International Equities

IFM 2015

Euro-Equities• Funds are raised from the international financial markets

through the issue of Euro-equities, Euro-bonds, Euro-notes and Euro-commercial papers.

• International equities or the Euro-equities do not represent debt, nor do they represent foreign direct investment. They are comparatively a new instrument representing foreign portfolio equity investment. In this case, the investor gets the dividend and not the interest as in the case of debt instruments. On the other hand, it does not have the same pattern of voting right that it does have in the case of foreign direct investment. In fact, international equities are a compromise between international debt and foreign direct investment.

Procedure of issue

• 1. Planning for size and government approval• When a company plans to issue international equity it

decides on the size of the issue, the market for launching the equity and the issue price.

• 2. It approaches the lead manager who has better market knowledge. The lead manager (merchant banker) examines the risk factor and the route whether it is to be an American depository (ADR) or a Global depository (GDR). When the lead manager finalizes then the issuing company prepares the prospectus and takes necessary permissions from regulatory authorities.

CONTD

• 3. Role of custodian bank: After getting approval it deposits the shares with the custodian bank located in the domestic/host country. The custodian bank asks the depository to issue depository receipts in lieu of the shares held by it on behalf of the issuer. The ratio of depository receipts and shares is decided before hand. Generally, the issues are priced at discount such that the earnings per share drops in proportion to the increase in capital. The market price depends upon earning potential, industry fundamentals and macro fundamentals.

Launching of ADR/GDR4. The depository which is a bank located at an international financial centre functions as a link between the issuing company and the investor. When the GDRs are purchased by investors, the funds flow from the depository to the custodian bank and then to the issuing company.

5. Registration: the company enters the name of the investor in the register of the shareholders. The investor has the right to surrender the GDR and take back the investment. For this he deposits the GDR who in turn informs the custodian who will issue the share certificates in exchange for the GDRs. The proceeds from the sale are converted into foreign exchange for making payment to the foreign investor. Often there is a lock-in period which prevents the foreign investor from selling the GDR back to the issuing company.

Voting Rights

• 6. The question of voting rights is important since GDR investors keep changing from time to time. The issuing company and the overseas depository enter into an agreement which enables the depository to vote either with the majority voters or according to the management vote. Alternately, it is understood that the depository votes in the same proportion as the rest of the shareholders.

Cost of issue

• 7. Ordinarily, launching a new equity even in a domestic market involves various costs such as management fees, registration charges, underwriters commission, publication fees, overhead expenses and other local costs. These are borne by the issuing company. The depository also incurs some expenses. The approximate cost of issue is about three to four percent of the issue amount.

DocumentATION

• 8. There are many documents used in the process of issue of international equity.

• A. Prospectus containing details about the issuer and the issue.

• B. The depository agreement between the issuing company and the depository regarding conversion and re-conversion of shares into GDRs.

• C. Underwriting agreement between the issuing company and the underwriter who is the lead manager or the merchant banker.

Contd

• D. Agreement between the custodian bank and the depository.

• E. Trust deed giving the duties and responsibilities of the trustee regarding servicing of the issue.

• F. Agreement with the listing stock exchange for investor awareness and other governance issues.

• G. Subscription agreement between the lead manager and the syndicate members who agree to subscribe to the issue.