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. EQUITY SHARES,
Equity shares, commonly referred to as
ordinary share also represents the form of
fractional ownership in which a
shareholder, as a fractional owner,
undertakes the maximum entrepreneurial
risk associated with a business venture.
The holder of such shares is the member
of the company and has voting rights.

3. EQUITY SHARES
According to explanation (i) to Section 43 of
Companies Act, 2013 ‘‘equity share capital’’, with
reference to any company limited by shares,
means all share capital which is not preference
share capital. Section 43 further provides for
equity share capital (i) with voting rights, or (ii)
with differential rights as to dividend, voting or
otherwise in accordance with such rules as may
be prescribed.

4. Characteristics of equity shares
Equity shares, have voting rights at all general meetings
of the company. These votes have the affect of the
controlling the management of the company.
Equity shares have the right to share the profits of the
company in the form of dividend (cash) and bonus
shares.
However even equity shareholders cannot demand
declaration of dividend by the company which is left to
the discretion of the Board of Directors.
When the company is wound up, payment towards the
equity share capital will be made to the respective
shareholders only after payment of the claims of all
the creditors and the preference share capital.

5. Equity share holders enjoy different rights as members under
the Companies Act, 2013 such as:
(a) The right to vote on every resolution placed before the
company – (Section 47)
(b) The rights to subscribe to shares at the time of further
issue of capital by the company (Preemptive
Right) – (Section 62)
(c) Right to appoint proxy to attend and vote at the meeting
on his behalf – (Section 105)
(d) Right to receive copy of annual accounts of the company
– (Section 136)
(e) Right to receive notice of the meeting of members –
(Section 101)
(f) Right to inspection of various statutory registers
maintained by the company – (Section 94)
(g) Right to requisition extraordinary general meeting of the
company – (Section 100)

6. PREFERENCE SHARES
According to explanation (ii) to Section 43 of Companies Act,
2013 ‘‘preference share capital’’, with reference to any
company limited by shares, means that part of the issued
share capital of the company which carries or would carry
a preferential right with respect to –
(a) payment of dividend, either as a fixed amount or an
amount calculated at a fixed rate, which may either be free
of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of
capital, of the amount of the share capital paid-up or
deemed to have been paid-up, whether or not, there is a
preferential right to the payment of any fixed premium or
premium on any fixed scale, specified in the memorandum
or articles of the company;

7. (iii) capital shall be deemed to be preference capital,
notwithstanding that it is entitled to either or both of
the following rights, namely:–
(a) that in respect of dividends, in addition to the
preferential rights to the amounts specified in sub-
clause (a) of clause (ii), it has a right to participate,
whether fully or to a limited extent, with capital not
entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the
preferential right to the repayment, on a winding up, of
the amounts specified in sub-clause (b) of clause (ii), it
has a right to participate, whether fully or to a limited
extent, with capital not entitled to that preferential right
in any surplus which may remain after the entire
capital has been repaid.

8. In simple terms, the preference shares are those shares
which have rights of preference over equity shares in the
case of distribution of dividend and distribution of surplus in
the case of winding up. They generally carry a fixed rate of
dividend and redeemable after specific period of time.
According to Section 55 of the Companies Act, 2013, a
Company cannot issues preference shares which are
irredeemable.
The following kinds of preference shares are issued by the
companies:
• Cumulative preference shares
• Non-cumulative preference shares
• Convertible preference shares
• Redeemable preference shares
• Participating preference share
• Non participating preference shares

9. Cumulative preference shares where the
preference dividend gets accumulated for
being paid subsequently if the company
does not have adequate profits.
Such arrears of dividend need to be paid in
subsequent years before payment of equity
dividends.

10. NON-CUMULATIVE PREFERENCE SHARES
In the case of these preference shares, dividend
does not accumulate. If there are no profits or the
profits are inadequate in any year, the shares are
not entitled to any dividend for that year.
Unless there is a specific provision in the Articles of
Association of the company, the preference
shareholders have no right to participate in the
surplus profits or in the surplus assets in a
winding up.
RBI also allowed Indian banks to issue these types
of preference shares as capital under Basel III
capital regulations.

11. CONVERTIBLE PREFERENCE SHARES
If the terms of issue of preference shares includes
a right for converting them into equity shares at
the end of a specified period they are called
convertible preference shares.
In the absence of such condition or right, the
preference shares are not converted into equity
shares to become eligible for various rights such
as voting, higher dividend, bonus issue etc. as in
the case of equity shares.
These shares are some times referred to as quasi
equity shares in common parlance.

12. REDEEMABLE PREFERENCE SHARES
These are such preference shares in which are
redeemed after specific period and money is
returned to shareholders. According to Section 55
of the Companies Act, 2013, a Company cannot
issue preference shares which are irredeemable.
If Article of association permits, the Company can
issue preference shares which are redeemable
not later than 20 years. Companies engaged in
infrastructure projects can issue shares
redeemable exceeding 20 years subject to
condition mentioned in rule 9 and 10 of the
Companies (Share Capital and Debenture) Rules,
2014.

