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MONEY MARKET

MONEY MARKET
• Money Market is a financial market where short-term debt
financial instruments having liquidity of one year or less are
traded.
• Instruments traded in money market are call money,
certificates of deposit, Treasury bills, commercial paper etc.
• RBI is the regulator of the Money Market.

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FUNCTIONS OF MONEY MARKET

• It enables borrowers and lenders of short-term funds to fulfill
their borrowing and investment requirements.
• It promotes economic growth by ensuring the availability of
funds to various sectors of the economy such as industry,
agriculture, and service sector, among others.
• The money market allows the Reserve Bank of India (RBI) to
implement monetary policy.
• It provides an equilibrating mechanism for demand and
supply of short-term funds.
• Money market provides efficient facilities for adjustment of
liquidity positions of commercial banks, non-bank financial
institutions, business firms and other investors.

PARTICIPANTS IN THE MONEY MARKET

CENTRAL GOVERNMENT

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• The Central Government is an issuer of Government of India

Securities (G-Secs) and Treasury Bills (T-bills).
• These instruments are issued to finance the Government as
well as for managing the Government's cash flow.
• These securities are issued by the RBI, on behalf of the
Government, so as to finance the latter's budget
requirements, deficits and public sector development
programmes.

Treasury Bills
• Treasury bills (T Bills) are money market instruments issued by
Government of India.
• Three types of T bills are issued, namely 91-day, 182-day and
364-day.
• Treasury bills are issued at a discounted price and redeemed
at par value.
Cash Management Bills
• Cash Management Bill (CMB) is a short-term financial
instrument issued to meet the temporary mismatch in the
cash flow of the government.

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• CMBs were first issued in 2010 and They are issued for less
than 91 days.

PUBLIC SECTOR UNDERTAKINGS

• Public Sector Undertakings (PSUs) issue bonds which are
medium to long-term coupon (interest) bearing debt
securities.
• PSU Bonds can be of two types: taxable and tax-free bonds.
These bonds are issued to finance the working capital
requirements and long-term projects of public sector
undertakings.
• PSUs can also issue Commercial Paper to finance their
working capital requirements.

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• PSUs generate large cash surpluses. Such PSUs are active

investors in instruments like Fixed Deposits, Certificates of
Deposits and Treasury Bills.

SCHEDULED COMMERCIAL BANKS

Call Money
Call Money is the borrowing or lending of funds for 1 day by
Banks.
Notice Money
Notice Money is the borrowing or lending of funds for period
between 2 days and 14 days Banks.
Term Money
Term money refers to borrowing/lending of funds for a period
exceeding 14 days and up to one year by banks.
Certificates Of Deposit
• Certificate of deposit is a negotiable money market
instrument issued in dematerialised form.

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• It issued by scheduled commercial banks, Regional Rural

Banks Small Finance Banks and all-India Financial Institutions
that have been permitted by RBI.
• CDs are issued at a discounted price and redeemed at par
value.
• Tenor of issue can range from 7 days to 1 year.
• Banks invest in Government securities to maintain their
Statutory Liquidity Ratio (SLR), as well as to invest their surplus
funds.

PRIVATE SECTOR COMPANIES

Commercial Paper
• It was introduced in India in 1990
• Commercial Paper (CP) is an unsecured money market
instrument
• It usually has a maturity period 15 days to one year.
• It is issued at a discounted price and redeemed at par value.

Eligibility for Issue of CP

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• Anybody corporate with a minimum net worth of 100 crore or

higher.
• Co-operative societies/unions and limited liability
partnerships with a minimum net worth of 100 crore or
higher.
• Any other entity specifically permitted by the Reserve Bank

PROVIDENT/PENSION FUNDS
Provident/Pension funds have short term and long term surplus
funds. They invest their funds in debt instruments according to
their internal guidelines and as per the prescriptions by the
regulators.
The instruments that these funds generally invest in are:
Government Securities & Related Investments: G-Secs,
government-guaranteed securities, and SEBI-regulated mutual
funds focused on G-Secs.
Debt Instruments: Listed debt securities, Basel III Tier-I bonds
issued by Scheduled Commercial Banks, Rupee Bonds from

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international financial institutions, term deposits from

commercial banks, debt mutual fund units.

