FMCB

UNIT IV

Gaurav Sonkar 1
 Financial Instruments
Financial instruments are assets that can be traded.
They can also be seen as packages of capital that may be traded.
Most types of financial instruments provide an efficient flow and
transfer of capital all throughout the world's investors.
These assets can be cash, a contractual right to deliver or receive
cash or another type of financial instrument, or evidence of one's
ownership of an entity.
Financial instruments can be real or virtual documents representing a
legal agreement involving any kind of monetary value.
Equity-based financial instruments represent ownership of an asset.
Debt-based financial instruments represent a loan made by an
investor to the owner of the asset.
Foreign exchange instruments comprise a third, unique type of
financial instrument.
International Accounting Standards defines financial instruments as
"any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity.
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 Shares
According to company law, Share is the fractional
part of the capital of the company which forms the
basis of ownership of certain rights and interest of a
subscriber in the company. It is not a sum of money
but an interest or right measured in a sum of money
to participate in the profits made by the company
or in the assets of the company when it is wound
up.
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 Equity shares:
Equity share holders are the real owners of the
organization, they enjoy voting rights and are paid
dividend in the last.
Preference shares:
The Preference share holders enjoy preferential
treatment in the payment of dividend and their
dividend if unpaid accumulates also but generally
they do not possess any voting right what so ever.
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 Classification of Preference shares

a) Cumulative and Non-Cumulative Preference share

b) Participating and Non-Participating Preference share

c) Convertible and Non- Convertible Preference share

d) Redeemable and Non-Redeemable Preference share

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 Cumulative and Non-Cumulative Preference share
When unpaid dividends on preference shares are treated as
arrears and are carried forward to subsequent years, then
such preference shares are known as cumulative
preference shares. It means unpaid dividend on such
shares is accumulated till it is paid off in full.
Non-cumulative preference shares are those type of
preference shares, which have right to get fixed rate
of dividend out of the profits of current year only. They do
not carry the right to receive arrears of dividend. If a
company fails to pay dividend in a particular year then that
need not to be paid out ofGaurav
future
Sonkar profits. 6
Participating and Non-Participating Preference share

Those preference shares, which have right to participate in

any surplus profit of the company after paying the equity
shareholders, in addition to the fixed rate of their dividend,
are called participating preference shares.

Preference shares, which have no right to participate on

the surplus profit or in any surplus on liquidation of the
company, are called non-participating preference shares.

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 Convertible and Non- Convertible Preference share

Those preference shares, which can be converted into

equity shares at the option of the holders after a fixed

period according to the terms and conditions of their

issue, are known as convertible preference shares.

Preference shares, which are not convertible into

equity shares, are called non-convertible preference

shares. Gaurav Sonkar 8

Redeemable and Non-Redeemable Preference share
Those preference shares, which can be redeemed or repaid
after the expiry of a fixed period or after giving the
prescribed notice as desired by the company, are known as
redeemable preference shares. Terms of redemption are
announced at the time of issue of such shares.