13. PARTICIPATING PREFERENCE SHARES
Preference shareholders are not entitled to
dividend more than what has been indicated as
part of the terms of issue, even in a year in which
the company has made huge profits.
Subject to provision in the terms of issue these
shares can be entitled to participate in the surplus
profits left, after payment of dividend to the
preference and the equity shareholders to the
extent provided therein.
Subject to provisions in the terms of issue such
preference shares can be entitled even to bonus
shares.

14. NON PARTICIPATING PREFERENCE SHARES
Unless the terms of issue indicate specifically otherwise, all
preference shares are to be regarded as non participating
preference shares.
FULLY CONVERTIBLE CUMULATIVE PREFERENCE
SHARE (EQUIPREF)
This instrument is in two parts A & B. Part A is convertible
into equity shares automatically and compulsorily on the
date of allotment without any application by the allottee,
and Part B is redeemed at par/ converted into equity after
a lock in period at the option of the investor, at a price
30% lower than the average market price. The dividend is
given only for part B shares.

15. NON-VOTING SHARES
Non-voting shares as the name suggests are shares
which carry no voting rights.
Till a few years ago, the term equity capital was
synonymous, in public companies, with voting rights
capital. However, by the Companies (Amendment)
Act of 2000, the concept of non-voting right equity
capital was introduced for the first time in public
limited companies.
Non-voting shares can be used with great effect to
achieve various transaction structuring objectives,
such as, in the case of joint ventures, foreign
collaborations, etc. The voting rights in relation to
preference shares are laid down in s.87 of the
Companies Act

16. Companies Act
The Companies Act now permits a public limited
company to issue shares with differential rights as
to dividend, voting or otherwise. The maximum
limit for the issue of shares with differential voting
rights is 25% of the total issue share capital. The
issuer company needs to comply with the following
conditions:
(a) In the year in which the company decides to issue
such shares, it has profits available for distribution
as dividend u/s. 205 of the Companies Act.
(b) The company has not defaulted in filing the
annual accounts and annual returns for the 3
financial years immediately preceding the financial
year in which the company decides to issue such
shares.

17. (c) The company has not failed to redeem its
debentures or repay its deposits or interest
thereon or to pay dividend.
(d) The Articles of Association of the
company permit the issue of shares with
differential voting rights. In case they do not
permit, then the Articles would first need to
be modified.
(e) It has not been convicted of any offence
under the SEBI Act, SCRA, or FEMA.

18. (f) It has not defaulted in meeting investors’
grievances.
(g) Shareholders’ approval is obtained. In case
of a listed company, the approval has been
obtained by way of a Postal Ballot.
(h) The Explanatory Statement to the Notice of
the Shareholders contains the prescribed
information.
(i) The shareholders of such shares would
continue to enjoy bonus/ rights of the same
class.
(j) Other than the differential voting rights, the
shareholder would enjoy all other rights as an
equity shareholder.

19. SEBI Takeover Regulations
The Takeover Regulations deal with the
acquisition of shares or voting rights over a
listed company. Since the shares are non
voting there is no question of acquisition of
voting rights.
Further, the definition of the term “shares” in the
Takeover Regulations only covers shares
which carry voting rights and includes any
security which would entitle the holder to
receive shares with voting rights. Hence,
correctly speaking the acquisition of non-voting
shares should not trigger the Takeover
Regulations.

20. FIXED DEPOSIT
Fixed Deposit is a low-risk financial
instrument that helps investors to grow
savings at a fixed rate of interest, which is
higher than the interest rates offered by
savings accounts.
The convenience of investing along with the
safety of your deposit can help you plan
your short-term and long-term goals easily.

21. FDs (Fixed Deposits) are of two types,
cumulative and non-cumulative.
A cumulative FD compounds interest
annually, whereas the non-cumulative FD
pays out interest at regular intervals.
These intervals can be monthly, quarterly,
semi-annually and annually. In both cases,
your money is locked in for a fixed tenor.

22. Advantages of Fixed Deposits:
They are Low Risk: Fixed deposits are low-risk
investments as they aren't dependent on market
fluctuations. So, they help your money grow at a
steady pace. Moreover, they offer a good rate of
interest that usually ranges between 7%–8% and
is pre-determined. While you don’t have the
opportunity of making windfall gains, your
money is safe and you get a fixed sum at the end
of the tenor. This type of investment is greatly
favoured because of its high stability.

23. Fixed Tenor: FDs have a fixed tenor so your
money is safely invested for a period of time.
You have the option of choosing between 12 and
60 months. However, it offers the option of
premature withdrawal.
If you need money, you can easily break your FD
or take a loan against FD.
Do note that if your interest exceeds Rs. 10,000, it
is subject to tax. Also, if you make a premature
withdrawal, you stand to lose a portion of the
interest.