GENERAL INSURANCE COMPANIES

• General insurance companies (GICs) have to maintain certain
funds which have to be invested in approved investments.
• They participate in the G-Sec, Bond and short term money
market as lenders.
• It is seen that generally they do not access funds from these
markets.

LIFE INSURANCE COMPANIES

• Life Insurance Companies (LICs) invest their funds in G-Sec,
Bond or short term money markets.
• They have certain predetermined thresholds as to how much
they can invest in each category of instruments.

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MUTUAL FUNDS
Mutual funds invest in money market and debt instruments
based on the approved investment pattern of each scheme. The
proportion allocated to each instrument varies according to the
scheme's guidelines.

NON-BANKING FINANCE COMPANIES

• Non-banking Finance Companies (NBCs) invest their funds in
debt instruments to fulfill certain regulatory mandates as well
as to park their surplus funds.
• NBCs are required to invest 15% of their net worth in bonds
which fulfill the SLR requirement.

PRIMARY DEALERS (PDS)

• It participate as principals in Government of India issues
through bidding in auctions.

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• It provide underwriting services and help develop

underwriting and market-making capabilities for government
securities outside RBI.
• It offer firm buy - sell/bid ask quotes for T-Bills & dated
securities and to improve secondary market trading system.
• It strengthens the infrastructure in the government securities
market in order to make it vibrant, liquid and broad based.

MONEY MARKET – INSTRUMENTS

CALL MONEY/ NOTICE MONEY

• Call money or call deposits are those funds which the
borrower has to repay when called upon to do so by the
lender.
• A major portion of the transactions in the call market are for
an overnight tenor i.e. the borrower repays principal and
interest on the next day of the transaction.
• This market is used by participants to manage their daily
funding mismatches and to comply with CRR stipulations.

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• The rate at which the funds will be deployed or borrowed will

be driven by demand and supply of funds and determined on
the basis of the market conditions at a given point of time.
• Notice money refers to those funds where the lender has to
give a certain number of days' notice, which has been agreed
on at the time of the contract, to the borrower to repay the
funds.
• The placement of money/lending in the call/ notice money
market is unsecured.

TERM MONEY
• Term Money refers to those borrowing/lending transactions
between the participants which have tenors greater than 14
days and upto 1 year.
• The reasons for the transactions and other aspects are the
same as those for the call/notice money transactions.
• However, there is no regulatory limit on the amount a
participant can lend and borrow.

BANK FIXED DEPOSITS (FDs)

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• The banks accept term deposits for a period of 7 days and

above. The rates of interest on such deposits vary from bank
to bank.
• Deposits are collected by bank branches. The depositor gets a
Fixed/Term Deposit Receipt (FDR).
• These deposits are not transferable. However, the depositor
has an option to liquidate the deposit prior to its contracted
maturity, subject to penalty, which varies from bank to bank.
• In a strict sense a fixed deposit is not a money market
instrument since it cannot be traded. However, often banks
and FIs make investment in FDs.

CERTIFICATE OF DEPOSITS (CDs)

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• Certificate of Deposit (CD) is a negotiable money market

instrument and issued in dematerialised form.
• Banks have the freedom to issue CDs depending on their
requirements. An FI may issue CDs within the overall umbrella
limit fixed by RBI.
• The maturity period of CDs issued by banks should be not less
than 7 days and not more than one year from the date of
issue.
• The FIs can issue CDs for a period of not less than 1 year and
not exceeding 3 years from the date of issue.
• Banks/FIs are also allowed to issue CDs on floating rate basis
provided the methodology of compiling the floating rate is
objective, transparent and market based.

