CAPITAL MARKETS

Presented by
Abhishek
 Capital market instruments

Capital
market
instruments

Preference Fixed Non-voting

Equity shares Warrants Bonds Debentures ADR GDR
share deposits shares
 Preference Shares
• Preferred shares (also known as preferred stock or preference
shares) are securities that represent ownership in a corporation,
and that have a priority claim over common shares on the
company’s assets and earnings
• Preference shareholders do not have the same voting rights as
ordinary equity shares.
• Unlike ordinary shares, preference shares pay a pre-defined rate
of dividend.
• The dividend is payable after all other payments are made, but
before dividend is declared to equity shareholders.
• Preference shares combine features of equity and debt, they carry
equity risk as the principal is not secured and they give out dividend
similar to an interest.
• Preference shares can be convertible into ordinary shares as well as
nonconvertible
 Features of Preferred Shares

• Preference in assets upon liquidation: The shares provide its

holders with priority over common stock holders to claim the
company’s assets upon liquidation.
• Preference in dividends: Preferred shareholders have a priority in
dividend payments over the holders of the common stock.
• Non-voting: Generally, the shares do not assign voting rights to its
holders. However, some preferred shares allow its holders to vote
on extraordinary events.
• Convertibility to common stock: Preferred shares may be
converted to a predetermined number of common shares. Some
preferred shares specify the date at which the shares can be
converted, while others require the approval from the board of
directors for the conversion.
• Callability: The shares can be repurchased by the issuer at specified
dates.
 Advantages
• No dilution of control: This type of financing allows
issuers to avoid or defer the dilution of control, as the
shares do not provide voting rights or limit these
rights.
• No obligation for dividends: The shares do not force
issuers to pay dividends to shareholders. For example,
if the company does not have enough funds to pay
dividends, it may just defer the payment.
• Flexibility of terms: The company’s management
enjoys the flexibility to set up almost any terms for
preferred shares.
 Equity Shares
• An equity share, commonly referred to as ordinary share also
represents the form of fractional or part ownership in which a
shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The holders
of such shares are members of the company and have voting rights
• The rate of dividend on these shares depends upon the profits of
the company. They may be paid a higher rate of dividend or they
may not get anything. These shareholders take more risk as
compared to preference shareholders.
• Equity capital is paid after meeting all other claims including that of
preference shareholders. They take risk both regarding dividend
and return of capital. Equity share capital cannot be redeemed
during the life time of the company.
 Features of Equity Shares

• Equity share capital remains permanently with

the company. It is returned only when the
company is wound up.
• Equity shareholders have voting rights and
elect the management of the company.
• The rate of dividend on equity capital depends
upon the availability of surplus funds. There is
no fixed rate of dividend on equity capital.
 Non –voting shares
• A non-voting share is a share in the capital of a
company which belongs to a class that has no voting
rights.
• Non-voting shares do not give the holder any voting
rights in the company. This means that the holder is
entitled to a portion of the company’s capital, but is
not able to take part in its general meetings.
• Non-voting shares are mostly issued to employees or
to family members of the main shareholders.
• This class of shares allows the main shareholders to
retain control of the company whilst multiplying the
number of shareholders.
 Features of a Warrant

• Issuance:-A warrant can either be issued by a company or a

financial institution. A company can issue these instruments for its
own stock while a financial institution issues them for a variety of
underlying assets.
• Exercise:-A warrant can either be exercised at the end of expiry or
can be traded independently of the debt instrument with which it
was issued.
• Life:-A warrant usually has a life running from 10 to 15 years.
American type warrant can be exercised anytime during its life
while a European type warrant can only be exercised at the end of
its life.
• Premium:-A warrant is an option like an instrument and hence has
a premium attached to it. Premium is the price that the holder pays
for the privilege of exercising the warrant at a suitable time.
 Warrant

• A warrant is a derivative instrument which gives the warrant-holder

a right to buy the underlying stock at a pre-determined strike price.
• A warrant-holder can exercise it to buy the stock of the issuing
company at an attractive price at a later date.
• It is basically a discount to the market price of the company’s stock.
• These are issued by the companies along with a debt or preferred
stock issue.
• It makes the yield attractive for potential debt investors. Warrants
are usually traded OTC.
• Financial institutions also issue warrants where the underlying
assets can be currencies, commodities, interest rates etc.
 Fixed deposits
• Fixed deposit is investment instruments
offered by banks and non-banking financial
companies, where money can be deposited
for a higher rate of interest than savings
accounts.
• A lump sum of money can be deposited in
fixed deposit for a specific period, which
varies for every financier.
 Features of Fixed Deposit

