Capital Market financial market in which long-term debt (over a year) or equity-backed securities are bought and sold,[1] in contrast to a money market where short-term debt is bought and sold.

CRR
4%
SLR
21.5
RR
6.75
Repo
7.75
MSF
8.75
Bank
Rate
8.75
Long term loan from
RBI
Only for Sch. Commercial
banks can borrow from RBI
@this Interest rate. Can
even use SLR securities
What RBI pays to its
clients for short term
loans
All clients can borrow short term loans
from RBI @this interest rate. can’t use
SLR securities though!
Banks have to keep this much in cash,
gold, G-sec & other RBI approved
securities
Have to set aside this
much cash in reserve
=no income
NDTL

Quant. Tool Inflation fight
Tight/Dear
Deflation fight
Easy/Cheap
CRR, SLR Increase Decrease
OMO Sell Buy
Policy
RATE
Increase Decrease
Monetary Policy

Bi-
monthly
2014
Bank
Rate
MSF
+1
Repo
RR
-1
SLR CRR
first April 9 9 8 7 23 4
second June 9 9 8 7 22.5 4
third August 9 9 8 7 22 4
fourth Sept,30 9 9 8 7 22 4
Fifth Dec, 2 9 9 8 7 22 4
Surpris
e
15/1/15 8.75 8.75 7.75 6.75 22 4

Financial Market
1. Debt vs Equity and their
subtypes
2.G.Sec, T-Bill, P-Notes, ETF, Hedge
funds……
If any discrepancy in these PPTs vs. wiki,Ramesh, Dutt-Sundaram et al
that’s bcoz I refer to book for NBFC & Finance topics.
PS: You don’t need to buy or read this book. This is only for ‘disclaimer’.

Rs.5 lakh
KVP: ~8 years
2x money
Rs.10 lakh
Inflation.. ??
Demand
uncertainty?

Rs. 1000 @8%; 10 years
Fixed income; Irrespective of
profit
Bonds, debentures, loan, ECB, T-
Bill, Commercial Papers,
Certificate of deposits. (REF:
INVESTOPEDIA)
Creditor to company
First claim during liquidation
11
Debt
Securities

Rs.10 lakh
1 lakh 4 lakh
5 lakh
20% 80%
Equity:
Shareholders
Proprietors
Creditors

20k 80k 5 lakh
20% 80%
Rs.1 Lakh Creditors
Liquidation: 6 Lakh

Debenture holders of a company are its:
A.Shareholders
B.Directors
C.Debtors
D.Creditors
14
UPSC 2003
Right answer
1. Skip 2. Attempt 3. Mark n
Review

Debt Instruments
ऋण साधन | ऋण विलेख
1. Credit rating: Gilt securities vs Junk bonds
2. Bond vs Debenture
3. OFCD
4. Other types of Debentures
5. Inflation indexed bonds (IIB)
Creditors

Gilt Edged
1. Assured return
2. Unlikely to default
on payments
3. But low return e.g.
US Treasury bond
~2%
Company may
default
But higher return:
~15-17%
Junk Bonds

Credit rating for Sovereign Bonds

1. Fiscal deficit
2. Inflation
3. Infrastructure
4. Foreign investment
5. GDP growth
6. Rating Improve expected in 2015
Factors
affecting
credit rating
India

Rs.100, @8%, 5 years
I keep it for a year (Rs.8 earned)
My yield: 8/100= 8%
Then I sell it @Rs.90
2nd buyer Current Yield: (8/90)=
8.89%
3rd buyer Current Yield:
(8/80)= 10%
Yield to maturity (YTM)
Bond Yield to
maturity?
securities

1. Assured but Low return: US
Treasury bond ~2%
2. Bogus Government => panic sales
by investors=>Bond yield goes
high
3. 2/100=> 2%
4. (2/50)=>4% (higher yield)
5. Credit rating down: next time
have to offer higher interest
rate – Junk bond
Bond Yield?
Gilt Edged

Yield vs Bond Price (inverse relation)
Interest vs Bond Price (Inverse relation)
REMEMBER for MCQs

Bond (Britain) = Debenture (America)
Bond (Govt./PSU) = Debenture (Private)
According to Stamp duty computation
Bond Vs Debenture

Debt instruments Types
1. Gilt edged securities vs Junk bonds
2. Bond vs Debenture
3. Municipal Bonds
4. OFCD
5. Other types

