The Indian Money Market Money market is a market for financial assets which are close substitutes for money. It is an overnight market for procuring short-term funds and instruments having a maturity period of one or less than one year. It does not refer to a physical location, but refers to an activity that is conducted over telephone. Money market constitutes a very important segment of the Indian financial system. Features of Indian Money Market Functions of Money Market Benefits of an efficient Money Market Money Market Instruments ( TBs, CDs, CP, Call Money, CBs, CBLO etc)

The Indian Capital Market The Indian Capital Market is an important constituent of the Indian Financial System. It is a market for long term funds – both equity and debt raised within and outside the country. The Capital Market aids economic growth by mobilizing the savings of the economic sectors and directing them towards channels of productive use. Functions of Capital Market Structural Framework of Indian Capital Market Primary Capital Market and Secondary Capital Market

Various sources of Finance The Corporate Sector draws its capital needs from the following sources: –Promoters Contribution, –Equity & Preference Capital raised from the shareholders (generally referred to as equity capital), –Bonds/Debentures raised from the Public (generally referred to as Debt Capital), –Term Loans from Banks & Financial Institutions, –Short-term Working Capital from Banks, –Unsecured Loans & Deposits, and –Internal generation of Funds (Profits/surpluses re- ploughed).

Debt finance through term loans and Project Financing A term loan is a loan made by a bank / financial institution to a business having an initial maturity of more than 1 year (usually less than 10 years). The primary source of this mode of finance is financial institutions. Term loans or project finance is provided by financial institutions for new projects and also for expansion / diversification and modernization whereas the bulk of term loans extended by banks are in the form of working capital term loan to finance the working capital gap. Though they are permitted to finance infrastructure projects on a long-term basis, the quantum of such financing is only marginal.

Loan financing A firm or hospital may meet its financial requirements by taking both short-term loans or credits and long term loans. The short term loans or credits are obtained for working capital requirements. Some of the popular sources of short term loans or credits are – trade credit, loans from commercial banks in the form of loans, cash credits, hypothecation, pledge, overdrafts, bills discounted and purchased, public deposits, loans from finance companies in the form of leasing and hire purchasing, merchant banking, equity research and investment counseling, accrual accounts, loans from indigenous bankers, advances from customers and other miscellaneous sources.

Lease A Lease is a Contract under which one party, the lessor (owner) of an asset agrees to grant the use of that asset to another, the lessee, in exchange for periodic rental payments (Lease Rental). Types of Leases: –Net Lease : It is a lease where the lessee maintains and insures the leased asset. –Operating Lease: It is a short-term lease that is often cancellable –Financial Lease: It is a long-term lease that is not cancellable –Full service or maintenance lease: Under this type of lease, the lessor pays for maintenance, repairs, taxes and insurance. –Sale and Lease back: It refers to the sale of an asset with the agreement to immediately lease it back for an extended period of time. –Direct Leasing: Under this type of lease, the company acquires the use of an asset it did not own previously, mostly from the manufacturer. –Leveraged Leasing: It refers to a lease arrangement in which the lessor provides an equity portion (usually 20% to 40%)of the leased asset’s cost, and third-party lenders provide the balance of the financing. –Up fronted Leases: In these leases, more rentals are charged in the initial years and less in the later years of the contract. –Back ended leases: Under these leases, at the end of the contract, the asset reverts to the lessor, who is the legal owner of the asset, who is entitled to claim depreciation.

Cash flow consequences of Financial Lease 1. Avoidance of the purchase price (P 0 ) 2. Loss of depreciation tax shield (DTS) 3. After-tax payment of lease rentals (L t )

Operating Lease An operating lease is a rental agreement. Usually it refers to the rental of an asset or equipment over a short period of time. At the end of the lease, you return the asset or equipment to the leasing company. When Is Leasing A Good Option? Leasing is a good option for businesses that need equipment for short periods of time.For instance, you may require a special machine for a project. After the project, you will have no need for the machine. In such cases, it would be more cost effective to lease the machine for the duration of the project instead of purchasing it. Increasingly, many small businesses are beginning to lease computers, photocopiers and fax machines. Not only does it help to reduce the upfront cash needed to purchase these items, but it also shifts the responsibility and cost of maintenance and servicing to the supplier.

What Are The Benefits Of Leasing? You do not need large sums of cash to acquire equipment you need for only short periods. The rental you pay is fixed, making it easier to draw up a budget and project your cash flow. By leasing, the responsibility of maintaining and servicing the equipment falls on the person renting the equipment to you. You can always rent the latest and most advanced equipment or assets as and when you need them.

Hire Purchase Under a Hire purchase arrangement, like in a lease, the hire purchaser is able to avoid the payment for the purchase of the asset now, and instead pays hire purchase installments (either monthly/quarterly/any other agreed period) over a specified period and time. The Hire purchaser becomes the owner of the asset once he had paid all installments. Unlike Lease, he is entitled to claim depreciation as well as the salvage value of the acquired asset.

When Is Hire Purchase A Better Option? Hire purchase is a better option when you need to use the equipment or asset frequently e.g. delivery vans. Hire purchase allows you to eventually own the equipment as opposed to purely renting the equipment. In leasing, you can only rent the item if it is available. If your business depends on an equipment or asset, you cannot afford to lease.

PROJECT FINANCING Project financing is another asset based financing arrangement. It is the financing of the project as an independent economic unit, where the project itself forms a direct security, and its cash flows are used to service the debt or equity provided by the project sponsor. Project financing is the most common method of financing large infrastructure projects.

Forms of Project Financing –BOOT (Build-own-operate-transfer): In a BOOT arrangement, the project sponsor builds a project, operates it for a long period of time to earn a reasonable return, and then transfers it to the host government or its agency. –BOO (Build-own-operate): Under this arrangement, the project is not transferred to the host government, rather, the owner divests its stake in the capital markets. –BLT (Built-Lease-Transfer): Under this arrangement, the owner transfers the project to a lessee for operational purposes, but keeping the ownership intact.

Venture Capital Financing Venture capital represents funds invested in a new firm. Wealthy investors and Financial Institutions are the major sources of Venture Capital. In the recent past, the Venture Capital came to be associated with the financing of high and new technology based enterprises. It can be said that Venture capital is the investment of long-term equity finance where the venture capitalist earns his return primarily in the form of capital gains. Features of Venture Capital –Equity Participation –Long-term investment –Participation in management.