• Fixed deposit enable investors to earn higher interest

on their surplus funds
• You can deposit money in a fixed deposit account only
once, but to deposit more money, you need to create
another account
• Though liquidity in fixed deposit is lesser, you can look
for higher rates of interests, which are higher in case of
company fixed deposit
• Fixed deposit can be easily renewed
• Tax is deducted at source, from interest on Fixed
Deposit as applicable, as per the Income Tax Act, 1961.
 Benefits of Fixed Deposits
• They are the safest investment instruments, and offer
greater stability
• Returns on fixed deposit are assured, and there is no risk of
loss of principal
• Periodic interest payouts can be opted to help manage
monthly expenses
• There is no effect of market fluctuations on your fixed
deposit, which ensures greater safety of your investment
capital
• Benefits from higher interest rates offered by company
fixed deposit
• Some financiers also offer greater returns for senior citizens
 Bonds
• A bond is a debt security, in which the
authorised issuer company, financial
institution, or Government, offers regular or
fixed payment of interest in return for the
money borrowed by the said issuer.
• It is for a certain period of time.
 Features
• Face value:-Corporate bonds normally have a par value.But this amount
can be much greater for government bonds
• Interest:-Most bonds pay interest every 6 months, but it's possible for
them to pay monthly, quarterly or annually
• Coupon or interest rate:-Fixed-rate bonds generate a constant interest
rate. You receive the same amount each year or month, depending on the
interest payment schedule.
• Maturity:-Maturities can range from as little as one day to as long as
30 yearsA bond that matures in one year is much more predictable and
thus less risky than a bond that matures in 20 years. Therefore, the longer
the time to maturity, the higher the interest rate. Also, a longer term bond
will fluctuate more than a shorter term bond.
• Issuers:It is issued by both Government and Corporate firms
• Rating agencies:-The bond rating system helps investors distinguish a
company's or government's credit risk.
 Debentures
• A debenture is one of the capital market instruments which
is used to raise medium or long term funds from public. A
debenture is essentially a debt instrument that
acknowledges a loan to the company and is executed under
the common seal of the company.
• The debenture document, called Debenture deed contains
provisions as to payment, of interest and the repayment of
principal amount and giving a charge on the assets of a
such a company, which may give security for the payment
over the some or all the assets of the company.
• Issue of Debentures is one of the most common methods
of raising the funds available to the company.
 Features
• A debenture acknowledges a debt It is in the form of
certificate issued under the seal of the company (called
Debenture Deed). It usually shows the amount & date of
repayment of the loan.
• It has a rate of interest & date of interest payment.
• Debentures can be secured against the assets of the
company or may be unsecured.
• Debentures are generally freely transferable by the
debenture holder. Debenture holders have no rights to vote
in the company’s general meetings of shareholders , but
they may have separate meetings or votes
• The interest paid to them is a charge against profit in the
company’s financial statements.
 American Depository Receipt
• American Depository Receipt (ADR) is a certified negotiable
instrument issued by an American bank suggesting the
number of shares of a foreign company that can be traded in
U.S. financial markets
 Process

• The domestic company, already listed in its local stock exchange,

sells its shares in bulk to a U.S. bank to get itself listed on U.S.
exchange.
• The U.S. bank accepts the shares of the issuing company. The bank
keeps the shares in its security and issues certificates (ADRs) to the
interested investors through the exchange.
• Investors set the price of the ADRs through bidding process in U.S.
dollars. The buying and selling in ADR shares by the investors is
possible only after the major U.S. stock exchange lists the bank
certificates for trading.
• The U.S. stock exchange is regulated by Securities Exchange
Commission, which keeps a check on necessary compliances that
need to be complied by the foreign company.
 Global Depository Receipt
• Global Depository Receipt (GDR) is an instrument in which a company
located in domestic country issues one or more of its shares or
convertibles bonds outside the domestic country. In GDR, an overseas
depository bank i.e. bank outside the domestic territory of a company,
issues shares of the company to residents outside the domestic territory.
Such shares are in the form of depository receipt or certificate created by
overseas the depository bank.
• Issue of Global Depository Receipt is one of the most popular ways to tap
the global equity markets. A company can raise foreign currency funds by
issuing equity shares in a foreign country.
• The domestic company enters into an agreement with the overseas
depository bank for the purpose of issue of GDR.
• On the instruction of domestic custodian, the overseas depository bank
issues shares to foreign investors.
• The whole process is carried out under strict guidelines.
• GDRs are usually denominated in U.S. dollars
Contd…….