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Money Market Capital Market

Saving accounts Equity Shares
Fixed Deposit/RD/ Shares with differential voting rights
Provident Fund Preference shares
Pension Funds Debentures
Mutual Fund Equity shares with detachable warrants
Call /Notice-Money Sweat Equity Shares
Inter-Bank Term Money Tracking Stocks
Treasury Bills Secured Premium Notes (SPN)
Certificate of Deposits Deep Discount Bonds
Commercial Paper Fully Convertible Debentures with Interest
Bankers Acceptance or Bills of EQUIPREF
Exchange or Letter of Credit Disaster Bonds
Repurchase agreement Mortgage Backed Securities (MBS)
Euro Dollar GDR and ADR
Euro Currency Foreign Currency Convertible Bonds (FCCBs)
Derivatives (Futures, Options, Swaps and P Notes)
Hedge Fund, Funds of Funds, ETF, Gold ETF
Money Market Instruments

The money market can be defined as a market for short-term money and financial assets that
are near substitutes for money. The term short-term means generally a period upto one year
and near substitutes to money is used to denote any financial asset which can be quickly
converted into money with minimum transaction cost. Some of the important money market
instruments are briefly discussed below.

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. When
money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening
holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and
repaid on the next working day, (irrespective of the number of intervening holidays) is "Call
Money". When money is borrowed or lent for more than a day and up to 14 days, it is
"Notice Money". No collateral security is required to cover these transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money
market. The entry restrictions are the same as those for Call/Notice Money except that, as per
existing regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union
government. It is an IOU of the Government. It is a promise by the Government to pay a
stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e.
less than one year). They are issued at a discount to the face value, and on maturity the face
value is paid to the holder. The rate of discount and the corresponding issue price are
determined at each auction.

4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument and issued in

dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Guidelines for issue of CDs are
presently governed by various directives issued by the Reserve Bank of India, as amended
from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional
Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial
Institutions that have been permitted by RBI to raise short-term resources within the umbrella
limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements.
An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD
together with other instruments viz., term money, term deposits, commercial papers and
intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the
latest audited balance sheet.
5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the
debt obligation is transformed into an instrument. CP is thus an unsecured promissory note
privately placed with investors at a discount rate to face value determined by market forces.
CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP
provided - (a) the tangible net worth of the company, as per the latest audited balance sheet,
is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from
the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is
classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is
7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other

6. Euro Dollar

Eurodollars are time deposits denominated in U.S. dollars at banks outside the United States,
and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits
are subject to much less regulation than similar deposits within the U.S., allowing for higher
margins. The term was originally coined for U.S. dollars in European banks, but it expanded
over the years to its present definition—a U.S. dollar-denominated deposit in Tokyo or
Beijing would be likewise deemed a Eurodollar deposit. There is no connection with the euro
currency or the euro zone. More generally, the euro- prefix can be used to indicate any
currency held in a country where it is not the official currency: for example, euroyen or even

Originally, dollar-denominated deposits not subject to U.S. banking regulations were held
almost exclusively in Europe; hence the name Eurodollars. These deposits are still mostly
held in Europe, but they're also held in such countries as the Bahamas, Canada, the Cayman
Islands, Hong Kong, Japan, the Netherlands Antilles, Panama and Singapore. Regardless of
where they are held, such deposits are referred to as Eurodollars.

Since the Eurodollar market is relatively free of regulation, banks in the Eurodollar market
can operate on narrower margins than banks in the United States. Thus, the Eurodollar market
has expanded largely as a means of avoiding the regulatory costs involved in dollar-
denominated financial intermediation.

7. Bankers Acceptance or Bills of Exchange or Letter of Credit

It is a short-term debt instrument issued by a firm that is guaranteed by a commercial bank.

Banker’s acceptances are issued by firms as part of a commercial transaction. These
instruments are similar to T-Bills and are frequently used in money market funds. Banker’s
acceptances are traded at a discount from face value on the secondary market, which can be
an advantage because the banker's acceptance does not need to be held until maturity.
Bankers acceptances are regularly used financial instruments in international trade.

Banker’s acceptances vary in amount, according to the size of the commercial transaction.
The date of maturity typically ranges between 30 and 180 days from the date of issue.
However, banks or investors often trade the instruments on the secondary market before the
acceptances reach maturity. Bankers acceptances are considered to be relatively safe
investments, since the bank and the borrower are liable for the amount that is due when the
instrument matures.

