Unit 6

Chap 6
Financial Instruments and Financial

Services
MISSION VISION CORE VALUES

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holistic development to make effective contribution to Love of Fellow Beings
the society in a dynamic environment Social Responsibility | Pursuit of Excellence
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Deemed to be University
Coverage
● Financial Instrument
● Financial Services
● Fee Based Services
Excellence and Service

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Classification Basis of Source of Finance
● Time Period
● Source of generation
● Ownership & Control

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Financial Instrument
● Share
● Debentures
● Bonds
● Mutual Funds
● Money Market Instruments
● Derivative Instruments

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What is share
● In simple words, a share indicates a unit of ownership of the particular

company.
● If you are a shareholder of a company, it implies that you as an
investor, hold a percentage of ownership of the issuing company.
● As a shareholder you stand to benefit in the event of the company’s
profits, and also bear the disadvantages of the company’s losses.

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Characteristics of share
Face Value: -Each share has a definite face value, say Rs. 10,
Rs. 25, Rs. 100 or so. The share has a market value which may
be more or less than the face value.
Issue Value: - A Share may be issued at par (exact face Value),

at Premium (more than the face value), or at discount (less than
the face value)

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-Contd-
Paid up Value: -Shares may be fully paid-up or partly paid-up. A

company can forfeit partly paid-up shares, if calls on shares not paid in
time.
Distinctive Number: - Each share has a distinctive number. The shares

are allotted in lots say 10 shares, 50 shares, 100 shares, or so.
Ownership: -The owner of the share is called shareholder or member of

the company. The shareholders are the owners of the company.

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-contd-
Rights: -A share confers certain rights on its holder, such as right to vote
at a meeting, right to inspect books of accounts, right to receive dividend,
etc.
Proof of Title: -The title of a share is evidence by a share certificate,

issued by the company under its common seal.
Transferability: - The shares of a public limited company are freely

transferable. The equity shares of reputed companies can be easily traded
on the stock markets.

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Types of share
● Equity Share
● Preference share

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Equity share
● Equity financing or share capital is the amount raised by a particular

company by issuing shares. A company can increase its share capital
by additional Initial Public Offerings (IPOs).

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Classification of Equity share on the basis of share

Capital
• Authorized Share Capital: Every company, in its Memorandum of
Associations, requires to prescribe the maximum amount of capital
that can be raised by issuing equity shares. The limit, however, can be
increased by paying additional fees and after completion of certain
legal procedures.
• Issued Share Capital: This implies the specified portion of the

company’s capital, which has been offered to investors through
issuance of equity shares. For example, if the nominal value of one
stock is Rs 200 and the company issues 20,000 equity shares, the
issued share capital will be Rs 40 lakh.

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-Contd-
• Subscribed Share Capital: The portion of the issued capital, which

has been subscribed by investors is known as subscribed share capital.
• Paid-Up Capital: The amount of money paid by investors for

holding the company’s stocks is known as paid-up capital. As
investors pay the entire amount at once, subscribed and paid-up
capital refer to the same amount.

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Classification Of Equity Shares On The Basis Of

Definition
• Bonus Shares
• Rights Shares
• Sweat Equity Shares
• Voting And Non-Voting Shares

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Bonus share

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Bonus Shares
● Bonus share definition implies those additional stocks which are

issued to existing shareholders free-of-cost, or as a bonus.
● 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.

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Key Take Away For Bonus Share
• A bonus issue of shares is stock issued by a company in lieu of cash

dividends. Shareholders can sell the shares to meet their liquidity
needs.
• Bonus shares increase a company's share capital but not its net
assets.

Why Are Bonus Shares Issued.?
Let me try & simplify this for

you…
Let’s say a company makes Rs 1000 as
profit, Now suppose the company
has 100 shares, Then earning per share
is:-
𝑃𝑟𝑜𝑓𝑡𝑖
= Rs. 1000 = Rs. 10.
𝑛𝑜.𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 100
Suppose there is a surge in the demand

for company’s product causing its profits
to go up from Rs 1,000 to Rs 10,000.
 One should observe is that while the profit went up
from Rs 1000 to Rs 10,000 the number of shares
remains the same at 100.Hence, by definition,
earnings per share would be 100. .
 Now, as we know that Market Price = EPS x 𝑃𝐸 .If

we
were to assume a P/E of 10, the price per share
would become Rs 1000…
Here :- P = Market vale per share.
E= Earning per share.

 At a price of Rs 1000, it would be very difficult
to expect retail participation because any
investor would need a minimum of Rs 1000 to
purchase a single stock.
 But that’s quite a large amount. Say, an
investor has only Rs 500 but wants to invest in
this company. What does he do??
 Despite having the desire to buy the stock, he
will not be able to participate for want of
money.

It, therefore, becomes essential for the
company to increase the number of shares, so
that the price per share is within the reach of
retail participants.
 Let’s say the company declares a 1:4 bonus
which essentially means that for every 1 share
you get an additional 4 shares. So, in effect, you
get a total of 5 shares…
 This would increase the total number of shares
from 100 to 500.
 The earnings per share would now become EPS =
Total Earnings (or)Rs (10,000 = Rs 20)
No. of Shares 500

And that would bring down the price per
share from an unaffordable Rs 1000 to a more
amenable Rs 200 (EPS x 𝑃/𝐸 = 20 x 10)

