A Presentation on

International Finance

Instruments and Intricacies

December, 2010
Venugopal Y 1
Agenda

 Familiarise with
 available options / instruments to raise funds from
international markets
 Terms commonly used in foreign currency loans
 Equity Instruments- GDRs, ADRs.
 Special features of each Instrument
 Suitability of such options and their limitations

2
India’s Capital Requirement is Huge
 Large capital requirements expected in the
infrastructure and power sectors
XI plan for infrastructure sector ~ Rs. 20 lakh crores
XI Plan for power sector ~ Rs.10 Lakh Crores
 Domestic markets are likely to prove insufficient to
absorb such kind of fund requirement
 Imperative is international markets needs to be
tapped

3
Why Should Your Company go Overseas

 Diversify investor base (by both type of institution

and geographic location)

 Saturation of limits with the Indian long-term investors

 Increase in funding costs

 Large amounts can be raised

 Diversify your borrowing profile

4
Why Should Your Company go Overseas

 Flexibility in terms of shifting between fixed/floating

rates and switching between currencies

 Refinance existing debt at competitive cost

 Lengthen debt maturity profile

 Beyond those typically available in the bank market--

10 years and longer

 Create benchmark for future financing

5
 Sources of International Finance
I n t e r n a t io n a l S o u r c e s

C o m m e r c ia l M u lt ila t e r a l B ila t e r a l E q u it y I n s t r u m e n t s
W B /A D B e t c ., G r a n ts
S o ft L o a n s
E x p o r t C r e d it s

I n t e r n a t io n a l B o n d s E q u it y
E u r o /F o r e ig n b o n d s
W a r r n a ts

S y n d ic a t e d L o a n s D e p o s it o r y R e c e ip t s
A D R /G D R /I D R
ED R

E x p o r t C r e d it s FC C B O N D S
B u y e r 's C r e d it
S u p p lie r 's C r e d it
6
 INTERNATIONAL SOURCES OF FINANCING

1. MULTILATERAL SOURCES • WORLD BANK

• International Development
Agency(IDA)
• International Bank for Reconstruction
and Development(IBRD)
• International Finance Corp(IFC)
• Multilateral Insurance Guarantee
Agency
• ASIAN DEVELOPMENT BANK
2. BILATERAL SOURCES
• GRANTS
• SOFT LOANS
• EXPORT CREDITS

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INTERNATIONAL SOURCES OF FINANCE

4.COMMERCIAL OPTIONS- EXPORT CREDIT- BUYERS/SUPPLIERS

CREDIT
- SYNDICATED LOANS
- EURO BONDS
- FOREIGN BONDS- YANKEE , BULLDOG,
SAMURAI, DRAGON ETC.
- CO-FINANCING WITH MULTILATERAL
INSTITUTION
- FOREIGN CURRENCY CONVERTIBLE
BONDS
EURO CONVERTIBLE

5.EQUITY INSTRUMENTS
- GDRs, ADRs

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 Terms Of Credit Generally Appearing In
Foreign Currency Loans (TERM SHEET)

 Loan Amount
 Maturity Period
 Grace Period
 Repayment Period
 Interest Rate
 Management Fees
 Commitment Fees

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 CREDIT TERMS contd..
 AGENCY FEES
 LEGAL AND OTHER FEES
 CREDIT INSURANCE PREMIUM
 PENAL INTEREST
 PREPAYMENT PENALTIES
OTHER COSTS, IF ANY
GUARANTEES TO BE GIVEN

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 DEBT PRICING ISSUES –
TYPES OF INTEREST RATES :

FLOATING/FIXED RATE :
 Floating linked to a market index like LIBOR
Priced as – margin over LIBOR.
 Fixed rate linked to govt. Bond / Treasury rates.
Fixed for loan life
 Different for different currencies
 Floating normally adopted for 1,3,6 months
 Interest re fixed periodically and notified to borrower.

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Movement of USD 6M LIBOR v/s. 10 yrs. US Treasury

10 Yr US Treasury

6 M USD LIBOR

12
6 months LIBORs of Major Currencies

USD

EUR

GBP

JPY
13
Multilateral Loans

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Main features of Multilateral Loans

