Page 13 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes shares and in case of fully convertible debentures, the full value of the debenture is
converted into equity. Convertible debentures are generally issued to prevent sudden
outflow of the capital at the time of maturity of the instrument, which may cause liquidity
problems. The conversion ratio, which is the number of equity shares exchanged per unit
of the convertible debenture is clearly stated when the instrument is issued. Usually,
Convertible Debentures offer more safety to the investor compared to Common Shares or
Preference Shares. They are suitable for investors who look for potential increases in asset
value (appreciation) compared to that yielded by Bonds, and more earnings than Common
Stocks provide.
2. Non-convertible Debentures are debentures issued without conversion option. The total
amount of the debenture will be redeemed by the issuing company at the end of the
specific period.

Asset-backed Securities (Secured Debentures)

Asset-backed Securities (ABS) are bonds collateralised (secured) by mortgages, loans, or other
receivables. Typically, the issuing institution sells mortgages, loans, instalment credit, credit
card or other receivables to a trust or a Special Purpose Vehicle (SPV) that in turn sells ABSs to
the public. ABSs are interest- bearing instruments and are often enhanced through the use of
guarantees or insurance.

Warrants

Warrants can be described as a derivative security that gives the holder the right to purchase
securities (usually equity) from the issuer at a specific price within a certain time frame.

Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer
to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and
make them more attractive to potential buyers. Warrants can also be used in private equity
deals.
Warrants are often confused with call options. But the main difference between the two is that
warrants are issued and guaranteed by the company, whereas options are exchange instruments
and are not issued by the company. Also, the lifetime of a warrant is often measured in years,
while the lifetime of a typical option is measured in months.

Shares

Shares are securities representing a portion of the ownership of a company that are a claim on
the company's earnings and assets. Shareholders are paid dividends which are a percentage of
the profits of the company.
Shares in the company may be similar i.e. they may carry the same rights and liabilities and
confer on their holders the same rights, liabilities and duties. There are two types of shares
under Indian Company Law:
1. Equity shares: Equity shares are shares which do not enjoy any preferential right in the
matter of payment of dividend or repayment of capital. The equity shareholder gets
dividend only after the payment of dividends to the preference shares. There is no fixed
rate of dividend for equity shareholders. The rate of dividend depends upon the surplus
profits. In case of winding up of a company, the equity share capital is refunded only after
refunding the preference share capital. Equity shareholders have the right to take part in
the management of the company. However, equity shares also carry more risk.

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