So in other words 100 shares x 1000 = Rs
10,000 is reconfigured as 500 shares x 200 = Rs
10,000.
 This division of shares thus increases retail

participation and hence liquidity to the stock,
making it easily tradable as more buyers and
sellers are able to participate because of a lower
unit value per share.
 And our friend is also in a better position &
can buy at least two shares with his Rs 500 (2
x 200 = 400) & he will be left with Rs 100.
Thus we have seen how and why ‘Bonus Shares’

are issued in the stock market.
What can be used for issue of bonus
shares ?
 Balance in the Profit and Loss Account;
 General Reserves or other Reserves created
out of the profits;
 Realized capital profits and reserves;
 Securities Premium Account;
 Capital Redemption Reserve Account
LEGAL
REQUIREMENT’S
Bonus shares to existing

share holder’s :-
Specific prior permission from
RBI.
ADVANTAGE
S
 Remedy for under capitalization .
 Marketability of share increases .
 Maintenance of liquidity position of the
company .
 Increase in shareholders holdings and
increased investor confidence .
 Retained profits can be used for
development and expansion.
Disadvantage’s
 More costly to administer.
 EPS, MPS, declines
 Rate of dividend in future may reduce
 It may encourage speculation in shares
 Increases in capitalization which cannot be
justified until and unless there is
proportionate increase in earning capacity of
the company
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Right Shares
● Right shares meaning is that a company can provide new shares to its
existing shareholders - at a particular price and within a specific time-
period - before being offered for trading in stock markets.

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• Key points regarding right shares
● 5. A special resolution should be passed

● 1. Right shares are always issued to current regarding right issue of shares .
shareholders in proportion to theirs existing
shareholding . ● 6. There must be provision in Article of
Association regarding right issue of shares .
● 2. They are issued at discounted price
( lower than market price). ● 7. This prior right of existing shareholders
is also known as ‘ Pre-emptive right. ‘
● 3. Companies Act , 2013 ( sec. 62 ) mention
that a company can make right issue either
after the two years of registration or after
the one year of first issue of shares ,
whichever is earlier .
● 4. Only those companies ( public or

private ) which are listed on stock exchange
can make right issue Of shares .

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Process

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Advantages of Right Issue share
1. It ensures that the control of the company is preserved in the hands of the existing
shareholders.
2. The expenses to be incurred, otherwise if shares are offered to the public, are avoided
3. There is more certainty of the shares being sold to the existing shareholders.
4. It betters the image of the company and stimulates enthusiastic response from
shareholders and the investment market.
5. It ensures that the directors do not misuse the opportunity of issuing new shares to
their relatives and friends at lower prices on the one hand and on the other get more
controlling rights in the company.

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Sweat Shares
● Sweat Equity Share is defined under Section 2(88) of the Companies

Act, 2013. The sweat equity shares mean shares issued by a company
to its directors or employees for non-cash consideration or at a
discount for making rights available in the nature of intellectual
property rights or providing know-hows or any providing any value
additions in any form. Rule 8 of Companies (Share Capital and
Debentures) Rules, 2014 regulates the procedure of issue of sweat
equity shares.

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Employee Stock Option Plan
● Employee Stock Option is defined under Section 2(37) of the

Companies Act, 2013. The employees stock option means the option
provided to the directors, employees or officers of the company or its
holding or subsidiary company, which gives the right or benefit to
subscribe or purchase the shares of the company at a predetermined
price on a future date. It is issued by a company when it wants to raise
its subscribed capital. Rule 12 of Companies (Share Capital and
Debentures) Rules, 2014 regulates the procedure of the issue of
ESOP.

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ESOP Vs Sweat Equity
● ESOP VS Sweat.docx

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Voting And Non-Voting Shares
● Although the majority of shares carry voting rights, the company can
make an exception and issue differential or zero voting rights to
shareholders.

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Classification Of Equity Shares On The Basis Of

Returns
• Dividend Shares: A company can choose to pay dividends in the
form of issuing new shares, on a pro-rata basis.
• Growth Shares: These types of shares are associated with companies
that have extraordinary growth rates. While such companies might not
provide dividends, the value of their stocks increase rapidly, thereby
providing capital gains to investors.
• Value Shares: These types of shares are traded in stock markets at
prices lower than their intrinsic value. Investors can expect the prices
to appreciate over a period of time, thus providing them with a better
share price.

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Preference Shares
● These are among the next types of shares issued by a company.

Preferentiprofitsal shareholders receive preference in receiving of a
company as compared to ordinary shareholders. Also, in the event of
liquidation of a particular company, the preferential shareholders are
paid off before ordinary shareholders.

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Types of Preference Shares
● Cumulative And Non-Cumulative Preference Shares

● Participating/Non-Participating Preference Share
● Redeemable/Irredeemable Preference Shares
● Convertible/Non Convertibles Preference Shares

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Cumulative And Non-Cumulative Preference Shares
● In the case of cumulative preference shares, if a particular company

doesn’t declare an annual dividend, the benefit is carried forward to
the next financial year. Non-cumulative preference shares don't
provide for receiving outstanding dividends benefits.

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Participating/Non-Participating Preference Share
● Participating preference shares allow shareholders to receive surplus

profits, after payment of dividends by the company. This is over and
above the receipt of dividends. Non-participating preference shares
carry no such benefits, apart from the regular receipt of dividends.

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Redeemable/Irredeemable Preference Share
● A company can repurchase or claim redeemable preference share at a

fixed price and time. These types of shares are sans any maturity date.
Irredeemable preference shares, on the other hand, have no such
conditions.

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Convertible/Non-Convertible Preference Shares
• Convertible preference shares can be converted into equity shares,

after meeting the requisite stipulations by the company’s Article of
Association (AoA), while non-convertible preference shares carry no
such benefits.

BENEFITS
 Helpful in raising long-term capital for a company.
 Have first claim on profits and proceeds from the sale of the
company’s asset at the time of bankruptcy.
 Have fixed rate of dividend for fixed number of years.
 Guaranteed Rate of Return.

DRAWBACKS
 Not traded in market like ordinary shares.
 Not available to retail investors.
 Not advantageous to investors form the point of view of

control & management as preference share do not carry
voting rights.
 Cost of raising preference share capital is higher.

WHO CAN BUY PREFRENCE SHARES?
 Financial Institution.
Lending firms.
 Other investors through brokerage firm.

