RAISING FUNDS FROM OFF SHORE SOURCES

Off shore sources fundsOff shore sources fundsDomestic financial system –

helps raise finance from domestic funds

International financial markets transfer funds across countries

Main sources are - Eurocurrency loans- Euro bonds - ADRs & GDRs

Eurocurrency LoansEurocurrency LoansIs freely convertible currency

deposited outside the country of origin

These loans are of high volume & are usually syndicated by more than bank.

Loans are on basis of floating rate of interest ie LIBOR + floating rate of interest

Can be borrowed in a variety of currencies & can be repaid in similar currencies

Euro bonds & Foreign Euro bonds & Foreign bondsbondsAre sold outside

the country in whose currency they are denominated. Eg an Indian co issusing dollar bonds in Japan.

Eurodollar, euroyen etc

Foreign bond is denominated in the currency of country where issued. Eg Indian co issuing dollar bonds in US.

Euro Convertible Euro Convertible Bonds/Foreign Currency Bonds/Foreign Currency Convertible BondsConvertible BondsUnsecured Debt.Sold in any freely convertible

currency.Carry a fixed rate of interest

(single digit coupon)Option to convert into a fixed

number of Equity Shares: upon conversion becomes GDR’s and then equity if desired.

Interest and redemption (when not converted) in convertible currency.

Depositary ReceiptsDepositary ReceiptsDifficult for co’s from developed countries

to raise equity funds from developed countries due to strict disclosure norms

Is an indirect method of raising funds thro equity route

Is the no of equity shares deposited with a foreign bank

ADR in American market & GDR in UK market

An Indian company issues a no of shares to a FI in the foreign country called depositary. This bundles the shares and sells the same as DR

DomesticCustodian bank

InvestmentBanker

(overseas depository

Bank) issuerOf ADR/

GDR

1.Public2.Private

3.Number of ADR/GDR

4.Issue price5.Rate of Interest

6.conversionPrice

7.coupon Rate

Pricing of conversion

option

Issu’g

Co

For EgFor EgNagarjuna Company wants to issue 10

lakh ADRsof face value Rs 10. And conversion

rate is 1 INR=$ 50.

The company is raising Rs 1 crore.As 1INR=$ 50, the company will issue 5

equity shares as 1 ADR

Who can issueWho can issueAn Indian co meeting eligibility

norms for IPONot barred by SEBIUnlisted co cannot unless

simultaneous ipo proposedShall appoint eligible intermediariesConsistent track record for 3 yearsRegulations of FDI fulfilledIntermediaries should be registered

in that country

Legal frameworkLegal frameworkApprovals from Ministry of

Finance, Ministry of Corporate Affairs, RBI, Stock Exchanges, Financial Institutions, Board of Directors, shareholders

Regarding quantum of issue, country, time etc

IntermediariesIntermediariesLead mgrCo lead mgrOverseas depositary bankDomestic custodian bankPrintersLegalUnderwritersListing agentsAuditorsProcess of issue the same

Advantages of ADR/GDRAdvantages of ADR/GDRCan be listed on any of the

overseas stock exchanges/OTC/Book entry transfer system

Freely transferable by non residentThey can be redeemed by ODBThe ODB should request DCB to

get the corresponding underlying shares released in favour of non resident investors.(Share holder of issuing company)

Company’s point of viewCompany’s point of viewEnhancement of corporate image of

the company.A host of foreign fund managers are

speculating on how best to cash in on the appetite for Indian shares.

Prepayment of foreign currency and rupee loans facilitated.

Low cost of issuance(4 to 5%) of the issue size.

Company not concerned with foreign exchange rate fluctuations as these are to the account of the investor

Advantages of FCCB/ECBAdvantages of FCCB/ECBLow interest rateFixed interestUnsecuredOption to convert into fixed no of

sharesNo voting rights

Disadvantages of FCCBsDisadvantages of FCCBsLimit on deployment of fundsNo projection of cap structureNo projection of cash flows

Advantages and Advantages and Disadvantages of Key Disadvantages of Key Financing AlternativesFinancing AlternativesIdeal situation to issue

ADR’s

Large current and future needs involved in International Industries.

GDR’s

Specialized Regional base.Not a frequent visitor to International Capital Markets.

ECB’s

Fast-rising priceTremendous Growth prospects in near future

Advantages

Ideal situation to issue

ADR’s

Large current and future needs involved in International Industries.

GDR’s

Specialized Regional base.Not a frequent visitor to International Capital Markets.

ECB’s

Fast-rising priceTremendous Growth prospects in near future

DisadvExtensive timing, disclosure & On- going filling requirementsRecognition with US GAAPHigher issuancecost

More limited investor UniverseMore limited liquidityModerate valuationSome timing and disclosure needs increase debt- equity ratio

Limits access to US capital markets if not $ denominated or US registeredLowest level of liquidity after conversion

ADR GDR ecb

Advantages•Broad investor and distribution

•Pricing premium and prestige

•Best liquidity and research coverage•More stable after market performance•Maximum flexibility in accessing various equity and debt markets postoffering

•No US SEC disclosure requirements and liability issues with ADRs•Can be executed more quickly and easily than ADRs•Can be executed more quickly and easily than ADRs

• Lower issuance cost than ADRs

Sell equity at premium

•Incremental investor base

Minimizes dilution

•Shortest timing schedule

Lowest issuance cost