FINANCIAL MANAGEMENT 1

Prof. R Madhumathi
Department of Management Studies
 Module 3
Financing Source
 Shares

Debentures

Warrants
 SECURITIES
1. Corporate securities
 Equity Shares
 Preference Shares
 Debentures
 Bonds
 Warrants
2. Deposits in banks and non-banking companies.
3. UTI and other mutual fund schemes.
4. Post office deposits and certificates
5. Life insurance policies
6. Provident fund schemes.
7. Government and semi-Government securities.
Corporate securities: Corporate securities are the securities issued by joint
stock companies in the private sector. These include equity shares,
preference shares and debentures. Equity shares have variable dividend and
hence belong to the high risk - high return category, while preference shares
and debentures have fixed returns with lower risk.

Deposits: Among the non-corporate investments, the most popular are

deposits with banks such as savings accounts and fixed deposits. Savings
deposits have low interest rates whereas fixed deposits have higher interest
rates varying with the period of maturity. Interest is payable quarterly or
half-yearly. Fixed deposits may also be recurring deposits wherein savings
are deposited at regular intervals. Some banks have reinvestment plans
wherein savings are deposited at regular intervals. Some banks have
reinvestment plans wherein the interest is reinvested as it gets accrued. The
principal and accumulated interest are paid on maturity.
Deposits: Joint stock companies also accept fixed deposits from the
public. The maturity period varies from three to five years. Fixed deposits
in companies have high risk since they are unsecured, but they promise
higher returns than bank deposits.
Fixed deposit in non-banking financial companies(NBFCs) is another
investment avenue open to savers. NBFCs include leasing companies, hire
purchase companies, investment companies, chit funds etc. Deposits in
NBFCs carry higher returns with higher risk compared to bank deposits.

Mutual fund schemes: UTI is the oldest mutual fund in the country. It has
many investment schemes. Unit Scheme 1964, Unit Linked Insurance Plan
1971, Master share, Master Equity Plans, Mastergain etc. are some of the
popular schemes of UTI. A number of commercial banks and financial
institutions have set up mutual funds. Mutual funds have been set up in
the private sector also. These mutual funds offer various investment
schemes to investors.
Post office deposits and certificates: The investment avenues provided by
post offices are generally non-marketable. Moreover, the major investments
in post office enjoy tax concessions also. Post offices accept savings deposits
as well as fixed deposits from the public. There is also a recurring deposit
scheme which is an instrument of regular monthly savings.
Six-year National Savings Certificates(NSC) are issued by post office to
investors. The interest on the amount invested is compounded half-yearly
and is payable along with the principal at the time of maturity which is six
years from the date of issue.
Indira Vikas Patra and Kissan Vikas Patra are savings certificates issued by
post office.

Life insurance Policies: The Life Insurance corporation offers many

investment schemes to investors. These schemes have the additional
facility of life insurance cover. Some of the schemes of LIC are whole Life
Policies, Convertible Whole Life Assurance Policies, Endowment Assurance
policies, Jeevan Saathi, Money Back Plan, Jeevan Dhara, Marriage
Endowment Plan, etc. Private insurance companies have also come up with
savings options.
Provident fund Scheme: Provident fund schemes are compulsory deposit
schemes applicable to employees in the public and private sectors. There
are three kinds of provident funds applicable to different sectors of
employment, namely, Statutory Provident Fund, Recognized Provident Fund
and Unrecognized Provident Fund.
In addition to these, there is a voluntary provident fund scheme which is
open to any investor whether employed or not. This is known as the Public
Provident Fund (PPF). Any member of the public can join the scheme which
is operated by the post office and the State Bank of India.

