FINANCIAL MARKETS – MONEY MARKET & CAPITAL MARKET

The market of an economy where funds are transacted between the fund-surplus and fund-scarce
individuals and groups is known as the financial market. Basis = Dividend or Interest.

Difference between Money Market and Capital Market

Money Market Capital Market

Def Short-term financial market of an economy Long-term financial market of an economy is
where money is traded b/w individuals or known as ‘capital market’. This market makes it
groups (FIs, banks, govt, companies, etc.), possible to raise long-term money (capital), i.e.,
who are either cash-surplus or cash-scarce. for a period of minimum 365 days and above.
Trading is done on a rate (discount rate) Deals in medium- and long-term securities.
determined by market and guided by
availability of and demand for cash in day-to-
day trading
Market Informal – Both Organized & Unorganized Formal
Nature (Money lenders, indigenous bankers, etc.)
Instruments Commercial Papers, Treasury Certificate of equity shares, debentures, bonds, preference
involved Deposit, Bills, Trade Credit, etc. shares etc.
Participants Largely undertaken by institutional Stockbrokers, insurance companies,
participants – RBI, banks, FI’s, finance Commercial banks, underwriters, foreign

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 companies. Individual investors although investors, ordinary retail investors from
permitted to transact in secondary money members of the public
market, do not normally do so.
Investment In money market, transactions entail huge Investment in capital market i.e., securities does
Outlay sums of money as instruments are quite not necessarily require huge financial outlay.
expensive. Value of units of securities generally low i.e., Rs
10, Rs 100 & minimum trading lot of shares is
kept small i.e. 5, 50, 100 or so.
Liquidity Money markets are highly liquid. Capital markets are comparatively less liquid.
Discount Finance House of India (DFHI) –
established for specific objective of providing
a ready market for money market
instruments.
Risk low risk. Riskier in comparison to money markets.
Functions Increasing liquidity of funds in the economy Stabilising economy by increase in savings
served
ROI ROI is usually low in money market ROI is comparatively high in capital market
Location It has no physical location, but is an activity
conducted over the telephone and through
the internet.
Major RBI, Commercial Banks, NBFC’s, State Govts,
Participants Large Corporate Houses and Mutual Funds.

Securities are generally of three types:

1. Debt – In these, the one who takes a loan or debt agrees to repay it after a fixed duration along
with some or no interest, like government securities, T-bills, etc.
2. Equity – Money is loaned in this case too but it also offers ownership rights like shares of a
company
3. Hybrid (have features of both debt & equity)

Bill: Security (issued by RBI on behalf of govt), when it needs money for < 365 days, is termed as Bill.

Government securities issued for > 365 days are termed as bonds and when these bonds are issued at
discounted prices then they are called zero-coupon.

Note: T-Bills are debt security while shares are a type of equity security

Money Market Instruments: (Organized)

 Call money or overnight call money – lending and borrowing done on overnight basis i.e., 1 day
 Notice money – Time period here is b/w 2 – 14 days (i.e., 2 to 13 days)

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  Term money – Time period here is b/w 14 – 365 days (i.e., 15 to 364 days)

Call Money:
In the call/notice money market funds are transacted on overnight basis and under notice money
market, funds are transacted for the period between 2 days – 14 days. (Source: RBI)
- Commercial banks must maintain CRR. RBI changes CRR from time to time which affects amount of
funds available to be given as loans by commercial banks.
- Call money is a method by which banks borrow from each other to maintain CRR.
- Interest rate paid on call money loans is known as the call rate.
- It is a highly volatile rate that varies from day-today and sometimes even from hour-to-hour. Inverse
relationship b/w call rates and other short-term money market instruments such as certificates of
deposit and commercial paper.
- A rise in call money rates makes other sources of finance such as commercial paper and certificates
of deposit cheaper in comparison for banks raise funds from these sources.
Treasury Bills Certificate of Deposit
Def When bills are issued at a discounted price Negotiable unsecured (without any collateral) short term
they are known as T-Bills. Discounted price money market instrument issued in a demat (electronic) form
means the security would be issued at a or as a Usance Promissory Note against funds deposited at a
discount instead of a face value. bank or other eligible FI for a specified time period.
- T- bills are issued in form of a - These are held in Bearer Form**
promissory note. - Regulated by: RBI

Issued and Can be purchased by individuals, firms, CDs can be issued by

purchased by institutions, banks, and trusts. - SCB’s (excluding RRB’s & Local Area Banks) and DFI.
- Select All-India FIs permitted by RBI to raise short-term
resources within limit fixed by RBI.