8. Repurchase agreement

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the
sale of securities together with an agreement for the seller to buy back the securities at a later
date. The repurchase price should be greater than the original sale price, the difference
effectively representing interest, sometimes called the repo rate. The party that originally
buys the securities effectively acts as a lender. The original seller is effectively acting as a
borrower, using their security as collateral for a secured cash loan at a fixed rate of interest.

A repo is almost equivalent to a spot sale combined with a forward contract. The spot sale
results in transfer of money to the borrower in exchange for legal transfer of the security to
the lender, while the forward contract ensures repayment of the loan to the lender and return
of the collateral of the borrower. The difference between the forward price and the spot price
is effectively the interest on the loan, while the settlement date of the forward contract is the
maturity date of the loan.


A capital market is a market for securities (debt or equity), where business enterprises and
government can raise long-term funds. It is defined as a market in which money is provided
for periods longer than a year, as the raising of short-term funds takes place on other markets
(e.g., the money market). The capital market is characterized by a large variety of financial
instruments: equity and preference shares, fully convertible debentures (FCDs), non-
convertible debentures (NCDs) and partly convertible debentures (PCDs) currently dominate
the capital market, however new instruments are being introduced such as debentures
bundled with warrants, participating preference shares, zero-coupon bonds, secured premium
notes, etc.
Pure Instrument: Equity shares, Preference shares and debenture or bonds which are issued
with the basic Characteristics without mixing the instruments are called Pure Instrument.
Hybrid Instrument: Those instruments which are created by combining the features of
equity with bond, preference or equity shares is called as Hybrid Instrument. This is created
in order to fulfil the needs of investors. For example: Convertible Preference Shares, Partial
convertible debentures etc.
Derivative: are those instruments whose value is determined from the reference of other
financial instruments. For example: future and option.
Various Capital Market Instruments
1. Equity Shares: are those shares which refer to a part of ownership as a shareholder.
These type of shareholder undertakes the maximum entrepreneurial risk associate
with the business.
2. Shares with differential voting rights