Government and semi-Government securities: The government and

semi-government bodies like the public sector undertakings borrow
money from the public through the issue of Government securities and
public sector bonds. These are less risky avenues of investment because
of the credibility of the Government and Government undertakings.
 EQUITY SHARES
• Equity shares are commonly referred to as common
stock or ordinary shares. Even though the words shares
and stocks are interchangeably used, there is a
difference between them. Share capital of a company is
divided into a number of small units of equal value
called shares. The term stock is the aggregate of a
member's fully paid up shares of equal value merged
into one fund. It is a set of shares put together in a
bundle. The "stock" is expressed in terms of money and
not as many shares. Stock can be divided into fractions
of any amount and such fractions may be transferred
like shares.
 EQUITY SHARES
• Share certificate means a certificate under the common seal
of the company specifying the number of shares held by any
member. Share certificate provides the prima facie evidence
of title of the members to such shares. This gives the
shareholder the facility of dealing more easily with the shares
in the market. It enables the sale of shares by showing
marketable title.
 EQUITY SHARES
Equity shares have the following rights according to
section 85 (2) of the Companies Act 1956 in India:
1. Right to vote at the general body meetings of the company.
2. Right to control the management of the company.
3 Right to share in the profits in the form of dividends and bonus shares.
4. Right to claim on the residual value after repayment of all the claims in the
case of winding up of the company.
5. Right of pre-emption in the matter of issue of new capital.
6. Right to apply to court if there is any discrepancy in the rights set aside.
7. Right to receive a copy of the statutory report, copies of annual accounts
along with audited report.
8. Right to appeal to the central government to call an annual meeting when a
company fails to call such a meeting.
9. Right to appeal to the Company Law Board for calling an extraordinary
general meeting.
 EQUITY SHARES
• In a limited company the equity shareholders are
liable to pay the company's debt only to the extent of
their share in the paid up capital. The equity shares
have certain advantages. The main advantages are:
• Capital appreciation
• Limited liability
• Free tradability
• Tax advantages (in certain cases) and
• Hedge against inflation
 EQUITY SHARES
• Types of Equity Shares
– Non-voting Shares
– Rights Shares
– Bonus shares
– Sweat Equity
 NON-VOTING SHARES
• Non-voting shares carry no voting rights. They carry additional
dividends instead of the voting rights. Even though the idea was
widely discussed in 1987, it was only in the year 1994 that the
Finance Ministry announced certain broad guidelines for the
issue of non-voting shares.

• They have right to participate in the bonus issue. The non-voting

shares also can be listed and traded in the stock exchanges. If
non-voting shares are not paid dividend for two years, the shares
would automatically get voting rights. The company can issue this
to a maximum of 25 per cent of the voting stock. The dividend on
non-voting shares would have to be 20 percent higher than the
dividend on the voting shares. All rights and bonus shares for the
non-voting shares have to be issued in the form of non-voting
shares only.
 RIGHTS SHARES
• Shares offered to the existing shareholders at a price by the company
are called rights shares. They are offered to the shareholders as a
matter of legal right. If a public company wants to increase its
subscribed capital by way of issuing shares after two years from its
formation date or one year from the date of first allotment,
whichever is earlier, such shares should be offered first to the existing
shareholders in proportion to the capital paid up on the shares held
by them at the date of such offer. This pre-emptive right can be
forfeited by the shareholders through a special resolution. The
shareholder can renounce the rights shares in favour of a nominee in
part or fully. The rights shares may be partly paid. Minimum
subscription limit is prescribed for rights issues. In the event of
company failing to receive 90% subscription, the company shall have
to return the entire money received. At present, SEBI has removed
this limit. Rights issues are regulated under the provisions of the
Companies Act and SEBI.
 BONUS SHARES
• Bonus share is the distribution of shares in addition to the
cash dividends to the existing shareholders. Bonus shares
are issued to the existing shareholders without any
payment of cash. The aim of bonus share is to capitalise the
free reserves. The bonus issue is made out of free reserves
built out of genuine profit or share premium collected in
cash only. The bonus issue could be made only when all the
partly paid shares, if any, existing are made fully paid up.