Risk Bills are zero-risk since they are backed by

govt itself
Maturity and o Banks: The maturity period of CDs issued by banks
Presently issued in three formats –
Interest rate should not be less than 7 days and not more than one
1. 91-day T-bills year, from the date of issue.
2. 182-day T-bills o Financial Institutions (FIs): FIs can issue CDs for a
3. 364-day T-bills period not less than 1 year and not exceeding 3
T- bills are zero-coupon securities and pay no years.
interest but issued at discount and redeemed  Exception – money market, financial assets are
at face value at maturity. bought & sold for less than a year but here time
period 1 year - 3 years.
o Similar to Fixed Deposits but are negotiable and
tradable.

T-Bills can also be kept under CRR & SLR

requirements.

Commercial Bills/Bills of exchange Commercial Paper (CP)

Def According to Negotiable Instruments Act - Commercial Paper (CP) is an unsecured money market

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 1881 – Instrument in writing containing instrument issued in the form of a promissory note.
unconditional order signed by - Original purpose of commercial paper was to provide
maker (creditor), directing a certain person short-terms funds for seasonal and working capital needs.
to pay a certain sum of money only to, or to E.g., Bridge Financing***
the order of a certain person.
Eligibility requirements for companies to issue CP–
 It is a short-term, negotiable, self- - the tangible net worth of the company, as per the latest
liquidating instrument which is used audited balance sheet, is not less than Rs. 4 Crore
to finance the credit sales of firms. - company has been sanctioned working capital limit by
 When goods are sold on credit, bank/s or all-India financial institution/s; and
buyer becomes liable to pay on - borrowable account of company is classified as a
specific date in future. Seller could Standard Asset by the financing bank/s/ institution/s.
wait till specified date or use Bill of - Credit rating is required to issue CP from rating agencies
exchange. Seller (drawer) of goods like CRISIL, ICRA, FITCH, or such agency specified by RBI
draws bill and buyer (drawee)
accepts it.
 On being accepted, bill becomes a
marketable instrument and called
trade bill.
 These bills can be discounted with a
bank if seller needs funds before bill
matures.
 When a trade bill is accepted by a
commercial bank it is known as a
commercial bill.
Issued & Unlike T-Bills, are issued by financial Corporates, primary dealers (PDs) and All-India Financial
purchased by institutions, firms, or businesses in exchange Institutions (FIs) are eligible to issue CP.
for goods sold or purchased.
Maturity and CP can be issued for maturities b/w min 7 days to a max of up
Interest rate 1 year from date of issue. However, maturity date of CP
should not go beyond date up to which credit rating of issuer
is valid
- It is sold at a discount and redeemed at par.

What is a promissory note?

 When a person gives a promise in writing to pay a certain sum of money unconditionally to a certain
person or according to his order document is called is a promissory note.
 Does not require any acceptance because maker of promissory note himself promises to make
payment.
 Can be negotiable or non-negotiable
 Negotiable means creditor can ask debtor to pay amount to a third party instead of him
 It is a legal instrument defined under the Negotiable Instruments Act 1881.
 Promissory note payable to bearer is illegal as per RBI
 Payable to bearer means amount to be paid to whosoever holding promissory note
 Types of promissory note: There can be many types of promissory notes, like
 On Demand: money has to be given when demanded by the creditor
 Usance: a future date of payment is mentioned

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  Interest bearing: Interest is applicable
 Interest-free: No interest
(Note, in case of promissory note there was unconditional promise but in Commercial Bills there is an
unconditional order because here person who has given money is ordering person to whom money is
given to return his money at a specified date).

