There are three main types of financial instruments in India: money market instruments, capital market instruments, and hybrid instruments. Money market instruments include treasury bills, commercial papers, certificates of deposit, and call/notice money, which are used for short-term borrowing and lending of up to one year. Capital market instruments such as equity shares, preference shares, debentures, and bonds are used for long-term borrowing and lending of over one year. Hybrid instruments blend characteristics of equity and debt instruments, with features like convertible debentures that can be converted into equity shares.

1. INDIAN FINANCIAL
INSTRUMENTS
By Vivek Sharma

2. 3 types of financial market
instruments
• Money market instruments.
• Capital market instruments.
• Hybrid instruments.

3. Money Market
The money market can be defined as a market for
short-term money and financial assets that are near
substitutes for money.
The term short-term means generally a period upto
one year and near substitutes to money is used to
denote any financial asset which can be quickly
converted into money with minimum transaction cost.

4. Money market instruments
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers

5. Call /Notice-Money Market
• Call/Notice money is the money borrowed or lent on demand
for a very short period. When money is borrowed or lent for a
day, it is known as Call (Overnight) Money.
• Intervening holidays and/or Sunday are excluded for this
purpose. Thus money, borrowed on a day and repaid on the
next working day, (irrespective of the number of intervening
holidays) is "Call Money".
• When money is borrowed or lent for more than a day and up to
14 days, it is "Notice Money". No collateral security is
required to cover these transactions.

6. Inter-Bank Term Money
• Inter-bank market for deposits of maturity
beyond 14 days is referred to as the term
money market.
• The entry restrictions are the same as those for
Call/Notice Money except that, as per existing
regulations, the specified entities are not
allowed to lend beyond 14 days.

7. Treasury Bills
• Treasury Bills are short term (up to one year) borrowing
instruments of the union government.
• It is an IOU of the Government. It is a promise by the
Government to pay a stated sum after expiry of the stated
period from the date of issue (14/91/182/364 days i.e. less than
one year).
• They are issued at a discount to the face value, and on
maturity the face value is paid to the holder. The rate of
discount and the corresponding issue price are determined at
each auction.

8. Certificate of Deposits
• Certificates of Deposit (CDs) is a negotiable money market
instrument and issued in dematerialised form or as a Usance
Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period.
• Guidelines for issue of CDs are presently governed by various
directives issued by the Reserve Bank of India, as amended
from time to time.

9. • CDs can be issued by
• (i) scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs); and
• (ii) select all-India Financial Institutions that have been
permitted by RBI to raise short-term resources within the
umbrella limit fixed by RBI.
• Banks have the freedom to issue CDs depending on their
requirements. An FI may issue CDs within the overall
umbrella limit fixed by RBI, i.e., issue of CD together with
other instruments viz., term money, term deposits, commercial
papers and intercorporate deposits should not exceed 100 per
cent of its net owned funds, as per the latest audited balance
sheet.

10. Commercial Paper
• CP is a note in evidence of the debt obligation of the
issuer. On issuing commercial paper the debt
obligation is transformed into an instrument.
• CP is thus an unsecured promissory note privately
placed with investors at a discount rate to face value
determined by market forces.
• CP is freely negotiable by endorsement and delivery.

11. • A company shall be eligible to issue CP provided -
• (a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore;
• (b) the working capital (fund-based) limit of the company from
the banking system is not less than Rs.4 crore and
• (c) the borrowal account of the company is classified as a
Standard Asset by the financing bank/s. The minimum maturity
period of CP is 7 days. The minimum credit rating shall be P-2
of CRISIL or such equivalent rating by other agencies.

12. Capital Market Instruments
• The capital market generally consists of the following
long term period i.e., more than one year period,
financial instruments; In the equity segment Equity
shares, preference shares, convertible preference
shares, non-convertible preference shares etc and in
the debt segment debentures, zero coupon bonds,
deep discount bonds etc.

13. INTRODUCTION
• The capital market is the market for securities where
companies and the government can rise long term
fund.
• It is a place where buyers and sellers of securities can
enter into transactions to purchase and sell shares,
bonds and debentures.

14. BASIC CAPITAL MARKET
INSTRUMENTS

15. EQUITY SHARES
• According to the Companies Act 1956, equity
shares are that part of the share capital of the
company, which are not preference shares.
• They are called as ordinary shares or common
stock or voting share.
• These shareholder are the real owner of the
company.
• The return on equity shares depends on the
performance profitability of the company.