• The declaration of the bonus issue used to have favourable

impact on the psychology of the shareholders. They take it
as an indication of higher future profits. Bonus shares are
declared by the directors only when they expect a rise in
the profitability of the concern. The issue of bonus shares
enables the shareholders to sell the shares and get capital
gains while retaining their original shares.
 SWEAT EQUITY
• Sweat equity is a new equity instrument introduced in the
Companies (Amendment) Ordinance, 1998. Newly inserted
Section 79A of the Companies Act, 1956 allows issue of sweat
equity. However, it should be issued out of a class of equity
shares already issued by the company. It cannot form a new class
of equity shares. Section 79A (2) explains that all limitations,
restrictions and provisions applicable to equity shares are
applicable to sweat equity. Thus, sweat equity forms a part of
equity share capital.
• The definition of sweat equity has two different dimensions:
– Shares issued at a discount to employees and directors.
– Shares issued for consideration other than cash for providing know-
how or making available rights in the nature of
intellectual property rights or value additions.
 SWEAT EQUITY
• In its first form, issue of sweat equity may be priced at
a discount to the preferential pricing or at a discount
to face value. Issue of sweat equity falls in the
category of preferential issue under Section 81 (lA) of
the Companies Act, 1956. Agreed upon price of shares
of the company is derived in accordance with
preferential pricing norm, which may be called as
normal price.

• The level of discount to normal price may be decided

on the basis of the valuation of the intangibles to be
acquired. Discount is the difference between the
normal price and price at which sweat equity is
issued.
 SWEAT EQUITY
• Discount may also mean any issue of sweat equity
below the par value. This eases the restriction on issue
of shares at discount as stated in Section 79. This route
can be used by a company whose share price is 10-20%
above the par value. Issue of shares at discount under
Section 79 can be carried at 10% discount. In case of
sweat equity, it becomes imperative to decide the
maximum level of discount that can be offered to the
employees and directors.

• The second type of sweat equity can be issued at par or

above par. In other words, the sweat equity can be
issued against know-how, intellectual property rights or
in recognition of value additions. Issue of sweat equity
for consideration other than cash should be at the
normal preferential price.
 Reasons for issuing sweat equity
• Directors and employees contribute intellectual property rights
to the company. This may be in the form of providing technical
know-how captured by way of research, contributing to the
company in the form of strategy, software developed for the
company, or adding profit.

• Traditional way of recognizing the employees and directors in

the form of monetary and non-monetary benefit is deficient.
Even incentive bonus on the basis of performance fails to
reward them adequately. Rather in the matter of intellectual
property right, the contributing employees/directors are not
well protected.

• In case a director/employee leaves the company or is asked

to leave, the generation of cash flows to the company for
an unidentified future period is not stopped and the
director/employee also gets adequate return.
 Sweat equity is especially for
• Directors/employees who designed strategic alliance
• Directors/employees who worked for strategic market penetration
and helped the company attain sustainable market share.

In the service industry, sweat equity has a special relevance. The major
industries where the directors and employees can be rewarded
through sweat equity are:

 Computer hardware and software development

 Management consultancy where a standard strategy is issued to earn a
fee, like Enterprise Resource Planning (ERP) solution
 NBFCs where product design is crucial
 Other non-traditional financial service industries like
custodians, depositories and credit rating wherein basic service design
is important
 In the life insurance segment, commission-based business can
be converted into sweat equity with development officers and
branch managers (sales)
 PREFERENCE SHARES
• The characters of the preferred share are hybrid in nature. Some of
its features resemble the bond and others the equity shares. Like the
bonds, their claims on the company's income are limited and they
receive fixed dividend. In the event of liquidation of the company
their claims on the assets of the firm are also fixed. At the same time
like the equity, it is a perpetual liability of the corporate. The decision
to pay dividend to the preferred stock is at the discretion of the
Board of Directors. In the case of bonds, payment of interest rate is
mandatory.