1997: Bangalore Muni. First to
launch with state guarantee
(Rs.125 cr)
1998: A’bad muni. First to launch
without state guarantee (Rs.100
crore)
Permitted to raise Upto Rs.10k
Crore, but hardly 1400Cr. Actually
raised.
Need more funds for smart cities
Municipal
bonds
Debt

1. Muni. Must contribute 20% of the
project cost
2. Bond tenure: minimum 3 years.
3. Muni. Must have good financial
track record.
4. provident funds, pension funds
and insurance companies can put
in their money
5. Minimum 75% must be subscribe,
else refund entire amount
SEBI
guidelines
2015
Muni. Bonds
Ignore for
Non-UPSC

Optionally fully-convertible debentures
(OFCD)
27
OFCD
Debenture Shares

Company
Interest Payment…x
Only profit share
No profit= no dividend
Higher profit=> Bigger
dividend
28
Investor
OFCD
Debenture Shares (Equity)

1.Non-Convertible
2. Partially convertible: Rs. 100
Debenture: Rs.70 + 30 (Equity)
3. Fully convertible: Rs. 100
Debenture=> equity (no
choice)
Debenture: other types

1. Optionally: Choice after two
years 1 Debenture = 3 shares
2. Redeemable vs irredeemable
(b4 Maturity)
3. Fixed interest rate vs Index-
linked
Debenture: other types

Inflation Indexed Bonds
1. Why?
2.Types and features

Rs./kg Money Buy?
1st Jan 20 100 5 kg

Rs./kg Money Buy?
1st Jan 20 100 5 kg
31st
Dec
100 104 ~1 kg
Purchasing
Power?

Nomina
l
CPI
(Inflation)
Real
=Nominal
MINUS
inflation
Savings
account 4% 11% -7%
Fixed
Deposit 9% 11% -2%
Interest Rate: Real Vs. Nominal

Jan 2012: ~27,000
Jan 2013: ~31,000
Profit : (31-27)/27= 15%
Investment in gold

Nomina
l
CPI
(Inflation)
Real
=Nominal
MINUS
inflation
Savings
account 4% 11% -7%
Fixed
Deposit 9% 11% -2%
Gold 15% 11% +4%

1. Saving => Capital…..x
2. Gold import ▲ = Trade deficit ▲
3. Current Account Deficit ▲
4. Rupee ▼
5. Crude oil ▲ = Petrol, Diesel ▲
6. Inflation ▲
7. Real Interest rate (negative)
8. More Gold consumption
Why Gold
consumption
bad?
Inflation

1. Gold import ban: Smuggling
2. Reduce Inflation: takes time
3. Provide new investment avenues with
positive REAL interest rate.
How to stop this vicious cycle?

IIB
1. Jun 2013 (Aug, Sep,
Nov…)
1. Dec 2013
2. Inflation Indexed National
Savings Securities-
Cumulative (IINSS-C)
IINSS-C
Inflation indexed bonds

IIB
1. Institutional Investors
(80%) + Retail (20%)
1. Only retail investors
1. Individual / NRI
2. HUF
3. Charity org
4. Educational bodies
IINSS-C

IIB (june)
1. RBI direct sell 1. RBI =>
1. Nationalized banks
2. Axis
3. HDFC
4. ICICI
IISS-C (Dec)

IIB (june)
1. Min 10,000
2. Max 25 lakhs
1. Min 5000
2. Max
1. 10 L
(individual)
2. 25 L (org)
IISS-C (Dec)

IIB (June)
1. Matures @10 years
2. Redeem penalty
1. Same. But senior citizen
=some relief.
IISS-C (Dec)

1st Jan
IIB
10,000
Compounded
half yearly
(June)
WPI
4 Months prior
1.44+WPI
Real Interest Rate
+ve/-ve?

Nominal WPI
Real
=Nominal MINUS
inflation
SA 4% 11% -7%
FD 9% 11% -2%
IIB X +1.44 X +1.44

IIB (june)
1. 1.44% + WPI (2004)
2. Four month lag
3. Compounded half yearly
1. 1.5% + CPI (Combined)
2010 base year
2. 3 months lag
3. Compounded half yearly
IISS-C (Dec)

IIB (june)
Principal also protected
Rs. 10,000 (2013)=>
60%=>16,000 (2023)
Earlier Capital index Bond
(CIB) 1997.
1. Same with CPI
IISS-C (Dec)

IIB (june)
Can be traded
@secondary market
Capital Gains Tax…yes
Nope
IISS-C (Dec)