HOW TO SELL THESE SHARES?
 Through private placement via broker at a negotiated price.
 Price one receives depend upon financial state of the

company.
 One may have to sell at discount which is negotiated price

not the market price.
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Debts

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Debentures
● When borrowed capital is divided into equal parts, then, each part is called as a
debenture. Debenture represents debt. For such debts, company pays interest at
regular intervals. It represents borrowed capital and a debenture holder is the creditor
of the company.
●
Debenture holder provides loan to the company and he has nothing to do with the
management of the company.

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Types of Debentures
● Registered and Bearer Debentures

● Secured and Unsecured Debentures
● Redeemable And Irredeemable Debentures
● Convertible /Non Convertible Debentures

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Registered and Bearer Debentures
● This classification of debentures is made on the basis of transferability of debentures.

● Registered debentures are those in respect of which the names, addresses, and
particulars of the holdings of debenture holders are entered in a register kept by the
company. The transfer of ownership of such debentures is possible through a regular
instrument of transfer which is duly signed by the transferee and the transferor.
However, the transfers are freely allowed through the execution of a regular Transfer
Deed. Only formal approval of the Board is necessary. Interest on such debentures is
paid through interest warrants.
● Bearer debentures are transferable by mere delivery. They are freely negotiable
instruments. The company keeps no records of the debenture- holders in the case of
bearer debentures. Such debentures are similar to Share Warrants; the interest on
them is paid by means of attached coupons which encashed by the holder are as and
when cash falls due. On maturity, the principal sum of Bearer Debenture is paid back
to the holder.

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Secured and Unsecured Debentures
● This classification is made on the basis of security offered to debenture-holders.

● Secured debentures are those which are secured by some safe charge on the property
of the company. The charge or, mortgage may be “Fixed”, or, “Floating”, and thus,
there may be “Fixed Mortgage Debentures”, or, “Floating Mortgage Debentures”
depending upon the nature of charge under the category of Secured Debentures.
● Unsecured, or, Naked Debentures are those that, are secured by any charge on the
assets of the company. The holders of such debentures are like ordinary creditors of
the company. The general solvency of the company is the only security available to
unsecured or, naked debentures.

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Redeemable And Irredeemable Debentures
● This classification is made on the basis of terms of repayment.
● Redeemable Debentures are for fixed period and they provide for payment of the
principal sum on specified date, or, on demand, or, notice.
● Irredeemable Debentures are not issued for a fixed period. The issuing company
does not fix any date by which the principal would be paid back. The holders of such
debentures cannot demand payment from the company so long as it is a going
concern. Such debentures are perpetual in nature as they are payable after a long
time, or, on winding up of the company.

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Convertible And Non- Convertible Debentures
● This classification is made on the convertibility of the debentures.
● Convertible Debentures are those which are convertible into Equity Shares on maturity
as per the terms of issue. Convertible Debentures are those which are convertible into
equity shares on maturity as per the terms of issue. Convertible debentures are now
popular in our India and many companies issue convertible debentures which are
automatically converted into shares after a fixed period, or, date (usually, after three
years). The rate of exchange of debentures into shares is also decided at the time of
issue of debentures. Interest is paid on such debentures till conversion. Such debentures
are popular with the investing class.
●Non- Convertible Debentures are not convertible into Equity Shares after some period,
or, on maturity. Prior approval of the shareholders is necessary for the issue of convertible
debentures. It also requires sanction of the central government. The conversion of
debentures into shares particularly of profitable companies is always advantageous to
debenture
● holders as well as to the company.

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Demerits of Debenture
● Interest Obligatory
● High Liability
● Charged against asset
● Not good weak firms

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Merits of Debentures
● Issuing in Cheap
● No dilution
● Best for depression period

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Brain at work (Asyc Class Assignment-Research

Based)
● Why Debenture is considered good for depression period?

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Bonds

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Meaning
● Bonds refer to high-security debt instruments that enable an entity to

raise funds and fulfil capital requirements. It is a category of debt that
borrowers avail from individual investors for a specified tenure.

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Features of Bonds
● Face Value
● Interest or Coupon rate on bond
● Maturity
● Tradable

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Advantage
• Stability – Bonds are long-term investment tools that accrue assured

returns in comparison to other investment options. They provide a
low-risk avenue to investors apprehensive of the volatility of returns
from equity. Even though dividend incomes from equities are
traditionally higher than coupon returns, bonds are comparatively
inelastic as compared to cyclical market fluctuations.

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-Contd-
• Indentures – Bonds grant a legal guarantee that binds borrowers to

return the principal amount to the creditors in due time. They serve as
financial contracts which contain details such as the par value, coupon
rates, tenure, and credit ratings. Companies that attract massive
investments in their bonds are highly unlikely to default on interest
payments due to their reputation in the securities market. Besides,
bondholders precede shareholders in receiving debt repayment in the
event of an entity’s bankruptcy.

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Callable Bonds
● A callable bond, also known as a redeemable bond, is a bond that

the issuer may redeem before it reaches the stated maturity date. A
callable bond allows the issuing company to pay off their debt early.
A business may choose to call their bond if market interest rates
move lower, which will allow them to re-borrow at a more beneficial
rate. Callable bonds thus compensate investors for that potentiality
as they typically offer a more attractive interest rate or coupon rate
due to their callable nature.

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-Contd-
• Portfolio diversification – Investors massively rely on investment in

fixed-income debt instruments such as bonds to diversify their
investment portfolio as they offer superior risk-adjusted returns on
investment. Consequently, portfolio diversification reduces the
possibility of short-term losses due to increased allocation of
investment funds to fixed-income resources instead of solely
depending on equities.

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Limitation
• Inflation’s influence – Bonds are susceptible to inflation risks when

the prevailing rate of inflation exceeds the coupon rate offered by
issuers. Debt instruments which accrue fixed interests face risks of
devaluation too due to the impact of inflation on the principal value
invested.