** A bearer form is a security that is not registered in the issuing corporation's books and is payable to
the person possessing the stock or bond certificate. Thus, one must possess ("bear") instrument as proof
of rightful ownership.

*** Suppose a company needs long-term finance to buy some machinery. In order to raise long term
funds in capital market company will have to incur floatation costs (costs associated with floating of an
issue are brokerage, commission, printing of applications and advertising, etc.). Funds raised through
commercial paper are used to meet floatation costs. This is known as Bridge Financing.

Capital Market
Primary Market:

1. Also known as new issues market. Deals with new securities being issued for first time.
2. Essential function is to facilitate transfer of investible funds from savers to entrepreneurs seeking to
establish new enterprises or to expand existing ones thr securities for first time.
3. Investors: banks, FI’s, insurance companies, mutual funds and individuals.
4. Forms of raising capital equity shares, preference shares, debentures, loans, and deposits.

Methods of Floatation in the primary market:

1. Offer through Prospectus: most popular method of raising funds by public companies in primary
market.

 Involves inviting subscription from public through issue of prospectus >> makes a direct appeal
to investors to raise capital, thr an advertisement in newspapers and magazines. T
 Issues may be underwritten and are required to be listed on at least 1 stock exchange.
 Contents of prospectus in accordance with Companies Act + SEBI disclosure and investor
protection guidelines.

2. Offer for Sale: Under this method securities are not issued directly to public but offered for sale thr
intermediaries like issuing houses or stockbrokers.
 Company sells securities enbloc at agreed price to brokers who, in turn, resell them to investing
public.

3. Private Placement: allotment of securities by a company to institutional investors and some selected
individuals. Helps to raise capital more quickly than a public issue.
 Access to primary market can be expensive due to mandatory and non-mandatory expenses.
 cannot afford a public issue and choose private placement.

4. Rights Issue: privilege given to existing shareholders to subscribe to new issue of shares according to
T&C of company. They are offered ‘right’ to buy new shares in proportion to number of shares they
already possess.

5. e-IPOs: A company proposing to issue capital to public thr on-line system of stock exchange has to
enter into an agreement with stock exchange. This is called IPO.

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  SEBI registered brokers must be appointed for accepting applications + placing orders with
company.
 Issuer company should appoint a registrar to issue having electronic connectivity with exchange.
Issuer company can apply for listing of its securities on any exchange other than exchange thr
which it has offered its securities.
 Lead manager coordinates all activities amongst intermediaries connected with issue.

P/E ratio: price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current
share price relative to its earnings per share (EPS).

Secondary Market: also known as stock market or stock exchange – market for purchase and sale of
existing securities. Helps existing investors to disinvest and fresh investors to enter market.
 Provides liquidity and marketability to existing securities + contributes to economic growth by
channelising funds towards most productive investments through disinvestment and
reinvestment.
 Securities are traded, cleared and settled within regulatory framework of SEBI.

Government Securities (G-secs)

- G-Secs are essentially debt instruments issued by a govt. These securities can be issued by both
central govt and state govts of India. When you invest in such options, you generally gain a regular
interest income.
- Since these products are backed by govt, risk associated with them is almost negligent.
- Two key categories are T- bills – that mature in 91 days, 182 days, or 364 days, and dated securities –
long-term instruments, which mature b/w 5 yrs - 40 yrs.
- Broadly classified into four categories: T-bills, CMBs, dated G-Secs, and SDLs.

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 T- Bills: Done
1. Cash Management Bills (CMBs)
In 2010, GOI, in consultation with RBI introduced a new short-term instrument, known as Cash
Management Bills (CMBs), to meet temporary mismatches in cash flow of GOI. CMBs have generic
character of T-bills but are issued for maturities less than 91 days.
2. State Development Loans (SDLs)
Unlike G-secs these are issued only by state govts of India to fund their activities and to satisfy their
budgetary needs >>similar to dated G-Secs.

