Page 73 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes Mortgage Backed Securities (MBS)

MBS is a type of asset-backed security, basically a debt obligation that represents a claim on the
cash flows from mortgage loans, most commonly on residential property. Mortgage backed
securities represent claims and derive their ultimate values from the principal and payments on
the loans in the pool. These payments can be further broken down into different classes of
securities, depending on the riskiness of different mortgages as they are classified under the
MBS.

 Mortgage originators to refill their investments
 New instruments to collect funds from the market, very economic and more effective

 Conversion of assets into funds
 Financial companies save on the costs of maintenance of the assets and other costs related
to assets, reducing overheads and increasing profit ratio.

 Kinds of Mortgage Backed Securities:
1. Commercial mortgage backed securities: backed by mortgages on commercial property
Collateralized mortgage obligation: a more complex MBS in which the mortgages are
ordered into tranches by some quality (such as repayment time), with each tranche sold as
a separate security.
Stripped mortgage backed securities: Each mortgage payment is partly used to pay down the
loan's principal and partly used to pay the interest on it? Residential mortgage backed
securities: backed by mortgages on residential property.
2. Residential mortgage backed securities: backed by mortgages on residential property.

Global Depository Receipts/ American Depository Receipts

A negotiable certificate held in the bank of one country (depository) representing a specific
number of shares of a stock traded on an exchange of another country. GDR facilitate trade of
shares, and are commonly used to invest in companies from developing or emerging markets.
GDR prices are often close to values of related shares, but they are traded and settled
independently of the underlying share.
Listing on a foreign stock exchange requires compliance with the policies of those stock exchanges.
Many times, the policies of the foreign exchanges are much more stringent than his policies of
domestic stock exchange. However a company may get listed on these stock exchanges indirectly
– using ADRs and GDRs.
If the depository receipt is traded in the United States of America (USA), it is called an American
Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA,
it is called a Global Depository Receipt, or a GDR.

But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals
wanting to invest in India. By buying these, they can invest directly in Indian companies without
going through the hassle of understanding the rules and working of the Indian financial market
- since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using
their regular equity trading accounts!

Example: HDFC Bank, ICICI Bank, Infosys have issued both ADR and GDR.

68 LOVELY PROFESSIONAL UNIVERSITY