Those preference shares, which can not be redeemed

during the life time of the company, are known as non-
redeemable preference shares. The amount of such shares
is paid at the time of liquidation
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of the company. 9
 Meaning And Concept Of Debentures
The total capital of joint stock companies can be divided into owner's
capital and borrowed capital.
Share capital is owner's capital whereas debenture is considered as
borrowed capital.
The buyers of shares i.e. shareholders possess the voting right
through which they own control power of the company.
Debenture is a long-term loan. Companies can raise additional capital
by the issue of debentures. Debenture-holders receive fixed
income in the form of interest during the loan period, however, they
do not possess the voting right.
Debenture is a written promise for a debt by a company under
its seal which contains the terms and conditions regarding the
amount of loan or principal, the rate of interest, maturity date,
maturity value etc. Gaurav Sonkar 10
 In other words, debenture is a certification of acknowledgment
issued with the seal of company in favor of lender as an evidence of
debt.
This written document grants the holder the right to receive interest
and return of principal as per the terms under which debentures are
issued.
Thus, debenture is a part of total capital of a company and
debenture-holders are the creditors.
Debenture-holders are entitled the right to receive interest on their
fund invested in debenture.
The rate of interest is predetermined and stated in the bond
certificate.
The interest is payable whether there is profit or loss.
The amount of debenture is returned to the holders at the end of
predetermined maturity period.Gaurav Sonkar 11
 Characteristics Of Debentures
Debentures are ranked as creditors of the company. Debenture is
long-term debt and issued under the common seal of the company.
In brief, a debenture possesses the following characteristics.
1. Debenture is an instrument of loan.
2. Interest is paid at fixed rate every year and debentures is known as
"fixed cost bearing capital".
3. Debenture has common seal of the company.
4. Debenture is redeemable at a fixed and specified time.
5. Debenture-holders are the creditors of company not owners.
6. Debenture is a form of long-term borrowed capital.
7. Debenture-holders have no right to cast vote in company's general
meting.
8. At the time of liquidation, first priority is given to debenture-holders
at the time of repayment.
9. Debentures can be issued to fulfill the requirement of huge capital.
Small firms most often find it more expensive source of financing.
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 Differences Between Shares And Debentures
1. Ownership
The share of a company provides ownership to the shareholders.
Debenture-holders are creditors of a company who provide loan to
the company.
2. Identity
Person holding share is known as shareholder. person holding
debenture is known as debenture-holder.
3. Certainty Of Return
No certainty of return in case of loss for the shareholder.
Debenture-holder receives the interest even if there is no profit.
4. Convertibility
Shares can not be converted into debentures. Debentures can be
converted into shares.
5. Control
Shareholders have the right to participate and vote in company's
meeting. Debenture holders do not possess any voting right and can
not participate in meeting. Gaurav Sonkar 13
 BONDS
Bond refers to a security issued by a Company, Financial
Institution or Government, which offers regular or fixed
payment of interest in return for borrowed money for a certain
period of time.
By purchasing a bond, an investor loans money for a fixed
period of time at a predetermined interest rate. While the
interest is paid to the bond holder at regular intervals, the
principal amount is repaid at a later date, known as the
maturity date.
While both bonds and stocks are securities, the principle
difference between the two is that bond holders are lenders,
while stockholders are the part-owners/owners of the
firm/organization/company.Gaurav Sonkar 14
 Another difference is that bonds usually have a defined

term, or maturity, after which the bond is redeemed,

whereas stocks may be outstanding indefinitely.

Thus a bond is like a loan: the issuer is the borrower

(debtor), the holder is the lender (creditor), and the

coupon is the interest. Bonds provide the borrower with

external funds to finance long-term investments, or, in the

case of government bonds, to finance current expenditure.

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 ZERO COUPON BONDS
As the name suggests, there is no periodic interest payment and they
are sold at a huge discount to the face value.
These bonds benefit both the issuers and investors by limiting
funding cost when interest rates are volatile for the issuers and by
reducing reinvestment risk for the investor.
ZCB are sometimes convertible into maturity which entails no outflow
for the issuers, or into a regular interest bearing bond after a
particular period of time.
These bonds are the best options for individuals or institutional
investors who look for safe and good returns and are ready to hold
them till the bond matures.
Moreover, these bonds do not carry any interest, which is otherwise
taxable.
Companies such as M&M, HB leasing and Finance have been
pioneers in introducing these bonds in Indian market.
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 DEEP DISCOUNT BONDS
A deep discount bond is a zero coupon bond whose maturity is very

high, 15 years or onwards and is offered at discount to the face value.

The Industrial Development bank was the first financial institution to

offer DDBs in 1992.

The issuers have successfully marketed these bonds by luring the

investors to become a lakhpati in 25 years.

Moreover these instruments are embedded with call and put

options, providing an early redemption facility both to the issuer and

the investor at a predetermined price and date.