Other Features
• CDs can be issued to individuals, corporations, companies
(including banks and PDs), trusts, funds, associations, etc. .
• Non-Resident Indians (NRIs) may also subscribe to CDs, but
only on non-repatriable basis which should be clearly stated

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on the Receipt/Certificate. Such CDs cannot be endorsed to

another NRI in the secondary market.
• Physical CDs are freely transferable by endorsement and
delivery. Demat CDs can be transferred as per the procedure
applicable to other demat securities.
• Currently, as per RBI guidelines Banks/FIs should issue CDs
only in the demat form. However, according to the
Depositories Act, 1996, investors have the option to seek
certificate in physical form.
• Minimum amount of a CD should be Rs.1 lakh, i.e., the
minimum deposit that could be accepted from a single
subscriber should not be less than Rs. 1 lakh and in the
multiples of Rs. 1 lakh thereafter.
• The instrument is to be stamped according to the rates
prescribed by the Indian Stamp Act.
• Banks/FIs cannot grant loans against CDs. Furthermore, they
cannot buy-back their own CDs before maturity.

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• All OTC trades in CDs shall be reported within 15 minutes of

the trade on the reporting platform of Clearcorp Dealing
Systems (India) Ltd. (CDSIL).

COMMERCIAL PAPER (CP)

• CP, as a privately placed instrument, was introduced in India
in 1990 with a view to enabling highly rated corporate
borrowers to diversify their sources of short-term borrowings.
• Subsequently, primary dealers and all-India financial
institutions were also permitted to issue CP to enable them to
meet their short-term funding requirements for their
operations.
• Corporates and primary dealers (PDs), and the all-India
financial institutions (FIs) that have been permitted to raise
short-term resources under the umbrella limit fixed by
Reserve Bank of India are eligible to issue CP.
• All eligible participants shall obtain the credit rating for
issuance of Commercial Paper from any one of the SEBI
registered Credit Rating Agencies.

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• The minimum credit rating shall be 'A3' as per rating symbol

and definition prescribed by SEBI. The issuers shall ensure at
the time of issuance of CP that the rating so obtained is
current.

Other Features
• CP may be issued to and held by individuals, banking
companies, other corporate bodies registered or
incorporated in India and unincorporated bodies, Non-
Resident Indians (NRIs).
• Foreign Institutional Investors (FlIs) shall be eligible to invest
in CPs subject to such conditions as may be set for them by
Securities & Exchange Board of India (SEBI) and compliance
with the provisions of the Foreign Exchange Management Act,
1999, the Foreign Exchange (Deposit) Regulations, 2000 and
the Foreign Exchange Management (Trans-fer or Issue of
Security by a Person Resident Outside India) Regulations,
2000.

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• CP can be issued either in the form of a promissory note

(Schedule I) or in a dematerialised form through any of the
depositories approved by and registered with SEBI.
• It is provided that all RBI regulated entities can deal in and
hold CP only in dematerialised form through such
depositories.
• CP shall be issued in denominations of Rs. 5 lakh and
multiples thereof. The amount invested by a single investor
should not be less than Rs. 5 lakh (face value).
• Options (call/put) are not permitted on CP.
• Every issuer must appoint an IPA [Issue and Pay Agent] for
issuance of CP. The issuer should disclose to the potential
investors, its latest financial position as per the standard
market practice.
• Only a scheduled bank can act as an IPA for issuance of CP.
All scheduled banks, acting as IPAs, shall report the details of
issuance of CP on the Online Returns Filing System (ORFS)
module of the RBI within two days from the date of issuance
of the CP.

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• The rate of interest is determined by parties to the transaction

• The instrument is to be stamped according to the rates
prescribed by the Indian Stamp Act.