Financial Market
Money Market Capital Market
Primary
Secondary
Short term Long term

1. MF Invested heavily in IIBs during
high inflation (2013-14)
2. Top 3 MF : ICICI Prudential, HDFC
and SBI
3. But WPI to be ~2.5% in next few
months
4. 1.44+2.50=~4%
5. Hence players exiting the game.
6. IIB worth Rs.100 (FACE VALUE)
sold @Rs.80
losing sheen
(January
2015)
IIB

1.Debt vs Equity
2.Credit rating
3.Debenture types
4.Municipal bonds,
inflation indexed bonds
5.NEXT: T-Bill and G-Sec

T-Bill
Upto 364 days
14, 91, 182, 364 days
1 to 20-30 years
OMC, Fertilizer companies
G-Sec
Government borrowing

T-Bill (364 days)
@discounted price
Rs.100 @Rs.80 (14 days)
1 to 20 years
Principle + Interest
Rs. 1000 @8% (20 years)
G-Sec (1 or more year)
Return method differs

1. Skip 2. Attempt 3. Mark n Review
A shopkeeper sells you a pen @20% discount
and repurchases it after a week @MRP. What
is your profit?
A. 10% Profit
B. 12.5% Profit
C. 20% profit
D. 25% profit
Aptitude: mock question

MRP: 100
Sold @20% discount: 100-20=80
Your investment = Rs.80
You sold back @100 (MRP)
Your profit= (100-80)/80 = 2/8=25%
Mental calculation: 100/80=1.25 hence
25% profit
Aptitude

T-Bill
Upto 364 days
14, 91, 182, 364 days
@discounted price
Rs.100 @Rs.80 (14 days)
1 to 20 years
Principle + Interest
Rs. 1000 @8% (20 years)
If Bond @discounted
price=> Zero Coupon Bond
G-Sec
Government borrowing

Coupon bond: $50, 6%, 20 years

Without coupons
But sold at a discounted price. (Rs.100 at
80)
Zero coupon bond?

Bearer Bonds: no names, no records

1. Skip 2. Attempt 3. Mark n Review
A.T-Bills are zero coupon
securities
B. T-Bills don’t pay interest rate.
C.Both A and B
D.Neither A nor B
Find correct statements

Money Market
Misc. Terms
1. Ways and Means Advances
2. Comm.Papers
3. Certificate of Deposits
4. Commercial Bills
5. Call money, Notice money
Chronology,
Factoids
Exact Mechnism
Only Basic idea

1. Ways and Means advances
2. Government- temporary
mismatch in receipt and
payment
3. RBI helps. But limits fixed.
4. Not counted in fiscal deficit
WMA
Money
Market

1. T-Bill: upto 364 days maturity,
sold @discounted price (Govt.)
2. Commercial Papers: same thing
but by Corporates.
3. Certificate of deposits: same
thing by Banks & Fin. Institutes
Misc. Debt
Instruments
Money
Market

Commercial Bills: Trade bill (will pay for xyz
goods in future). Same trade bill sold to
Commercial bank @discounted price =
Commercial bills.
Money Market: Misc. Debt
Instruments
10,000 9,000

1. Short term borrowing among
banks and FI.
2. No collateral. Mainly to fulfill
CRR
3. 1 day: call money
4. Over 1 day upto 14 days: notice
money
Call money
Money
Market

1. Credit rating
2. Gilt edged securities vs Junk Bonds
3. OFCD, Debenture types
4. Muni. Bonds, IIB
5. G-sec vs T-Bill
6. 0-Coupen Bonds
7. Bearer-Bonds
8. YTM
9. Money market: Misc. Terms

Equities
1. IPO, Public issue, Red Herring
2.Book building
3.Bonus Issue, Rights issue, Preferential
shares
4.ETF, MF, Hedge fund, P-Notes

Rs.10 lakh
1 lakh 4 lakh 5 lakh
20% 80%
Shareholders
Proprietors Creditors

1. *** % of shares out of 100%
2. Dividend from profit
3. IPO, Shares, VCF, Angel
Investor
4. Owners / proprietors
5. Last claim during liquidation
Equities
Securities

Debt (Debenture)
Interest:
TAX @investor
Dividend:
Tax @Company
72
Equity (Shares)
Securities: Debt vs Equity