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 Warrants
Warrants are financial derivatives, which are frequently traded in the
market.
Warrant is just like an option contract where the holder has the right
to buy shares of a specified company at a certain price during the
given time period.
In other words, the holder of a warrant instrument has the right to
purchase a specific number of shares at a fixed price in a fixed period
from an issuing company.
If the holder exercised the right, it increases the number of shares of
the issuing company, and thus, dilutes the equities of its
shareholders.
Warrants are usually issued as sweeteners attached to senior
securities like bonds and debentures so that they are successful in
their equity issues in terms of volume and price.
Warrants can be detached and traded separately.
Warrants are highly speculative and leverage instruments, so trading
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in them must be done cautiously.
 DERIVATIVES
The term Derivative indicates that it has no independent
value, i.e., its value is entirely derived from the value of the
underlying asset.
Derivatives are specific types of instruments that derive their
value over time from the performance of an underlying asset:
eg equities, bonds, commodities.
A derivative is traded between two parties who are referred to
as the counterparties. These counterparties are subject to a pre-
agreed set of terms and conditions that determine their rights
and obligations.
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 Derivatives can be traded on or off an exchange and are known
as:
Exchange-Traded Derivatives (ETDs):
Standardised contracts traded on a recognised exchange, with
the counterparties being the holder and the exchange. The
contract terms are non-negotiable and their prices are publicly
available.
Over-the-Counter Derivatives (OTCs):
Customized contracts traded off-exchange with specific terms
and conditions determined and agreed by the buyer and seller
(counterparties). As a result OTC derivatives are more illiquid, eg
forward contracts and swaps.
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 Need For Financial Derivatives
There are several risks inherent in financial transactions and asset
liability positions. Derivatives are risk-shifting devices; they shift risk
from those who have it but may not want it to those who have
appetite and are willing to take it.
The three broad types of risk are as follows:
1. Market risk: Arises when security prices go up due to reasons
affecting the sentiments of the whole market. MR is also referred as
systematic risk since it cant be diversified away because the stock
market as a whole go up or down from time to time.
2. Interest rate risk: This risk arises in the case of fixed income
securities, such as TBs, govt securities and bonds, whose market
price could fluctuate heavily if interest rates change.
3. Exchange rate risk: In the case of imports, exports, foreign loans or
investments, foreign currency is involved which gives rise to
exchange rate risk.
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To hedge these risks various derivatives have emerged
 Types of Financial Derivatives
Financial derivatives are those assets whose values are determined
by the value of some other assets, called as the underlying.