- They support same repayment methods + wide range of investment tenures.

3. Dated G-Secs
Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) paid on face value, on
half-yearly basis. Generally, tenor of dated securities ranges from 5 years to 40 years.

Public Debt Office (PDO) of RBI acts as registry / depository of G-Secs and deals with issue, interest
payment and repayment of principal at maturity. Most dated securities are fixed coupon securities.
a. Fixed Rate Bonds –coupon rate is fixed for the entire life (i.e. till maturity) of bond. Most Govt bonds
in India are issued as fixed rate bonds.

b. Floating Rate Bonds (FRB) – FRBs are securities which do not have a fixed coupon rate. Instead, it
has a variable coupon rate re-set at pre-announced intervals.
 It can also carry coupon, with base rate plus fixed spread, to be decided by auction mechanism. The
spread will be fixed throughout tenure of bond.

c. Zero Coupon Bonds –bonds with no coupon payments. However, like T- Bills, they are issued at a
discount and redeemed at face value. GOI issued such securities in 1996 but has not issued zero
coupon bonds after that.
d. Capital Indexed Bonds – These bonds, principal of which is linked to an accepted index of inflation
with a view to protecting Principal amount of investors from inflation.
e. Inflation Indexed Bonds (IIBs) - bonds wherein both coupon flows and Principal amounts are
protected against inflation. Inflation index used in IIBs may be WPI or CPI. Globally, IIBs were first
issued in 1981 in UK.

f. Bonds with Call/ Put Options – Bonds can also be issued with features of optionality wherein
issuer can have option to buy-back (call option) or investor can have option to sell bond (put option)
to issuer during currency of bond. Such bond may have put only or call only or both options.
 Optionality on bond could be exercised after completion of 5 years tenure from date of issuance on
any coupon date falling thereafter.
 Govt has right to buy-back bond (call option) at par while investor had right to sell (put option) to
Govt at par value on any of half-yearly coupon.

g. Special Securities – Under market borrowing program, GOI issues special securities to entities like
OMC’s, Fertilizer Companies, FCI, etc. (popularly oil, fertiliser and food bonds respectively) as
compensation to these companies in lieu of cash subsidies. These are usually long dated securities
and carry marginally higher coupon over dated securities of comparable maturity.

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 Not eligible as SLR securities but eligible as collateral for market repo transactions. Beneficiaries
may divest these securities in secondary market to banks, insurance companies / Primary Dealers,
etc., for raising funds.
 GoI has also issued Bank Recapitalisation Bonds to specific PSB’s in 2018.

h. STRIPS – Separate Trading of Registered Interest and Principal of Securities – securities created by
way of separating cash flows associated with a regular G-Sec i.e., each semi-annual coupon payment
and the final principal payment to be received from issuer, into separate securities. They are
essentially Zero-Coupon Bonds (ZCBs). However, they are created out of existing securities only and
unlike other securities, are not issued through auctions. Stripped securities represent future cash
flows (periodic interest and principal repayment) of an underlying coupon bearing bond. Being G-
Secs, STRIPS are eligible for SLR. All fixed coupon securities issued by Government of India,
irrespective of the year of maturity, are eligible for Stripping/Reconstitution, provided that the
securities are reckoned as eligible investment for the purpose of Statutory Liquidity Ratio (SLR) and
the securities are transferable.

i.Sovereign Gold Bond (SGB): unique instruments, prices of which are linked to commodity price viz
Gold.
 Bonds are denominated in units of 1 gram of gold and multiples thereof. Minimum investment in
Bonds shall be one gram with a maximum limit of subscription per fiscal year of 4 kg for
individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts/university and similar
entities notified by Govt from time to time.
 Bonds shall be repayable on expiration of 8 years from date of issue of Bonds.
 Pre-mature redemption of Bond is permitted after 5th year of date of issue of Bonds.

j. 7.75% Savings (Taxable) Bonds, 2018: GOI decided to issue 7.75% Savings (Taxable) Bonds, from
2018. These bonds may be held by
(i) an individual, not NRI-in his or her individual capacity, or in individual capacity on joint basis, or in
individual capacity on any one or survivor basis, or on behalf of a minor as father/mother/legal
guardian and
(ii) a Hindu Undivided Family. There is no max limit for investment in these bonds.
 Interest on these Bonds taxable under Income Tax Act, 1961 + exempt from wealth-tax under
Wealth Tax Act, 1957. These Bonds issued at par for min ₹1,000 and multiples thereof.

