Conventional Financial Instruments 1.ppt
- 2. Conventional financial instruments are traditional tools used in financial markets for investment, funding, or risk management. These instruments have been widely accepted and used over time due to their simplicity, reliability, and regulatory framework.
- 3. 1. Equity Shares: Represent ownership in a company Shareholders are entitled to dividends (if declared) and voting rights in the company’s decisions Return: Capital appreciation and dividends Risk: High; depends on company performance and market conditions
- 4. Differential Voting Rights (DVR) Equity Shares Shares with different voting rights compared to ordinary shares Reduced or no voting rights but provide higher dividends as compensation Purpose: to raise capital without diluting control of existing promoters Examples: Tata Motors, Gujarat NRE Coke, Jain Irrigation
- 5. Superior Voting Rights (SVR) Equity Shares Equity shares that provide their holders with grater voting rights (3:1 to 10:1 voting rights ratio) compared to ordinary shares Often used by founders/promoters to retain control over a company while still raising equity capital from public SVR shares have restrictions on transferability or a lock-in period Can be converted into ordinary shares upon certain conditions (e.g. death of promoter) Only companies in intensive sectors like technology, innovation or intellectual property are allowed to issue SVR shares Examples: Zomato, Flipkart Alphabet (parent company of Google) has 3 classes of shares- Class A, Class B and Class C Class A shares have 1 vote per share, Class C shares have no vote, and Class B shares have 10 votes per share
- 6. Bonus Shares Issued to existing shareholders as a bonus, typically from company’s retained earnings or reserves Free of cost and in proportion to existing share holding Purpose: to reward shareholders without impacting liquidity
- 7. Rights Shares Equity shares issued by a company to its existing shareholders, giving them the right to purchase additional shares at a discounted price (price lower than the prevailing market price) Shareholders have option to subscribe to the rights issue or renounce it Primarily issued to raise additional capital while maintaining proportionate ownership of existing shareholders Less expensive compared to public offerings, as they do not involve extensive marketing or underwriting
- 8. Sweat Equity Shares Shares issued by company to employees or directors at discount or consideration other than cash Often issued as reward for contributions like patents, copyrights, designs, operational expertise, etc. rather than monetary payments Lock-in period of 3 years ESOPs vs Sweat Equity Shares: - Sweat Equity Shares are issued immediately, whereas ESOPs are exercisable at a later date Recognizes and rewards employees for creating intellectual property Allows companies, particularly startups, to reward employees without significant cash outflow Serves as an incentive to retain key employee and align their interests with company goals
- 9. Preferential Allotment Equity shares issued to select investors at a predetermined price Typically part of fund-raising strategies Example: Shares issued to private equity investors or institutional investors
- 10. Employee Stock Options (ESOPs) Offered to employees as an incentive, allowing them to purchase shares at a price less than prevailing market price at a future date Tool for a company to retain talent To align employee interests with company performance
- 11. 2. Preference Shares: Holders of these shares have priority over equity shareholders with respect to dividend and in case of liquidation Shareholders receive fixed dividends Types: Cumulative, non-cumulative, redeemable, convertible, non- convertible Risk: moderate, as dividends are fixed but no voting rights
- 12. 3. Debt Instruments: - Bonds/Debentures - FD - Treasury Bills (T-Bills)
- 13. 4. Money Market Instruments: - Commercial Papers (CPs) - Certificates of Deposit (CDs) - Call Money Short-term interbank borrowings for a single day - Repos (Repurchase Agreements) Agreements where securities are sold with an agreement to repurchase them at a later date at a higher price Used by banks and RBI for liquidity management
- 14. 5. Mutual Funds: - Equity Funds - Debt Funds - Balance Funds
- 15. 6. Derivatives: - Futures - Options - Forwards - Swaps
- 16. 7. Insurance Instruments: - Life insurance - General insurance - Endowment plans: Life insurance policy that combines insurance and investments - Term insurance
- 17. 8. Small Savings Instruments: - Public Provident Fund (PPF) - National Savings Certificate (NSC) - Senior Citizens Savings Scheme (SCSS) - Recurring Deposits
- 18. 9. Pension and Retirement Plans: - Employees’ Provident Fund (EPF) - National Pension System (NPS) - Gratuity
- 19. 10. Commodities: - Physical Commodities - Commodity Futures
- 20. 11. Banking Instruments: - Savings Accounts - Recurring Deposits - Loans
- 21. 12. Foreign Exchange Instruments: - Spot Contracts - Forward Contracts - Currency Swaps
- 22. 13. Real Estate