As per section 86 of the Act, a company can issue equity shares with differential
rights to voting, dividend or otherwise in accordance with the companies (issue of
shares with differential voting rights) Rules 2001, which means that the company can
now issue equity shares which may carry different rights of voting or dividend or
3. Preference shares: Sec. 85(1) of the Companies Act defines preference shares as
those shares which carry preferential rights as the payment of dividend at a fixed rate
and as to repayment of capital in case of winding up of the company. Thus, both the
preferential rights include (a) preference in payment of dividend and (b) preference in
repayment of capital in case of winding up of the company, must attach to preference
4. Cumulative Preference Shares : are those preference shares which gets dividend in
first claim as and when dividends are declared .if the company is not earned profit,
then the dividend get accumulated and whenever company earns profit the
shareholder will get all the accumulated dividend.
5. Non – Cumulative Preference Shares: are those preference shares which does not
accumulate the profit if the company has not earned the profit. As and when the
company declare dividend then only it goes to non- cumulative preference shares.
6. Convertible Preference Shares: If the Preference Share holders have termed in
issue of shares that they can convert the preference shares into equity shares. These
type of convertible shares are called as Convertible Preference Shares. Preference
shares are convertible because to get various rights like voting rights, bonus issue and
higher dividend. So for these issues, companies issue these shares with premium.
7. Redeemable Preference Shares: When the preference shares are issued with the
stipulation that these shares are to be redeemed after a certain period of time, then
such preference shares are known as redeemable preference shares. If a company
collects the money through redeemable preference shares, this money must be
returned on its maturity whether company is liquidated or not. These shares are issued
only to raise the capital for temporary period.
8. Irredeemable Preference Shares: are those shares which are issued with the terms
that shares will be not redeemed for indefinite period except certain instances like
winding up.
9. Participating Preference Shares: If a company earns profit then it gets distributed
to preference shareholders, equity shareholders etc. But after that also profit is left,
then such profit can again distribute as dividend to participating preference
shareholder as well as company can also issue bonus shares.
10. Debentures: includes stocks, bonds etc which are issued by the company as a
certificate of indebtness. For the issue of debentures, date of the repayment of
principle and interest is decided. It is created on the charge of undertaking of assets of
the company. If the company is not able to make the payment on the time, so the
investors can redeem the debentures by undertaking the assets or from the sale of
11. Unsecured debentures: are those debentures which are not secured from the asset for
the repayment of principle and interest.
12. Secured debentures: are those debentures which are secured by registered asset of
the company.
13. Redeemable debentures: are those debentures which are redeemable after a certain
period or on their expiry date.
14. Perpetual debentures: are those debentures which are issued for the redemption on
any specific event like winding up which may happen for any indefinite period.
15. Bearer debentures: are the debentures payable to bearer and also transferrable and
the name of the holder will not be registered in the books of the company. SO
whoever is the holder can bear the principle and interest as on due.
16. Sweat Equity Shares: are shares allotted to employee’s of companies, as rewards,
free of cost or at a price which is considerable below the ruling market price. It is
given as a reward for performance to further encourage them to put in their best in the
organization. Under the Companies act, 1956, sweat equity shares means equity
shares issued by a company to its employees or directors at a discounts or for
consideration other than cash for providing know how or making available rights in
the nature of intellectual property rights. Such issue may be made only if it is
authorized by a special resolution passed by the company in the general meeting
specifying the number of shares to be issued, class of the employees or directors to
whom such shares are to be issued , the consideration and the current market price of
the equity shares. Sweat equity shares can be issued if more than one year has elapsed
from the commencement of the business. All limitations, restriction and provisions
relating to equity shares shall be applicable to such sweat equity shares.
17. Secured Premium Notes (SPN) is a secured debenture redeemable at premium
issued along with a detachable warrant, redeemable after a notice period, say four to
seven years. The warrants attached to SPN gives the holder the right to apply and get
allotted equity shares; provided the SPN is fully paid. There is a lock-in period for
SPN during which no interest will be paid for an invested amount. The SPN holder
has an option to sell back the SPN to the company at par value after the lock in
period. If the holder exercises this option, no interest/ premium will be paid on
redemption. In case the SPN holder holds it further, the holder will be repaid the
principal amount along with the additional amount of interest/ premium on
redemption in instalments as decided by the company. The conversion of detachable
warrants into equity shares will have to be done within the time limit notified by the
Ex-TISCO issued warrants for the first time in India in the year 1992 to raise 1212
18. Deep Discount Bonds is a bond that sells at a significant discount from par value and
has no coupon rate or lower coupon rate than the prevailing rates of fixed-income
securities with a similar risk profile. They are designed to meet the long term funds
requirements of the issuer and investors who are not looking for immediate return and
can be sold with a long maturity of 25-30 years at a deep discount on the face value of
Ex-IDBI deep discount bonds for Rs 1 lac repayable after 25 years were sold at a
discount price of Rs. 2,700.
19. Equity Shares with Detachable Warrants is a warrant is a security issued by
company entitling the holder to buy a given number of shares of stock at a stipulated
price during a specified period. These warrants are separately registered with the
stock exchanges and traded separately. Warrants are frequently attached to bonds or
preferred stock as a sweetener, allowing the issuer to pay lower interest rates or
Ex-Essar Gujarat, Ranbaxy, Reliance issue this type of instrument.
20. Fully Convertible Debentures with Interest it is a debt instrument that is fully
converted over a specified period into equity shares. The conversion can be in one or
several phases. When the instrument is a pure debt instrument, interest is paid to the
investor. After conversion, interest payments cease on the portion that is converted. If
project finance is raised through an FCD issue, the investor can earn interest even
when the project is under implementation. Once the project is operational, the investor
can participate in the profits through share price appreciation and dividend payments
21. EQUIPREF are fully convertible cumulative preference shares. This instrument is