 Limited funds available to member countries

 Allocation within various sectors of economy by
Govt.
 Multi stage appraisal & approval
 International Competitive Bidding
 Generally large projects selected
 Various covenants to cover policy compliance /
enforcement
 Long maturity of Loans (upto 20 Yrs)
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 WORLD BANK
The World Bank provides loan through the following windows :
International Development Agency (IDA)
The IDA provides loans directly to the Government of Member
Countries. These loans are provided free of interest charge i.e. zero
percent (0%) rate of interest and for longer maturities. The loans are
given mainly for welfare purpose like health etc.
International Bank for Reconstruction and Development (IBRD)
Loans provided through IBRD to the Member Countries carries rate of
interest based on the cost of borrowing the funds by the IBRD. The
IBRD loans are available only for Developmental Projects in the public
sector.
International Financial Corporation (IFC)
The IFC is an affiliate with the World Bank. The loans are given directly
to the private sector are through the developmental financial institution
for lending to entrepreneurs in the private sector.
Multilateral Investment Guarantee Agency (MIGA)
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Types of loans given by WB/ADB
• Project Loan
A project loan is used to finance specific projects and has been the
most important vehicle for transferring the Bank’s resources to its
member countries.

• Sector Loan
A sector loan is used to finance a large number of sub-projects in a
single sector or sub-sector in a member country.

• Programme Loan
A program loan in the public sector supports sector development
programs over the medium term (3-5 years), contributing to faster
economic development of the member country concerned.

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Types of loans given by WB/ADB ...
• Co - financing
Refers to any arrangement where Bank funds and funds
provided by other sources outside the borrowing country
finance a particular project or program. The term generally
applies when the Bank provides its own resources for
project financing while also arranging for the participation
of other financing institutions.

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 Bilateral Loans

• Generally Govt. to Govt. credits

• Limited availability
• Available as Grant, Soft credit or mixed credit
• ( Examples ; Nizamuddin bridge through Japan
ODA Grant, Delhi Metro rail with JBIC mixed
credit.)
• Long sanction process
• Sectoral restrictions
• Purchase restrictions

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 ECBs
 What are overseas commercial Debt options
raising options ?
 Export Credits
 Syndicated Loans
 Floating Rate Notes
 Medium Term Notes
 Eurobond
 Eurobond with Rule 144A
 Yankee Bond
 Global Bond
 Private Placement
 General Covenants and conditions
 Issue Process

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RECOURSE / NON RECOURSE FINANCING

• RECOURSE. FINANCING
FINANCING MADE AVAILABLE ON THE BASIS OF CREDIT- WORTHINESS
OF THE BORROWER, DEPENDING UPON THE BALANCE SHEET OF THE
EXISTING COMPANY. IN CASE OF DEFAULT, LENDER HAS RIGHT ON
OTHER ASSETS OF THE BORROWER ( Not financed out of the loan ).

• NON-RECOURSE FINANCING
- FINANCING DONE ON STAND-ALONE BASIS Viz., THE CAPACITY FOR
REPAYMENT OF PRINCIPAL/ INTEREST ETC. IS JUDGED ON THE BASIS
OF PROPOSED CASH FLOWS OF THE PROJECT .
- IT IS CASH FLOW LENDING AS OPPOSED TO BALANCE SHEET LENDING
- MOSTLY IT IS NON-RECOURSE. HOWEVER, NO PROJECT FINANCING IS
PURE NON-RECOURSE

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BASIC CONSIDERATION OF SUCCESSFUL ECB

Important Consideration in raising debts:-

 Choice of Instrument
 Currency
 Pricing
 Maturity
 Covenants
 Disclosure
 Rating
 Timing
 All in cost

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External Commercial Borrowings
Export Credits

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Export Credit
 An export credit arises whenever a foreign buyer
of exported goods is allowed to defer payment

 Credit extended by

 Supplier

 Exporter’s bank

 Other financial institution

 To protect exporter against risks of non-payment

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 EXPORT CREDITS

 Leading countries have their export credit agencies

(ECAs) to provide export credits.
 Mostly tied to the exports from the lending country.
 The export credits are regulated by guidelines of
Organisastion for Economic Cooperation and
Development (OECD) protocol.
 Maximum Finance - 85% of the export content + local
costs not exceeding 15% of the export cost.
 15% down payment to be paid cash or out of commercial
Bank loan
 Disbursement directly to suppliers.
 Repayment- in maximum 12 years, starting from 6 months
after commissioning. 25
 EXPORT CREDITS...

