Department of Commerce and Management

Studies,
University of Calicut
February 10,2010
The basic documents issued to the large body
of investors when an organisation or
institution raises the funds from a large body
of investors
Standardised document as per statute or
governing institution containing features of
the relation between the fund raiser and the
user
Limited formats

Altering the terms of
issue in a novel way in
order to achieve the
predetermined purpose
Different Type of Credit Control and Macro-
level Liquidity Management
Matching Cash Flow Requirement of the Fund
Raiser
Satisfying other Objectives like Retaining
Management Control
More Effective Catering to the Needs of the
Investors
Better Treasury Managment


Liquidity Adjustment Facility (LAF)
{Repo and Reverse Repo}
Collateralized Borrowing & Lending
Obligations (CBLO)
Market Stabilisation Scheme (MSS)
Perpetual Bonds or Innovative Bonds

Repo and Reverse Repo as part of LAF since
2000
Designed to form the Interest Rate Platform
within which all short-term interest rates will lie
Together with CRR, it has become an effective
short-term liquidity management tool
Needed to manage the unexpected movement
of funds into and out of the country due to
Hedge Funds and Others
Introduced by CCIL in 2003
A Wider Call Money Market
Participation by Pledging specified securities
with CCIL
Participation by NBFCs and Corporate also
apart from usual Call Money Market Players
One Day or more
Better Treasury Management by Corporate
Better Profitability of Banks
Cheaper Market than Call Money Market
Launched in 2004 through an MOU between RBI
and the Central Government
Part of a Longer Period Sterilisation of Market
Managing Liquidity Problems arising out of
Forex Remittances
RBI to issue after consultation with Government
Sale of Treasury Bills and Dated Securities
through Auction
Better Fiscal Accountability as they are issued
against cash maintained by the Government
with RBI
Introduced in 2005
Issued by Scheduled Commercial Bankss
15 year Tenure with a Roll on forever at the
option of the Bank
Part of Tier I Capital of Banks
Enabling the Banks to meet Basel Norm
regarding Capital Adequacy Ratio
Insurance Companies are usually the
investors
Bonus Debenture
Zero Coupon Bonds
FCCB
Multiple Option Bonds
Infrastructure Bonds
Commercial Paper
Certificate of Deposit
Forex Backed
Infrastructure Bonds

Shares with Differential
Voting Rights
Bonus Preference Shares
Time Share
Plantation Share
ADR/GDR
Shares with
Disproportionate Voting
Rights
Rewarding Shareholder by better Treasury
Management
Hindustan Lever tried it in early 2000s
Avoiding a Blown-up equity capital base
Did not enthuse the investors much
Concept did not catch the fancy of the
market
Interest in the form of discount on the face
value of bonds
Cross Border Investment
Taxation benefit
Better Treasury Management since
postponing the payment of interest on
redemption
Where convertibility alone is the
consideration, saving of interest
Provisions of FEMA
Convertibility is the cream
Cross Border Investment
Gained Popularity Recently
Reliance Industries pioneered it in India
Appealing to Different Requirements of
Investors for Income Planning
Flexibility in Tax Planning of Investors
Payment of Interest is staggered with varied
options
Became Popular and adopted for
Infrastructure Bonds also
short-term security
Rated instrument
Issued by listed companies
Short-term source of finance for corporates
Banks and other corporates invest
SBI-DFHI tried to create a secondary market, but
failed
Securities are held until maturity
Banks allowed to issue COD by RBI since 1989
though US banks were issuing since 1961
Tapping large deposits of corporates and HNI
Tenure is short-term for 3 months to one year
Held until maturity
SBI-DFHI buys the CODs
No secondary market exists as SBI-DFHI is
not able to accumulate sufficient CODs
In 2009, For the First time RBI invested with a
private fund
The UK Subsidiary of India Infrastructure
Finance Company Ltd issued the bonds
The RBI used its foreign exchange reserve to
invest in the bonds
Indian firms operating in foreign countries
can augment the resources by issuing such
bonds
A product for the M&A era
Lesser Dilution of management control
Each share carrying fraction of a vote
Share issued at a discount
Dividend is more than the dividend on the
normal shares
Tata Motors issued in 2008 (one tenth of vote,
305 against 340 per share and 5% more
dividend)-Gujarat NRE Coke in the same year
In 2003, Sun Pharmaceuticals issued bonus
preference shares
Better cash management
Better than bonus debentures as there is no
compulsion of payment of interest
Did not enthuse the shareholders like the
bonus equity shares
Did not catch the fancy of the market
Property sharing for a certain number of days
per year
Used by Resorts in Tourist Destinations
Sterling Group and a few other organisations
tapped the market well
Fancy ruled only for a few years
Came out with big fanfare
Promised fantastic returns in the distant
future
Many gullible investors were taken for a ride
Least Liquid instrument
Only a few firms have a token presence

Instruments issued to foreign investors in lieu
of the shares deposited with a custodian in
the home country
Mainly to get the instruments of Instruments
of Indian companies listed in foreign bourses
Enhanced the image of Indian companies and
added a global perspective
Contributed to the volatility of Indian Market

New Companies Bill is doing away with
shares with differential voting rights
In its place, shares with superior voting rights
are being proposed
Helping the promoters to ward off hostile
take-overs
Lacking fairness
Creating a hype
Not a proper study is made before the
introduction
Complexity
Complexity leads to lack of correction of
wrong steps
IT enabled financial system enables excesses
which endanger the very survival of the firm
Short term growth for higher managerial
remuneration
Collateralised Debt Obligation (CDO) in 70s
Mortgage Backed Securities (MBOs) (pioneered
by Larry Fink of First Boston Corporation in 1984)
Sub-prime Mortgages in 1990s due to the
popularity of MBOs resulting in lowering rates of
interest
Credit Default Swaps (CDS) invented by Blythe
Masters JP Morgan Chase in 1997
CDS reaching 62.1 trillion dollars in 2007(AIG
being the main player)



2000-03 Alan Greenspan cuts Fed Rates
from 6% - 1%
Banks go on a Lending Spree
2004-Govt. Backed Lenders Fannie Mae,
Ginnie Mae and Freddie Mac have nearly 20%
of lending to sub-prime clients
2005-CDS market soars with increase in
housing sector boom
2006-Interest Rates rise to 5+%
2007-08-the bubble burst in the housing
sector