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 One form of classification of derivative instruments is between
commodity derivatives and financial derivatives.
The basic difference between these is the nature of the underlying
instrument or asset.
In a commodity derivatives, the underlying instrument is a
commodity which may be wheat, cotton, pepper, sugar, jute,
turmeric, corn, soya beans, crude oil, natural gas, gold, silver, copper
and so on.
In a financial derivative, the underlying instrument may be treasury
bills, stocks, bonds, foreign exchange, stock index, gilt-edged
securities, cost of living index, etc.
It is to be noted that financial derivative is fairly standard and there
are no quality issues whereas in commodity derivative, the quality
may be the underlying matters.
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 1. Forward Contract
A forward contract is a simple customized contract between two
parties to buy or sell an asset at a certain time in the future for a
certain price.
Unlike future contracts, they are not traded on an exchange, rather
traded in the over-the-counter market.
Forward contracts are bilateral contracts, and hence, they are
exposed to counterparty risk. There is risk of non-performance of
obligation either of the parties, so these are riskier than to futures
contracts.
Each contract is custom designed, and hence, is unique in terms of
contract size, expiration date, the asset type, quality, etc.
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Gaurav Sonkar 25
 Futures Contracts
A futures contract is a standardized forward contract, with fixed
amount of the underlying asset, fixed maturity date, which can be
bought and sold at exchanges.
The idea behind the futures is the futures contract is eliminate the
default risk of the forward contract to make it possible to trade the
futures contract on secondary markets (exchanges).
This is done through daily settlements on a marking account, and an
institution called a clearing house and daily settlements according
to a principle called marking to market.
If one counterparty defaults there should be money in the margin
account to cover the defaulting partners obligations.
Futures contract involve daily cash settlements of the contract, on a
margin account. This mechanism is called marking to market, and
solves most of the credit risk.
The remaining risk is insured by the exchange through a Clearing
house. Gaurav Sonkar 26
 Suppose a farmer produces rice and he expects to have an excellent
yield on rice; but he is worried about the future price fall of that
commodity. How can he protect himself from falling price of rice in
future?
He may enter into a contract on today with some party who wants to
buy rice at a specified future date on a price determined today itself.
In the whole process the Farmer will deliver rice to the party and
receive the agreed price and the other party will take delivery of rice
and pay to the farmer.
In this illustration there is no exchange of money and the contract is
binding on both the parties.
Hence future contracts are forward contracts traded only on
organized exchanges and are in standardized contract-size.
The farmer has protected himself against the risk by selling rice
futures and this action is called short hedge while on the other hand,
the other party also protects against-risk by buying rice futures is
called long hedge. Gaurav Sonkar 27
 Options
Option may be defined as a contract, between two parties whereby
one party obtains the right, but not the obligation, to buy or sell a
particular asset, at a specified price, on or before a specified date.
The person who acquires the right is known as the option buyer or
option holder, while the other person is known as option seller or
option writer.
The seller of the option for giving such option to the buyer charges an
amount which is known as the option premium.
Options can be divided into two types: calls and puts.
A call option gives the holder the right to buy an asset at a specified
date for a specified price whereas in put option, the holder gets the
right to sell an asset at the specified price and time.
The specified price in such contract is known as the exercise price or
the strike price and the date in the contract is known as the
expiration date or the exerciseGaurav
date or the maturity date.
Sonkar 28
 Call Option
A call option is a contract between two parties to exchange a stock at strike
price by a predetermined date.
One party, the buyer of call, has the right, but not an obligation, to buy the
stock at the strike price by the future date, while the other party, the seller
of the call, has the obligation to sell the stock to the buyer at the strike price
if the buyer exercises the option.
Foreg: if a stock trading at Rs500 and you think its going up to Rs600, you
might buy a Rs550 call option for say, Rs10. If the stock rose to Rs600, that
would allow you to buy the stock at Rs550 even though its valued at Rs600,
netting you a Rs40 profit on each share.
On the other hand, the person that sold you the call option would be
obligated to sell you the stock at Rs550 at a loss of Rs 40.
If the stock never rises above Rs 550 by expiration date, the call expires
worthless and the call buyer is out Rs 10 and the call seller keeps Rs 10.
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 Put Option
A put option is a contract between two parties to exchange a stock at
a strike price, by a predetermined date.
One party, the buyer of the put has the right, but not an obligation, to
sell the stock at the strike price by the future date, while the other
party, the seller of the put, has the obligation to buy the stock from
the buyer at the strike price if the buyer exercises the option.
Example: Suppose the current price of CIPLA share is Rs 750 per
share. X owns 1000 shares of CIPLA Ltd. and apprehends in the
decline in price of share. The option (put) contract available at BSE is
of Rs 800, in next two-month delivery. Premium cost is Rs 10 per
share. X will buy a put option at 10 per share at a strike price of Rs
800. In this way X has hedged his risk of price fall of stock. X will
exercise the put option if the price of stock goes down below Rs 790