• The dividend received by the preferred share is treated on par with

the dividend received from the equity share for tax purposes. These
shareholders do not enjoy any of the voting powers except when any
resolution affects their rights.
 Types of Preference Shares

• Cumulative preference shares

• Non-cumulative preference shares
• Convertible preference shares
• Non-Convertible preference shares
• Redeemable preference shares
• Irredeemable preference shares
• Cumulative Convertible Preference shares
 Cumulative preference shares
• Here, the cumulative total of all unpaid preferred
dividends must be paid before dividends are paid on
the common equity. The unpaid dividends are known
as arrears. The arrears do not earn interest. The non
payment of the dividend only continues to grow. The
arrears occur only for a limited number of years and
not indefinitely. Generally three years of arrears accrue
and the accumulative feature ceases after three years.
But the dividends in arrears continue if there is no
provision in the Articles of Association. In the case of
liquidation, no arrears of dividends are payable unless
there is a provision for them in the Articles of
Association.
 Non-cumulative shares
• As the name suggests, the dividend does not accumulate. If there is
no profit or inadequate profit in the company in a particular year,
the company does not pay it. When the company is wound up if the
preference and equity shares are fully paid they have no further
rights to have claims in the surplus. If there is a provision in the
Articles of Association for such claims, then they have the rights to
claim.

Convertible preference shares

The convertibility feature makes the preference share a more
attractive investment security. The conversion feature is almost
identical with that of the bonds. These preference shares are
convertible as equity shares at the end of the specified period and are
quasi-equity shares. This gives the additional privilege of sharing the
potential increase in the equity value, along with the security and
stability of income.
 Non-Convertible preference shares
• The non-convertibility feature implies that the preference
shares retain their characteristics of a preference share
document.
Redeemable preference shares
If there is a provision in the Articles of Association, redeemable
preference shares can be issued. But redemption of the shares can be
done only when
a) The partly paid up shares are made fully paid up.
b) The fund for redemption is created from the profits, which would
otherwise be available for distribution of dividends or out of the proceeds
of a fresh issue of shares for the purpose.
c) If any premium has to be paid on redemption, it should be paid out of
the profits or out of the company's share premium account.
d) When redemption is made out of profits, a sum equal to the nominal
value of the redeemed shares should be transferred to the capital
redemption reserve account.
 Irredeemable preference shares
• This type of shares is not redeemable except on occasion like
winding up of the business. In India, this type of shares were
permitted till 15th June 1988. The introduction of section 80A in
the Companies Act 1956 has put an end to it.
Cumulative Convertible Preference Shares (CCPS)
This CCPS was introduced by the Government in 1984 This preference
share gives a regular return say 10% during the gestation period from
three years to five years and then are converted into equity as per the
agreement. According to the guidelines, CCPS can be issued for any of
the following purposes (a) setting up of new projects (b) expansion or
diversification of existing projects (c) normal capital expenditure for
modernization and (d) working capital requirements. CCP failed to
attract the interest of the investors because the rate of interest is very
low and the gain that could be received from the conversion into
equity also depends on the profitable functioning of the company.
 DEBENTURES
• According to the Companies Act 1956, "Debenture includes
debenture stock, bonds and any other securities of company,
whether constituting a charge on the assets of the company
or not". Debentures are generally issued by the private sector
companies as a long-term promissory note for raising loan
capital. The company promises to pay interest and principal
as stipulated. Bond is an alternative form of debenture in
India. Public sector companies and financial institutions issue
bonds.
 Characteristic Features of Debentures
• Form It is given in the form of certificate of indebtedness by the
company specifying the date of redemption and interest rate.
• Interest The rate of interest is fixed at the time of issue itself which is
known as contractual or coupon rate of interest. Interest is paid as a
percentage of the par value of the debenture and may be paid
annually, semi annually or quarterly. The company has the legal
binding to pay the interest rate.
• Redemption As stated earlier the redemption date would be specified
in the issue itself. The maturity period may range from 5 years to 10
years in India. They may be redeemed in installment. Redemption is
done through a creation of sinking fund by the company. A trustee
incharge of the fund buys the debentures either from the market or
owners. Creation of the sinking fund eliminates the risk of facing
financial difficulty at the time of redemption because redemption
requires a huge sum.
• Buy back provisions help the company to redeem the debentures at a
special price before the maturity date. Usually the special price is
higher than the par value of the debenture.
 Characteristic Features of Debentures
• Indenture: Indenture is a trust deed between the
company issuing debenture and the debenture trustee
who represents the debenture holders. The trustee
takes the responsibility of protecting the interest of the
debenture holders and ensures that the company
fulfills the contractual obligations. Financial
institutions, banks, insurance companies or firm
attornies act as trustees to the investors. In the
indenture the terms of the agreement, description of
debentures, rights of the debenture holders, rights of
the issuing company and the responsibilities of the
company are specified clearly.
 Types of Debentures
• Debentures are classified on the basis of the security and
convertibility :
• Secured or unsecured
• Fully convertible debenture
• Partly convertible debenture
• Non-convertible debenture
 Secured or unsecured
• A secured debenture is secured by a lien on the company's
specific assets. In the case of default the trustee can take hold
of the specific asset on behalf of the debenture holders. In the
Indian market secured debentures have a charge on the
present and future immovable assets of the company.

