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FINANCIAL SYSTEM

IT INCLUDES A COMPLEX OF
INSTITUTIONS & MECHANISM WHICH IS
MADE OF ALL THOSE CHANNELS
THROUGH WHICH SAVINGS BECOME
AVAILABLE FOR INVESTMENTS.
FOLLOWING ARE THE ELEMENTS :-
FINANCIAL INSTRUMENTS
FINANCIAL INTERMEDIARIES
FINANCIAL MARKETS

FINANCIAL INSTRUMENTS
FINANCIAL ASSET REPRESENTS A CLAIM TO
FUTURE CASH FLOWS IN THE FORM OF
INTEREST,DIVIDENDS.
VARIOUS FINANCIAL INSTRUMENTS ARE:-
DEBT(BONDS,DEBENTURES,TERM LOANS)
EQUITY SHARES
HYBRID SECURITY(PREFERENCE SHARES &
CONVERTIBLES)
BASED ON TYPE OF ISSUER:-
DIRECT
INDIRECT
DERIVATIVE

FINANCIAL INTERMEDIARIES
ARE INSTITUTIONS THAT CHANNELISE THE
SAVINGS OF INVESTORS INTO
INVESTMENTS.
MAIN FUNCTION IS TO CONVERT DIRECT
FINANCIAL ASSETS INTO INDIRECT
SECURITIES.
FOLLOWING ARE BENEFITS FOR THE
INVESTORS:-
CONVENIENCE
LOWER RISK
EXPERT MANAGEMENT
LOW COST
FINANCIAL MARKETS
PROVIDE A FORUM IN WHICH
SUPPLIERS OF FUNDS & DEMANDERS
OF LOANS CAN TRANSACT DIRECTLY.
THE TWO KEY FINANCIAL MARKETS
ARE:-
1. MONEY MARKET
2. CAPITAL MARKET
MONEY MARKET
SHORT TERM FUNDS WHICH HAVE
MATURITIES OF 1 YEAR OR LESS.
IDLE FUNDS TO BE PLACED IN SOME
TYPE OF SHORT TERM INTEREST
EARNING INSTRUMENTS AT THE SAME
TIME OTHER ENTITIES FIND
THEMSELVES IN NEED OF TEMPORARY
FINANCING.
CAPITAL MARKET
LONG TERM FUNDS HAVING MATURITY
EXCEEDING 1 YEAR.
BACKBONE OF THIS MARKET IS FORMED
BY VARIOUS SECURITIES EXCHANGES
THAT PROVIDE FORUM FOR EQUITY &
DEBT MARKET.
IT COMPRISES OF :-
NEW ISSUE (PRIMARY MARKET)
STOCK/SECURITY EXCHANGE(SECONDARY
MARKET)

RELATIONSHIP BETWEEN
NIM & STOCK EXCHANGE
NIM STOCK EXCHANGE

TYPES OF SECURITIES
NEW SECURITIES

NATURE OF FINANCING
DIRECT

ORGANISTIONAL DIFFERNCES
NO GEOGRAPHICAL
EXISTENCE
NO TANGIBLE FORM
NO CENTRALISED CONTROL


OLD SECURITIES


INDIRECT


GEOGRAPHICAL EXISTENCE
TANGIBLE FORM
CENTRALISED CONTROL
FUNCTIONS OF NEW ISSUES/PRIMARY MARKET
ORIGINATION
UNDERWRITING
DISTRIBUTION
FUNCTIONS OF SECONDARY MARKET/STOCK
EXCHANGES
NEXUS BETWEEN SAVINGS &
INVESTMENT
MARKET PLACE
CONTINUOUS PRICE FORMATION
ISSUE MECHANISM
PUBLIC ISSUE THROUGH PROSPECTUS
TENDER/BOOK BUILDING METHOD
OFFER FOR SALE
PLACEMENT METHOD
PLACING OF SECURITIES
RIGHTS ISSUE
EQUITY/ORDINARY SHARES
Equity/ordinary share capital, as a long term
source of finance, represents ownership of
capital/securities & its owners. Equity/ordinary
shareholders share the reward and risk
associated with the ownership of corporate
enterprises.
Types
Authorized
Issued
Subscribed
Paid-up
FEATURE OF EQUITY/ORDINARY SHARES
Residual claim to income
Residual claim on assets
Right to control
Pre-emptive right
Limited liability
TERM LOANS
Term loans are negotiated loans between the
borrowers & the lenders with a maturity of upto
10 years. They are employed to finance
acquisition of fixed assets & working capital
margin. They are also known as term/project
finance.
Features of term loans
Maturity
Negotiated
security
Term Loan
Procedure
Promoters
background
Particulars of
the industrial
concern
Particular
s of the
project
Cost of
the project
Means of
financing
Marketin
g and
selling
arrangem
ents
Profitabilit
y and
cash flow
Economic
consideration
Governme
nt
sanctions
DEBENTURES/BONDS/NOTES
Debentures/Bond is a debt instrument

Trust(bond) indenture is a complex legal
document

Fixed rate of interest

A company can choose the maturity period
INNOVATIVE DEBT INSTRUMENTS

Zero Interest Bonds/Debentures: ZIB do not
carry any rate of interest. They are sold at a
discount from their maturity value
Deep Discount Bond : DDB is a form of ZIB.
It is issued at a deep discount over its face
value
Secured Premium Notes: SPN is a secured
debenture redeemable at a premium over the
face value
SECURITISATION