divided into parts namely Part A & Part B. Part A is convertible into equity shares
automatically /compulsorily on date of allotment without any application by the
allottee. Part B is redeemed at par or converted into equity after a lock in period at the
option of the investor, at a price 30% lower than the average market price.
22. Tracking Stocks is a security issued by a parent company to track the results of one
of its subsidiaries or lines of business; without having claim on the assets of the
division or the parent company. It is also known as "designer stock". When a parent
company issues a tracking stock, all revenues and expenses of the applicable division
are separated from the parent company's financial statements and bound to the
tracking stock. Oftentimes, this is done to separate a subsidiary's high-growth division
from a larger parent company that is presenting losses. The parent company and its
shareholders, however, still control the operations of the subsidiary.
This type of stock issued as per the performance of a particular department on the
financial position. This is issued, so that each department can be tracked by investors.
These stock earns only from the position of that particular invested department. It
does not matter as a whole of the company
Ex- QQQQ, which is an exchange-traded fund that mirrors the returns of the Nasdaq
100 index.
23. Disaster Bonds also known as Catastrophe or CAT Bonds, Disaster Bond is a high-
yield debt instrument that is usually insurance linked and meant to raise money in
case of a catastrophe. It has a special condition that states that if the issuer (insurance
or Reinsurance Company) suffers a loss from a particular pre-defined catastrophe,
then the issuer's obligation to pay interest and/or repay the principal is either deferred
or completely forgiven.
Ex- Mexico sold $290 million in catastrophe bonds, becoming the first country to use
a World Bank program that passes the cost of natural disasters to investors. Goldman
Sachs Group Inc. and Swiss Reinsurance Co. managed the bond sale, which will pay
investors unless an earthquake or hurricane triggers a transfer of the funds to the
Mexican government.
24. Mortgage Backed Securities (MBS) is a type of asset-backed security, basically a
debt obligation that represents a claim on the cash flows from mortgage loans, most
commonly on residential property. Mortgage backed securities represent claims and
derive their ultimate values from the principal and payments on the loans in the pool.
These payments can be further broken down into different classes of securities,
depending on the riskiness of different mortgages as they are classified under the
◦ Mortgage originators to refill their investments
◦ New instruments to collect funds from the market, very economic and more
◦ Conversion of assets into funds
▪ Financial companies save on the costs of maintenance of the assets and other costs
related to assets, reducing overheads and increasing profit ratio.
▪ Kinds of Mortgage Backed Securities:
◦ Commercial mortgage backed securities: backed by mortgages on commercial
property Collateralized mortgage obligation: a more complex MBS in which the
mortgages are ordered into tranches by some quality (such as repayment time), with
each tranche sold as a separate security.
Stripped mortgage backed securities: Each mortgage payment is partly used to pay
down the loan's principal and partly used to pay the interest on it.
Residential mortgage backed securities: backed by mortgages on residential
25. Global Depository Receipts/ American Depository Receipts( GDR and ADR)
A negotiable certificate held in the bank of one country (depository) representing a
specific number of shares of a stock traded on an exchange of another country. GDR
facilitate trade of shares, and are commonly used to invest in companies from
developing or emerging markets. GDR prices are often close to values of related
shares, but they are traded and settled independently of the underlying share. Listing
on a foreign stock exchange requires compliance with the policies of those stock
exchanges. Many times, the policies of the foreign exchanges are much more stringent
than the policies of domestic stock exchange. However a company may get listed on
these stock exchanges indirectly – using ADRs and GDRs.
If the depository receipt is traded in the United States of America (USA), it is called
an American Depository Receipt, or an ADR. If the depository receipt is traded in a
country other than USA, it is called a Global Depository Receipt, or a GDR. But the
ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals
wanting to invest in India. By buying these, they can invest directly in Indian
companies without going through the hassle of understanding the rules and working
of the Indian financial market – since ADRs and GDRs are traded like any other
stock, NRIs and foreigners can buy these using their regular equity trading accounts!
Ex- HDFC Bank, ICICI Bank, Infosys have issued both ADR and GDR
26. Foreign Currency Convertible Bonds (FCCBs) a convertible bond is a mix
between a debt and equity instrument. It is a bond having regular coupon and
principal payments, but these bonds also give the bondholder the option to convert the
bond into stock. FCCB is issued in a currency different than the issuer's domestic
currency. The investors receive the safety of guaranteed payments on the bond and are
also able to take advantage of any large price appreciation in the company's stock.
Due to the equity side of the bond, which adds value, the coupon payments on the
bond are lower for the company, thereby reducing its debt-financing costs.
Some companies, banks, governments, and other sovereign entities may decide to
issue bonds in foreign currencies because, as it may appear to be more stable and
predictable than their domestic currency
· Gives issuers the ability to access investment capital available in foreign
· Companies can use the process to break into foreign markets
· The bond acts like both a debt and equity instrument. Like bonds it makes
regular coupon and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock
· It is a low cost debt as the interest rates given to FCC Bonds are normally 30-
50 percent lower than the market rate because of its equity component
· Conversion of bonds into stocks takes place at a premium price to market
price. Conversion price is fixed when the bond is issued. So, lower dilution of
the company stocks
Advantages to investors
· Safety of guaranteed payments on the bond
· Can take advantage of any large price appreciation in the company’s stock
· Redeemable at maturity if not converted
· Easily marketable as investors enjoys option of conversion in to equity if
resulting to capital appreciation
· Exchange risk is more in FCCBs as interest on bond would be payable in
foreign currency. Thus companies with low debt equity ratios, large forex
earnings potential only opted for FCCBs
· FCCBs means creation of more debt and a FOREX outgo in terms of interest
which is in foreign exchange
· In case of convertible bond the interest rate is low (around 3 to 4%) but there
is exchange risk on interest as well as principal if the bonds are not converted
in to equity
· If the stock price plummets, investors will not go for conversion but
redemption. So, companies have to refinance to fulfil the redemption promise
which can hit earnings · It remains a debt in the balance sheet until
A derivative is a financial instrument whose characteristics and value depend upon the