Eligibility for Issue of CP

• Anybody corporate with a minimum net worth of 100 crore or
higher.
• Co-operative societies/unions and limited liability
partnerships with a minimum net worth of 100 crore or
higher.
• Any other entity specifically permitted by the Reserve Bank

BILL REDISCOUNTING SCHEME (BRDS)

• The Bills Rediscounting Scheme (BRDS) is an initiative
introduced by the Reserve Bank of India (RBI).

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• The scheme is designed to provide a mechanism for banks

and financial institutions to rediscount bills of exchange and
promissory notes with the eligible entities.
• The bank borrowing under BRDS issues a Derivative Usance
Promissory Note and certifies its possession of eligible bills
equal to the transaction amount.
• BRDS transactions have a minimum tenor of 15 days and a
maximum of 90 days.

ELIGIBILITY CRITERIA FOR REDISCOUNTING BILLS

• Bills eligible for rediscounting must originate from legitimate
trade transactions. Bills from house transactions and finance
companies are excluded from BRDS coverage.
• The bill of exchange must not be encumbered or tied to any
obligations and The bill's remaining term should not exceed
90 days.
• The advances of a bank borrowing under the BRDS get
reduced to the extent of the borrowing, while it is shown as
an advance on the lender's books.

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INTER-BANK PARTICIPATION CERTIFICATES (IBPCs)

• IBPC is yet another short-term money market instrument
whereby the banks can raise money/ deploy short-term
surplus.
• In the case of IBPC the borrowing bank (Issuing Bank) passes
on/sells the loans and credit that it has in its book, for a
temporary period, to the lending bank (Participating Bank).
• IBPCs are of two types with risk sharing and without risk
sharing .Scheduled Commercial Banks can issue and
purchase/participate in IBPCs.
• The scheme was also extended to the Regional Rural Banks
(RRBs) in 2009 whereby they were allowed to issue IBPCs to
scheduled commercial banks in respect of their priority sector
advances.

FEATURES OF INTER-BANK PARTICIPATION CERTIFICATES

(IBPCS)
• The minimum period shall be 91 days and maximum period
180 days in the case of IBPCs on risk sharing basis and in the

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case of IBPCs under non-risk sharing basis the total period is

limited to 90 days.
• The maximum participation in loan/cash credit under IBPC
would be 40% of the amount outstanding or the limit
sanctioned, whichever is lower The participation, however,
should be in "standard asset" only.
• Interest rates are determined between issuing bank and the
participating bank.
• IBPCs are not transferable and IBPCs cannot be redeemed
before due date.
• In case the balance in the cash credit/loan account on which
IBPCs have been issued comes down, at any point of time, the
issuing bank has to repay the portion of the IBPCs issued to
the participating bank so that the participation is not more
than 40% of the balance outstanding in the said accounts

Q: 1 Which of these statements is correct regarding money

market?

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I. It involves low market risk.

II. SEBI is the regulator of the Money Market
III. Deals in short-term debt instruments.
IV. The instruments traded are highly liquid
a) I, III, IV
b) II, III, IV
c) I, II, IV
d) I, II, III,

Q: 2 Money Market allows the Reserve Bank of India (RBI) to

implement ___________.
a) Long-term infrastructure projects

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b) Monetary policy
c) Foreign exchange policy
d) Capital market policy

Q: 3 Certificates of Deposit are issued at a discounted price and

redeemed at par value. Certificates of Deposit is issued by

__________.
I. Scheduled commercial banks
II. Regional Rural Banks
III. Small Finance Banks
IV. All-India Financial Institutions that have been permitted by
RBI

a) I, III, IV

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b) II, III, IV

c) I, II, IV

d) I, II, III, IV

Q: 4 T-Bills, which are short-term securities sold at a discount

and redeemed at face value, help the government cover

immediate expenses and manage cash flow efficiently. T-
bills are issued by __________.