Debt =Interest
73
Equity = Dividend
Economic activity
Slowdown Boom

IPO
1. Par value and Premium Value?
2.Red Herring
3.Public Issue
4.Book building

Par Value
Face value
Rs. 10, 100
(1999) Any integer
1,2,5,8,10,20,50,100
1.50……x
IPO < PAR VALUE ….x
@Rs.40
Face value + premium
Rs. 10 + 30 = 40
Premium Value
Shares Value: Par vs Premium

Promoter
Underwriter
Public issue
Underwriter
 US: Investment
banker
 UK: Merchant
Banker

1. Initial Public offer
2. 1 lakh equity shares
3. Par value Rs.10
4. Premium Rs.15
5. Final Price: (10+15)=25
6. IPO Total value: 25 lakh
Fixed pricing
IPO

1. Applications for 1 lakh shares
2. Rs. 500 x 10,000 shares
3. Rs. 200 x 50,000 shares
4. ….
5. Rs. 125 x 40,000 shares
6. Rs. 100 x 5000 shares
7. 125 cutoff [Because 1 lakh
shares booked]
#2: Book
Building
IPO

1. Present: investor has to fill long
paper form, cheque-clearance
(T+12)
2. Proposed: electronic application
via internet, share-broker’s
terminals, even mobile apps.
3. If IPO allotted, investor gets
email-SMS alert.
Features
E-IPO

1. Time reduced to (T+2 or T+3)
2. Companies get equity-funding
@cheaper + @Faster speed.
3. Retail participation ▲
4. In future even Debt-instruments
too. (But need amendment in
SEBI regulation)
Benefits?
E-IPO

Revenue
- interest to Debenture/bonds/loans/ECB
- salary, Expenditure, input cost
- Taxes [corporate, excise, service]
- dividend to preferential shares
- dividend to ordinary shareholders
====
Reserve / Company’s Retained Earnings
Retained earning

Share buyback (1998)
Invest in other companies, open new
subsidiaries
Issue bigger dividend next time
What to do with Retained earning?

1. Issue bonus shares (FREE)
2. 1:2 =one bonus share for two
existing shares
Bonus Shares
Equities

1. Bonus issue….FREE
2. Rights issue….NOT FREE
3. Existing shareholders given first
right to purchase new shares
4. According to their existing
shareholding
5. If they refuse => offer to aam
junta.
6. NOT IPO
Rights
Issue
Equities

1. IPO= first time share sold &
company gets listed on stock
exchange
2. FPO= [Follow on Public Offer]
when same company issues more
shares OR disinvestment
3. SEBI: for PSUs & companies with
250 crores valuation= they can
do FPO without SEBI clearance.
FPO, Rights
issue
Fast track

Bond/Debenture: first payout, first claim
Ordinary share: Last payout, last claim
Debenture> Preferential share > ordinary
shares
Voting …or Non voting (FDI limits, Bank
license limit)
Preferential shares

Before
1 share x Rs.10 face value 10 shares x Rs.1 face value
After
Share splitting (SBI)

1. Liquidity to investor (Easier to
sell Rs.1 share than Rs.10 share)
2. Increases retail participation
3. Doesn’t increase company’s
market capitalization
4. Doesn’t increase company’s value
Why share splitting?

1. Bonds
2. Equities
1. IPO, book building, E-IPO
2. Bonus shares
3. Rights issue
4. Preferential shares
NEXT:
ADR, GDR, Bharat DR, IDR

DR : Depository receipt
Kingfisher=> NASDAQ (SEC permission,
accounting norms)
Kingfisher => Indian shares @Bank of
America (investment banker)
BoA => Kingfisher ADR=> NASDAQ
10 desi shares = 1 ADR [$ paid, $ dividend]
ADR GDR

GDR= Global depository receipts @EU
1st GDR: Reliance '92
1st ADR: Infosys '99
ADR GDR

Reduce restrictions on ADR GDR
We’ll introduce Bharat Depository receipts
Budget 2014 reform

2004: IDR permitted
So far only 1, via Standard chartered
Finmin: MS Sahoo panel
Bharat Depository receipt (BhDR)
Both debt and equity
IDR will be a subpart
IDR, Bharat Depository receipts

Only SEBI regulation
Level I : sophisticated investors
Level II: all investors
Allow Foreign investors
More choices for Indian investors (Gold
CAD)
IDR, Bharat Depository receipts

Bonds, Equities
IPO, Bonus shares
ADR, GDR, IDR,Bh.DR
NEXT
Mutual funds, ETF
Hedge funds, P-notes