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-Contd-
• Limited liquidity- Bonds, although tradable, are mostly long-term

investments with withdrawal restrictions on the investment amount.
Shares precede bonds in terms of liquidity, as in bonds are liable to
several fees and penalties if creditors decide to withdraw their debt
amount.

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-Contd-
• Lower returns – Issuers offer coupon rates on bonds which are

usually lower than returns on stocks. Investors receive a consistent
amount as interest over the tenure in a low-risk investment
environment. However, returns are much lower than on other debt
instruments.

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Deep Discount Bond/ Zero Coupon Bond
● A deep discount bond, also known as an accrual bond, is a debt

security that does not pay interest but instead trades at a deep
discount, rendering a profit at maturity, when the bond is
redeemed for its full face value

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Key Take Away
● Debt Security Instrument that does not pay interest

● Trade at deep discount offering profit at face value.
● Difference between face value and purchase value is return to
investor.

Mutual Funds

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Definition
● A mutual fund is a type of financial vehicle made up of

a pool of money collected from many investors to
invest in securities like stocks, bonds, money market
instruments, and other assets.
● Mutual funds are operated by professional money
managers, who allocate the fund's assets and attempt to
produce capital gains or income for the fund's
investors.
● A mutual fund's portfolio is structured and maintained
to match the investment objectives stated in its
prospectus.
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Operation Flow Chart

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Advantages
● Professional Management
● Diversification
● Convenient Administration
● Return Potential
● Low Cost
● Liquidity
● Transferability
● Flexibility
● Tax Benefit
● Well Regulated
● Capital appreciation.

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Organisation of Mutual Funds

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Ways to Earn return trough Mutual Funds
1. Income is earned from dividends on stocks and interest on bonds

held in the fund's portfolio. A fund pays out nearly all of the
income it receives over the year to fund owners in the form of
a distributions. Funds often give investors a choice either to
receive a check for distributions or to reinvest the earnings and
get more shares.
2. If the fund sells securities that have increased in price, the fund
has a capital gain. Most funds also pass on these gains to
investors in a distribution.
3. If fund holdings increase in price but are not sold by the fund
manager, the fund's shares increase in price. You can then sell
your mutual fund shares for a profit in the market.
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Types of Mutual Fund (based on Structure)
● Open Ended
● Close Ended
● Interval Funds

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Open Ender Fund
● Open ended funds allow investors to

subscribe or redeem units as per the
prevailing Net Asset Value (NAV) on a
continuous basis. Basically, what you get
with open ended funds is liquidity and
flexibility of time.

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● Under close-ended schemes, there is no repurchase

facility.
● However, the Units are listed in the stock market and
investors can sell and buy Units like any other
securities in the market.
● The scheme has a `specific life (say 10 years or 5
years) and at the end of the period, the mutual fund
sells securities bought under the scheme and disburses
the proceeds to Unit holders.

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Interval Funds
● Interval funds combine the features of

open-ended and close-ended schemes.
They are open for sale or redemption
during pre-determined intervals at NAV
related prices.

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Based on Investment Objective
● Growth Fund
● Income Fund
● Balanced Fund
● Money Market Fund
● Unit Linked Fund
● Tax Saving Scheme
● Special Schemes

Financial Service

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Fund Based Service
● Leasing
● Hire purchase
● Consumer Credit
● Bill Discounting
● Factoring
● Insurance

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Leasing
● A lease is a contract under which one party, the lessor

(owner of the asset), gives another party (the lessee)
the exclusive right to use the asset, usually for a
specified time in return for the payment of rent.
● Leasing is the process by which a firm can obtain the

use of certain fixed assets for which it must make a
series of contractual, periodic, tax-deductible
payments. A lease is a contract that enables a lessee to
secure the use of the tangible property for a specified
period by making payments to the owner.
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Features of Leasing
1. The Contract: There are essentially two parties to a contract of

lease financing, namely the owner and the user.
2. Assets: The assets, property to be leased are the subject matter
lease financing contract.
3. Lease Period: The basic lease period during which the lease is
non-cancelable.
4. Rental Payments: The lessee pays to the lessor for the lease
transaction is the lease rental.
5. Maintain: Provision for the payment of the costs of maintenance
and repair, taxes, insurance, and other expenses appertaining to
the asset leased.
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-Contd-
6. Term of Lease: The term of the lease is the period for

which the agreement of lease remains in operation.
7. Ownership: During the lease period, ownership of the assets is
being kept with the lessor, and its use is allowed to the
lessee.
8. Terminating: At the end of the period, the contract may be
terminated.
9. Renew or Purchase: An option to renew the lease or to
purchase the assets at the end of the basic period.
10. Default: The lessee may be liable for all future payments at
once, receiving title to the asset in exchange.
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Advantages (Point of view of lessee)
● Saving of Capital
● Flexibility and Convenience
● Planning Cash Flows
● Improvement in Liquidity
● Shifting of Risk of Obsolescence
● Maintenance And Specialized Services
● Off-the-Balance-Sheet-Financing

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Advantages (Point of view of lessor)
● High Profit
● Tax Benefit
● Quick Returns

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Disadvantages(lessee)
1. Higher Cost: The lease rental includes a margin for the

lessor as also the cost of risk of obsolescence; it is, thus,
regarded as a form of financing at a higher cost.
2. Risk: Risk of being deprived of the use of assets in case
the leasing company winds up.
3. No Alteration in Asset: Lessee cannot make changes in
assets as per his requirement.
4. Penalties On Termination of Lease: The lessee has to
pay penalties in case he has to terminate the lease
before the expiry lease period.
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Disadvantages(lessor)
1. High Risk of Obsolescence: The Lessor has to bear the

risk of obsolescence as there are rapid technological
changes.
2. Price Level Changes: In the case of inflation, the
prices of an asset rise, but the lease rentals remain
fixed.
3. Long term Investment: Leasing requires the long term
investment in the purchase of an asset and takes a long
time to cover the cost of that asset

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Types of Lease
● Operating Lease
● Financial Lease

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Operating Lease
● An operating lease is a cancellable contractual

agreement whereby the lessee agrees to make
periodic payments to the lessor, often for 5 or
fewer years, to obtain an asset set’s services.
According to the International Accounting
Standards (IAS-17), an operating lease is one
that is not a finance lease.