a) The Central Government

b) The State Government

c) The Local Government

d) All of the above

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Q: 5 Cash Management Bills (CMBs) are a type of short-term

debt instrument issued by the government to address what

kind of financial situation?
a) Long-term investment needs

b) Temporary cash flow mismatches

c) Funding large infrastructure projects

d) Paying off long-term debts

Q: 6 What is the typical maturity period for commercial paper?

a) More than 5 years

b) Over 10 years

c) Between 15 days to one year.

d) None of the above

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Q: 7 Which of the following entities is NOT eligible to issue

commercial paper in India?

a) Any corporate entity possessing a net worth of at least 100
crore or more.
b) Any additional organization explicitly authorized by the
Reserve Bank.
c) Cooperative societies, unions, and limited liability
partnerships with a net worth of a minimum 100 crore or
higher.
d) None of the above

MONEY MARKET
MONEY MARKET – INSTRUMENTS

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COLLATERALISED BORROWING AND LENDING OBLIGATION

(CBLO)
• CBLO is a money market instrument approved by RBI. This is a
product developed by Clearing Corporation of India Ltd.
(CCIL).
• It enables entities to borrow or lend funds against collateral
in a secured and efficient manner and borrowers must pledge
eligible securities to CCIL, which acts as a central
counterparty.
• It is designed primarily catering to entities that do not have
direct access to the interbank call money market or have
been given restricted participation in terms of ceiling on call
borrowing and lending transactions
• Maturity period ranging from one day to ninety days (can be
made available up to one year as per RBI guidelines).
• In order to enable the market participants to borrow and lend
funds, CCIL provides the Dealing System through Indian
Financial Network (INFINET).

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• Membership (including Associate Membership) of CBLO

segment is extended to banks, financial institutions, insurance
companies, mutual funds, primary dealers, NBFCs, non-
Government Provident Funds, Corporates etc.
• The Members are required to open Constituent SGL (CSGL)
Account with CCIL for depositing securities which are offered
as collateral/margin for borrowing and lending of funds.
• Besides, Associate Members are required to open a current
account with a Settlement Bank designated by CCIL for
settlement of funds.

TREASURY BILLS (T-BILLS)

• Treasury bill is a short-term money market instrument

issued by the Government of India (GOI) through the RBI.
• The T-Bills are issued in the primary market by the Reserve
Bank of India periodically. Normally there are T-Bill auctions
every week.

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• The market participants have to bid for a discounted price

in the auction. The cut-off price for the auction is
determined by the RBI at a level where the notified amount
of the auction is fully bid for.
• T-Bills have a moderately active secondary market. The
secondary market trades in T-Bills on a yield basis.

REPURCHASE AGREEMENTS (REPOS)

• It is a repurchase agreement for borrowing and lending of
funds, on a collateralised basis.
• A repo involves selling of a security, with an agreement to
repurchase the same, at a future date, at a predetermined
price.
• The seller of the security receives funds, while the buyer of
the security receives collateral for the funds that has been
lent.

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• REPO is also undertaken by RBI for controlling liquidity in the

market as also to help banks in need of liquidity. The banks
can borrow funds from RBI by doing a REPO.
• Repo rate is the annualized interest rate for the funds lent by
the buyer of the securities (lender) to the seller of the
securities (borrower).
• Generally, the repo rate is lower than that offered on
unsecured (or clean) inter-bank loan for the reason that it is
a collateralised transaction.
Ready Forward Transaction
A repo is sometimes called a ready forward transaction as it is a
means of funding by selling a security held on a spot (ready)
basis and repurchasing the same on a forward basis.
Double Ready Forward Transaction.
When an entity sells a security to another entity on repurchase
agreement basis and simultaneously purchases some other
security from the same entity on resell basis it is called a double
ready forward transaction.

