8741596 [ojklSorjnturyurces of Foreign Capital

Kalyan Teja Nimushakavi

FDI

FII

ADR/GDR

Foreign Currency Loans

ECB

FCCB

• History – 1927

• What are DRs ?

• Why DR s?

• Mechanisms

• DR s are US Negotiable Securities issued by a depositary bank that represent the ownership of certain underlying shares of a non US Company.

• DR Programs allow the non US companies to get their shares listed and traded in the US market. Some structures allow them to raise capital even.

• For Company

Overseas capital markets’ access

Enhances visibility

Increased liquidity

Fair Valuation

Mergers & Acquisitions

Privatization

• For Investors

To Diversify their portfolio

Transactions in local currency

Information easily available

• DRs are frequently identified by the markets in

which they are available or the rules and regulations

associated with the structure.

• ADRs – Traded in US markets

• GDR s – Typically traded in one or more markets

• EDR s – Traded in Euro markets

OTC Market

Exchange Listed

Capital Raising

Privately Placed

OTC Market

1. Purchase request

2. Contact to purchase

3. Shares Purchase

4. Depositing Shares

5. Confirmation

6. Issue of DR s

7. Transfer of DR s

Foreign Investors

Foreign Stock Exchange

Issuer Company

DTC/EuroClear/ Clear sream

Local Custodian

Depositary Bank

DividendsMoney

Underlying SharesAgreement

Listing Requirements

Money DR sDividends

Sale of DRs:

Intra market trading

Cancellation (Cross border trading)

1. Cancellation Request

2. Surrender DR s

3. Confirmation

4. Release of Shares into home market

• Due to the mechanisms involved , DR s are prone to following

risks

Inflation Risks of the respective countries

Exchange Rate risks

Political risks

Finally Performance of the company

ADR

• Higher Valuation

• Higher participation

• Wide research Coverage

• More processing time i.e. 5-6

months

• Stringent regulatory requirements

• US GAAP

• Higher Costs associated

GDR

• Lower Valuation

• Lower participation

• Limited research coverage

• Less processing time

• Relaxed requirements

• IAS

• Relatively Lower costs

• Foreign currency loans are given by the domestic banks to

Corporates.

• These loans are given from the deposits of the Foreign

currency accounts Non Resident Indians.

• However Credit rating of the company plays an important role

• Terms differ for different banks in terms of requirements

• These funds are primarily available to

Export Oriented Units (Project Financing)

Importing companies (Payments)

Pubic Sector Units (For purchase of capital goods)

• Relatively Cheaper Funds

• Lesser Processing time

• Funds can be used for following:

Working Capital Management (3-18 Months)

Project Financing

New Capacity augmentation – Capital goods

Importers for meeting import obligations

• End Use Restrictions:

Investment in Capital Markets

Investment in Real Estate Sector

• Indian companies/entities other than individuals, trusts and

non‐profit making organisations can raise money from abroad

• These include buyer’s credit, bank loans, securities issued,

credits from official export credit agencies

• These funds are made available by foreign banks, financial

institutions abroad like IMF, World Bank, UBS, ADB etc.

• The regulations are subject to change from time to time

• There is a cap on the total amount that can be taken in a year

through the route of ECB s

• Generally three years of good financial performance and

prudent debt management are prerequisites for ECB

• ECB s - approved by RBI.

• Usage Specifications:

Raised only for Investment (Capital Goods, Capacity augmentation)

Permitted for Overseas Acquisitions (JVs or Subsidiaries)

Permitted for acquisition of shares in PSUs (Disinvestment)

• Restrictions:

Investment in Capital Markets

Investment in Real Estate Sector

On Lending of funds

Domestic Companies Takeover

• Quasi Debt instrument with an option of conversion

• All the transactions happen in currency other than the local

currency Receipts from issue of FCCB Coupon Payments Redemption

• Advantages of both debt and equity instrument

• Companies issuing FCCB s need to hedge (Till maturity

period)

• FCCBs are generally of two types

• Due to the option of conversion,

Associated with low Coupon rates (30-40 % lesser)

Associated with Premium offerings (30-70 % higher)

• Availability of Zero Coupon Bonds

• Redemption based on future expected cash flows

• Intention of conversion both from lender and issuer

• Approvals

• Processing time

• Ease of availability

• Purpose of borrowing