and will not exercise the option if price is more than Rs 800, on the
exercise date.
In case of options, buyer has a limited loss and unlimited profit
potential unlike in case of forward and futures.
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 SWAPS
A swap is an agreement between two counter parties to exchange
cash flows in the future.
Under the swap agreement, various terms like the dates when the
cash flows are to be paid, the currency in which to be paid and the
mode of payment are determined and finalized by the parties.
There are two most popular forms of swap contracts, i.e., interest
rate swaps and currency swaps.
In the interest rate swap one party agrees to pay the other party
interest at a fixed rate on a notional principal amount, and in
return, it receives interest at a floating rate on the same principal
notional amount for a specified period. The currencies of the two
sets of cash flows are the same.
In case of currency swap, it involves in exchanging of interest
flows, in one currency for interest flows in other currency. In other
words, it requires the exchange of cash flows in two currencies.
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 A swap is an agreement between two counter parties to exchange
cash flows in the future.
Under the swap agreement, various terms like the dates when the
cash flows are to be paid, the currency in which to be paid and the
mode of payment are determined and finalized by the parties.
Usually the calculation of cash flows involves the future values of one
or more market variables.
There are two most popular forms of swap contracts, i.e., interest
rate swaps and currency swaps.
In the interest rate swap one party agrees to pay the other party
interest at a fixed rate on a notional principal amount, and in return,
it receives interest at a floating rate on the same principal notional
amount for a specified period. The currencies of the two sets of cash
flows are the same.
In case of currency swap, it involves in exchanging of interest flows, in
one currency for interest flows in other currency. In other words, it
requires the exchange of cash flows in two currencies. There are
various forms of swaps based upon these two, but having different
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features in general.
 American Depository Receipt
American Depository Receipt represents the shares of a foreign
company issued by U.S bank which can be traded in U.S. equity
markets.
American Depository Receipt (ADR) is a certified negotiable
instrument issued by an American bank suggesting the number of
shares of a foreign company that can be traded in U.S. financial
markets.
American Depository Receipts provide US investors with an
opportunity to trade in shares of a foreign company.
Example of securities markets in the U.S.A.
New York Stock Exchange (NYSE)
National Association of Securities Dealers Automated Quotation
System (NASDAQ)
American Stock Exchange (AMEX)
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 AMERICAN DEPOSITORY RECEIPT PROCESS
The domestic company, already listed in its local stock exchange, sells
its shares in bulk to a U.S. bank to get itself listed on U.S. exchange.
The U.S. bank accepts the shares of the issuing company. The bank
keeps the shares in its security and issues certificates (ADRs) to the
interested investors through the exchange.
Investors set the price of the ADRs through bidding process in U.S.
dollars. The buying and selling in ADR shares by the investors is
possible only after the major U.S. stock exchange lists the bank
certificates for trading.
The U.S. stock exchange is regulated by Securities Exchange
Commission, which keeps a check on necessary compliances that
need to be complied by the foreign company.
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 ADVANTAGES OF AMERICAN DEPOSITORY RECEIPT
Following are the advantages of ADRs:
The American investor can invest in foreign companies which can
fetch him higher returns.
The companies located in foreign countries can get registered on
American Stock Exchange and have its shares trades in two different
countries.
The benefit of currency fluctuation can be availed.
It is an easier way to invest in foreign companies as there are no
restrictions to invest in ADR.
ADR simplifies tax calculations. Trading in shares of foreign company
in ADR would lead to tax under US jurisdiction and not in the home
country of company.
The pricing of shares of foreign companies in ADR is generally
cheaper. Hence it provides additional
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benefit to investors. 35
 DISADVANTAGES OF AMERICAN DEPOSITORY RECEIPT
The following are the disadvantages of American Depository Receipts:
Even though the transactions in ADR take place in US dollars, still they
are exposed to the risk associated with foreign exchange fluctuation.
The number of options to invest in foreign companies is limited. Only
few companies feel the necessity to register themselves through
ADR. This limits the choice available to US investor to invest.
The investment in companies opting for ADR often becomes illiquid
as investor needs to hold the shares for long term to generate good
returns.
The charges for entire process of ADR are mostly transferred on
investors by the foreign companies.
Any violation of compliance can lead to strict action by Securities
Exchange Commission. Gaurav Sonkar 36
 GDR - Global Depository Receipt
Global Depository Receipt (GDR) is an instrument in which a company
located in domestic country issues one or more of its shares or
convertibles bonds outside the domestic country.
In GDR, an overseas depository bank i.e. bank outside the domestic
territory of a company, issues shares of the company to residents
outside the domestic territory. Such shares are in the form of
depository receipt or certificate created by overseas the depository
bank.
Issue of Global Depository Receipt is one of the most popular ways to
tap the global equity markets.
A company can raise foreign currency funds by issuing equity
shares in a foreign country. Gaurav Sonkar 37
 GDR - Global Depository Receipt
GLOBAL DEPOSITORY RECEIPT EXAMPLE
A company based in USA, willing to get its stock listed on German