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Repo Pricing
• The price adjustment depends on the relationship between
the net coupon and the repo amount worked out on the basis
of the repo interest agreed upon the total funds transferred.
• When repo rate is higher than current yield, repurchase price
will be adjusted upward signifying a capital loss for seller.
• If the repo rate is lower than the current yield, then the
repurchase price will be adjusted downward signifying a
capital gain for seller.
• If the repo rate and coupon are equal, then the repurchase
price will be equal to the sale price of security since no price
adjustment at the repurchase stage will be required.

Eligible Instruments
Different instruments can be considered as collateral security for
undertaking the ready forward deals and they include

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Government dated securities, Treasury Bills, corporate bonds,

money market securities and equity.

Types of Repos
Broadly, there are four types of repos available in the
international market when classified with regard to maturity of
underlying securities, pricing, term of repo etc.
Buy-Sell Repo
• Under a buy-sell repo transaction, the lender actually takes
possession of the collateral. Here, a security is sold outright
and bought back simultaneously for settlement on a later
date.
• In a buy-sell repo, the ownership is passed on to the buyer
and hence he retains any coupon interest due on the bonds.
• The forward price of the bond is set in advance at a level
which is different from the spot clean price by actually
adjusting the difference between repo interest and coupon
earned on the security.

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Classic Repo
• In the case of this type of repo, the start and end prices of the
securities are the same and a separate payment of "interest"
is made.
• Classic repo makes it explicit that the securities are only
collateral for cash loan. Here, the coupon income will accrue
to the seller of the security.

Hold in custody repo

Under a 'hold in custody' repo, the counterparties enter into an
agreement whereby the securities sold are held in custody by
the seller for the buyer until maturity of the repo thus
eliminating the settlement requirements.
Tripartite repo
• In this repo securities are sold by the borrower to the lender,
but they are held by a third-party custodian during the term
of the repo agreement.

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• The custodian ensures that the securities remain in

safekeeping and cannot be sold or pledged again during the
repo period.
• Under a Tripartite repo, a common custodian/ clearing
agency arranges for custody, clearing and settlement of repo
transactions.

Repo Period
• Repo transaction can be undertaken for overnight to a longer
term period. Overnight repo lasts only one day.
• If more than one day period is fixed and agreed in advance, it
is a term repo. Though these are terminated as per
agreement, it is possible for either party to terminate the repo
at any time by giving one- or two-days’ notice.
• In an open repo, there is no such fixed maturity period, and
the interest rate would change from day to day depending on
the money market conditions.
• Under flexible repos the lender places funds, but they are
withdrawn by the borrower as per his requirements over an
agreed period.

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Risks
• Repos are collateralized transactions, the parties to repo are
exposed to counterparty risk and the issuer risk associated
with the collateral.
• Counterparty risk is minimized because the lender can
liquidate the securities received as collateral to offset any
potential loss.
• Lenders in repos may face interest rate risk because rising
interest rates can lower the market value of the securities
used as collateral.
• If the borrower defaults or becomes bankrupt and fails to
repurchase the securities, the lender might be left holding
securities worth less than the loan amount.
• Borrowers in repos are also at risk if interest rates fall, as the
market value of the securities sold increases, leading to a loss
of opportunity.
• If the lender defaults, the borrower may need to repurchase
the securities at a higher market price, incurring a loss.

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Documentation
• Legal title to the collateral security, which is used in repo
transaction, passes to the buyer during the repo period.
• As a result, in case the seller defaults in repayment of funds
the buyer need not establish right on the collateral security.

Agreement (OSLA) developed by the International Stock

Lenders Association.
• The Overnight Stock Lending Agreement (OSLA), developed by
the International Securities Lending Association (ISLA), is a
master agreement that governs the relationship between
parties in repo transactions.
• It sets out terms for securities transfer, margin requirements,
marking to market, and how income on securities is handled.
• It defines events of default and the actions parties can take in
case of default, such as set-off of claims.
• The agreement also covers collateral substitution and
specifies the timing for coupon and interest payments.

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• In short, OSLA ensures clear terms for security, obligations,

and risk management in repo transactions.

