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Introduction Genesis of International Market Classification of International Instruments Concept & Mechanism - ADR/GDR/IDR 360° Perspective of ADR/GDR/IDR Case Study ² Infosys ADR Issue Timeline of ADR/GDR/IDR Debt Instruments Hybrid Instruments Conclusion
International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits.
Trends in International Finance
International financial market are influenced by the structural changes in the world economy it is possible to differentiate four phases relevant for the analysis of financial markets globalization. First phase (1960) Second phase (1970) Third phase (1980) Fourth (1990)
Features Scale and structure of financial resources Structure of the basic groups of countries' share on the market Institutional and sector share Degree of joining home with foreign markets ("osmosis") Positive effects. risks and control .
Classification of Instuments Instruments in International Market Equity Debt Hybrid ADR GDR IDR Bonds FCCB FCEB Yankee Samurai Bulldog .
problematic Investing indirectly .DRs .expensive.Infosys GDR .DRs Receipt .predefined number of shares Listed on stock exchanges ADR .comply policies of stock exchanges Investing directly . risky.RIL IDR .what are they and how do they work? Company .
Players in International Market Borrowers/Issuers Corporates Government Supranational organizations Lenders/Investors Institutional investors HNIs QIBs Insurance companies .
marketing the issues Underwriters .for the issue Agents and Trustees .facilitate the documentation Depository bank .issue of bonds/convertibles Lawyers and Auditors .only issue DRs Custodian .offer circular.holds the shares underlying DRs .Indian/English/American law and financial information Listing Agents and Stock exchanges .Intermediaries Lead managers/Co-lead managers .
How DRs are issued and cancelled .
144-A and Regulation S . GDR and IDR ADR Programs Unsponsored shares Level I Level II (listed) Level III (offering) Restricted programs .Mechanism for ADR.
government and investors with the issuers Advises the company The industry . quantum of issue.Issuance of GDR Shareholder Approval Needed Offering memorandum Fixation of issue price Opening of bank account outside India Notifying the stock exchange Appointment of a Lead Manager Vital link .engaged The international monetary and securities market The economic conditions and The terms. price of equity. shares on conversion . stages of conversion.
Finalization of issue structure .government The Documentation Prospectus Depository agreement Custodian agreement Subscription agreement Trust deed Paying and conversion agency agreement Underwriting agreement Listing agreement .
future profitability.The Launch Euro-Equity Syndication .intermediaries Segmented Syndication .geographically targeted Marketing Lead manager & advertising agencies Back-up material Road shows . growth prospects Face-to-face presentations .financial centres .
Pricing and Closing Underwriters response Book-runner keeps the book open .1to2 weeks Fix a particular price Costs Lead-manager Marketing cost .
Recent trends in capital raising show continued growth in use of GDR .
360° Perspective of ADR/GDR/IDR Investor Perspective Company Perspective Economy Perspective .
Investor Perspective Opportunities .
S. Dollars Easy access to markets Transparency Lower transactions costs Tax efficient Prompt dividend payments .Investor Perspective Global portfolio Benefits of higher risk. higher return equities Quoted and traded in U.
Company Perspective Raise capital from international market Enlarged investor base Greater exposure & Share·s liquidity Boosting the company's prestige Extend its research base to foreign countries International shareholder base Stock-swap acquisition Costs of Cross Listing .
Company Perspective Arbitrage opportunities Repatriate funds Buy DR Deposit proceeds in Indian bank account Sell local stock in India Deliver shares to stock exchange in India Convert shares from DR to local .
Economy·s Perspective Coupling of global economies Risks Political Risk Exchange Rate Risk Inflationary Risk Impact on Company·s Valuation ² Forex exposure .
Economic Perspective BOP·s Position of the country .
Case Study ² Infosys ADR .