24. Currently, the rate has dropped to 6.95% from
7.25%. The decrease of 0.3% in FD rates is
effective from 1 Feb, 2021. As on 07 Jul, 2021,
PNB Housing Finance, Karnataka Bank fixed
deposit rates 6.95%.
FD Tenure Highest FD Rate Banks with highest FD rate
1 year FD 6.50% Ujjivan Small Finance Bank
2 year FD 6.50%
IndusInd Bank, Jana Small Finance
Bank, Ujjivan Small Finance Bank
3 year FD 6.50% Jana Small Finance Bank
5 year FD 6.70% India Post Office

25. Fixed Deposit Interest Rates for Senior Citizens
Senior citizen fixed deposit interest rates / Senior Citizen FD
rates is currently at 7.25% offered by Yes Bank for 36
Months from 3 Years to 10 Years . Bank FD Interest
offered to senior citizens is typically 25-75 basis points
higher than corresponding rates on regular FDs and other
individuals. Senior citizens are required to submit their age
proof to be eligible for higher rates on Senior Citizens FD.
Age of a senior citizen should be 60 or more on the date of
investment.
Tenure on senior citizens FD is between 7 days to 10 years in most
of the banks.
Senior citizens FDs earn 1.75% to 7.30% higher interest compared
to regular deposit rates.
Loans against FDs are available on senior citizen FD.
Penalties are applicable in case of premature withdrawal of FDs of
senior citizens as applicable to other regular accounts.

26. Factors that affect FD Rates
Fixed Deposits are an important source of funds for
banks which they lend to make profits. Bank FD
interest rates vary by the amount deposited, tenure of
deposit, type of depositor as well as the amount of
funding required by banks from FDs. List of factors
that determine the interest rates on banks FD are:
Deposit Amount: Banks offer lower interest rate on
bulk deposits of more than Rs. 1 crore and high
interest rate on deposits of less than Rs. 1 crore.
Deposit Tenure: Banks offer lower rate of interest on
deposits with a shorter tenure. Based on current
rates, the highest rate on FDs with a tenure of less
than 1 year is 6.80% and highest FD interest rates on
the tenure of 10 years is 7.25%.

27. Factors that affect FD Rates
Depositor Type: All banks in India offer higher interest
on senior citizens FDs. Currently, the interest rate on
senior citizens FDs ranges from 1.75% to 7.30%
depending on the deposit amount and deposit tenure.
Funding Requirement: Large banks like SBI and
HDFC Bank which have a wide access to low cost
savings account typically look to raise lower amounts
from FDs and hence offer lower interest rates
compared to new banks and small finance banks
which are dependent on term deposits. Hence, small
finance banks are relatively new private sector banks
that will always offer higher interest rates on FDs
opened with them.

28. Tax Saving FD Minimum deposit Tax Saving
SBI Tax Saving Fixed Deposit Rs. 1,000 5.40%
HDFC Bank 5 Year Tax Saving Fixed Deposit Rs. 100 5.50%
Axis Bank Tax Saver Fixed Deposit Rs. 100 5.75%
Kotak Bank Tax Saving Fixed Deposit Rs. 100 5.30%
ICICI Bank Tax Saving Fixed Deposit Rs. 10,000 5.50%
Citibank Tax Saver Deposits Rs. 1,000 3.50%
Bank of Baroda Tax Savings Term Deposit N.A 5.25%
Corporation Bank Tax Saver Plus Deposit Rs. 100 5.60%
NB Tax Saver Fixed Deposit Rs. 100 5.25%
RBL Bank Tax Savings Fixed Deposits N.A 6.30%
Central Bank of India Tax Saving Deposit Rs. 100 5.10%
Syndicate Bank SyndTaxShield Deposit Rs. 100 5.50%
IDBI Bank Suvidha Tax Saving Fixed Deposit N.A 5.25%

29. FD Interest Calculator
Using the FD calculator, you can find out the total
interest you will earn at the end of tenure. The
formula for calculating fixed deposit interest rates
is shown below
A = P * (1+ r/n) ^ n*t
I = A – P
A = Maturity value
P = Principal amount
r = rate of interest
t = Number of years
n = Compounded interest frequency
I = Interest earned amount

30. ICRA Rating Meaning
MAAA Highest credit quality
MAA High credit quality
MA Adequate credit quality
MB Inadequate credit quality
MC Risk prone credit quality
MD Lowest credit quality
ICRA rating list for Fixed Deposits
ICRA or Information Credit Rating Agency ratings help you to
calculate the safety of your investment. The table below
provides the ICRA ratings list for fixed deposits:

31. Rating Meaning
FAAA Highest safety
FAA High safety
FA Adequate safety
FB Inadequate safety
FC High risk
FD Default
NM Not Meaningful
CRISIL Rating List for Fixed Deposits
Before investing in FD, you can also view the credit
ratings of CRISIL for all banks and NBFCs.