The capital market serves as the heartbeat of the global economy, facilitating the exchange of financial assets and investments. Central to understanding this intricate ecosystem are the myriad terms and concepts that define its functioning. From stocks and bonds to derivatives and risk management strategies, the capital market encompasses a diverse array of instruments and practices. These terms not only shape the dynamics of investment but also influence economic growth, corporate governance, and regulatory frameworks. Delving into the lexicon of the capital market unveils a complex tapestry of financial instruments, market participants, and mechanisms that drive the allocation of capital and shape the trajectory of economies worldwide.
Foreign Institutional Investors (FIIs) Investment in Debt:
- Investment Scope:
- Foreign Institutional Investors (FIIs) can invest in both government and corporate debt in the primary and secondary markets. These investments are subject to specific limits and regulations set by regulatory authorities.
- Currency:
- FII debt investments are denominated in the local currency (rupee debt).
Regulations and limits regarding FII investments in debt securities may be adjusted periodically based on the economic requirements and regulatory considerations.
Take-out Financing (TOF):
- Purpose:
- Take-out Financing (TOF) addresses the mismatch in the maturity period between bank deposits (typically 3-5 years) and the longer-term funding requirements of infrastructure projects, such as roads and ports.
- Introduction:
- TOF came into effect in 2010 as a method to provide finance for longer-duration projects, extending up to 15 years. It involves banks sanctioning medium-term loans (e.g., 5-7 years) with the understanding that another institution, often engaged in long-term financing like IDFC, will “take out” the loan from the bank’s books after a predetermined period.
- Mechanism:
- The bank provides a medium-term loan for a specific duration. Once the project achieves predefined milestones, the long-term financing institution agrees to take over the loan. At the end of the agreed-upon period, the bank can sell the loans to the institution, mitigating any potential asset-liability mismatch.
- Benefits:
- TOF allows infrastructure projects to secure long-term funding through collaboration between banks and specialized financing institutions. Banks, constrained by the short-term nature of deposits, can participate in funding infrastructure projects without exposing themselves to prolonged asset-liability mismatches.
External Sources of Finance for India:
- Foreign Stock Exchanges for ADRs and GDRs:
- Indian companies can raise capital by listing on foreign stock exchanges through American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs).
- ECB (External Commercial Borrowing):
- Indian entities can raise funds from foreign sources through External Commercial Borrowing.
- International Financial Institutions:
- India can access funds from international financial institutions such as the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), International Monetary Fund (IMF), Asian Infrastructure Investment Bank (AIIB), New Development Bank (NDB), and Contingent Reserve Arrangement (CRA).
- Bilateral Loans:
- Foreign governments may extend bilateral loans to India for specific projects or developmental initiatives.
- Masala Bonds:
- These are rupee-denominated bonds issued in international markets, allowing Indian entities to raise funds abroad.
- Foreign Portfolio Investment (FPI):
- Foreign Portfolio Investment involves investments by foreign individuals, institutions, or funds in Indian financial markets, including stocks and bonds.
India utilizes these external sources of finance to diversify funding channels and support its economic development and infrastructure projects.
External Commercial Borrowings (ECBs):
- Definition and Scope:
- ECBs (External Commercial Borrowings) serve as a financial instrument for Indian corporations and Public Sector Undertakings (PSUs) to access foreign currency. They encompass various forms, including commercial bank loans, credit from official export credit agencies, buyers’ credit, and commercial borrowings from private sector Multilateral Financial Institutions.
- Components of ECBs:
- Components include commercial bank loans, official export credit, buyers’ credit, private sector borrowings from Multilateral Financial Institutions, and investments by Foreign Institutional Investors (FIIs) in dedicated debt funds.
- Use of ECBs:
- ECBs are not intended for stock market investments or speculation in real estate. They can be utilized for a range of purposes, such as financing expansion, fresh investments, and meeting rupee-related expenditures or imports.
- Regulation and Monitoring:
- The Department of Economic Affairs (DEA) under the Ministry of Finance, Government of India, in collaboration with the Reserve Bank of India (RBI), monitors and regulates ECB guidelines and policies.
- Sources of ECBs:
- Companies can raise ECBs from internationally recognized sources, including banks, export credit agencies, equipment suppliers, and international capital markets.
- Diversification and Risk Mitigation:
- ECBs provide an additional source of funds, diversifying risks for companies. They offer Indian companies access to foreign funds, usually at softer interest rates, aiding in financial diversification.
- Routes for Raising ECBs:
- ECBs can be raised through two routes: Automatic Route and Approval Route. The Automatic Route does not require regulatory permits, while the Approval Route does. The RBI policy permits corporates registered under the Companies Act, 1956, excluding certain financial intermediaries, to access ECBs.
- Special Cases:
- NGOs engaged in microfinance activities have limited permission to raise ECBs. Financial institutions focused on infrastructure or export finance, such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON, and EXIM Bank, are considered on a case-by-case basis.
- Benefits:
- ECB Policy benefits companies by sourcing cheaper loans, easing domestic liquidity constraints, providing foreign exchange to the country, curbing the depreciation of the rupee, and contributing to infrastructural development.
Euro Issues:
- Euro Issues refer to shares (receipts) and bonds issued to raise foreign currency. These issues are listed on European stock exchanges.
FAQs
1. What is a Stock Market?
Answer: The stock market is a platform where buyers and sellers trade shares of publicly listed companies. It provides liquidity for investors to buy and sell ownership stakes in companies, enabling capital formation and wealth creation.
2. What are Bonds?
Answer: Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. Investors purchase bonds as a form of lending money to the issuer, who promises to repay the principal amount plus interest at a specified future date.
3. What is Market Capitalization?
Answer: Market capitalization, often referred to as “market cap,” is the total value of a company’s outstanding shares of stock. It is calculated by multiplying the current market price per share by the total number of outstanding shares. Market cap determines a company’s size and is used to compare it with other companies in the market.
4. What is Dividend Yield?
Answer: Dividend yield is a financial ratio that indicates the percentage return an investor receives in the form of dividends relative to the price of the stock. It is calculated by dividing the annual dividend per share by the current market price per share and multiplying the result by 100.
5. What is a Mutual Fund?
Answer: A mutual fund is an investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, mutual funds offer investors access to a diversified portfolio without requiring them to directly manage individual securities.
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