Asia Emrg.Name Ticker Cusip Underlying Ratio Sedol 1:1 1:3 1:2 1:1 1:2 1:2 Exchange Depositary Region NYSE NYSE NYSE JPM JPM DB Emrg. Asia Emrg. Asia WNS HOLDINGS LTD WNS . Asia Emrg. Asia Emrg. Asia Emrg. Asia Emrg. Asia TCL TTM WIT 876564105 6114745 876568502 6101509 97651M109 6206051 92932M101 1:2 1:1 1:1 1:1 NYSE NYSE NYSE NYSE BNY CIT JPM DB Emrg. Asia Emrg. Asia Emrg.5 NASDAQ CIT 1:2 1:1 NYSE CIT SATYAM COMPUTER SAY SERVICES LTD SIFY LTD STERLITE INDUSTRIES INDIA LTD TATA COMMUNICATIONS LTD TATA MOTORS LTD WIPRO LTD SIFY NASDAQ CIT SLT 859737207 B13TC37 1:1 NYSE CIT Emrg. Asia Coun Sector try India Pharmaceuticals India Banks India Banks India Software Telecommunicati India ons India Semiconductors India Internet India Software India Internet Metal Fabricate/Hardwa India re Telecommunicati India ons Auto India Manufacturers India Software Commercial India Services DR REDDYS LABORATORIES LTD RDY HDFC BANK LTD ICICI BANK LTD HDB IBN 256135203 6410959 40415F101 6100131 45104G104 6100368 456788108 6205122 559778402 6117807 703248203 6734745 757479100 804098101 6241858 82655M107 B05DZX1 INFOSYS TECHNOLOGIES LTD INFY MAHANAGAR TELEPHONE NIGAM PATNI COMPUTER SYSTEMS LIMITED REDIFF. Asia Emrg. Asia Emrg. Asia Emrg.COM INDIA LTD MTE PTI REDF NASDAQ DB NYSE NYSE BNY BNY 1 : 0.
Infosys Incorporated ² 1981 53 Global Development Centers 47 Sales Offices around the world .
Nov 2006 . 95/share ² Feb 1993 Listed @Rs.07b ² June 2005 US $1.FI) ² Oct 1994 ADR issue 20.ADR issue IPO @ Rs.000 ADS @ $34 ² March 1999 Secondary ADR issue o o o US $294m ² July 2003 US $1.70. 145/share ² June 1993 Private placement (FII.605b .
INFY Date of ADS issue: March 11. Amt raised US$ 70.000 (Rs 296.86 crore) . 1999.5 ADS symbol -.380.Details of ADR issue Stock market data ADS Listed @ NASDAQ Ratio of ADS to equity shares (A:O)= 1:0.
Details of ADR issue Depository Bank: Deutsche Bank Trust Company Americas Custodian Bank: ICICI Bank Limited Investment Banks: Lead Bank: NationsBanc Montgomery Securities Co-Lead Banks: 1. BankAmerica Robertson Stephens of San Francisco Brown of New York . 2.
30.653 2.Details of ADR issue ADR issue expenses: Rs.05.03.26.090 .437 77.28. Legal and accounting fees Printing charges TOTAL 1.
Details of ADR issue Forms related to the issue: Form 20F Form F-1 .
Strategic Perspective .
ADR Issue Increase Visibility and Comfort for clients Position as a US based Technology comp Diversify Shareholder base Unlock Share Value Become part of Global Index Issue Stock Options ² Overseas employees Obtain Hot Money for M&A .Objectives .
Secondary ADR issue Issue Primary Issue 11 Mar 1999 Secondary Issue July 2003 Secondary Issue June 2005 Secondary Issue Nov 2006 Float 3% 9% 14% 19% .Objectives .
yahoo.Research on ADR Premium Data : NSE: nseindia.INFY ADR .com: INFYTECH Yahoo Finance: finance.com.
Research Outcome .
Analysis ² ADR Premium Demand ² Supply Regulatory Foreign Exchange Management Act Two-way fungibility ² Feb 2002 .
should not be ineligible to issue shares to non-resident persons in terms of the Foreign Exchange Management Act (FEMA) Foreign investment .GDRs.Regulations: Issue of ADRs/GDRs by Indian Companies Issue ADRs/GDRs if eligible in terms of the Scheme for Issue of FCCB and OS (Through DR) Scheme. ADRs . or a group of cos. in a financial year No end use restrictions on GDR/ADR issue proceeds ² except ban on investment in real estate and stock markets .treated as FDI No restriction on the number of GDRs/ADRs/FCCBs floated by a co. 1993 and guidelines issued by MoF. GoI Co.