characteristics and value of some underlying asset typically commodity, bond, equity,
currency, index, event etc. Advanced investors sometimes purchase or sell derivatives
to manage the risk associated with the underlying security, to protect against
fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are
often leveraged, such that a small movement in the underlying value can cause a large
difference in the value of the derivative.
Derivatives are usually broadly categorised by:
· The relationship between the underlying and the derivative (e.g. forward,
option, swap)
· The type of underlying (e.g. equity derivatives, foreign exchange derivatives
and credit derivatives)
· The market in which they trade (e.g., exchange traded or over-the-counter)
27. Futures
It is a financial contract obligating the buyer to purchase an asset, (or the seller to sell
an asset), such as a physical commodity or a financial instrument, at a predetermined
future date and price. Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a futures exchange.
Some futures contracts may call for physical delivery of the asset, while others are
settled in cash. The futures markets are characterized by the ability to use very high
leverage relative to stock markets. Some of the most popular assets on which futures
contracts are available are equity stocks, indices, commodities and currency.
28. Options
It is a financial derivative that represents a contract sold by one party (option writer)
to another party (option holder). The contract offers the buyer the right, but not the
obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-
upon price (the strike price) during a certain period of time or on a specific date
(exercise date).
A call option gives the buyer, the right to buy the asset at a given price. This 'given
price' is called 'strike price'. It should be noted that while the holder of the call option
has a right to demand sale of asset from the seller, the seller has only the obligation
and not the right. For e.g.: if the buyer wants to buy the asset, the seller has to sell it.
He does not have a right. Similarly a 'put' option gives the buyer a right to sell the
asset at the 'strike price' to the buyer. Here the buyer has the right to sell and the seller
has the obligation to buy. So in any options contract, the right to exercise the option is
vested with the buyer of the contract. The seller of the contract has only the obligation
and no right. As the seller of contract bears the obligation, he is paid a price called as
'premium'. Therefore the price that is paid for buying an option contract is called as
The primary difference between options and futures is that options give the holder the
right to buy or sell the underlying asset at expiration, while the holder of a futures
contract is obligated to fulfil the terms of his/her contract.
29. Swaps
It is the exchange of one security for another to change the maturity (bonds), quality
of issues (stocks or bonds), or because investment objectives have changed. Recently,
swaps have grown to include currency swaps and interest rate swaps. If firms in
separate countries have comparative advantages on interest rates, then a swap could
benefit both firms. For example, one firm may have a lower fixed interest rate, while
another has access to a lower floating interest rate. These firms could swap to take
advantage of the lower rates.
30. Participatory Notes
Participatory Notes also referred to as "P-Notes" Financial instruments used by
investors or hedge funds that are not registered with the Securities and Exchange
Board of India to invest in Indian securities. Indian-based brokerages buy India-based
securities and then issue participatory notes to foreign investors. Any dividends or
capital gains collected from the underlying securities go back to the investors. These
are issued by FIIs to entities that want to invest in the Indian stock market but do not
want to register themselves with the SEBI. RBI, which had sought a ban on PNs,
believes that it is tough to establish the beneficial ownership or the identity of ultimate
31. Hedge Fund
A hedge fund is an investment fund open to a limited range of investors that
undertakes a wider range of investment and trading activities in both domestic and
international markets, and that, in general, pays a performance fee to its investment
manager. Every hedge fund has its own investment strategy that determines the type
of investments and the methods of investment it undertakes. Hedge funds, as a class,
invest in a broad range of investments including shares, debt and commodities.
As the name implies, hedge funds often seek to hedge some of the risks inherent in
their investments using a variety of methods, with a goal to generate high returns
through aggressive investment strategies, most notably short selling, leverage,
program trading, swaps, arbitrage and derivatives. Legally, hedge funds are most
often set up as private investment partnerships that are open to a limited number of
investors and require a very large initial minimum investment. Investments in hedge
funds are illiquid as they often require investors keep their money in the fund for at
least one year.
32. Fund of Funds
A "fund of funds" (FoF) is an investment strategy of holding a portfolio of other
investment funds rather than investing directly in shares, bonds or other securities.
This type of investing is often referred to as multi-manager investment. A fund of
funds allows investors to achieve a broad diversification and an appropriate asset
allocation with investments in a variety of fund categories that are all wrapped up into
one fund.
33. Exchange Traded Funds
An exchange-traded fund (or ETF) is an investment vehicle traded on stock
exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades
at approximately the same price as the net asset value of its underlying assets over the
course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI
EAFE. ETFs may be attractive as investments because of their low costs, tax
efficiency, and stock-like features, and single security can track the performance of a
growing number of different index funds (currently the NSE Nifty)
34. Gold ETF
Gold Exchange Traded Fund (ETF) is a financial instrument like a mutual fund whose
value depends on the price of gold. In most cases, the price of one unit of gold ETF
approximately reflects the price of 1 gram of gold. As the price of gold rises, the price
of the ETF is also expected to rise by the same amount. Gold exchange-traded funds
are traded on the major stock exchanges including Zurich, Mumbai, London, Paris
and New York There are also closed-end funds (CEF's) and exchange-traded notes
(ETN's) that aim to track the gold price.
35. Foreign Currency Exchangeable Bonds (FCEBs):
36. FCEBs means a bond expressed in foreign currency, the principal and interest in respect of
which are payable in foreign currency, issued by an Issuing Company and subscribed to by a
person who is a resident outside India, in foreign currency and exchangeable into equity
share of another company, to be called the Offered Company, in any manner, either wholly,
or partly or on the basis of any equity related warrants attached to debt instruments. The
FCEBs must comply with the “Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme,
2008”, notified by the Government of India, Ministry of Finance, Department of Economic
Affairs vide Notification G.S.R.89(E) dated February 15, 2008. The guidelines, rules, etc.
governing ECBs are also applicable to FCEBs.