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Financial Lease
● A financial (or capital) lease is a longer-term lease than

an operating lease that is non-cancelable and obligates
the lessee to make payments for the use of an asset
over a predetermined .period of time.
● According to the International Accounting Standard
(IAS-17), in a financial lease, the lessor transfer to the
lessee substantially all the risks and rewards identical
to the ownerships of the asset whether or not the title is
eventually transferred.

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Distinguish between the Operating and Financial Lease
Topics Operating Lease Financial Lease
An operating lease is short term lease used to A financial lease is the lease used in connection with long-
Definition finance assets & is not fully amortized over the life term assets & amortizes the entire cost of the asset over
of the asset. the life of the lease.
Duration Short term leasing Long term leasing
Cost The lessor pays the maintenance cost. Lessee pays the maintenance cost.
Cancelable lease & It is a changeable lease Non-cancelable lease & It is not a changeable lease
Cancel & Changeable
contract. contract.
Risk lessor bears the risk of the asset. The lessee bears the risk of the asset.
Purchase At the end of the asset is hot purchasable. At the end of the contract, the asset is purchasable.
Renew It is a renewable contract. It is not a renewable contract.
Also called Service lease, short term lease, cancelable lease. A capital lease, long term lease, non-cancelable lease.

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Hire Purchase
● Hire purchase is a method of financing of

the fixed asset to be purchased on future
date. Under this method of financing, the
purchase price is paid in instalments.
Ownership of the asset is transferred after
the payment of the last instalment.

CHRIST
Features
 The hire purchaser becomes the owner of the

asset after paying the last instalment.
 Every instalment is treated as hire charge for
using the asset.
 Hire purchaser can use the asset right after
making the agreement with the hire vendor.
 The hire vendor has the right to repossess the
asset in case of difficulties in obtaining the
payment of instalment.
 Rental payments are paid in instalments over the
period of the agreement.

CHRIST
-Contd-
 Each rental payment is considered as a charge for hiring the

asset. This means that, if the hirer defaults on any payment, the
seller has all the rights to take back the assets.
 All the required terms and conditions between both the parties
involved are documented in a contract called Hire-Purchase
agreement.
 The frequency of the instalments may be annual, half-yearly,
quarterly, monthly, etc. according to the terms of the agreement.
Assets are instantly delivered to the hirer as soon as the
agreement is signed.

CHRIST
-Contd-
 If the hirer uses the option to purchase, the assets are passed to him after the
last installment is paid.
 If the hirer does not want to own the asset, he can return the assets any time
and is not required to pay any installment that falls due after the return.
 However, once the hirer returns the assets, he cannot claim back any payments
already paid as they are the charges towards the hire and use of the assets.
 The hirer cannot pledge, sell or mortgage the assets as he is not the owner of
the assets till the last payment is made.
 The hirer, usually, pays a certain amount as an initial deposit / down payment
while signing the agreement.
 Generally, the hirer can terminate the hire purchase agreement any time before
the ownership rights pass to him.

CHRIST
Advantage
 Financing of an asset through hire purchase is very easy.
 Hire purchaser becomes the owner of the asset in future.
 Hire purchaser gets the benefit of depreciation on asset
hired by him/her.
 Hire purchasers also enjoy the tax benefit on the interest
payable by them.
 Immediate use of assets without paying the entire
amount.
 Expensive assets can be utilized as the payment is
spread over a period of time.
 Fixed rental payments make budgeting easier as all the
expenditures are known in advance.

CHRIST
Disadvantage
 Ownership of asset is transferred only after the payment of the last installment.
 The magnitude of funds involved in hire purchase are very small and only
small types of assets like office equipment’s, automobiles, etc., are purchased
through it.
 The cost of financing through hire purchase is very high.
 The addition of any covenants increases the cost.
 If the hired asset is no longer needed because of any change in the business
strategy, there may be a resulting penalty.
 Total amount paid towards the asset could be much higher than the cost of the
asset due to substantially high-interest rates.

CHRIST
Term Used for Hire Purchase
 Hire Purchaser: He is buyer in hire purchase

agreement.
 Hire Vendor: He is seller in a hire purchase agreement.
 Cash Price: It is the amount to be paid for outright
purchase in cash.
 Down Payment: It is the of initial payment payable by
the hire purchaser at the time of entering into a hire
purchase agreement.
 Hire Purchase Price: It is the total amount payable by
the hire purchasers to the hire vendor of goods are
purchased under the hire purchase system.

CHRIST
Suitability
● Small scale companies and entrepreneurs can

benefit from Hire Purchase. Expensive and
important assets can be hired and later owned.
This ensures that they can start using the asset
from very first day and use the money earned to
later buy the same assets.

CHRIST
Consumer Credit
● Consumer credit is personal debt taken on to purchase

goods and services. A credit card is one form of
consumer credit.
● Although any type of personal loan could be labeled
consumer credit, the term is more often used to
describe unsecured debt that is taken on to buy
everyday goods and services. However, consumer debt
can also include collateralized consumer loans like
mortgage and car loans.
● Consumer credit is also known as consumer debt.

