Financial Markets & Instruments

Primary Market
 The primary market is also known as new issues market.

 The transaction is conducted between the issuer and the buyer. In

short, the primary market creates new securities and offers them
to the public.

 Since the companies issue securities directly to the investors, it is

responsible to issue the security certificates too

 For instance, Initial Public Offering (IPO) is an offering of the

primary market where a private company decides to sell stocks to
the public for the first time.
 Public Issue
 As the name suggests, public issue means selling securities to the
public at large, such as IPO. It is the most vital method to sell
financial securities.
Rights Issue
 Whenever a company needs to raise supplementary equity capital,
the shares have to be offered to present shareholders on a pro-rata
basis, which is known as the Rights Issue.
Bonus Issue
 Bonus shares are additional shares given to the current
shareholders without any additional cost, based upon the number
of shares that a shareholder owns. These are company's
accumulated earnings which are not given out in the form of
dividends, but are converted into free shares.
 Private Placement
 This is about selling securities to a restricted number of classy investors
like frequent investors, venture capital funds, mutual funds, and banks
comes under Private Placement.
Preferential Allotment
 When a listed company issues equity shares to a selected number of
investors at a price that may or may not be pertaining to the market
price is known as Preferential Allotment.

 Where a Public company can issue shares through Public Issue, Private
Placement, Rights issue or Bonus issue, a Private Company may issue
shares by way of Rights issue or Bonus issue and Private Placement.

 .
Secondary Market
 The securities issued in the primary market are bought and
sold.
 Here, shares can be bought directly from a seller, the stock
exchange or broker acts as an intermediary between two
parties.
 Secondary markets help trade safely in shares as they are
regulated by the capital Market regulator, SEBI
 Secondary market is the market for outstanding securities
and enables price discovery.
 The market value of shares gives value to the Company.
Debt Market
 Debt market refers to the financial market where investors buy
and sell debt securities
 mostly in the form of bonds.
 trading (i.e. buying or selling) fixed income instruments
 These markets are important source of funds, especially in a
developing economy like India.
 India debt market is one of the largest in Asia.
 Like all other countries, debt market in India is also considered a
useful substitute to banking channels for finance.
 The Indian debt market offers a variety of debt instruments,
offered by the Government and non-Government entities
 Fixed income instruments could be securities issued by
Central and State Governments, Municipal Corporations,
Govt. Bodies or by private entities like financial institutions,
banks, corporates, etc.
 Returns are almost risk-free.
 This fixed return on the bond is often termed as the 'coupon
rate' or the 'interest rate'.
 Therefore, the buyer (of bond) is giving the seller a loan at a
fixed interest rate, which equals to the coupon rate.
 The factors that are propelling the growth of the Indian Debt
market are:
 introduction of new instruments
 increased liquidity
 deregulation of interest rates
 improved settlement systems
 The debt market in India comprises broadly two segments,
viz.,
 Government Securities Market
 Corporate Debt Market.
MAJOR PLAYERS

 State governments and Central government. The

largest segment of the Indian Debt market consists of the
Government of India securities with instrument tenors
ranging from short dated Treasury Bills to long dated
securities extending upto 30
years.(source: www.dbie.rbi.org.in)
 Non-government entities like Banks, Financial
Institutions, Insurance Companies, Mutual Funds, Primary
Dealers, Corporate entities.
Debt Instruments
There are various types of debt instruments available that one can find in Indian debt
market.
Government Securities
It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of
the Government of India. These securities have a maturity period of 1 to 30 years. G-
Secs offer fixed interest rate, where interests are payable semi-annually. For shorter
term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182
days and 364 days.
Corporate Bonds
These bonds come from PSUs and private corporations and are offered for an extensive
range of tenures up to 15 years. There are also some perpetual bonds.

Comparing to G-Secs, corporate bonds carry higher risks, which depend upon the
corporation, the industry where the corporation is currently operating, the current
market conditions, and the rating of the corporation. However, these bonds also give
higher returns than the G-Secs.
Certificate of Deposit
These are negotiable money market instruments. Certificate of
Deposits (CDs), which usually offer higher returns than Bank
term deposits, are issued in demat form and also as a Usance
Promissory Notes. There are several institutions that can issue
CDs. Banks can offer CDs which have maturity between 7 days
and 1 year.
CDs from financial institutions have maturity between 1 and 3
years. There are some agencies like ICRA, FITCH, CARE, CRISIL
etc. that offer ratings of CDs. CDs are available in the
denominations of ` 1 Lac and in multiple of that.
Commercial Paper
 This Money Market Instrument highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide
an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue
CP to enable them to meet their short-term funding requirements for their operations.

 Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP
 No. A corporate would 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. company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and
 c. the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

 All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from Credit Rating Information
Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis
and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the
Reserve Bank of India from time to time, for the purpose.
 The minimum credit rating shall be A-2 [As per rating symbol and definition prescribed by Securities and Exchange Board of India (SEBI)].
 The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for revi
 CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. However, the
maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.
CPs are issued by corporate entities at a discount to face value.
 Medium- to long-term bonds.These are issued by corporate entities/financial
institutions. They can feature fixed or floating rates.
 Call money market. This represents overnight and term money between banks and
institutions.
 Repo transactions. These represent temporary sale with an agreement to buy back
the securities at a future date at a specified price.
 Collateralized Borrowing And Lending Obligation (CBLO). CBLOs were
developed by the Clearing Corporation of India (CCIL) and Reserve Bank of India (RBI).
 It is a money market instrument that represents an obligation between a borrower and a
lender as to the terms and conditions of the loan.
 The details of the CBLO include an obligation for the borrower to repay the debt at a
specified future date and an expectation of the lender to receive the money on that
future date, and they have a charge on the security that is held by the CCIL.
 CBLOs are used by those who are heavily restricted or have
been phased out of the interbank call money market.
 The other instruments that are prevalent in the debt market
are Debentures, Secured premium notes, Deep Discount
Bonds, PSU Bonds / Tax-Free Bonds, Floating Rate Bonds,
State Government Securities, STRIPS and Interest Rate
Derivative products.
Risks
 The debt market features the usual risks associated with financial
securities like:
 Credit risk. While corporate papers carry credit risk due to
changing business conditions, government securities are perceived
to have zero credit risk. Credit Risk is the risk that the issuer will
not pay the coupon income and/ or the maturity amount on the
specified dates. Credit Ratings have been established by rating
agencies to reflect their opinion of an issuer’s ability and
willingness to do so.
 Interest rate risk. Interest rate risk is present in all debt
securities and depends on a variety of macroeconomic factors.
Interest Rate Risk is the risk that interest rates may rise, causing a
fall in value of traded debt instruments.
 Settlement risk. The risk that one party will fail to deliver
the terms of a contract with another party at the time of
settlement is called settlement risk. All debt securities are
settled within the specified duration, excepting special cases
like death of the holder, etc, in which case it may be delayed
till all the required formalities are completed.
 liquidity risk. The risk arising from the lack of possibility
to either buy or sell a security quickly as per one’s
requirement is called liquidity risk. Debt securities have
minimum liquidity risk and can be easily bought and sold
after due listing.