • Reclassification rules of promoters as
public shareholders and disclosure of
their shareholding pattern
• Rules for reclassification of promoters have been
mentioned in Regulation 31A of SEBI (Listing
Obligations and Disclosure Requirements)
Regulation, 2015. On 23rd of November, 2020,
SEBI released a consultative paper on the same
that proposed a few amendments to the existing
rules pertaining to promoter reclassification.

30. It composed of the following proposed
amendments:
• Promoters with shareholding up to 15%, seeking
to reclassify should be allowed with
shareholding’s status quo maintained.
• One-month duration for meeting between board &
shareholders and for reclassification request to be
put up before exchange.
• Promoters seeking reclassification pursuant to an
order/direction of government or regulator
should be exempted like reclassification pursuant
to resolution approved under Insolvency and
Bankruptcy Code, 2016.

31. • Promoters seeking reclassification pursuant to an offer
should be exempted from the reclassification procedure
where intent for reclassification is mentioned in the offer
letter which needs to be in accordance with SEBI
Substantial Acquisition of Shares and Takeover [“SAST”]
Regulations and Regulation 31A(3)(b) and 31A(3)(c) of
SEBI(LODR) Regulations, 2015.
• Pursuant to an offer, where the former promoters aren’t
traceable by the listed entity or not cooperative towards it,
exemption from reclassification procedures should be
given if erstwhile promoters aren’t in control of the
company and diligent efforts have been made by the listed
company to reach out to them.
• Mandatory disclosure of promoters.