CHRIST
Type of Consumer Credit
● Instalment Credit
● Revolving Credit

CHRIST
Advantages
● Consumer credit allows consumers to get an advance

on income to buy products and services. In an
emergency, such as a car breakdown, that can be a
lifesaver. Because credit cards are relatively safe to
carry, America is increasingly becoming a cashless
society in which people routinely rely on credit for
purchases large and small.
● Revolving consumer credit is a highly lucrative
industry. Banks and financial institutions, department
stores, and many other businesses offer consumer
credit.
CHRIST
Disadvantages
● The main disadvantage of using

revolving consumer credit is the cost to
consumers who fail to pay off their entire
balances every month and continue to accrue
additional interest charges from month to
month.

CHRIST
Bill Discounting
● Bill discounting, also known as invoice discounting or invoice

financing, is a financing arrangement where a business sells its
unpaid invoices to a financial institution at a discounted rate.
● The business receives immediate funds, usually a percentage of
the invoice value, while the financial institution assumes the
right to collect the full payment from the debtor.
● Bill discounting allows businesses to address immediate cash
flow needs without waiting for their customers to make the
payment.

CHRIST
Process of Bill Discounting
● The business delivers goods or services to its customers and generates

an invoice.
● The business approaches a financial institution, such as a bank or a
non-banking financial company (NBFC), for bill discounting.
● The financial institution evaluates the creditworthiness of the business
and the debtor.
● If approved, the financial institution purchases the invoice from the
business at a discount.
● The financial institution provides immediate funds to the business,
usually a percentage of the invoice value.
● The business retains the responsibility of collecting the payment from
the debtor within the specified period.
● Once the debtor pays the invoice, the business repays the financial
institution the discounted amount
CHRIST
Factoring
● Factoring, on the other hand, involves a broader range of services

beyond financing. It is a financial arrangement where a business sells
its accounts receivable to a third-party known as a factor.
● The factor purchases the receivables at a discounted rate and assumes
responsibility for collecting the payments from the debtors.
● Factoring includes not only financing but also services such as credit
checks, collections, and bookkeeping.

CHRIST
Factoring
● The business delivers goods or services to its customers and generates

an invoice.
● The business enters into a factoring agreement with a factor.
● The factor assesses the creditworthiness of the business and the
debtors.
● The factor purchases the accounts receivable from the business at a
discount.
● The factor provides immediate funds to the business, usually a
percentage of the accounts receivable value.
● The factor assumes the responsibility of collecting the payments from
the debtors.
● The factor may provide additional services such as credit checks,
collections, and bookkeeping.
● Once the debtors pay the invoices, the factor deducts its fees and
returns the remaining amount to the
Excellence business.
and Service
CHRIST
Natu of Transaction Short-term financing against Sale of accounts receivable or

the discounted value of a bill invoices to a third-party
of exchange or promissory (factor) at a discount
note
Parties Involved Involves the drawer of the Involves the seller (client),
bill (seller), the drawee the buyer (debtor), and the
(buyer), and a financing factor (financing company)
institution
Financing Provides immediate cash Provides immediate cash
flow by receiving a flow by selling invoices or
discounted value of the bill accounts receivable to the
from the financing institution factor
Ownership of Receivables The seller retains ownership The factor takes ownership of
of the bill and is responsible the accounts receivable and is
for collecting payment from responsible for collecting
the buyer payment

CHRIST
Risk and Responsibility The seller remains The factorDeemed
assumes the risk
to be University
responsible for credit risk, of non-payment and is

collection, and credit responsible for credit
control control and collection
Invoice Verification The financing institution The factor verifies the
generally verifies the authenticity and validity of
authenticity and acceptance the invoices
of the bill
Use of Collateral Collateral may or may not Collateral may or may not
be required, depending on be required, depending on
the creditworthiness of the the creditworthiness of the
drawer and the buyer invoices
Relationship with Buyer The seller maintains a The factor may establish a
direct relationship with the direct relationship with the
buyer, who is obligated to buyer for payment
pay the bill collection

CHRIST
Insurance
● epresented in a form of policy, Insurance is a contract in which the

individual or an entity gets the financial protection, in other words,
reimbursement from the insurance company for the damage (big or
small) caused to their property.
● The insurer and the insured enter a legal contract for the insurance
called the insurance policy that provides financial security from the
future uncertainties.

CHRIST
Principle of Insurance
● Utmost Good Faith

● Proximate Cause
● Insurable Interest
● Indemnity
● Subrogation
● Contribution
● Loss Minimization

CHRIST
Types Of Insurance
There are two broad categories of insurance:

1. Life Insurance
2. General insurance

CHRIST
Life Insurance
● The insurance policy whereby the policyholder (insured) can ensure

financial freedom for their family members after death. It offers
financial compensation in case of death or disability.

CHRIST
Classification of Life Insurance
● Term Insurance: Gives life coverage for a specific time

period.
● Whole life insurance: Offer life cover for the whole
life of an individual
● Endowment policy: a portion of premiums go toward
the death benefit, while the remaining is invested by
the insurer.
● Money back Policy: a certain percentage of the sum
assured is paid to the insured in intervals throughout
the term as survival benefit.

CHRIST
-Contd-
● Pension Plans: Also called retirement plans are a

fusion of insurance and investment. A portion from the
premiums is directed towards retirement corpus, which
is paid as a lump-sum or monthly payment after the
retirement of the insured.
● Child Plans: Provides financial aid for children of the
policyholders throughout their lives.
● ULIPS – Unit Linked Insurance Plans: same as
endowment plans, a part of premiums go toward the
death benefit while the remaining goes toward mutual
fund investments.
CHRIST
General Insurance
● Everything apart from life can be insured under

general insurance. It offers financial compensation on
any loss other than death.
● General insurance covers the loss or damages caused
to all the assets and liabilities.
● The insurance company promises to pay the assured
sum to cover the loss related to the vehicle, medical
treatments, fire, theft, or even financial problems
during travel.

