Financial Instruments of India

In this paper we will discuss about the various financial instruments, for example, G-secs, Commercial Papers, Certificate of Deposits, Preference Shares, Call Money Market etc, available in the Indian financial markets. This paper provides a brief description of all of these.
Several financial instruments are available in the Indian money market. These are government securities, or G-sec, preference shares, commercial papers, equity shares, certificate of deposits, call money market and industrial securities.

These are discussed below.

Government Securities:

In India, mainly the institutional investors buy the government securities. The government, both State and Central, and the government authorities, for example, state electricity boards, municipalities etc issue it.
Commercial banks are the biggest investors who buy the G-secs. The government collects money through the G-secs to finance its several new infrastructure development projects or to meet its present needs. The government itself issues the risk of default for G-sec, for it.

Preference Shares:

These carry a fixed dividend rate and a special right to dividends over the private equity holders. Currently, all the preference shares in the Indian market are `redeemable&rsquo, that is, they have a fixed period of maturity. Therefore, sometimes they are termed as `hybrid variety’ –

Commercial Papers (CP):

These are issued mainly by the corporate businessmen to fund their working capital needs. Commercial Papers are issued generally for short-term maturities. Commercial papers are not secure and subject to market risks, so those corporate bodies that have a good credit history will only be able to use this financial instrument.

Equity Shares:

It is a "high return risk" instrument. Equity shares don't have any fixed return rate and thereby, no period of maturity.

Certificate of Deposits (CD):

These are very similar to the Commercial papers. But the CDs are issued mainly by the commercial banks.

Call Money Market:

The loans made in the call money market are mainly short term in nature. Call money market mainly deals with the interbank markets. Those banks that are suffering from a short-term cash deficit borrow cap from the call money market. The interest rate varies with the market rate and depends upon the banking system.

Industrial Securities:

Normally the big corporate bodies are used to issue this to fulfill their long-term requirements regarding working capital. The • debentures, • equity shares fall under this category.