stock exchange can do so with the help of GDR.

The US based company shall enter into an agreement with the

German depository bank, who shall issue shares to residents based in

Germany after getting instructions from the domestic custodian of

the company.

The shares are issued after compliance of law in both the countries.
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 GLOBAL DEPOSITORY RECEIPT MECHANISM
The domestic company enters into an agreement with the overseas
depository bank for the purpose of issue of GDR.

The overseas depository bank then enters into a custodian

agreement with the domestic custodian of such company.

The domestic custodian holds the equity shares of the company.

On the instruction of domestic custodian, the overseas depository

bank issues shares to foreign investors.

The whole process is carried out under strict guidelines.

GDRs are usually denominated in U.S. dollars

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 ADVANTAGES OF GDR
GDR provides access to foreign capital markets.
A company can get itself registered on an overseas stock exchange or
over the counter and its shares can be traded in more than one
currency.
GDR expands the global presence of the company which helps in
getting international attention and coverage.
GDR are liquid in nature as they are based on demand and supply
which can be regulated.
The valuation of shares in the domestic market increase, on listing in
the international market.
With GDR, the non-residents can invest in shares of the foreign
company.
GDR can be freely transferred.
Foreign Institutional investors can buy the shares of company issuing
GDR in their country even if they are restricted to buy shares of
foreign company.
GDR increases the shareholders base
Gaurav Sonkar of the company. 40
 DISADVANTAGES OF GDR
Violating any regulation can lead to serious consequences
against the company.
Dividends are paid in domestic countrys currency which is
subject to volatility in the forex market.
It is mostly beneficial to High Net-Worth Individual (HNI)
investors due to their capacity to invest high amount in GDR.
GDR is one of the expensive sources of finance.
Conclusion
GDR is now one of most important source of finance in todays
world. With globalization, every company is willing to expand its
wings. GDR makes it possible for such companies to reach and
tap international markets. GDR provides companies in emerging
markets with opportunities Gaurav
for Sonkar
rapid growth and development.
41
 Indian Depository Receipts
A foreign company can access Indian securities market for raising
funds through issue of Indian Depository Receipts (IDRs).
An IDR is an instrument denominated in Indian Rupees in the form of
a depository receipt created by a Domestic Depository (custodian of
securities registered with the Securities and Exchange Board of India)
against the underlying equity of issuing company to enable foreign
companies to raise funds from the Indian securities Markets.
IDRs are like American Depository Receipts or Global Depository
Receipts, except that the issuer is a foreign company raising funds
from the Indian market. IDRs are rupee-denominated and created by
a domestic depository against the underlying equity shares of a
foreign company. Gaurav Sonkar 42
 Which intermediaries are involved in issuance of
IDRs?
Overseas Custodian Bank is a banking company which is established
in a country outside India and has a place of business in India and
acts as custodian for the equity shares of issuing company against
which IDRs are proposed to be issued in the underlying equity shares
of the issuer is deposited.
Domestic Depository who is a custodian of securities, registered with
SEBI and authorised by the issuing company to issue Indian
Depository Receipts;
Merchant Banker registered with SEBI who is responsible for due
diligence and through whom the draft prospectus for issuance of the
IDR and due diligence certificate is filed with SEBI by the issuer
company. Gaurav Sonkar 43
 How will it work?
The process is similar to an initial public offering where a draft
prospectus is filed with the Securities and Exchange Board of India.
The minimum issue size is $500 million (around Rs 2,250 crore).
Shares underlying IDRs will be deposited with an overseas custodian
who will hold shares on behalf of a domestic depository.
IDRs will be issued through a public offer in India in the demat form
and will be listed on Indian exchanges. Trading and settlement will be
similar to those of Indian shares.
At least half of the investors have to be qualified institutional
investors with 30 per cent of the issue size reserved for small
investors.
Recently, the regulators allowed a single institutional investor to
acquire up to 15 per cent of the issue size.
In addition, banks have also been allowed to participate.
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 Regulatory Framework for Foreign Investments in India
Foreign investments in India are governed under the Foreign
Exchange Management Act, as notified by Reserve Bank of India from
time to time. The below schematic representation gives the different
routes for foreign investments in India,