Uses
• An active repo market would lead to an increase in turnover
in the money market, thereby improving liquidity and depth
of the market;
• Repos would increase the volumes in the debt market as it is
a tool for funding transactions. It enables dealers to deal in
higher volumes.
• Repos provide an inexpensive and most efficient way of
improving liquidity in the secondary markets for underlying
instruments.
• For institutions and corporate entities, repos provide a
source of inexpensive finance and offers investment
opportunities of borrowed money at market rates thus
earning a good spread.

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• Tripartite repos will offer opportunities for suitable financial

institutions to intermediate between the lender and the
borrower;
• A large number of repo transactions with different durations
create a term interest rate structure, particularly in the
interbank market.
• Central banks can use repo as an integral part of their open
market operations with the objective of
injecting/withdrawing liquidity into/ from the market and
also to reduce volatility in short term, in particular, in call
money rates.
• Bank reserves and call rates are used in such instances as the
operating instruments with a view to ultimately easing/
tightening the monetary conditions.

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CAPITAL MARKET

CAPITAL MARKET
• Capital market is a financial market in which long-term debt
or equity-backed securities are bought and sold.
• The main instruments traded in the capital market are –
equity shares, debentures, bonds, preference shares etc.
• SEBI is the regulator of the Capital Market.

FINANCIAL PRODUCTS DEALT IN CAPITAL MARKET

EQUITY SHARES
• The holders of equity shares are the real owners of the
company.
• Equity shareholder have a control over the working of the
company and they have voting rights.

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• The equity shares which are issued by the company are

permanent and are non-redeemable.
• Equity shareholders are entitled to dividends from
distributable profits at a rate decided by the Board.
• Market price of shares depends on factors such as earnings,
dividends, liquidity, and economic conditions.
• Shares are transferable and considered movable property,
with each share identified by a distinct number.
• Share certificates are issued to registered shareholders within
three months of share allotment.
• Shares are now issued and traded in dematerialized form,
eliminating physical certificates.
• NSDL and CDSL are the two central depositories managing
electronic shares, with Depository Participants (DPs) handling
them.

PREFERENCE SHARES

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• Preference shares represent ownership in a company. They

are secondary owner of business.
• Preference shareholders enjoy the preference over common
shareholders in the payment of dividend and capital.
• Fixed rate of dividend is paid to the preference share holder.
Types of Preference Shares
Cumulative Preference Shares : These shares accumulate
unpaid dividends from previous years. If the company is unable
to pay dividends in a particular year, the unpaid dividends are
carried forward and must be paid before any dividends are
distributed to equity shareholders.
Non-Cumulative Preference Shares: These shares do not
accumulate unpaid dividends. If the company does not declare
a dividend in a given year, the shareholder has no right to claim
it in the future.
Participating Preference Shares: These shares provide
shareholders with a fixed dividend, but also allow them to
participate in any additional profits of the company, beyond

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the fixed dividend, after the equity shareholders have received

their due share.

Convertible Preference Shares: These shares can be converted

into a certain number of equity shares at a predetermined price,
within a specified time frame.
Redeemable Preference Shares: These shares are issued on
condition that the company can buy them back (redeem) at a
future date, at a fixed price or according to a predetermined
schedule.
Irredeemable Preference Shares: These shares cannot be
redeemed by the company, meaning they must remain
outstanding until the company is liquidated or dissolved.
EXTERNAL COMMERCIAL BORROWINGS (ECB)
• An external commercial borrowing (ECB) is an instrument
used in India to facilitate the access to foreign money by
Indian corporations and Public Sector Undertaking.

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• External Commercial Borrowings (ECB) are commercial loans

raised by eligible resident entities from recognised non-
resident entities.

ECB Framework: Three Tracks for Raising Loans

Track I: Medium term foreign currency denominated ECB with
minimum average maturity of 3/5 years.
Track II: Long term foreign currency denominated ECB with
minimum average maturity of 10 years.
Track III: Indian Rupee (INR) denominated ECB with minimum
average maturity of 3/5 years.