Buyer’s Credit :
* Buyer takes credit directly
* Lender takes risk on Buyer
* credit enhancement/ guarantee may be needed
Supplier’s credit (Deferred payment
facility)
* Supplier gets credit from Banks .
* Credit risk on the supplier.
* Supplier extends credit to the Buyer
* credit enhancement/ guarantee may be needed 26
 EXPORT CREDITS...
• Interest : Fixed rate linked to CIRR ( commercial interest
reference rate) arrived at by taking Govt. note/Bond rate for
matching maturity + 1% Interest is payable half yearly.
Floating rate linked to LIBOR or other indices also possible.
• IDC can also be financed by increasing credit amount
• Currency :Financing in domestic currencies is the norm, but
many ECAs are willing to support financing denominated in
other leading currencies.
• Credit insurance : all export credits carry credit insurance the
cost of which is borne by the borrower. The fees ranges from
3 to 11% flat, but is eligible for financing by enhancing the
credit amount.
• Other Cost :Management fees, commitment fees.
• Can be arranged in shortest time frame (generally 1-3
months).
• Example – EDC Line of Credit
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Syndicated Loans
 Syndicated Bank Loan
 Funds provided by commercial banks
 Structure specific to the requirements of the borrowers
 Maturity 1 to 7 Years
 Floating Rate Interest Rate pegged to 3 to 6 months LIBOR+
margin expressed as %age Basis points over LIBOR
 Loan currency to match project requirement
 Un-tied loan can be used to finance import/local cost anywhere
 Minimum time required to finalise the deal ( 8 - 12 weeks )
 Credit rating not necessary
 Documents generally standardised.

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The Syndicated Loan Market
 Cheapest margin to Libor
 Speed and ease of
Advantages
Advantages Arrangement
 Little pre-marketing required--
except for first time borrowers

 Limited to bank market

Limitations
Limitations  Limited appetite
 Maturity restrictions

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 Syndicated Loan--Indicative Pricing

An indicative pricing for a syndicated loan would be as under

Amount USD 100 million plus greenshoe
Maturity Bullet after 5 years
Upfront fees 1.00%
Interest Rate 1, 2 or 3 month Libor plus interest margin
Interest Margin Year 1 60 bps p.a.
Year 2 70 bps p.a.
Year 3 80 bps p.a.
Years 4,5 95 bps p.a.
Implied all-in price USD Libor + 100 bps
Commitment Fees 0.50% p.a. after 30 days grace
Facility Agent Fees USD 15,000 p.a.
Underwriting A group of banks acceptable to the borrower and the
Lead Manager
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Syndicated Loan--Main Terms and Conditions
 Prepayment
 Taxes
 Security
 Financial Covenants
 Management/Shareholding Covenants
 Clear Market
 Force Majeure
 Transferability
 Information and syndication
 Expenses
 Approvals

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Financial Covenants
 Minimum Tangible Net Worth (“TNW”): Minimum of INR75
billion at all times
 Ratio of Total Debt to TNW: Not to exceed 1.50 times at all
times.
 Ratio of Total External Liabilities to TNW: Not to exceed 2.00
times at all times
 Ratio of Total Long Term Secured Debt to Total Fixed Assets:
Not to exceed 0.75 time at all times
 Ratio of PBIT to Net Interest Expenses (over a 12-month
calculation period):
 Minimum 2.0 times – from 31 March XXXX till 31 March XXXX
 Minimum 3.0 times – from 30 Sept XXXX till Final Maturity
Above to be calculated as per Indian GAAP
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Management Covenants
 Management Covenant: Company AA will continue
to have management control over the Borrower
during the life of the Facility; and

 Shareholding Covenant: Company AA, together with

its associate companies, will hold in aggregate not
less than 51% of the issued share capital of the
Borrower, during the life of the Facility.

 Example – JPY syndicated Loan

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External Commercial Borrowings
International Bond Issues

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 EURO BOND ISSUE PROCESS
 Selection of Lead manager
 Appointment of Legal
counsel/ statutory auditors
 Initiate for getting approvals
 Due diligence
 Preparation of Research
Report
 Draft preliminary Offering
Circular
 Appointment of Paying
Listing agent, Trustee
 Road shows/ Presentations
 Book building exercise &
Setting Offering price
 Launch Issue
 Appoint Common Depository
 Release Final Offering
Circular
 Documentation & Signing
 Listing & funding
36
The Debt Capital Markets
Definition
 The debt capital market is the market for the
issue and trading of long-term debt securities
(normally more than 3 years tenure)
 Classified as per maturity
 Upto 5 years: Short term instruments
 5 to 10 years: Medium term
 More than 10 years: Long term
 Primary Market--for first issue of securities
 Secondary Market--Trading once issued

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Method of Issue
 Public Issue
 Prospectus
 Intermediary
 Private Placement
 Select group of investors
 “Tender” or “Book-building” or “Auction”
 On “Tap”

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Factors that Affect Access to Capital
 Information about the company
 Do investors know and trust you?
 The Business Cycle
 Transactions costs
 Country and Market
 Amount of money desired
 Ability to monitor use of capital
 Can investors track what’s being done with their
money?