Debentures and Derivatives

Debentures : debt instruments issued by a listed or non-listed firm to raise funds in a security market.
They are Redeemable, Non-redeemable, Partially Convertible and Fully Convertible.
In case of ‘fully convertible debentures’ an ‘option’ (OFCDs, i.e., Optionally Fully Convertible Debentures)
is given to debenture-holders to convert their OFCDs into shares (after expiry of ‘lock-in’ period). But
‘rate’, will be decided by company (e.g., how many shares against how many debentures).

 Redeemable Debentures: due on cessation of time either in a lump-sum or instalments during

lifetime of enterprise. These can be reclaimed either at premium or par.

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  Irredeemable Debentures: also called as Perpetual Debentures as company doesn’t give any
attempt for repayment of money acquired or borrowed by circulating such debentures.
Repayable on closing of an enterprise or on expiry (cessation) of a long period.

Derivative: product whose value is derived from value of one or more basic variables, called bases
(underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity,
forex, commodity, or any other asset.
For ex, wheat farmers may wish to sell their harvest at a future date to eliminate risk of a change in
prices by that date. Such a transaction is an example of a derivative.

NRI Bonds:
 Issued by RBI to non-resident Indians interested in investing their money in India.
 Since these offer higher returns than other similar investments, they can be used as a tool to attract
capital during times when other domestic assets fail to attract interest of foreign investors.
 Many investors view them as a safe investment as these bonds are issued by RBI.

Can NRI bonds prevent the depreciation of Rupee?

 NRI bonds could theoretically help increase demand for rupee and stabilise its value against
dollar. These were also issued in 1998 and 2000 to help curb slide of rupee.
 Actual effect of these bonds will depend on how attractive they are to NRIs.
 Also, these bonds can only provide temporary assistance to rupee by encouraging capital inflows into
economy, they may not address fundamental economic issues causing fall of rupee.
 For that, RBI will have to control domestic inflation and the government will have to take steps to
boost exports and curb imports.

Alternative Investment Funds

As per SEBI – AIF Regulations, 2012 - refer to any privately pooled investment fund, (Indian or foreign
sources), in form of a trust or company or body corporate or LLP.

e.g. Private equity or venture capital, hedge funds, real property, commodities, tangible assets

 Not include funds under SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment
Schemes) Regulations, 1999 or other regulations of Board.
 Hence, in India, AIFs are private funds not under jurisdiction of any regulatory agency.

Categories:
Category I: Invests in start- ups, SME’s, or sectors which Govt. considers economically + socially viable.
Category II: AIF such as private equity funds or debt funds for which no specific incentives or
concessions are given by govt or any other Regulator
Category III: AIF such as hedge funds or funds which trade with a view to make short term returns or
such other funds which are open ended and for which no specific incentives or concessions are given by
govt or any other Regulator.

Collective Investment Schemes

Any scheme or arrangement made or offered by any company under which the contributions, or
payments made by the investors, are pooled and utilised with a view to receive profits, income, produce

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or property, and is managed on behalf of the investors is a CIS. Investors do not have day to day control
over the management and operation of such scheme or arrangement.

Which are the schemes not treated as CIS?