CHRIST
Types of General Insurance
● Health Insurance: Covers the cost of medical care.

● Fire Insurance: give coverage for the damages caused
to goods or property due to fire.
● Travel Insurance: compensates the financial liabilities
arising out of non-medical or medical emergencies
during travel within the country or abroad
● Motor Insurance: offers financial protection to motor
vehicles from damages due to accidents, fire, theft, or
natural calamities.
● Home Insurance: compensates the damage caused to
home due to man-made disasters, natural calamities, or
other threats Excellence and Service
Fee Based Services

CHRIST
Fee Based Financial Service
● Merchant Banking,
● Issue Management,
● Credit rating,
● Debt Restructuring
● Depository Services
● Stock Broking

CHRIST
Merchant Bank
●A merchant bank is a financial institution that conducts

underwriting, loan services, financial advising, and
fundraising services for large corporations and high-net-
worth individuals *HNWI).
●Merchant banks specialize in providing services for

private corporations.

CHRIST
-Contd-
● Unlike retail or commercial banks, merchant banks do not typically

provide financial services to the general public.
● Unlike investment banks, they focus on private companies not public
companies.
● Examples of large merchant banks include JPMorgan Chase,
Goldman Sachs, and Citigroup.

CHRIST
Functions
●Corporate counseling
● Project Counseling
●Capital Structuring
●Portfolio Management
●Issue Management
●Credit Syndication
●Working capital
●Venture Capital
●Lease Finance
●ØFixed Deposits

CHRIST
Other Functions
● Treasury Management- Management of short

term fund requirements by client companies.
● •Stock broking- helping the investors through a
network of service units
● •Servicing of issues- servicing the shareholders
and debenture holders in distributing
● dividends, debenture interest.
● •Small Scale industry counseling- counseling
SSI units on marketing and finance
CHRIST
-Contd-
● Equity research and investment counseling –merchant

banker plays an important role in providing equity
research and investment counseling because the
investor is not in a position to take appropriate
investment decision.
● •Assistance to NRI investors - the NRI investors are
brought to the notice of the various investment
opportunities in the country.
● •Foreign Collaboration: Foreign collaboration
arrangements are made by the Merchant bankers.

CHRIST
Issue Management
● Issue Management: Management of issues refers to effective

marketing of corporate securities viz., equity shares, preference
shares and debentures or bonds by offering them to public.
● Merchant banks act as intermediary whose main job is to
transfer capital from those who own it to those who need it.
● The issue function may be broadly divided in to pre issue and
post issue management.
● a. Issue through prospectus, offer for sale and private
placement.
● b. Marketing and underwriting
● c. pricing of issues

CHRIST
-Contd-
● The function of capital issues management in India is carried out by

merchant bankers.
● The funds are raised by companies to finance new projects, expansion
/ modernization/ diversification.
● Issue are through

i)Public Issue
ii)Right Issue
iii)Private Placement

CHRIST
Issue Management Activities
● Pre Issue Activities

● Post Issue Activities

CHRIST
Pre Issue Activities
● Issue of share
● Marketing , Coordinating and Underwriting of Issue
● Pricing of Issue

CHRIST
Post Issue Activities
● Collection of Issue form and amount

● Scrutinizing Application
● Deciding Allotment
● Mailing share certificate refund or allotment otders.

CHRIST
Example-LIC IPO –Merchant Bankers
● SBI Capital
● Goldman Sachs
● JP Morgan
● Citigroup
● JM Financial
● Bank of America
● ICICI Securities
● Kotak Mahindra Capital
● Nomura
● Axis Capital

CHRIST
Credit Rating
● Definition: Credit rating is an analysis of the

credit risks associated with a financial
instrument or a financial entity. It is a rating
given to a particular entity based on the
credentials and the extent to which the financial
statements of the entity are sound, in terms of
borrowing and lending that has been done in the
past.

CHRIST
CHARACTERISTICS OF CREDIT RATING
● 1. Assessment of issuer's capacity to repay. It assesses issuer's

capacity to meet its financial obligations i.e., its capacity to pay
interest and repay the principal amount borrowed.
● 2. Based on data. A credit rating agency assesses financial
strength of the borrower on the financial data.
● 3. Expressed in symbols. Ratings are expressed in symbols e.g.
AAA, BBB which can be understood by a layman too.
● 4. Done by expert. Credit rating is done by expert of reputed,
accredited institutions.
● 5. Guidance about investment-not recommendation. Credit
rating is only a guidance to investors and not recommendation
to invest in any particular instrument.
CHRIST
Function
●It provides unbiased opinion to investors

●Provide quality and dependable information.
●Provide information in easy to understand
language
●Provide information free of cost or at nominal
cost.
●Helps investors in taking investment decisions.
●Disciplines corporate borrowers
●Formation of public policy on investment

CHRIST
Benefits of Credit Rating
● A. Benefits to investors.
● B. Benefits to the rated company.
● C. Benefits to intermediaries.
● D. Benefits to the business world

CHRIST
Benefits to Investors
● Assessment of Risk
● Information at low Cost
● Advantage of continuous monitoring
● Provides the investors a choice of
Investment.
● Ratings by credit rating agencies is dependable

CHRIST
Benefits to Company
● Ease in borrowings
● Borrowing at cheaper rates.
● Facilitates growth.
● Recognition of lesser known companies
● Adds to the goodwill of the rated company
● Imposes financial discipline on borrowers

CHRIST
Benefits to Business world
● Increase in investor population.

● Guidance to foreign investors.

CHRIST
BENEFITS TO INTERMEDIARIES
● Merchant bankers' and brokers' job made

easy.