already floated ADR/GDR listed on any bourse outside India ADR/GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party Total foreign holding should be within the prescribed sectoral cap limits . whichever is higher Indian co.Swap or exchange of shares of an Indian Company Indian co. engaged in same core activity. permitted to acquire shares of foreign co. in exchange for ADRs/GDRs provided: Investment don't exceed USD 100 million or 10 times the export earnings of Indian party in preceding FY.
with 3yr·s track record can float ADR/GDR Euro Issue proceeds to be treated as FDI No restrictions on the no.Govt.use specifications Repatriation of proceeds ² Cos. Policies: Amendments in ADR/GDR Norms Amendments in May 1998 Three Year Track Record required for ADR/GDR issue Unlisted co.issues in a financial year NBFCs registered with RBI allowed to raise GDR Liberal end . of Euro . may retain proceeds abroad or may remit funds into India .
allowed to invest 100% of proceeds of ADR/GDR issues (earlier 50%) for acquisitions of foreign cos. and direct investments in JV and wholly-owned subsidiaries overseas FII investment limit in a co.through portfolio investment increased to 49% Two way fungibility in ADR/GDR issues of Indian cos. into DR listed in foreign bourses Cos.ADR. introduced subject to sectoral caps wherever applicable . GDR norms further relaxed February 2003 Conversion and reconversion ( fungibility) of shares of Indian co.
on behalf of a person resident outside India to convert the shares so purchased into ADRs/GDRs Purchase and re-conversion of shares which is equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market Benefits of Fungibility Improvement in liquidity and Elimination of arbitrage .Two-way Fungibility Scheme of ADR/GDR Registered broker in India can purchase shares of Indian co.
Proposed changes in Pricing Rules August 2008 Higher of the two months' average price or the last 15 days average price as against last six months' average price or last 15 days' average price New pricing rules will reflect accurate and more up to date .prices of the ADR/GDR issues Move is significant when funds for companies are not easily forthcoming from the domestic equity market .
Indian Depository Receipts . 5 years and must have declared a dividend of 10% in each such year Pre issue debt-equity ratio must be not more than 2:1 Listed in its home country Not been prohibited by any regulatory body to issue securities Good track record with compliance with securities market regulations Comply with any additional criteria set by SEBI .Rules and Regulations Issuers Eligibility Criteria ² ´MUSTµ Average turn over of US$ 500 million in previous 3 fin. yrs Capital and free reserves aggregating to at least US$100 million Making profit for the prev.
shall appoint an overseas custodian bank.Procedure for making IDR Issue Cannot raise funds in India by issuing IDR without permission from the SEBI Application seeking permission made to the SEBI at least 90 days prior to the opening date of the issue with a non-refundable fee of US $10.000 Issuing co. a domestic depository and a merchant banker for the purpose of issue of IDRs . shall obtain necessary approvals/exemption from the appropriate authorities from the country of its incorporation under the relevant laws relating to issue of capital Issuing co.
50 crores 90% of the issue must be subscribed Automatic fungibility is not permitted .Who can Invest in IDRs??? Indian Companies Qualified Institutional Buyers NRI·s and FII·s with permission of RBI The Issue The minimum issue size is Rs.
Conditions to be applied for IDR Issue
Market cap (in any fin. Yr) cannot exceed 15 % of the paid up capital and free reserves of the issuer Redemption into underlying shares prohibited for 1 year, beginning the issue date Repatriation of proceeds: Subject to Indian foreign exchange laws, prevailing at time of repatriation Issue must be in rupees Issuer is subject to Clause 49 of the listing agreement
International Bond Market
Bonds can be defined as negotiable debt instruments with original maturity in excess of one year It has an estimated size of US $47 trillion
of US bond market is largest, equal to US $ 25 trillion Eurobond is the largest international bond market(1963)
Foreign Bonds Euro Bonds
Dollar-denominated bonds issued in the United States by foreign corporations, banks, and governments.
Free from currency risks Interest rates Registered Pay Interest semi-annually Major issuers Interest equalization tax (1963-1974)
Largest and most active market in the world but potential borrowers must meet stringent disclosure.
Reasons for Issuing Yankee Bonds Attractive opportunities Somewhat shielded form the expensive regulation Dollar income stream US interest rates Currency strengths (Value of dollar) .