1. any scheme or arrangement made or offered by a co-operative society or a society
2. any scheme or arrangement under which deposits are accepted by NBFC,
3. a contract of insurance to which the Insurance Act, applies
4. Pension Scheme or the Insurance Scheme framed under EFF Act or Miscellaneous Provisions Act,
1952
5. deposits under Companies Act, 1956, declared as a Nidhi
6. Chit business

Chit Fund
 Agreement arrived at by a group of individuals to invest a certain amount thr periodic instalments
over a specified period. Depending on form of chit fund, each subscriber is entitled to a reward sum
determined by lot, auction, or tender. Typically, prize is equal to total amount of contributions
minus a discount, which is then given as a dividend to subscribers.
 Classifying them as contracts, SC has read chit funds as being part of Concurrent List >>hence both
Centre and state can frame legislation regarding chit funds.
 Chit funds in India are managed, conducted, and regulated according to Chit Funds Act of 1982, RBI
Act of 1934, and SEBI Act of 1992 etc.
 Regulator of chit funds is Registrar of Chits appointed by respective state govts under Section 61
of Chit Funds Act.
 Functionally, Chit funds are included in definition of NBFCs by RBI under Miscellaneous Non-Banking
Company (MNBC). RBI however has not laid out any separate regulatory framework for them.
 However, RBI can provide guidance to state govts on regulatory aspects of chit Funds.
 SEBI regulates collective investment schemes. But SEBI Act, 1992 specifically excludes chit funds
from def of collective investment schemes.
 Entities such as chit funds and Nidhi companies come under jurisdiction of state govts.

There are three types of chit funds:

1) Chit funds run by state govts
 These funds are managed and regulated by state govts.
 Funds run by PSUs also belong to this class + safe and chances of loss limited. Business processes
are transparent and clean.
2) Private registered chit funds
 Registered as per Chit Funds Act of 1982. Normally floated by prominent FI’s or business houses.
 Participating in these funds is not as safe as in state govts or PSU’s.
3) Unregistered chit funds
 Not legal and participation in these is up to risk of members. Such types of chit funds are common
throughout India and are usually formed by a close group of associates.
 Participation in these funds should be avoided as disputes are subject to members’ integrity and
honesty.

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Hedge Funds & P-Notes

Participatory or P-Notes (PNs) are financial instruments issued by a registered FII to an overseas investor
who wishes to invest in Indian stock markets without registering themselves with market regulator SEBI.
Key points:

1) P-Notes are Offshore Derivative Investments (ODIs) with equity shares or debt securities as
underlying assets.
2) They provide liquidity to investors as they can transfer ownership by endorsement and delivery.
3) While FIIs have to report all such investments each quarter to SEBI, they need not disclose identity of
actual investors.

External Commercial Borrowings

1) Loan availed by an Indian entity from a non-resident lender with a minimum average maturity.
2) Most loans are provided by foreign commercial banks buyers’ credit, suppliers’ credit, securitized
instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
3) provide opportunity to borrow large volume of funds.
4) The funds are available for relatively long term.
5) Interest rates are also lower compared to domestic funds.

Regulations of RBI
- RBI kept the borrowing limit under the automatic route unchanged at $750 million per financial
year
- expanded the definition of beneficiaries eligible: port trusts, units in SEZ, microlenders, not-for-
profit companies, registered societies/trusts/cooperatives and NGO.
- EXIM and SIDBI has been allowed to borrow overseas from recognised lenders.
- previous four-tier structure replaced by two specific channels: dollar- and rupee-denominated ECBs.
- special dispensation to public sector oil marketing companies.
- minimum avg maturity period at 3 years except specifically permitted.
- if ECB is raised from a foreign equity holder and utilised for working capital, general corporate
purposes or repayment of rupee loans, the maturity period will be five years.

Masala Bond:
Masala bonds are rupee denominated bonds that is the funds would be raised from overseas market in
Indian rupees. 1st Masala Bond = World Bank backed IFC.

