Page 72 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 4: Indian Capital Market

employees to buy shares of the company, so they become part owners and participate in the Notes
profits, apart from earning salary. This gives a boost to the sentiments of employees and motivates
them to work harder towards the goals of the company.

The Companies Act defines `sweat equity shares' as equity shares issued by the company to
employees or directors at a discount or for consideration other than cash for providing knowhow
or making available rights in the nature of intellectual property rights or value additions, by
whatever name called.

Tracking Stocks

A tracking stock 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.

Example: QQQQ, which is an exchange-traded fund that mirrors the returns of the Nasdaq
100 index.
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 predefined catastrophe, then the issuer's obligation to pay interest and/or repay the
principal is either deferred or completely forgiven.

Example: 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.

Self Assessment

Fill in the blanks:
11. …………………… is that part of the capital markets that deals with the issue of new
securities.
12. Apart from allotment through auction, a system of …………………… bidding was
introduced in January 2002 to encourage retail investors who do not have sufficient
expertise in such bidding.
13. …………………… protects the interests of investors in securities and promotes the
development of the securities market.
14. SPN is a …………………… debenture redeemable at premium issued along with a
detachable warrant, redeemable after a notice period, say four to seven years.

15. …………………… refers to equity shares given to the company's employees on favorable
terms, in recognition of their work

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