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1. Passive Funds:
The Securities and Exchange Board of India (SEBI) recently issued a circular on passive funds covering matters related to transparency, liquidity and operational aspects of exchange-traded funds (ETFs) and index funds.
What are Passive Funds?
- A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in.
- Unlike with an active fund, the fund manager does not decide what securities the fund takes on.
- This normally makes passive funds cheaper to invest in than active funds, which require the fund manager to spend time researching and analyzing opportunities to invest in.
- Tracker funds, such as ETFs (exchange traded funds) and index funds fall under the banner of passive funds.
2. Initial Public Offer:
Last year IPO was making huge attention in India after Paytm and Zomato IPOs were open.
What is an IPO?
- Every company needs money to grow and expand.
- They do this by borrowing or by issuing shares.
- If the company decides to opt for the second route of issuing shares, it must invite public investors to buy its shares.
- This is its first public invitation in the stock market and is called the Initial Public Offering (IPO).
How does an IPO work?
- The Securities and Exchange Board of India (SEBI) regulates the entire process of investment via an IPO in India.
- A company intending to issue shares through IPOs first registers with SEBI.
- SEBI scrutinizes the documents submitted, and only then approves them.
Who can hold IPOs?
- It could be a new, young company or an old company that decides to be listed on an exchange and hence goes public.
3. Derivatives:
- A derivative is a contract between two parties which derives its value/price from an underlying asset.
- The value of the underlying asset is bound to change as the value of the underlying assets keep changing continuously.
- Generally, stocks, bonds, currency, commodities and interest rates form the underlying asset.
Types of Derivatives
The most common types of derivatives are futures, options, forwards and swaps:
(1) Futures
- Futures are standardized contracts that allow the holder to buy/sell the asset at an agreed price at the specified date.
- The parties to the futures contract are under an obligation to perform the contract. These contracts are traded on the stock exchange.
- The value of future contracts is marked to market every day.
- It means that the contract value is adjusted according to market movements till the expiration date.
(2) Options
- Options are derivative contracts that give the buyer a right to buy/sell the underlying asset at the specified price during a certain period of time.
- The buyer is not under any obligation to exercise the option.
- The option seller is known as the option writer. The specified price is known as the strike price.
(3) Forwards
- Forwards are like futures contracts wherein the holder is under an obligation to perform the contract.
- But forwards are unstandardized and not traded on stock exchanges.
- These are available over-the-counter and are not marked-to-market.
- These can be customized to suit the requirements of the parties to the contract.
(4) Swaps
- Swaps are derivative contracts wherein two parties exchange their financial obligations.
- The cash flows are based on a notional principal amount agreed between both parties without the exchange of principal.
- The amount of cash flows is based on a rate of interest.
- One cash flow is generally fixed and the other changes on the basis of a benchmark interest rate.
- Swaps are not traded on stock exchanges and are over-the-counter contracts between businesses or financial institutions.
4. What are Agri-Futures?
Like equity, currency or interest rate futures, they allows to buy or sell an underlier at a preset price on a future date. All agri contracts end in compulsory delivery.
- Agri products available for trade include wheat, sugar, chana, soyabean, castor, chilli , jeera futures, etc. Edible oil seeds and oils, spices and items like guar are among the more liquid contracts.
- An objective of futures trading is gains reaching farmers, by establishing an efficient price-discovery platform.
- This has been achieved to a large extent on NCDEX, in products such as castor, chana, soy complex, mustard, guar, cumin, etc.
Securities & Exchange Board of India (SEBI) has issued an order suspending futures trading in paddy (non-basmati), wheat, Bengal gram (chana dal), mustard seeds and its derivatives, soyabean and its derivatives, crude palm oil and green gram (moong dal) for a year.
5. Infrastructure Investments Trusts:
The National Highway Authority of India’s first infrastructure investment trust has raised more than Rs 5,000 crore, informed the Ministry of Road Transport and Highways of India.
What are InvITs?
- InvITs are like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return.