• When the debentures are not protected by any security they

are known as unsecured or naked debentures. In the
American capital market debenture means unsecured bonds
while bonds could be secured or unsecured in the Indian
market. Unsecured debentures find it difficult to attract
investors because of the risk involved in them. Generally
debentures are rated by the credit rating agencies.
 Fully convertible debenture
• This type of debenture is converted into equity shares of the
company on the expiry of specific period. The conversion is
carried out according to the guidelines issued by SEBl. The FCD
carries lower interest rate than other types of debentures
because of the attractive feature of convertibility into equity
shares.
Partly convertible debenture
This debenture consists of two parts namely convertible and non-
convertible. The convertible portion can be converted into shares
after a specific period. Here, the investor has the advantage of
convertibe and non-convertible debentures blended into one
debenture. Example: Procter and Gamble had issued PCD of Rs 200
each to its existing shareholders. The investor can get a share for
Rs 65 with the face value of Rs 10 after 18 months from allotment.
 Non-convertible debenture

Non-convertible debentures do not confer any option

on the holder to convert the debentures into equity
shares and are redeemed at the expiry of the specified
period.
 BONDS
• Bond is a long term debt instrument that promises to pay a
fixed annual sum as interest for specified period of time.
The basic features of the bonds are given below
1) Bonds have face value. The face value is called par value. The bonds
may be issued at par or at discount.
2) The interest rate is fixed. Sometimes it may be variable as in the case of
floating rate bond. Interest is paid semi-annually or annually. The interest
rate is known as coupon rate. The interest rate is specified in the
certificate.
3) The maturity date of the bond is usually specified at the issue time
except in the case of perpetual bonds.
4) The redemption value is also stated in the bonds. The redemption value
may be at par value or at premium.
5) Bonds are traded in the stock market. When they are traded the market
value may be at par or at premium or at discount. The market value and
redemption value need not be the same.
 Types of Bonds
• Secured bonds and unsecured bonds
• Perpetual bonds and redeemable bonds
• Fixed interest rate bonds and floating interest
rate bonds
• Zero coupon bonds
• Deep discount bonds
• Capital indexed bonds
 Secured bonds and unsecured bonds The secured bond is
secured by the real assets of the issuer. In the case of the
unsecured bond the name of issuer may be the only security.
Perpetual bonds and redeemable bonds Bonds that do not mature
or never mature are called perpetual bonds. The interest alone
would be paid. In the redeemable bond the bond is redeemed after
a specific period of time. The redemption value is specified by the
issuer.