37. Masala Bond

Masala bond is an informal name used for Rupee denominated bond that Indian
corporate borrowers can sell to investors in international markets (typically in the
major financial centres like London, Singapore, New York etc)
The interest rate faced by companies in India is often higher than the rate outside
India. So some Indian companies would like to borrow abroad. Until now they had
been able to borrow only in the major currencies (Dollar, Euro etc). This is called
External Commercial Borrowing (External commercial borrowing (India)) - ECB for
ECBs have few disadvantages from the perspective of the borrowing company and
Reserve Bank of India (RBI).
The debt is in a foreign currency. Interest and principal payments have to be made in
the foreign currency. However most of the company earnings will usually be in
Indian Rupee. So in the face of a falling Rupee the company faces a currency risk.
This can be solved by hedging but it increases the cost of borrowing.
Large amount of foreign currency debt raised this way can influence the Rupee rate
itself which is partly managed by RBI. This is because the companies have to sell
the foreign currency and buy Rupee to use the funds in India - causing the Rupee to
If large amount of debt in important domestic companies are raised this way, it can
expose the economy to currency risk -reducing RBI's ability to play the role of
lender of last resort.
To avoid some of the above RBI has several capital account restrictions around
ECB. They limit how much can be borrowed in foreign currency, at what interest
rate, term , who can borrow, what proportion of debt can be ECB etc. Here is an
example RBI circular - Master Circulars RBI also changes these limits and
restrictions regularly to reflect changing economic conditions.
The above three can mostly be solved if Indian corporations can borrow in Rupee
itself. In that case the borrower will need to pay interest in Rupee. Then the currency
risk (Rupee falling against Dollar) will be shifted to the lender (who would typically
hedge their exposure by buying some currency derivative). This is what the Masala
bonds do. They are RBI's attempt to internationalize the Rupee.
This is similar to Chinese government's attempt to internationalize the Yuan. In their
case Yuan denominated bonds are called Dim Sum bonds