Summary
Highlights
The video starts with an introduction to Chapter 1 of CMSL, highlighting its importance for exams despite being an easy chapter. The instructor advises multiple revisions for Chapter 1 and 2, which are considered 'gold mines' in CMSL, along with numericals, as they can contribute up to 40 marks in the examination. The goal is to quickly go through all topics for easy memorization.
The financial system acts as a channel to mobilize money from surplus to deficit entities. For instance, a bank takes deposits (surplus) and provides loans (deficit), earning a commission. This system mobilizes savings from households and allocates them to productive uses like trade, commerce, and manufacturing. The financial system comprises financial markets, financial assets, financial services, and financial institutions. India's financial market is over 200 years old, with Mumbai being a key hub, hosting the BSE, one of the world's largest stock exchanges. Functions of the financial market include mobilizing savings, determining security prices, providing liquidity, reducing costs, and facilitating asset exchange without physical delivery.
The financial market is broadly divided into the money market and capital market. The money market deals with short-term funds, typically with a maturity of up to one year (e.g., certificates of deposit, commercial papers), involving large amounts and high volumes. The capital market, on the other hand, caters to medium and long-term funding needs, dealing with instruments like shares, stocks, debentures, and bonds. The need for a capital market includes mobilizing funds, fostering economic investment, providing risk management, improving information quality, and facilitating technological progress and economic development.
The securities market is further divided into the primary and secondary markets. The primary market is where investors buy securities directly from the issuer (e.g., IPOs, FPOs). Examples include companies, central and state governments, and public sector undertakings issuing shares or debt instruments. The secondary market involves trading and settlement of already issued securities among investors, like buying shares on a stock exchange. This market provides liquidity to initial buyers.
The regulatory framework for the securities market includes the SEBI Act 1992, SCRA 1956, Depositories Act 1996, and Companies Act 2013. SEBI (Securities and Exchange Board of India) is the primary regulator, with its main objectives being investor protection (P), promoting securities market development (P), and regulating the market (R).
Qualified Institutional Buyers are sophisticated investors who are eligible to participate in Qualified Institutional Placements (QIPs). The definition of QIB includes 13 categories: mutual funds, venture capital funds, AIFs, Foreign Venture Capital Investors; Foreign Portfolio Investors (FPIs); Scheduled Commercial Banks; Public Financial Institutions; Insurance Companies (under IRDA), Insurance Funds (managed by Army, Navy, Air Force), Insurance Funds (managed by Department of Post); Provident Funds, Pension Funds (with minimum corpus of ₹25 Cr); Multilateral and Bilateral Development Financial Institutions; State Industrial Development Corporations; National Investment Funds (under Government of India); and Systemically Important NBFCs.
A Foreign Portfolio Investor is any foreigner who intends to invest in India. To become an FPI, they must register with SEBI after opening an account with an AD Category-I bank and entering into an agreement with a custodian. FPIs are categorized into two types: Category I (top-notch investors like government entities, pension funds, regulated foreign financial institutions, and FATF member country entities) and Category II (all other investors not qualifying for Category I, such as individuals, corporate bodies, and family offices).
Alternative Investment Funds are privately pooled investment vehicles established in India as a trust, company, body corporate, or LLP. They collect funds from Indian or foreign investors and invest them according to a defined policy. AIFs are not covered by other SEBI regulations like mutual funds or CIS. Certain entities are explicitly excluded from AIF definition if they have their own regulator, such as family trusts, ESOP trusts, employee welfare trusts, holding companies, SPVs, and securitization/reconstruction companies.
AIFs are categorized into three types: Category I AIFs invest in economically and socially desirable sectors like startups, SMEs, social ventures, and infrastructure. Category III AIFs engage in complex and diverse trading strategies, including derivatives, and may take leverage. Category II AIFs are those not covered under Category I or Category III, serving as a residual category.