Fixed interest rate bonds and floating interest rate bonds In the
fixed interest rate bonds the interest rate is fixed at the time of the
issue. Whereas in the floating interest rate bonds the interest rates
change according to the prefixed norms. For example in Dec 1993
State Bank of India issued floating interest rate bonds worth Rs 500
Cr. pegging the interest rate with its own three and five years fixed
deposit rates to provide built in yield flexibility to the investors
Zero coupon bonds: These bonds sell at a discount and the face value is
repaid at maturity. The origin of this type of bond can be traced in the U.S.
Security Market. The high value of the U.S.Government security prevented
the investors from investing their money in the Government security. Big
brokerage companies like Merril Lynch, Pierce and others purchased the
Government securities in large quantum and resold them in smaller
denomination at a discounted rate. The difference between the purchase
cost and face value of the bond is the gain for the investor. Since the
investor does not receive any interest on the bond, the conversion price is
suitably arranged to protect the interest loss to the investor.
Zero coupon bonds: The merit of this bond is that the company does not
have the burden of servicing the debt during the execution period of the
project. The repayment could be adjusted to fall after the completion of
the project. This could result in considerable cost savings for the company.

Deep discount bonds : Deep discount bond is another form of zero coupon
bond. The bonds are sold at large discount on their nominal value; interest is
not paid for them and they mature at par value. The difference between the
maturity value, and the issue price serves as an interest return. The deep
discount bonds' maturity period may range from 3 years to 25 years or more.
IDBI was the first to issue deep discount bonds in India in 1992 with varying
maturity period options. ICICI also issued deep discount bonds with four
optional maturity periods in 1997. Early redemption option is provided at the
end of the 6th,12th and 18th year.
Capital indexed bonds: Capital indexed bonds were introduced in 1997. In the
capital indexed bond, the principal amount of the bond is adjusted for
inflation for every year. For example, an investment of Rs.l000 in the inflation
indexed bonds earn the investor a semi annual interest income for the five
years' period. The reselling of the principal amount is done semi annually
based on the Wholesale Price Index (WPI) movements. The principal amount
of the bond is adjusted for inflation for each of the years. On the inflation-
adjusted principal, the coupon rate of 6 per cent is worked.
The benefit of the bond is that it gives the investor an increase in return by
taking inflation into account. The investor enjoys the benefit of a return on his
principal, which is equal to the average inflation between the issue (purchase)
and maturity period of the instrument. To avail the benefit of inflated
principal, the investor needs to hold the instrument for the entire 5 year
period.

If the investor wants to exit early, he can do it through the secondary

market. The value of the principal repayment will be adjusted by the
Index Rate (IR), which will be announced by the RBI two weeks prior to
the repayment of the principal. The IR is worked out as follows
 Index ratio (IR) = Reference WPI date/Base WPI issue date

Where Date = Interest payment date

Reference WPI Date : Reference WPI applicable for a specific day, i.e.,
interest payment date,
Reference WPI Issue date : Applicable for the original issue date.

In the Indian situation indexed bonds offer more scope since the
economy is highly sensitive to inflation. According to the study
conducted by the Development Research Group (DRG) of the RBI,
during the period 1972-93, the real rate of interest was negative for
most of the years. Average value over the period is minus 1.84 per cent.

This situation warrants an inflation hedge. The inflation protection

provided by the bond guarantees real rate of return which means that
with the rise in inflation, the return from the inflation protected bond
will rise.
 WARRANTS
• A warrant is a bearer document of title to buy specified number of equity
shares at a specified price. Usually warrants can be exercised over a number
of years. The life periods of warrants are long. Warrants are generally offered
to make the bond or preferred stock offering more attractive. Bonds may
bear low interest rate but the warrants offered along with them helps the
investor to enjoy the equity appreciation value. Warrants are detachable.
The investor can sell the warrants separately and they are traded in the
market.