The process through which an issuer creates a financial instrument by
combining other financial assets and then marketing different tiers of the
repackaged instruments to investors. The process can encompass any
type of financial asset and promotes liquidity in the market. The
essential features of securitization are :-
1) the sale proceeds are available to the Originator of the transaction(i.e.
the seller) immediately
2) the assets are taken off the Originators books and are not available
to the Originators creditors in the event of his bankruptcy
3) can have higher credit ratings than the Originators , depending on the
quality of assets securitized and credit enhancements made available
THE DIFFERENT ENTITIES
Originator: The original lender is called the originator. It is the entity on
whose books the assets to be securitized exist. Typically, the Originator
is a bank, a Non-banking finance company(NBFC), a housing finance
company or, occasionally even a manufacturing/service company.
Special Purpose Vehicle: SPVs are companies with small capital, or
sometimes trusts, formed for the specific purpose of issuing securities in
securitization transactions whose ownership and management are
independent of the Originator. In order to ensure that the assets actually
achieve the bankruptcy remoteness, it is essential to move them out of
the balance sheet of the Originator and park them with another
independent entity.
Obligor The Obligor(s): The Obligor is the Originators debtor (borrower
of the original loan).The amount outstanding from the Obligor is the
asset that is transferred to the SPV. The credit standing of the Obligor(s)
is of paramount importance in a securitization transaction
Servicer: The servicer collects the moneys due from individual
borrowers in the pool, makes payouts to the investors and follows up on
delinquent accounts. The servicer also furnishes periodic information to
the rating agency and the trustee on pool performance.
Trustee :The trustees have a fiduciary role to oversee the performance
of the transaction until maturity with a view to protect the interest of the
investors. The trustee is vested with necessary powers including the, in
particular, the power to changer the Servicer, if necessary .Trustees tend
to be reputed banks, financial institutions or firms of Chartered
Accountants.
Rating Agency: Credit rating agencies rate the securities which are
issued to provide an external perspective on the liabilities being created
and help the investor make a more informed decision. The rating
process would assess the strength of the cash flow and the mechanism
designed to ensure full and timely payment by the process of selection
of loans of appropriate credit quality
HYBRID INSTRUMENTS
Hybrid Financing has characteristics of both
Equity & Debt.
4 important source Of Hybrid Financing are:
Preference Share Capital
Convertible Debentures/bonds
Warrants
Options
PREFERENCE SHARE CAPITAL

Features:
Prior Claim on Income/Assets
Cumulative Dividends
Redeemability
Fixed Dividend
Convertibility
Voting Rights
Merits
Demerits


CONVERTIBLE DEBENTURES/BONDS

It gives the debenture holder the right to convert
them into Equity shares.
Conversion Ratio is the number of ordinary
share for each convertible debenture.
Conversion Price is the price paid for ordinary
shares at the time of conversion.
Conversion Time refers to the period from date
of allotment of CD after which the option to
convert can be exercised.
WARRANTS

Features:
Exercise Price is the price at which the
holder of the warrant is entitled to acquire
shares of the firm.
Exercise Ratio is the number of shares that
can be acquired per warrant.
Expiry Date is the date after which the option
to buy the shares expires
Types:
Detachable
Non Detachable
OPTIONS
Option is a derivative security that derives
its value from an underlying asset.
Striking Price is the price at which the
holder of a call/put option can buy/sell a
specified amount of shares at any time
prior to expiration date.
Call option
Put option
LEASE FINANCING
What is lease ???
a contractual arrangement/transaction in
which a party owning an asset/equipment
(lessor) provides the asset for use to
another/transfer the right to use the
equipment to the user (lessee), over a
certain/for an agreed period of time, for
consideration in form of/in return for
periodic payments, with or without a further
payment.
ELEMENTS
Lessor :- is the owner of the assets that
are being leased
Lessee :- is the receiver of the services of
the assets under a lease contract
Assets :- machinery, land &
building,etc.
Term of lease :- lease agreement which
remains in operation.
Lease rental :- a consideration

TYPES OF LEASING
FINANCE LEASE
OPERATING LEASE
SALES AND LEASE BACK
DIRECT LEASE
Bipartite lease
Tripartite lease
SINGLE INVESTOR LEASE
LEVERAGED LEASE
DOMESTIC LEASE
INTERNATIONAL LEASE
Import lease
Cross-border lease

MERITS OF LEASEING
TO THE LASSEE
Financing the capital goods
Additional source of finance
Less costly
Flexibility in structuring of rents
Ownership preserved
Simplicity
Tax benefits

MERITS OF LEASEING
TO THE LESSOR
Full security
Tax benefits
High profitability
High growth potential
DEMERITS OF LEASING
Restriction of use of equipments
Limitations of financial lease
Consequences of default
Double sales tax
Understatement of lessee`s asset
HIRE-PURCHASE FINANCE
What is hire purchase finance ???
A peculiar type of transaction in
which goods are let on hire with an
option to the hirer to purchase them.
Hire purchase V/S installment payment
Lease financing V/S hire purchase
financing