CMR( Capital Market Instruments)

7th Sem.

Rajdip Bhadra Chaudhuri

Assistant Professor,
School of Law,
KIIT Deemed to be University.
 Preference Shares
 Optimal alternative for risk averse equity investors
 Less volatile than equity shares
 There is steadier flow of dividends
 No voting rights so does not affect decision making of
company
 Preference share capital for Co. ltd. by shares (S. 43 of Co.
Act, 2013)
 Carries preferential right for:
1. Dividend payment (fixed amount or rate) may be free or
subject to income tax
2. Repayment (WU or repayment of capital) – preference
right of payment of fixed premium or on fixed scale as per
MOA or AOA
 P S types
Cumulative
Non-cumulative
Convertible
Redeemable
Participating
Non participating
Fully convertible cumulative P.S.
Non convertible redeemable P. S.
 Equity Shares
 Ordinary shares representing fractional ownership
 SHs undertakes maximum risk
 SHs considered as members and has voting rights
 Equity share capital – all share capital which is not
preference share capital (S. 43 Co. Act, 2013)
 E. S. C. may be with
1. Voting rights
2. Differential rights as to dividend, voting or otherwise
 Eq. Cap. & further issue rank pari passu with earlier issued
Sh. Cap.
 AOA should authorize issue of shares with diff. rights
 Different rights
 Right to share of profits (dividend or bonus)
Note: cannot demand declaration of dividend
 Right to vote on every resln.
 Right to subscribe (further issue – Preemptive
right)
 Right to appoint proxy
 Receive copy of annual a/cs
 Receive notice of meeting
 Inspect various statutory registers
 Requisition Extraordinary General meeting
 Equity Shares with Differential rights
Conditions: [R. 4 of Co. (Sh. Cap. & Deb. Rules), 2014]
 AOA should authorize
 Issue authorized by Ord. Reln. passed by SHs G.M.
 If eq. sh. listed issue approved by SHs through postal ballot at GM
 Shares with differential rights should exceed 26% of total post issue ESC
 Consistent track record of distributable profit for last 3 yrs
 No default in filing Fin. Statements & Ann. Returns for last 3 yrs
 No subsisting default in payment (declared div., repayment of matured deposit,
redemption or interest payment)
 No other default in payment (div. for P.S., loan of PFI of State Level FI, SCB,
Inv. Edu. & Pro. Fund)
 Not penalized by Court or Tribunal during last 3 yrs
 Explanatory statement to be annexed to notice of GM
 BOD to disclose Board’s Report for fin. yr.
 No conversion of existing Sh Cap with Vot Rights to Sh Cap with D V R or vice
versa
 If differential right mentioned shall enjoy bonus & rights issue
 Debentures
 S. 2(30) Co. Act, 13 – Deb. includes deb. stock., bonds or
any other inst. of a Co. evidencing debt, whether
constituting a charge on the assets of Co. or not
 Issued by Co. as certificate of indebtness
 Usually indicates date of redemption
 Provides for repayment of principal & int. at specified
date/s
 Usually creates charge on undertaking / assets of Co.
 If charge created DHs enjoy better position like secured
creditors
 If no principal or interest paid action brought directly or
through D Trustees by sale of assets earmarked as
security
 There is no voting rights
 Interest to be paid compulsorily irrespective of profit
made or not
 Types
 Unsecured – does not carry any charge on assets of Co. –
no particular property can be attached to recover
repayment
 Secured – secured by a mortgage of whole or part of
assets of Co. – D. Trustees appointed to hold assets on
behalf of DHs & has right to sell
 Redeemable – redemption after certain period – issued for
a fixed period
 Perpetual – redemption on happening of specified event –
eg. Winding up
 Bearer – payable to bearer & transferable by mere
delivery – name of DH not entered in books of Co.
 Registered – payable to registered holders whose name
written in D Certificate/allotment letter & registered on
Co. register of DHs as per S. 88 (1)(b) of Co. Act, 2013
 Depository Receipts
 Negotiable instrument
 Evidencing fixed no. of equity shares of issuing Co. (Indian)
 Denominated in foreign currency
 Traded in foreign exchange
 Helps in raising capital
 Diversify SH base
 Visibility & recognition in international market
 Global image
 Set up employee stock option plans
 Facilitate M&A by creating a desirable acquisition currency
 Recommendations of Sahoo committee to Review the FCCBs and
Ordinary Shares (Mechanism) Scheme, 1993, to increase participation by
In. Co. in overseas financial markets & to facilitate raising of capital
from global investors
 MOF – 21.10.2014 – notified D R Scheme, 2014, amending & repealing
issue of Foreign Currency Convertible Bonds & Ordinary Shares
(Through Depository Receipt Mechanism) Scheme, 1993, to the extent
applicable to issuance of D R
Euro Issue (modes of raising funds by Indian
Co. outside India in foreign currency)

