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Financial market in India.

FINANCIAL MARKET in India

A financial market in India is a medium that allows buyers and sellers of a specific good or service to interact and facilitate an exchange. This type of  financial market in India may either be a physical marketplace where people come together to exchange goods and services in person (as in a bazaar or shopping centre), or a virtual financial market in India wherein buyers and sellers do not interact, as in an online market.

Financial market in India is a market for exchange of funds. In a financial market, people with surplus funds such as lenders or investors give funds to people in need, such as borrowers or other receivers for interest or share in profits.

Investment and Speculation

The decision to invest funds in financial market in India is a particular asset can be undertaken on mainly two basis: investment or speculation. Investment is a basis when the amount is invested with complete analysis in expectation of the safety of the amount invested and adequate return.

Conversely, speculation is a basis when the amount is invested in a risky financial transaction or asset in expectation of enormous profits from fluctuations in the financial market in India value of the financial asset. In speculation, there is a high risk of losing maximum or all initial outlay.

In investment, the time horizon for which money is invested is relatively longer, generally spanning at least one year while in speculation, the term may be short.

Basis   Investment      Speculation
Meaning The purchase of an asset with the objective of earning normal returns The objective is to earn large profits in a short span of time
Basis for decision Fundamental   factors, i.e.

performance of the company, industry, and economy

Market psychology and intuition
Time period Long term Short term
Risk involved Moderate risk High risk

 

Read more about market: https://www.brainyias.com/sectors-of-indian-economy/

MONEY MARKET in India

A  financial market in India is a market where funds are exchanged for a period of less than 1 year. Various money market instruments are as follows:

  • Bill of exchange: It is a money market financial instrument. In a bill of exchange, the debtor is required to pay a fixed sum of money after a certain period of time to the creditor or bearer of bill of exchange as the case may be. The creditor writes the bills of exchange and the debtor signs it. On maturity of the bill, the bill is presented to the debtor for payment.
  • Promissory note: A promissory note is a money market financial in India  instrument in which the maker of document (debtor) promises in writing to pay a certain sum of money at certain period of time to the first owner (creditor) or bearer of the document.
  • Short-term loans: These are loans for a duration of less than 1 year. Long-term loans are considered part of capital market.
  • Commercial paper: It is a promissory note issued by large corporations to obtain funds in order to meet their short-term obligation. It is usually unsecured. The corporation promises to make payment along with interest to the holder of the document.
  • Treasury bills: These are money in financial market instruments issued by the government to collect funds to meet expenditure for a short period of time. The holders of treasury bills are given principal along with the interest.

CAPITAL MARKET as Financial market in India

A capital market is a financial market in India where exchange of funds is for a period of 1 year or more. Various capital market instruments are as follows:

  • Long-term loans: These loans are taken for a period of more than 1 year.
  • Shares: A share is one of the equal parts into which a company’s capital is divided, entitling the holder to a proportion of the profits. Shareholders are owners of the company. Shares are of two types: equity and preference.

Equity shareholders are given share out of profits or repayment of capital on liquidation only after settling the claims of preference shareholders. Thus, they are the primary risk bearers in the company.

Preference shares are called so because their claim in profits and repayment of capital on liquidation is settled before payment is made to equity shareholders.

Venture Capital as financial market in India

Venture capital refers to finance provided by investors to start-up companies and small businesses that are believed to have long-term growth potential. For start-ups without access to capital markets, venture capital is an essential source of money. Risk is typically high for investors, but the potential for above-average returns is an attractive payoff.

Venture capital does not always take a monetary form; it can be provided in the form of technical or managerial expertise. For new companies or start-up ventures that have a limited operating history, venture capital funding is increasingly becoming a popular capital raising source, as funding through loans or other debt instruments is not readily available.

Angel Investors and Venture Capital Firms

Angel investors are typically a diverse group of individuals who gained their wealth through a variety of sources. However, the majority are usually entrepreneurs themselves, or are executives who retired early from previous ventures that developed into successful empires. These investors who act as venture capitalist are called angel investors.

Venture Capital Process

The first step for any business looking for venture capital is to submit a business plan, either to a venture capital firm or to an angel investor. The firm or the investor evaluates the proposal. If satisfied with the potential of the project, the firm or the investor will pledge an investment in exchange for equity in the company. The firm or investor then takes an active role in the funded company. The capital is typically provided in rounds. Therefore, the firm or investor actively ensures that the venture is meeting certain milestones before receiving another round of capital. The investor then exits the company after a period, typically 4-6 years after the initial investment, through a merger, acquisition, or initial public offering (IPO).

  • Debentures: These refer to the unit of debt or loan. Debentures are issued at a fixed rate of interest by the company. Debenture holders are the lenders of the company. The interest on debenture is required to be paid even if the company suffers losses.
  • Bonds: Bonds, like debentures, carry fixed rate of interest. Usually bonds are issued by the government to collect money to carry out its expenditure. For example, the Government of India launched infrastructure bonds to raise funds for infrastructure development in India.

Difference between Bonds and Debentures

  •      Debentures and bonds are types of debt instruments that can be issued by a company. In some markets (India, for instance), the two terms are interchangeable, but in the United States, they refer to two separate kinds of debt-based securities.
  •      Debentures have a more specific purpose than bonds. Both can be used to raise capital, but debentures are typically issued to raise short-term capital for upcoming expenses or to pay for expansions.
  •      Another important difference is that debentures are never asset backed (they are not secured by any collateral) and are only backed by the credit of the issuer. On the other hand, bonds ail secured by particular collateral.
  •      However, as mentioned above, debentures and bonds are used almost interchangeably it India.

Green Bonds

A bond is a debt instrument with which an entity raises money from investors. The bond issuer gets capital, while the investors receive fixed income in the form of interest. When the bond matures, the money is repaid.

A green bond is very similar. The only difference is that the issuer of a green bond publicly states that capital is being raised to fund “green” projects, which typically include those relating to renewable energy, emission reductions, and so on.

What Are the Benefits of Issuing Green Bonds?

Green bonds enhance the reputation of issuers, as they help in showcasing their commitment towards sustainable development. They also provide issuers access to a specific set of global investors who invest only in green ventures. These investors often provide money at a low rate of interest.

Why Should an Investor Invest in Green Bonds Despite Low Return?

Green bonds inherently carry lower risk than other bonds. In a green bond, proceeds are raised for specific green projects, but repayment is tied to the issuer and not the success of the projects. This means the risk of the project not performing stays with the issuer rather than investor.

When Did the Concept Start?

In 2007, green bonds were launched by a few development banks such as the European Investment Bank and the World Bank. Subsequently, in 2013, companies also started issuing green bonds. Yes Bank was the first bank to come out with an issue worth ₹1000 crore in 2015.

 Why Are Green Bonds Important for India?

India has embarked on an ambitious target of building 175 GW of renewable energy capacity by 2022, from just over 30 GW in 2017. This requires a massive investment. At higher interest rates and unattractive terms under which debt is available in India, the cost of renewable energy will be 24-32% higher compared to that in the United States and Europe. Thus, green bonds are a good option to source global investment at low interest rates.

Indian Economy

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