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Global Depository Receipts (GDRs) & American Depository Receipts

Exchange Traded Fund (ETF)

 An Exchange-Traded Fund (ETF) is a basket of securities that trade on an exchange, like a stock.
 ETF reflects the composition of an Index, like BSE Sensex. Its trading value is based on the Net
Asset Value (NAV) of the underlying stocks (such as shares) that it represents.
 ETF share prices fluctuate all day as it is bought and sold. This is different from mutual funds that
only trade once a day after the market closes.
 An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to
one particular industry or sector.
 Bond ETFs are a type of ETFs which may include government bonds, corporate bonds, and state
and local bonds—called municipal bonds. Besides being cost efficient, ETFs offer a diversified
investment portfolio to investors.

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 Features of Bharat Bond ETF

 ETF will comprise a basket of bonds issued by CPSEs, CPSUs, CPFIs, and other govt organisations.
 The unit size of the bond has been kept at just ₹1,000 so that even retail investors can invest.
 Each ETF will have a fixed maturity date and initially they will be issued in two series, of 3 years and
10 years. Each series will have a separate index of the same maturity series.
 Index will be constructed by an independent index provider – National Stock Exchange.
Benefits and significance of ETFs:

 ETFs are cost efficient. Given that they don’t make any stock (or security choices), they
don’t use services of star fund managers.
 They allow investors to avoid the risk of poor security selection by the fund manager ,
while offering a diversified investment portfolio.
 The stocks in the indices are carefully selected by index providers and are rebalanced
periodically.
 They offer anytime liquidity through the exchanges.

Angel Investors and Venture Capitalists

BASIS FOR
ANGEL INVESTOR VENTURE CAPITALIST
COMPARISON

Meaning Angel Investors are affluent individuals, who Venture Capitalist refers to an organization or a
help startup founders in starting their business part of an organization or a professional person
by infusing their money, in exchange for an who invests in budding companies, by providing
ownership stake or convertible debt. them capital, to help them grow and expand.

What is it? Individual investors, who are often successful Professionally managed public or private firm.
businessmen.

Investment Investment is made in the pre-revenue Investment is made in the pre-profitability

business. business.

Money Use their own money to make investment. Pools money from insurance companies, funds,
foundations, and corporations, to make an
investment.

Investment size Less Comparatively large

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BASIS FOR
ANGEL INVESTOR VENTURE CAPITALIST
COMPARISON

Screening Undertaken by the angel investor according to Undertaken by a team of experts or by an outside
their own experience. firm which specializes in the same.

Post Investment role Active Strategic

Stresses on Investment criteria related to ex-post Investment criteria related to initial screening of
involvement. investment opportunities.

Approach to agency Incomplete contracts approach Principal-agent approach

risk control

Credit Default Swap (CDS):

refers to a financial derivative that allows an investor to swap or offset their credit risk with that of
another investor. To swap the risk of default, the lender buys a CDS from another investor who agrees to
reimburse the lender in the case the borrower defaults.

Infrastructure Debt Fund:

IDFs are investment vehicles which can be sponsored by commercial banks and NBFCs in India in which
domestic/offshore institutional investors, specially insurance and pension funds can invest through
units and bonds issued by the IDFs.
 IDF’s act as vehicles for refinancing existing debt of infrastructure companies, thereby creating
fresh headroom for banks to lend to fresh infrastructure projects.
 IDF-NBFCs would take over loans extended to infrastructure projects which are created through
PPP route and have successfully completed one year of commercial production.
 Such take-over of loans from banks would be covered by a Tripartite Agreement between IDF,
Concessionaire and Project Authority for ensuring a compulsory buyout with termination payment
in event of default in repayment by Concessionaire.
Q.2 What legal forms can IDF be set up as and who will be the regulators?
Ans: Infrastructure Debt Funds (IDFs), can be set up either as a Trust or as a Company. A trust based IDF
would normally be a Mutual Fund (MF), regulated by SEBI, while a company based IDF would normally
be a NBFC regulated by Reserve Bank.
Q3. Who can sponsor IDF-MFs and IDF-NBFCs?
Ans: IDF-MFs can be sponsored by banks and NBFCs. Only banks and Infrastructure Finance companies
can sponsor IDF-NBFCs.