Venture Capital Funds (VCFs) are a type of AIF that make equity investments in privately held, early-stage companies (startups) with high return potential, focusing on new products, services, or technology. They raise funds from institutional investors and individuals ready for high-risk investments. Private Equity (PE) involves investing in assets not publicly traded or in publicly traded assets with the intent to privatize them, focusing on long-term revenue and asset access, often using debt for acquisition. PE has three types: leveraged buyouts (LBOs), venture capital, and growth capital. Angel Funds are a sub-category of VCFs that invest in early-stage startups, raising capital from accredited angel investors seeking equity or convertible debt.
High Networth Individuals are distinguished from other retail investors based on their wealth, assets, or investible surplus. In the Indian context, an HNI typically has an investible surplus of ₹2 crore or more, while an 'emerging HNI' has ₹25 lakh to ₹2 crore. Pension Funds collect money from employers and employees for employee benefits, managed either in-house or by entities like UTI AMC. Historically, they primarily invested in debt and liquid assets, but are now allowed to invest a portion in equity. Pension funds can be formal (regulated by acts, government, or voluntary company schemes) or informal.
An Anchor Investor is a Qualified Institutional Buyer (QIB) who applies for at least ₹10 crore in a book-building issue on the main board. Specific provisions apply: if the allocation is up to ₹10 crore, a maximum of two anchor investors can be served. For allocations between ₹10 crore and ₹250 crore, a maximum of 15 anchor investors can be served (with a minimum of ₹5 crore per investor). For every additional ₹250 crore, the maximum number increases by 10. Anchor investors' issue opens one day prior, they get allotment on the same day at their bid price; 50% of holding has a 30-day lock-in, and the remaining 50% has a 90-day lock-in. If the final cutoff price is higher than their bid price, they pay the difference; no refund is given if it's lower. Allotment to anchor investors is discretionary, not proportionate. 60% of the QIB portion is reserved for anchor investors, and 1/3rd of the anchor investor portion is reserved for domestic mutual funds.
Equity shares are all shares that are not preference shares, granting voting power, profit-sharing rights, and residual claims during winding up. Differential Voting Right (DVR) shares allow different voting powers; their conditions include AOA authorization, DVR holders' voting rights not exceeding 74% of total, passing an ordinary resolution, and no default by the company in financial compliances. Preference shares provide preferential rights in dividend payments and capital repayment during winding up. Debentures are debt instruments evidencing a company's debt, with fixed interest and redemption dates, generally secured, and no voting rights. Bonds are similar debt securities, typically with longer tenures (5-10 years), fixed interest (coupon rate), and principal repayment. They offer diversification and are less risky. Types include government, corporate, bank/financial institution, and tax-saving bonds.
Foreign Currency Convertible Bonds (FCCBs) are unsecured bonds issued by Indian companies to non-residents, denominated in foreign currency, with fixed interest and principal repayment in foreign currency, convertible into the issuing company's equity shares. Foreign Currency Exchangeable Bonds (FCEBs) are similar but convertible into equity shares of another company (e.g., a group company for the issuer). Indian Depository Receipts (IDRs) allow foreign companies to raise capital from Indian investors. A foreign company's shares are given to an Indian depository, which issues IDRs to Indian investors. The IDRs' value is derived from the underlying foreign company's shares, making them a form of derivative. Standard Chartered PLC is the only company to have issued IDRs in India.
Warrants give the buyer the right to purchase a specified number of shares at a given exercise price during a specified period. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are like mutual funds that allow investors to invest in real estate or infrastructure assets, respectively. They involve sponsors, trustees, and investment managers. InvITs additionally have project managers due to the operational nature of infrastructure projects. Benefits include less capital intensiveness, transparency, assured dividends, and suitability for small investors. Securitized Debt Instruments are financial securities created by securitizing individual loans, like mortgage-backed securities, governed by SEBI regulations. Municipal Bonds (Muni Bonds) are issued by urban local governments (municipalities) and their agencies to raise funds for public projects. Eligibility criteria for issuing Muni Bonds include a positive net worth for three preceding years, no default on debt payments, and no willful defaulter promoters/directors.