NISM Research Analyst Chapter 2: Introduction to Securities Market – Part 2

In Part 1 – Introduction to Securities Market, we covered equity, debentures, warrants, NAV, mutual funds, and ETFs. Now, let’s move ahead and look at the remaining key instruments like bonds, depository receipts, FCCBs, and more. It will be similar to part 1, with examples and simple explanation. So, let’s start…

Bonds

• A bond is like a loan given by an investor to a company or government.
• In return, the company/government promises to:
  Pay regular interest (called the coupon)
  Repay the principal amount after a fixed time (maturity).

Example:
You buy a bond of ₹1,000 with 8% interest for 5 years.
Every year → you get ₹80 interest.
After 5 years → you get back ₹1,000 principal.

Types of Bonds

1. Government Bonds (G-Secs)

• Issued by Government of India.
• Very safe, low risk.
• Example: RBI issues 10-year G-Sec.

2. Corporate Bonds

• Issued by companies to raise money.
• Higher risk than government bonds, but may give more return.

3. Fixed Rate Bonds

Pay fixed interest throughout the life of bond.

4. Floating Rate Bonds

Interest rate changes as per market conditions.

5. Zero-Coupon Bonds

• No regular interest.
• Issued at a discount, repaid at face value.
• Example: Buy at ₹800, after 5 years get ₹1,000. Profit = ₹200.

6. Convertible Bonds

Convertible Bondscan be converted into shares after a fixed period time.

7. Perpetual Bonds

No maturity date. Company keeps paying interest forever (or till it decides to repay).

Coupon Rate of a Bond

The coupon rate is the fixed percentage of the bond’s face value (par value) that the issuer agrees to pay as interest to the bondholder every year.

• It is expressed as a percentage.
• The coupon payment is usually made semi-annually or annually.
• It does not change with the market price of the bond.

Easy way to remember:
Bond = Fixed income loan investment (safe, but limited returns)

Depository Receipts

A Depository Receipt (DR) is a financial instrument that represents shares of a company, but it is traded in another country’s stock exchange.

IDR, GDR, and ADR

IDR – Indian Depository Receipt

• It is a financial instrument used by foreign companies to raise funds in India.
• Issued by an Indian depository to Indian investors.
• Represents ownership in the shares of a foreign company.
• Example: If a U.S. company issues IDRs, Indian investors can buy them in rupees and indirectly invest in that U.S. company.

GDR – Global Depository Receipt

• It is a financial instrument used by Indian companies (or any company) to raise funds from international markets.
• Issued by international depositories outside the home country (e.g., in London or Luxembourg).
• Allows companies to attract foreign investors.
• Example: An Indian company issues GDRs in Europe to raise money from European investors.

ADR – American Depository Receipt

• It is similar to a GDR but specifically used to raise funds from the U.S. market.
• Issued by a U.S. depository bank.
• Allows foreign companies to get listed and traded on U.S. stock exchanges (like NYSE, NASDAQ).
• Example: Infosys (India) issues ADRs to trade on U.S. exchanges.

Key Difference:

IDR → Foreign company raising money in India.
GDR → Indian (or other) company raising money outside home country (global market).
ADR → Foreign company raising money specifically in the U.S.

Easy way to remember:
Depository Receipts = Foreign company’s shares, packed in a simple format, and traded in your local market.

Sponsored Issue

A Sponsored Issue happens when a foreign company itself takes the initiative to issue Depository Receipts (DRs) in another country.

Example:

• Infosys wants to issue ADRs in the U.S.
• Infosys signs an agreement with a U.S. bank.
• That bank issues ADRs on behalf of Infosys.
• U.S. investors can now buy Infosys ADRs easily.

FCCB (Foreign Currency Convertible Bond)

• FCCB is a bond issued in foreign currency by Indian companies which can later be converted into company shares.
• The special part is – these bonds can later be converted into equity shares of the company at a pre-decided price.

Example:

Suppose Reliance Ltd. issues FCCBs worth USD 10 million.

• Investors abroad buy these bonds.
• They earn a small interest in USD every year.
• After 5 years, the bondholders have 2 choices:
  Convert bonds into Reliance shares (if the share price is attractive).
  Take back their money in USD (if share price is low).

Equity Linked Debentures (ELDs)

• These are debentures whose returns are linked to equity (stock market performance).
• Instead of getting a fixed interest like normal debentures, the investor’s return depends on how a particular stock or stock index performs.

Example:

• A company issues an ELD linked to Nifty 50 index.
• If Nifty 50 rises by 12% in a year → investor may get 10% return.
• If Nifty 50 falls → investor may get only a small fixed amount (say 2%).

Commodity Linked Debentures (CLDs)

• These are debentures whose returns are linked to the price of a commodity (like gold, silver, oil, etc.).
• Interest or repayment value depends on how the commodity’s price moves.

Example:

• A company issues CLDs linked to gold prices.
• If gold price increases → investor gets higher returns.
• If gold price falls → investor gets lower returns.

That completes Part 2 of Chapter 2 – Introduction to Securities Market. Together with Part 1, you now have a full overview of all major financial instruments that appear in the NISM Research Analyst exam. However, Chapter 2 is not yet complete, now in Part 3, I will cover primary and secondary markets.