Foreign Currency convertible funds (FCCBs)

A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different
than the issuer's domestic currency. In other words, the money being raised by the issuing company is in
the form of foreign currency convertible into ordinary shares of the issuing company in any manner.

Foreign Currency Exchangeable Bond (FCEB) means a bond expressed in foreign currency, principal and
interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed

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to by a person who is resident outside India, in foreign currency and exchangeable into equity share of
another company, to be called the Offered Company, in any manner, either wholly, or partly or on the
basis of any equity related warrants attached to debt instruments.

Difference between FDI & FII

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  Top five countries for FDI inflows to India: See survey

Sectors having 100% FDI in India under autonomous route

1. May 2020: FDI limit in Defence Production has been raised to 74% from existing 49% under
Automatic Route.
2. Further, Govt inserted “National Security Clause” under which Govt reserves right to review any
foreign investment in Defence Sector that affects or may affect national security. Hence, FDI in
defence sector may now fall in three categories:
a. through automatic route up to 49 %;
b. with prior scrutiny from the national security angle between 50 and 74 %; and
c. above 74 % wherever it is likely to result in access to modern technology or for other reasons to
be recorded, and subject to scrutiny from national security angle.
3. According to guidelines foreign investment of <10% in a listed Indian Company is considered as
Portfolio Investment.
4. Foreign Investment of 10% or more in a listed Indian company is considered as FDI.
5. FDI leads to both ownership and management control of a company, while FPI provides for only
ownership in accordance with the shareholding.

FDI Limit Sector Route

100% Agriculture and allied activities: Automatic
 Floriculture, Horticulture, and Cultivation of Vegetables &
Mushrooms under controlled conditions;
 Development and Production of seeds and planting material;
 Animal Husbandry, Pisciculture, Aquaculture, Apiculture;
 Services related to agro and allied sectors
 plantation activities namely; coffee, rubber, cardamom, palm oil
tree and olive oil
100% Coal Mining Automatic
100% Defence Automatic up to 74%
Govt Route beyond 74%
26% Print Media Automatic
49% TV news
100% Airports Automatic
100% Telecom Automatic
100% Single Brand Retail Automatic

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 74% Pvt Sector Banks Automatic
20% PSB’s Automatic
74% Insurance and Pension Automatic

Gold monetization scheme:

See old CA

Securities Exchange board of India

a) SEBI is a statutory body established on April 12, 1992 in accordance with SEBI Act, 1992. Initially
SEBI was a non-statutory body without any statutory power.
b) Basic functions – to protect interests of investors in securities and to promote and regulate
securities market.
c) Before SEBI, Controller of Capital Issues was regulatory authority; it derived authority from
Capital Issues (Control) Act, 1947.
d) 1988 SEBI was constituted as regulator of capital markets under a resolution of GoI.
e) HQ of SEBI = Mumbai. Regional offices = Ahmedabad, Kolkata, Chennai and Delhi.
f) By Securities Laws (Amendment) Act, 2014, SEBI is now able to regulate any money pooling
scheme worth Rs. 100 cr. or more and attach assets in cases of non-compliance.

BSE and NSE index

BSE Ltd was established in 1875 and was Asia’s first Stock Exchange. It was granted permanent
recognition under Securities Contract (Regulation) Act, 1956.
It is known as BSE Ltd but was established as the Native Share Stockbrokers Association in 1875.

NSE: latest, most modern and technology driven exchange. It was incorporated in 1992 and was
recognised as a stock exchange in April 1993. It started operations in 1994, with trading on wholesale
debt market segment.

Credit rating agencies

 A credit rating agency (CRA) is a company that assigns credit ratings, which rate a debtor's ability
to pay back debt by timely principal and interest payments and likelihood of default.
 There are 6 credit rating agencies registered under SEBI – CRISIL, ICRA, CARE, SMERA, Fitch
India, and Brickwork Ratings.
 Set up to provide independent evidence and research-based opinion on ability and willingness of
issuer to meet debt service obligations, probability of default etc.

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