Mutual fund
Portfolio
(AMC)
EXIT
LOAD

Portfolio Nature: equity, debt, gilt edged
fund, real estate
Income vs risk
Growth Fund: 80 (Equity): 20 (Debt)
Balance: 50: 50
Income = 20 : 80
Mutual funds types:

ETF: Exchange Traded Fund
Portfolio
Goldman Sach
ONGC, CIL, GAIL
10 CPSE
Rs.3000 crore NFO
BSE-NSE

15 ETF: 1 free (for high quantity orders)
Redeem
MF Unit: CASH (minus EXIT LOAD)
ETF: Shares=> secondary market
sell=>CASH
EXIT load…no; commission less
ETF: USA 1993; India 2002
Modi: March 2015, 5k-ETF planned
ETF different from MF?

Hedge Fund = pvt MF for HNI
Portfolio
(Hedge Fund)

HNI=> private MF
SEBI: min. 1 crore investment (SBIMF-100)
Karvy Capital, Motilal Oswald etc.
SEBI regulation…not strict like MF
Alternative investment fund Cat.III
High risk, high reward
100 Cr. Pooled=> bet upto Rs.200 crore
(T+2)
Hedge Fund

P-Notes: Participatory Notes
Hedge Fund
manager

P-Note: Offshore Derivative
Instrument
Hedge Fund
manager
FII
(India)

P-Note: Offshore Derivative
Instrument
Offshore Investor
Without PAN card,
DEMAD account
or SEBI Registration
SEBI
registered
FII (India)
FII’s portfolio
P-Note
Derives value from
FII portfolio

March 2014: 2 lakh Crore (13% of FII)
Hot money
CGT evade
Anonymous (Quarterly records to SEBI)
terrorist money (Ex-NSA MK Narayan)
Money Laundering (FM Whitepaper)
P-notes : SEBI

P-Note
Derives value from
FII’s portfolio
Sadhu Yadav a.k.a
Politician, builder,
Contractor & Mafia
all in one Multiskill
Hawala operator
sends Rupees to Tax
Haven, converting
to Dollars
Hedge Fund Manager
or Investment banker
in Tax Haven
SEBI registered FII
FII’s portfolio

FPI new classification
Risk profile + KYC compliance
CAT I: Foreign government, government's fin.
Institutions (UTI, EPFO, LIC)
CAT II: Mutual Fund, Pension Fund, Univ.Fund,
CAT III: not in CAT I and CAT II (e.g. Hedge Funds)
Who can't issue P-notes?
CAT III
CAT II: certain high risk
SEBI on P-Notes

Bond types, IIB, T-bill, G-Sec
Equities: IPO, share types
ADR-GDR, Bh.DR, IDR
MF, ETF, Hedge Fund, P-Notes

Derivatives, Options
1. Derivatives?
2.Forward vs future
3.CALL vs PUT?
4.Credit default swap

1. Debt (Bonds, Debentures)
2. Equity (Shares)
3. Derivatives (derive value from assets)
1. Physical Assets (home, shop, machines)
2. Debt / equity
3. Forex
4. Commodity
5. Even other derivatives
Financial instruments: 3 types of

Sell / purchase /execution @future date
Future vs forward=> not important for
UPSC.
Option: to minimize risk
Derivatives=> Futures/Forward

Right to buy
But no obligation to buy
Option: CALL option

CALL OPTION
Strike price:
Rs.150
(3 month) 2000 shares
Call writer
Premium 4k
3,04,000

CALL option: right to buy
3 lakh
3,04,000 4,000
3,20,000
PROFIT
3.20
3.04
=16k

CALL option: No obligation to buy
3 lakh
2,64,000 4,000
2.6 lakh
Loss
prevented

Right to SELL
But no obligation to SELL
Strike price: Infosys @Rs.150 x 2000 after 3
months.
Premium: Rs.4,000
140 …yes
160..refuse
Option: PUT option

How to memorize?
PUT option:
Right to sell
But no obligation to sell

Credit Default Swap (CDS)
Bond
Mone
y

1. SENSEX calculation
2. Harshad Mehta, Ketan Parekh
3. Sahara, NSEL, Chit fund
4. FSLRC
5. Companies Act, Corporate
governance
6. Vodafone, Nokia, GAAR, DTAA

Capital Market financial market in which long-term debt (over a year) or equity-backed securities are bought and sold,[1] in contrast to a money market where short-term debt is bought and sold.

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Capital Market financial market in which long-term debt (over a year) or equity-backed securities are bought and sold,[1] in contrast to a money market where short-term debt is bought and sold.

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