16. MERITS OF EQUITY SHARES
• A permanent source of finance to the company
• No fixed rate of dividend
• Easy liquidity and marketability

17. LIMITATIONS OF EQUITY SHARES
• No guarantee on returns to shareholders
• Loss of managerial control

18. PREFERENCE SHARES
• Preference shares are known as preferred stock.
• Preference share capital has two priorities i.e.,
in the repayment of capital and payment of
dividend.
• Preferred stocks usually carry no voting rigths.

19. TYPES OF PREFERENCE SHARE

20. MERITS OF PREFERENCE SHARE CAPITAL
From Company’s point of view
• Hybrid security
• Absence of voting rights
• No dilution of control
• Fixed return

21. LIMITATIONS OF PREFERENCE SHARES
From Investor ’s point of view
• Not secured
• Not an attractive investment
• No right to participate in the
management

22. • When a corporation is in need of fund in
addition to share capital it borrows money by
issuing debentures.
• The debenture holder gets interest which is
fixed at the time of issue.
DEBENTURES

23. Redeemable
or
irredeemable
Convertible
or non-
convertible
Secured
or
unsecured
Bearer
or
registered
TYPES OF DEBENTURES

24. MERITS OF DEBENTURES
• No loss of managerial control
• A Flexible source of finance
• Reduces burden of tax of the company

25. LIMITATION OF DEBENTURES
• Fixed rate on interest
• Companies may have to mortgage their
assets
• Not an attractive investment from company’s
point of view.

26. BONDS
• Bonds are issued by public authorities, credit
institutions, companies and super national institutions
in the primary market.
• A bond is a negotiable certificate which entitles the
holder of repayment of the principal sum plus interest.
• The most common process of issuing bonds is through
underwriting.

27. TYPES OF BONDS
• Bearer bonds
• Registered bonds
• Callable bonds
• Convertible bonds
• Zero coupon bonds
• Fixed rate bonds

28. DIFFERENCE BETWEEN
• .
EQUITY SECURITY
Owner of the company. Creditor of the company.
Get Dividend only when
company earns sufficient profits.
Provides steady in come to the
investors.
Have voting rights. No voting rights.
Not secured. Secured in nature.
Share capital of the company. Borrowed capital of the company.
DEBT SECURITY

29. Hybrid Instruments
• Hybrid instruments have both the features of
equity and debenture. This kind of instruments
is called as hybrid instruments. Examples are
convertible debentures, warrants etc.

30. • a hybrid financial insturment is an investment that blends chearacteristics of
both equity and debt markets (stocks and bonds).
• The most common form of a hybrid insturment is the convertible bond,
warrants.
• This type of security is an issuance of debt that can be converted to a
company's common stock at any given time. So, it is kind of like a call
option.
• Obviously, the major advantage of this type of security is that if the
corporations stock price goes down, the option will not be exercised and you
will still receive interest payments on your bonds. However, if the stock price
goes up, you can convert the bonds to stock at a given strike price. If the
price of the stock is above the strike price, the convertible is considered in "
in the money."
• The major advantage here is security. There is opportunity to profit greatly
on increases in stock prices, but at worse case you will still hold the debt
security. The only way you can realize "real" losses is if the corporation
defaults on its debt.

31. • One disadvantage of a convertible is a low yield.
Convertibles often yield a lower interest rate
than the corporations no convertible bonds due.
• One important thing to point out when dealing
with hybrid securities is they are very difficult to
accuratly value, and this misreresentation is
often reflected in its market value. This leaves
alot of opportunity for an arbitrage situation,
where a securtiy can be purchased then
immediatly sold for a profit simultaniously.

32. Conclusion
• In India money market is regulated by Reserve bank
of India (www.rbi.org.in) and Securities Exchange
Board of India (SEBI) [www.sebi.gov.in ] regulates
capital market. Capital market consists of primary
market and secondary market. All Initial Public
Offerings comes under the primary market and all
secondary market transactions deals in secondary
market.

33. • Secondary market refers to a market where securities
are traded after being initially offered to the public in
the primary market and/or listed on the Stock
Exchange. Secondary market comprises of equity
markets and the debt markets. In the secondary
market transactions BSE and NSE plays a great role
in exchange of capital market instruments. (visit
www.bseindia.com and www.nseindia.com ).