Financial Markets

  • Gilt-edged Securities Market

    • Gilt-edged securities mean securities of the best quality, where the government secures the repayment of principal and interest. They are risk-free investments.
    • Government securities are issued by central and state governments, semi-government authorities and government financial institutions.
    • Individuals, corporates, other bodies, state governments, provident funds and trusts are allowed to invest in government securities.
    • Government securities play a vital role in the open market operations conducted by the central bank of the country.
    • In the primary market, government securities can be issued through auctions, pre-announced coupon rates, as floating rate bonds, as zero-coupon bonds, as stock on tap, as stock for which payment is to be made in installments or as stock on conversion of maturing treasury bills/dated securities.
    • There is a huge demand for government securities in the secondary market as they are the first choice of banks to comply with the SLR requirements.
    • The RBI usually undertakes the following transactions with banks: open market operations, repo transactions and switch deals.

     

    Repurchase Agreements (REPOs)

    • Repos are ready forward deals or agreements involving sale of a security with an undertaking to buyback the same at a predetermined price and time in future. To the seller, it is known as a repo and to the buyer it is known as a reverse repo.
    • The market participants in repos are: banks, DFHI, financial institutions, non-banking entities like mutual funds that hold current and SGL accounts with the RBI.
    • The operational aspects of a repo depend on: size of the loan, selection of security, interest rate and settlement system.
    • The procedure to issue repos involves the acceptance of tenders, announcement of auction results and the payment.

     

    Public Deposits

    • Corporates prefer public deposits to bank loans because they are unsecured debts and the funds can be deployed at the discretion of the company.
    • Non-banking finance companies have been defined as loan companies or hire purchase finance companies or investment companies or equipment leasing companies or mutual benefit financial companies, while non-banking non-financial companies are those involved in manufacturing, trading or service sector.
    • Public deposit is any money borrowed by a company, but does not include advances, guarantees from any government, bank borrowings, security deposits, funds from the promoters or directors, share capital or debenture funds.
    • The maximum rate of interest is decided by the RBI and the brokerage paid to the agents depends on the duration of the deposit. The maximum amount of deposits cannot exceed 25% of the paid-up capital and free reserves. In addition, the company can accept deposits from shareholders up to 10% of the paid-up capital and free reserves.
    • The company must maintain liquid assets to the extent of 15% of the deposits maturing by the end of the financial year (March 31). The liquid assets can be deposits with scheduled banks without any lien, unencumbered securities of central and state governments, other unencumbered securities or bonds of HDFC. The liquid amount can never fall below 10% of the maturing deposits.
    • Receipts of deposit must be issued within 8 weeks of acceptance and premature deposits are allowed after a period of 3 months from the date of deposit, subject to the penalty for early withdrawals.
    • Every company accepting deposits should maintain a register of deposits at the registered head office with the basic details of each deposit-holder, for a period of 8 years from the financial year in which the latest entry is made.
    • A company inviting public deposits must advertise the details of the company and the profitability in an English and a local language newspaper.
    • In order to market its public deposits successfully, a company has to develop a mix of the following factors: product differentiation, pricing, promotion, quality service and distribution.

     

    Financial Guarantees

    • A guarantee is a contract to perform or to discharge the liability of a third person in case of his default. There are three parties involved in a guarantee: the lender, the borrower and the guarantor.
    • There are three major types of guarantees: personal, governmental and institutional (usually by financial institutions, banks, insurance companies, etc.).
    • The government of India has also set up two specialized public guarantee institutions: Deposit Insurance and Credit Guarantee Corporation (DICGC) and Export Credit and Guarantee Corporation (ECGC).
    • While DICGC undertakes insurance of deposits on banks, guarantee for credit extended by banks to priority sector and guarantee for credit extended to small scale industries, ECGC offers cover to exporters against commercial risks and political risks.
    • The main services offered by ECGC are: standard policy, small exporters' policy, specific policy, guarantees to banks and special schemes (transfer guarantee, overseas investment insurance and exchange rate fluctuation risk).