Innovative Financial Instruments

29/12/2020 1 By indiafreenotes

Innovative financial instruments are a range of activities such as:

  • Participation in equity (risk capital) funds
  • Guarantees to local banks lending to a large number of final beneficiaries, for instance small and medium-sized enterprises (smes)
  • Risk-sharing with financial institutions to boost investment in large infrastructure projects.

The aim is to boost the real economy through increasing the access to finance for enterprises and industry producing goods and services. Spending through innovative financial instruments is another way of spending country budget than giving grants or subsidies.

Innovative financial instruments can attract funding from other public or private investors in areas of country strong interest but which are perceived as risky by investors. Examples include sectors with high economic growth or innovative business activities.

Despite the accelerated industrial growth experienced this decade from recent economic reforms, most major investors around the globe do not yet see India as an ideal country for foreign investment. The competition for global capital will only get tougher in the years to come, and unless the political, judicial and economic environments are right, India will lag behind many other emerging nations. More importantly, the rising expectations of the middle-class, widening income and wealth inequalities between the haves and have-nots, require efficient initiatives from Government and corporate to attract and accommodate the funds available.

Variety of financial products like mutual funds, insurance, shares, debentures, derivative instruments, etc. are available in India. However, the reach of these products is very limited and the features of many of these products are very basic in nature. Further development and innovation in these products would be faster if they are accessed by all classes of investors in urban as well as rural areas. The thrust lies mainly on the development of new financial products to deepen the improvements in the product distribution itself. The responsibility of ensuring these improvements vests with all the stakeholders in the financial services industry.

The Indian financial market has been primarily divided into three categories namely: Equity; Debt; Derivatives. Every category has its own importance in the development of financial markets. In most of the developed nations after the development of Equity now the major focus is on Debt and Derivatives market. The reason for this focus can be many supportive benefits which accrue to a market by development of double ‘D’ market.

Surprisingly in financial market is used as a synonym for equity market which has completely under deployed Debt and derivative markets. The importance and potentials of debt market are still under a doubtful impression in India and no major revolution has been brought to this effect in the recent periods. Focus of more and more to just equity markets has created saturation in Indian stock market. So willingly or unwillingly now the focus has to be shifted towards other possible avenues.

Some of the possible avenues have been categorized during this research conducted on various instruments which are globally available but cannot find place in Indian markets. Now these instruments are also categorized in the various forms and accrue to a specific market.

Firstly the focus is laid on so called Backbone of Indian Financial system Vis the Indian equity market, which has incorporated every possible instrument which can be accommodated in Indian family of Equity instruments. Few instruments has been recognized which can be absorbed in Indian market, which can be Indian Depository Receipt (IDR), Non-Voting Shares, Cumulative convertible preference shares (CCPS), Debt-equity swap.

Secondly it comes the most awaited Debt market which needs great development especially in case of corporate bonds. In India 80% of bonds are Govt. issued and 80% of remaining by institutional investors. So there has to happen lot of work by GOI (Government of India). In this few instruments which can be of utmost importance for Indian environment can be Inflation linked bonds (ILB), junk bonds, Specialized debt fund for infrastructure funding, securitization of debt.

Thirdly it comes to the funds of masses i.e. pension funds and retirement schemes which are always backed by government and also has gained support from the government. In this case one of the major innovative works can be on New Pension Scheme.

Fourthly, it comes to mutual funds which has the role of UTI, SEBI, RBI, AMFI and other such authorities which are regulating the workings of mutual funds in India. One of New Direction in mutual funds can be Investment funds in international Markets.

Fifthly it comes to the derivatives market, which can be divided in two major forms futures and options. In future major development can be in the newly arrived concepts which can become,

Instruments of masses. These include Futures on the Index of Industrial and Economy growth and Index and futures for Carbon Emission in the country. Further option market again has a lot of scope for improvements in the fields of Weather derivatives, Commodity Options, Credit derivatives.

Last but not the least there is an open category which also has few innovative instruments to be captured. These can be Index for Natural Disaster and risk Management and Financial development Index.

Important consideration to be noticed here is that India is a great Economy with tremendous growth opportunities has to cater with ongoing global competition in terms of capital and Money markets developments.

Another important issue here is that India has to balance its Financial market with the equitable share of debt and equity.

It should be open for latest and innovative types of instruments suitable for the growth and development of financial system.

New concepts like Carbon Emission index should be a given a proper research and find out the ways to develop and implement it.