Forms Of ECB
The ECB Framework enables permitted resident entities to
borrow from recognized non-resident entities in the following
forms:
• Loans including bank loans
• Securitized instruments
• Buyers' credit

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• Suppliers' credit
• Foreign Currency Convertible Bonds (FCCBs).
• Financial Lease
• Foreign Currency Exchangeable Bonds

Available Routes For Raising ECB

• Under the ECB framework, ECBs can be raised either under the
automatic route or under the approval route.
• For the automatic route, the cases are examined by the
Authorized Dealer Category-I (AD Category-I) banks.
• Under the approval route, the prospective borrowers are
required to send their requests to the RBI through their ADs
for examination.
• While the regulatory provisions are mostly similar, there are
some differences in the form of amount of borrowing,
eligibility of borrowers, permissible end-uses, etc. under the
two routes.

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• While the first six forms of borrowing, can be raised both

under the automatic and approval routes, Foreign Currency
Exchangeable Bonds can be issued only under the approval
route.

PARAMETERS FOR ECB

Track I:
Minimum Average Maturity Period
• 3 years for ECB upto USD 50 million or its equivalent.
• 5 years for ECB beyond USD 50 million

Eligible Borrowers
• Companies in manufacturing and software development
sectors.
• Shipping and airlines companies.
• Small Industries Development Bank of India (SIDBI).
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• Units in Special Economic Zones (SEZs).

• Export Import Bank of India (Exim Bank) (only under the
approval route).

Recognised Lenders/Investors
• International banks.
• International capital markets.
• Multilateral financial institutions
• Regional financial institutions
• Government owned financial institutions.
• Export credit agencies.
• Suppliers of equipment.
• Foreign equity holders.
• Overseas long term investors such as:

(a) Prudentially regulated financial entities;

(b) Pension funds;
(c) Insurance companies;
(d) Sovereign Wealth Funds;
(d) Financial institutions located in International
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All-in-Cost (AIC)

The all-in-cost ceiling is prescribed through a spread over the

benchmark rate as under:
• For ECB with minimum average maturity period of 3 to 5
years - 300 basis points per annum over 6-month LIBOR or
applicable bench mark for the respective currency.
• For ECB with average maturity period of more than 5 years -
450 basis points per annum over 6-month LIBOR or applicable
bench mark for the respective currency.
• Penal interest, if any, for default or breach of covenants
should not be more than 2 per cent over and above the
contracted rate of interest.

End-use prescriptions
• ECB proceeds can be utilised for capital expenditure in the
form of:

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a) Import of capital goods including payment towards import of

services, technical know-how and license fees.
b) Local sourcing of capital goods.
c) New project;
d) Modernisation/expansion of existing units;
e) Overseas direct investment in Joint ventures (JV)/Wholly
owned subsidiaries (WOS);
f) Acquisition of shares of public sector undertakings at any
stage of disinvestment under the disinvestment programme
of the Government of India.
g) Refinancing of existing trade credit raised for import of
capital goods;
h) Payment of capital goods already shipped/imported but
unpaid;
i) Refinancing of existing ECB provided the residual maturity is
not reduced.
• SIDBI can raise ECB only for the purpose of on-lending to the
borrowers in the Micro, Small and Medium Enterprises
(MSME sector), where MSME sector is as defined under the

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MSME Development Act, 2006, as amended from time to

time.
• Units of SEZs can raise ECB only for their own requirements.
• Shipping and airlines companies can raise ECB only for import
of vessels and aircrafts respectively. The respective conditions
will be applicable for all the three tracks.
• ECBs for the following purposes will be considered only under
the approval route:
a) Import of second hand goods as per the Director General of
Foreign Trade (DGFT) guidelines;
b) On-lending by Exim Bank.

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