• The person who is holding the warrant cannot enjoy the benefits of the
equity holder before the conversion of the warrant. The price at which the
warrants are converted is called exercise price. The exercise price is always
greater than the current market price of the respective equity at the time of
issue of warrant. When warrants are issued along with host securities and
are detachable, they are known as detachable warrants. In some cases the
warrants can be sold back to the company before the expiry date and is
known as puttable warrants. Naked warrants are issued separately and not
with any host securities. The investor has the option to convert it into equity
or bond.
 Advantages of Warrants
1) Warrants make the non-convertible debentures and other debentures
more attractive and acceptable.
2) The debentures along with the warrants are able to create their own
market and reduce the company's dependence on financial
institutions and mutual funds.
3) Since the exercise of the warrants takes place at a future date, the cash
flow and the capital structure of the company can be planned
accordingly.
4) The cost of debt is reduced if warrants are attached to it. Investors are
willing to accept lower interest rate in the anticipation of enjoying the
capital appreciation of equity value at a later date.
5) Warrants provide high degree of leverage to the investors. They can
sell the warrant in the market or convert it into stocks or allow it to
lapse. But if the conversion is compulsory, even if there is a fall in the
price of the shares, the investors have to shell out money from his
pocket.
6) Warrants are liquid and they are traded in the stock exchanges. Hence,
the investor can sell the warrants before exercising them.
 Difference Between Share Warrants and Share
Certificate
Warrants Share Certificate
1. Issued by public limited company Issued by public and private companies

2. Need for provision in the Articles of No need for provision in the Articles of
Association Association

3. Should be approved by the central Central Government approval is not

Government needed

4. Transfer of share warrant requires no Transfer of share would be complete only

registration if it registration is complete

5. Share warrants are issued to fully paid Share certificates are issued to fully and
up shares partly paid shares
6. It is considered as a negotiable
Share certificate is not considered like that
instrument
 American Depository Receipts
– Introduced to the financial markets in 1927, an American
Depository Receipt (ADR) is a stock that trades in the
United States but represents a specified number of shares
in a foreign corporation.
– ADRs are bought and sold on American markets just like
regular stocks, and are issued/sponsored in the U.S. by a
bank or brokerage.
– For individuals, ADRs are an easy and cost-effective way to
buy shares in a foreign company. They save money by
reducing administration costs and avoiding foreign taxes
on each transaction.
– Foreign entities prefer ADRs because they get more U.S.
exposure, allowing them to tap into the wealthy North
American equities markets.
 Depository Receipts

• American Depository Receipts(ADR)

– Non US companies raise equity financing from US
markets through issue of ADRs.
– ADRs are certificate representing bundles of
shares
– ADRs are then traded in US stock exchanges.
• Eg. ADRs of ICICI Bank, Infosys
 Depository Receipts -Contd..

• Global Depository Receipts(GDR)

– Companies raise equity financing from
international financial markets outside US through
issue of GDRs.
– A certificate issued in more than one country
against shares in a foreign company.
– A Negotiable instrument
– GDRs are traded in the stock exchanges of
countries where they are issued.
• Eg.GDRs of AXIS Bank,SBI
 Depository Receipts -Contd..

• Indian Depository Receipt (IDR)

– An IDR is a receipt, declaring ownership of shares
of a foreign company.
– The IDRs are denominated in Indian currency and
are issued by a domestic depository.
– These receipts can be listed in India and traded in
rupees.
– An IDR is proof of ownership of foreign company’s
shares.
• Eg. Standard Chartered Bank in 2010
 Participatory Notes
• Participatory Notes commonly known as P-Notes or PNs are
instruments issued by registered foreign institutional
investors (FII) to overseas investors, who wish to invest in
the Indian stock markets without registering themselves
with the market regulator, the Securities and Exchange
Board of India - SEBI.
• They are used outside India for making investments in
shares listed in the Indian stock market.
• Any entity investing in participatory notes is not required to
register with SEBI whereas all FIIs have to compulsorily get
registered. It enables large hedge funds to carry out their
operations without disclosing their identity.