- They work like mutual funds or real estate investment trusts (REITs) in features.
- They can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
How are they notified in India?
- SEBI notified the Sebi (Infrastructure Investment Trusts) Regulations, 2014 on September 26, 2014, providing for registration and regulation of InvITs in India.
- The objective of InvITs is to facilitate investment in the infrastructure sector.
Their structure
InvITS are like mutual funds in structure. InvITs can be established as a trust and registered with Sebi. An InvIT consists of four elements:
- Trustee: He inspects the performance of an InvIT is certified by Sebi and he cannot be an associate of the sponsor or manager.
- Sponsor(s): They are people who promote and refer to any organisation or a corporate entity with a capital of Rs 100 crore, which establishes the InvIT and is designated as such at the time of the application made to SEBI, and in case of PPP projects, base developer.
- Investment Manager: It is an entity or limited liability partnership (LLP) or organisation that supervises assets and investments of the InvIT and guarantees activities of the InvIT.
- Project Manager: It is the person who acts as the project manager and whose duty is to attain the execution of the project and in case of PPP projects.
6. Important Points from RBIs FAQs Page:
What is a Bond?
A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
What is Government Security (G-Sec)?
A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
- Treasury Bills (T-bills): Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity.
- Cash Management Bills (CMBs): In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
- Dated G Secs: Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on a half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.
The Public Debt Office: The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry / depository of G-Secs and deals with the issue, interest payment and repayment of principal at maturity. Most of the dated securities are fixed coupon securities.
Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life (i.e. till maturity) of the bond. Most Government bonds in India are issued as fixed rate bonds.
Floating Rate Bonds (FRB) – FRBs are securities which do not have a fixed coupon rate. Instead it has a variable coupon rate which is re-set at pre-announced intervals (say, every six months or one year).
Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the Principal amount of the investors from inflation.
Inflation Indexed Bonds (IIBs) – IIBs are bonds wherein both coupon flows and Principal amounts are protected against inflation. The inflation index used in IIBs may be Wholesale Price Index (WPI) or Consumer Price Index (CPI). Globally, IIBs were first issued in 1981 in the UK. In India, the Government of India through RBI issued IIBs (linked to WPI) in June 2013.
Special Securities – Under the market borrowing program, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. (popularly called oil bonds, fertiliser bonds and food bonds respectively) as compensation to these companies in lieu of cash subsidies These securities are usually long dated securities and carry a marginally higher coupon over the yield of the dated securities of comparable maturity. These securities are, however, not eligible as SLR securities but are eligible as collateral for market repo transactions.
STRIPS – Separate Trading of Registered Interest and Principal of Securities. – STRIPS are the securities created by way of separating the cash flows associated with a regular G-Sec i.e. each semi-annual coupon payment and the final principal payment to be received from the issuer, into separate securities. They are essentially Zero Coupon Bonds (ZCBs). Being G-Secs, STRIPS are eligible for SLR. All fixed coupon securities issued by Government of India, irrespective of the year of maturity, are eligible for Stripping/Reconstitution, provided that the securities are reckoned as eligible investment for the purpose of Statutory Liquidity Ratio (SLR) and the securities are transferable.
State Development Loans: :State Governments also raise loans from the market which are called SDLs. SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government. Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date.
Under the amended RBI Act, the monetary policy making is as under:
- The MPC is required to meet at least four times in a year.
- The quorum for the meeting of the MPC is four members.
- Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
The resolution adopted by the MPC is published after the conclusion of every meeting of the MPC in
according to the provisions of Chapter III F of the Reserve Bank of India Act, 1934.
- On the 14th day, the minutes of the proceedings of the MPC are published which include:
- a. the resolution adopted by the MPC;
- b. the vote of each member on the resolution, ascribed to such member; and
- c. the statement of each member on the resolution adopted.
- Once in every six months, the Reserve Bank is required to publish a document called the Monetary Policy Report to explain:
- a. the sources of inflation; and
- b. the forecast of inflation for 6-18 months ahead.