Eurodollar Bonds A US dollar denominated bond issued by a overseas company and held in a foreign institution outside both US and the issuer·s home nation Issuer·s Major trading center Constitute most of the Eurobond market Fewer regulatory restrictions Pay Interest annually without deduction of tax Unavailability of suitable database of Eurobond returns and related information .
size of issue. Not subjected to Japanese withholding taxes Minimum maturities of 5 years or longer No secondary market restrictions Minimum rating.Japanese Co.Bulldog Bonds A bulldog bond is a sterling bond whose issuer is not British Usually issued to acquire a revenue stream or assets in sterling Samurai Bonds A Yen-denominated bond issued in Tokyo by a non. maturity etc .
ECB-External Commercial Borrowing Meaning Regulator Considered Aspects: Eligibility volume & maturity End-use funds .
Accessibility Automatic Route Eligible Borrowers Recognized Lenders Approval Route Eligible Borrowers .
ECB .Guidelines Amount & Maturity All-in-Cost Ceilings End-use Refinance of existing ECB .
Foreign Exchange Convertible Bonds Meaning Pricing Significance .FCCB .
FCEB ² Foreign Currency Exchangeable Bonds Meaning Pricing Significance .
89 crores Maturity:5 years Coupon Rate: 1% Purpose: Retire expensive foreign currency debt amt.TATA MOTORS LTD First issue of Fccbs: 2003 Amount:$100 million of $1000 each Fccb issue expenses: Rs. $40 mio approx Capital expenditure plan of $150 mio Conversion Price: Rs.250 per share . 11.
1% in I and 4.6000 Refinancing loan taken for Daewoo commercial plant Purpose: Listed on: Singapore Stock Exchange Conversion Price: Tranche I: Rs.5% premium Tranche II: Rs. 1% Capex plan of Rs. 60 % premium Max equity dilution: 6.3% in II tranche) . 0 coupon Tranche II: $ 300 mio for 7 years maturity.573.4% (2. 780.e.e.40 per share i.106 per share i. 17.Second Issue: 2004 Amount: $400 million of $100 mio Multi Tranche Offer Tranche I: $ 100 mio for 5 years maturity .
Simultaneous ADR Issue:FY-05 and fccb issue in 06 Giving Fccb holders robust platform to trade in shares Latest Development: June 2008 Completed acquisition of Jaguar and &Land Rover.3 billion Received shareholders approval to raise $1 billion Raised Company·s overall borrowing limit to $ 5 billion (Rs. 20k cr.) EPS diluted: Rs.48 .64 to Rs. 46. 52.Deal worth $2.
increasing debt to equity ratio .Current Issues For Borrower Investors not exercising conversion from bond to equity Borrowers burden of debt servicing Have to redeem the FCCB on maturity Inadequate provision for FCCB redemption as its not pure debt May have to raise new debt.
000 convertible bonds Face value : $ 1000 each Yield: 5% Conversion Premium: 25% Stock price: $ 40 at issue Conversion Price: $40 * 1.Illustration: ABC SPORTS LTD FCCB issue: $ 10 mio 10.25= $50 Conversion Ratio: 20:1 ($ 1000/ $ 50= 20) 1 bond= 20 shares Current Stock price: $ 25 .
($1000/ $50) .Impact of tumbling stock price Investor A: Has 1 bond Face value $ 1000 He will not exercise the put option As on maturity: on redemption of bond he will get $ 1000 he can buy 40 shares of the co. ($1000/$ 25) On exercising put option: He will get 20 shares of the company.
347.25%* Net Debt including FCCB: $615 mio Existing Debt : EBITDA ratio= 5.86 .4 per share Current share price: Rs.1483.Example: Aurobindo Pharma FCCB issue: $ 200 mio Redemption maturity: May 2011 Conversion price: Rs.20 per share Difference of 327.
reducing its PAT. . Company must show mark to market losses.Depreciation of Rupee In a months time depreciated by more than 8.5% Debt value increases as it is denominated in dollar.
5 times more equity than originally planned Leads to higher equity dilution . conversion price: Rs.Possible Solution Making Put option attractive Attractive swap price/ conversion price Example: Spice Jet Prev. 25 per share Have to issue 3.57 per share Current conversion price: Rs.
New Problem: Equity Dilution Larger equity base to service EPS reduces as No of shares increases Other way out: Extend Maturity Date Bad impact on the credibility of the company Longer period to service debt .
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