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What are the financial instruments used in India?
There are various forms of equities and debts that are used as financial instruments in India. Some of these instruments are given below.
Ordinary shares offer a certain part of the ownership of the company to the shareholders. These shareholders offer permanent capital for the company’s projects. They have voting rights and can receive dividends when the board approves it.
As the name suggests, preference shares are preferred ones. The holders of preference shares get preference in case a company goes for liquidation.
Preference shareholders must be paid dividends in case of liquidation before the ordinary shareholders.
In India, companies can only offer redeemable shares but they cannot issue irredeemable preference shares.
A preference share may be subject to the accumulation of dividends which is then called a cumulative preference share.
Debentures are long-term debts offered to the company by the debenture holders.
Debentures may either be secured or unsecured. Secured debentures are also called bonds.
Debentures have specified interest rates, and the interest rates are deductible in the hands of the company.
There are debentures that are not convertible. Also, there are some debentures that come with zero interest which are called zero-interest debentures. These debentures are offered at a lower rate than the face value.
Convertible debentures can be converted to equity shares after a specified period of time at a given price. These debentures usually have qualities of both debentures and securities.
Warrants offer the debenture owners a right to buy equity shares after a specified period of time and at a pre-set rate. Companies usually offer warrants along with equity shares and debentures.
Cumulative Convertible Preference Shares
Cumulative convertible preference shares (CCPS) offer a regular income from three years to five years' gestation period and thereafter offer equity benefits. The Indian government had issued CCPS in 1984 but it could not succeed as investors found the rate of interest too low and the equity benefits were also unattractive for them.
CDs, Warrants, and CCPS that come with a nature of buy or sell are known as derivative securities. Simply put, these are securities that come with a buy or sell option.
Indian borrowers sometimes borrow funds from financial institutions such as banks and other financial firms. Banks are an important source of funding as they operate within a given timeframe and offer specialized treatment to borrowers.
There is an ample number of financial instruments to invest and grow funds in India nowadays as opposed to the 1980s when the number of instruments was limited. It is the choice of the investors now as to which instrument to choose from the portfolio.
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