CHRIST
Credit rating Agencies
• Credit Rating Information Services of India Limited (CRISIL)

• Investment Information and Credit Rating Agency of India
Limited (ICRA)
• Credit Analysis & Research (CARE)
• Onida Individual Credit Rating Agency of India (ONICRA)
• Fitch India.
• Brickwork Ratings (BWR)

CHRIST
Debt Restructuring
● Debt restructuring is a process used by

companies, individuals, and even countries to
avoid the risk of defaulting on their existing
debts, such as by negotiating lower interest
rates. Debt restructuring provides a less
expensive alternative to bankruptcy when a
debtor is in financial turmoil, and it can work
to the benefit of both borrower and lender.

CHRIST
Depository Services
● Depository is an institution or organisation, which holds securities

(e.g. s
hares, debentures , bonds, etc) in electronic form, in which trading is
done.
Depositories provide following services :
(i) Maintain records of shareholding in electronic form.
(ii) Enables deposit and withdrawal of securities and from the depository
through the process of dematerlisation and rematerialisation.
(iii) It effects the transfer of securities traded in the depository mode on a

stock exchange.
CHRIST
Types of central depositories in India
● In India, there are two central depositories, namely.
● NSDL (National Security Depository Limited)

● CSDL (Central Depository Services Limited)

CHRIST
NSDL
● NSDL is India’s primary & biggest depository founded on 8 August

1996, which is developed mainly to manage securities held in the
Indian economy in a Demat form. Every day the NSDL introduces an
average of 3602 accounts.
● Industrial Development Bank of India (IDBI), Unit Trust of India

(UTI), and National Stock Exchange ( NSE) are promoting NSDL.

CHRIST
Benefit
● Given the significant financial stakes in NSDL exchanges,

safeguarding measures are imperative.
● The depository system implements various security protocols for
stakeholders.
● SEBI ensures only reputable entities participate.
● Transactions are meticulously recorded in NSDL's central and
partners' databases.
● Depository participants furnish investors with regular account
statements for oversight.
● NSDL conducts routine inspections of participants and Registrar &
Transfer agents..

CHRIST
CDSL
● The Central Depository Services Limited, or CDSL, is an Indian

central securities depository. To provide depository services to the
Indian securities market, it was founded in 1999.
● Dematerialization of securities—converting physical securities into

electronic form—and dematerialization—converting electronic
securities back into physical form—are services that CDSL provides.

CHRIST
Difference Between NSDL &CDSL

Particulars NSDL CSDL
Stock Exchange NSE BSE
Establishment Date 1996 1998
Market Share More Comparatively less
Depository Participant More Comparatively less
DEMAT Account Number The NSDL code is a 14- The CDSL DEMAT account
Format character numeric code that number is a numeric code of 16
begins with IN digits.

CHRIST
Depository Participants
● A depository participant in India refers to a stockbroker or agent

registered with a depository. They should fulfill the minimum net
worth criteria as instructed by the Securities and Exchange Board of
India (SEBI) and the respective depositories. They act as an
intermediary between the depository and investors.

CHRIST

CHRIST
Role
● Digitised Convenience: In the past, trading involved significant

paperwork. With depository participants, all these processes are
digitized, making asset management and trading convenient.
● Enhanced Security: Electronic execution of processes by depository
participants enhances security, eliminating concerns about physical
asset loss or theft.
● Speedy Transactions: The transparent and efficient operations of
depository participants expedite the buying, storing, and trading of
assets, compared to traditional methods.
● Efficient Management of Bulk: With online operations, depository
participants efficiently manage transactions with a multitude of
investors, ensuring smooth processes.

CHRIST
Stock Broking
● Is a service provided by individual or a firm stockbroker is a

financial professional who executes orders in the market on behalf
of clients. A stockbroker may also be known as a registered
representative (RR) or an investment advisor.

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Chap 6

Financial Instruments and Financial

MISSION VISION CORE VALUES

Excellence and Service

Classification Basis of Source of Finance

Excellence and Service

Excellence and Service

● In simple words, a share indicates a unit of ownership of the particular

Excellence and Service

Issue Value: - A Share may be issued at par (exact face Value),

Excellence and Service

Paid up Value: -Shares may be fully paid-up or partly paid-up. A

Distinctive Number: - Each share has a distinctive number. The shares

Ownership: -The owner of the share is called shareholder or member of

Excellence and Service

Proof of Title: -The title of a share is evidence by a share certificate,

Transferability: - The shares of a public limited company are freely

Excellence and Service

Excellence and Service

● Equity financing or share capital is the amount raised by a particular

Excellence and Service

Classification of Equity share on the basis of share

• Issued Share Capital: This implies the specified portion of the

Excellence and Service

• Subscribed Share Capital: The portion of the issued capital, which

• Paid-Up Capital: The amount of money paid by investors for

Excellence and Service

Classification Of Equity Shares On The Basis Of

Excellence and Service

Excellence and Service

● Bonus share definition implies those additional stocks which are

● Bonus shares are additional shares given to the current shareholders

Excellence and Service

Key Take Away For Bonus Share

• A bonus issue of shares is stock issued by a company in lieu of cash

Excellence and Service

Let me try & simplify this for

Suppose there is a surge in the demand

 Now, as we know that Market Price = EPS x 𝑃𝐸 .If

Here :- P = Market vale per share.

E= Earning per share.

 This division of shares thus increases retail

Thus we have seen how and why ‘Bonus Shares’

Bonus shares to existing

Excellence and Service

• Key points regarding right shares

● 5. A special resolution should be passed

● 4. Only those companies ( public or

Excellence and Service

Excellence and Service

Advantages of Right Issue share

Excellence and Service

● Sweat Equity Share is defined under Section 2(88) of the Companies

Excellence and Service

Employee Stock Option Plan

● Employee Stock Option is defined under Section 2(37) of the

Excellence and Service

ESOP Vs Sweat Equity

Excellence and Service

Voting And Non-Voting Shares

Excellence and Service

Classification Of Equity Shares On The Basis Of

Excellence and Service

● These are among the next types of shares issued by a company.