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 1. Foreign Direct Investments Equity and Convertible
Instruments
Foreign Direct Investment (FDI) in India is undertaken as per the FDI
Policy formulated by the Department of Industrial Policy and
Promotion, Ministry of Commerce and Industry, Government of India.
Under FDI, investments can be made in equity shares, mandatorily
and fully convertible debentures and mandatorily and fully
convertible preference shares of an Indian company by non-residents
through two routes:
Automatic Route: Under the Automatic Route, the foreign investor or
the Indian company does not require any approval from the Reserve
Bank or Government of India for the investment.
Government Route: Under the Government Route, the foreign
investor or the Indian company should obtain prior approval of the
Government of India through the Foreign Investment Promotion
Board (FIPB), Department of Economic Affairs (DEA), Ministry of
Finance or Department of Industrial Policy & Promotion, as the case
may be. Gaurav Sonkar 46
 2. Foreign Portfolio Investors and Other Investors
a) Equity and Convertible Instruments
Foreign Institutional Investors - FIIs, sub accounts of FIIs, Qualified
Foreign Investors QFIs (these three categories has now been
merged into a single category of FPIs), Non-Resident Indians (NRIs)
and People of Indian Origin (PIOs) are eligible to purchase shares and
convertible debentures issued by Indian companies through stock
exchanges in India, either in the primary or secondary market.
FIIs, sub accounts, NRIs and PIOs can invest in equity and convertible
instruments under the Portfolio Investment Scheme (PIS).
Under PIS, the limits for investment are as follows,
The ceiling for overall investment for FIIs is 24 per cent of the paid up
capital of the Indian company and 10 per cent for NRIs/PIOs.
The ceiling of 24 per cent for FII investment can be raised up to sectoral
cap/statutory ceiling, subject to the approval of the board and the
general body of the company passing a special resolution to that effect.
Similarly, the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per
cent subject to the approval of the general body of the company passing
Gaurav Sonkar 47
a resolution to that effect.
 b) Debt Instruments
FPIs, NRIs, PIOs and Long Term Investors can buy a host of debt

instruments like dated Government securities/treasury bills,

listed or to be listed non-convertible debentures/bonds ,

commercial papers issued by Indian companies, units of

domestic mutual funds, security receipts issued by Asset

Reconstruction Companies, perpetual debt instruments eligible

for inclusion as Tier I capital and debt capital instruments as

upper Tier II Capital.

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 3. Foreign Venture Capital Investments Equity and Debt
Instruments
A SEBI registered Foreign Venture Capital Investor (FVCI) with specific
approval from the Reserve Bank of India can invest in Indian Venture Capital
Undertaking (IVCU) or a Venture Capital Fund (VCF) registered with SEBI.
An IVCU is defined as a company incorporated in India whose shares are not
listed on a recognized stock exchange in India and which is not engaged in
an activity under the negative list specified by SEBI.
A VCF is defined as a fund and registered under the Securities and Exchange
Board of India (Venture Capital Fund) Regulations, 1996. Such funds will
now move to the new regime of Alternative Investment Funds in India.
FVCIs can purchase equity /equity linked instruments/debt/debt
instruments of an IVCU or units of a VCF through initial public offer, private
placement, private arrangement or purchase from third party.

Gaurav Sonkar 49
4. External Commercial Borrowings (ECBs) and Foreign Currency
Convertible Bonds (FCCBs) Debt Instruments
ECBs refer to commercial loans in the form of bank loans, securitized
instruments (e.g. floating rate notes, fixed rate bonds, non-convertible,
optionally convertible or partially convertible preference shares) with a
minimum average maturity of 3 years. FCCBs mean a bond issued by an
Indian company expressed in foreign currency, and the principal and
interest in respect of which is payable in foreign currency.
Eligible borrowers can raise ECB/FCCB from internationally recognized
sources, such as (a) international banks, (b) international capital markets, (c)
multilateral financial institutions/regional financial institutions and
Government owned development financial institutions, (d) export credit
agencies, (e) suppliers of equipments, (f) foreign collaborators and (g)
foreign equity holders
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