EURO ISSUE

DEPOSITORY
FCCB/FCEB
RECEIPTS

ADRs GDRs

Existing From EURO From US

Fresh Shares
Shares market market
 Process of Issue of DRs
Issuing Co. (In. Co.) (Issues rupee dominated Eq. Sh. To Domestic Custodian)

Domestic Custodian
(Retains Rupee dominated shares & instructs overseas Depositories to issue receipt)

Overseas Depository (Issues DRs to foreign investors)

Foreign Investors

Shares traded in overseas market in DRs form

 Investors perspective
Diversify Portfolio
Convenience of holding foreign securities in
their markets
Simplification of trading & settlements(DRs
trade and settle just like US or EURO
securities)
No restrictions on dealing: DRs are
recognized as domestic securities
Avoid Currency risk.
 ADR
dollar denominated form of equity
ownership
form of DR in a non-US company
represents the foreign shares of the company
held on deposit by a custodian bank in Co.’s
home country
carries the corporate and economic rights of
the foreign shares
 GDR
 Access usually to Euro market and US market
 US portion of GDRs to be listed on US exchanges
 comply with SEC requirements
 European portion are to be complied with EU
directive
 Listing of GDR - international stock exchanges -
London Stock Exchange, New York Stock Exchange,
 American Stock Exchange, NASDAQ, Luxemburg
Stock Exchange
 Section 41 of Co. Act, 2013 & Co. (Issue of GDR)
Rules, 2014
 FCCB
 Unsecured instrument – though debt instrument no cover
required
 Advantage of both equity & debt
 Carry fixed rate of interest
 Option of conversion to fixed no. of equity shares of issuer
company
 Interest & redemption price payable in $ (if no conversion)
 Denominated in any freely convrt. Foreign currency
 FCCB issue proceed need to conform to ECB end use requirements
 Conversion into equity at a discount on prevailing market price
 25% of FCCB proceeds can be used for corporate restructuring
 Iss. Co. cannot plan capital structure as conversion not assured
 Projection of cash flow at time of maturity cannot be assured
 Coupon rate lower than direct debt instruments
 Regulatory Framework
The Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism) Scheme,1993

Foreign Currency Exchangeable Bonds Scheme, 2008

Depository Receipts Scheme, 2014

RBI Regulations/Circulars

Consolidated FDI Policy.

Notifications/Circulars issued by Ministry of Finance (MoF),

GOI

Companies Act and Rules

Listing Regulations
 ECB
 Commercial loans
 Raised by eligible resident entities
 From recognized non-resident entities
 Should conform to parameters - minimum maturity,
permitted & non-permitted end-uses, maximum all-
in-cost ceiling, etc.
 3 tracks:
 Track I: Medium term foreign cur. denominated ECB
with min. avg. maturity - 3/5 yrs
 Track II: Long term foreign cur. denominated ECB
with min. avg. Maturity - 10 yrs
 Track III: INR denominated ECB with min. avg.
Maturity - 3/5 yrs
 Some non -permitted end use of
ECB
Varies with Track I, II & III
Real estate activities
Investing in capital market
Using the proceeds for equity investment
domestically
On-lending to other entities with any of the
above objectives
Purchase of land