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Who Issues Bonds?
 Municipal Governments
 Federal Governments
 Federal Government Agencies
 Foreign Governments
 Supranationals
 Corporations

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Features of Bonds
 Maturity Date
 Coupon
 Yield
 Collateral
 Sinking Funds
 Call Provisions
 Covenants (e.g. negative pledge clauses)
 Guarantees
 Event risk protection (force majeure, market
flex)
42
Types of Bonds
 Bills/Notes/Bonds
 Debentures
 Subordinated
 Asset-backed bonds
 Mortgage bonds
 Collateral trust bonds
 Floating rate bonds
 Convertible bonds
 Warrant bonds
 Zero-coupon or deep discount bonds

43
Bond Ratings
S&P Rating Characteristic

AAA Extremely string ability to pay principal and

interest
AA Very strong capacity to repay

A Strong capacity to repay, somewhat

susceptible to change in economic
conditions
BBB Adequate capacity to repay. Adverse
economic conditions could hurt

BB, B, CCC, D Speculative grade and in default

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EURO BONDS
Eurobonds
 Bonds issued internationally outside home
country’s market in own or different currency
 For example, a US firm issues a dollar bond
outside the US
 A firm issuing yen bonds outside Japan
 When a Japanese firm issues yen bonds in the
Euromarket, it’s a Sushi bond
 Eurobonds are sold in a number of countries by
a syndicate of underwriters
 Eurodollar took off in 1956 after the Sinai War
 Today the Euromarkets are huge

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Eurobond Market--Characteristics
Maturity Upto 10 years
Investors Widespread institutional and retail investor base outside the U.S.
Pricing Priced over benchmark U.S. Treasuries. Pricing spread is generally wider for
institutional investors
Liquidity Potentially good if well syndicated and distributed
Ratings Advisable but not necessary
Documentation Standard Euromarket
Disclosure Sufficient to meet London or Luxembourg Stock Exchange requirements
Timing 4-6 weeks
Profile Wide international publicity
End Use Subject to RBI/MoF approval

Example – Fixed Rate Euro Notes 7.5%

47
Eurobonds
 Highly targeted investor base
Advantages
Advantages  Regional identity
 Quick to access market
(relative to US market
alternatives)
 High profile transaction
 Limited liquidity/benchmark
status
Limitations
Limitations  Maturity restricted
 Bank rather than institutional
investors
 Roadshow required 48
Accessing the US Market
Why Access the US Markets
• The Yankee Market is by Far the Deepest
– Maturities available for up to 30-years or higher
– Greatest number of institutional investors with
deep pockets
• Market is capable of easily absorbing sizable
transactions
– January 2001, British Telecom raised Euro 9.75b
– February 2001, Fannie Mae issued USD 11.5b
of bonds
– March 2001, France Telecom issued US$16.4
billion multi-tranche multi currencies bond with
maturities from 2 to 30 years

50
Why Access the US Markets
• Most in depth financial institution credit research
analysts in the world are located in the US
– This serves to develop the company’s position
within the international financial community
• Broad distribution will ensure tightest funding
cost
• Create an appropriate benchmark for future
market access

51
Three Common Sales Structures
• Initial Public Offering (IPO)
– Sale of securities to the public where securities are
registered with SEC
• Private Placement
– Sale of securities not registered with SEC because of
exemption. Sales are limited in number and the purchasers
are sophisticated, meaning they can evaluate and
understand the risks and have a relationship with the issuer
that allows them to command access to information
• Rule 144A Offering Hybrid of Private Placement and IPO
– Securities may be sold to QIB who can resell securities to
other QIB or to buyers outside the US under Regulation S

52
US Bond Market Alternatives
SEC Registered Yankee
– Securities are registered with the US Securities
and Exchange Commission
– The registration statement (filed on Form F-1 for a
first time issuer) requires extensive disclosure
about the company and financial statements filed
in accordance with US Generally Accepted
Accounting Principles (GAAP)
– Bonds are fully underwritten and offered to the
broadest investor base on a “take-it or leave-it”
basis.

53
SEC Registered Issue

– The single largest investor base for US$

products
– Very broad distribution
– High profile
Advantages
Advantages – Long maturities available
– Fewer covenants and restrictions than
either private placement or 144A offering
– Creation of Public Market
• Enhances security value because of liquidity
– Prestige

54
 SEC Registered Issue
– Expensive issue costs (but cheaper
funds)
• Substantial initial expense
• Underwriters fees high
• Legal accounting and printing expenses
• Filing Fees
• Compliance costs
Disadvantages
Disadvantages • Due diligence expenses for preparing and
filing reports can be significant
– Lengthy preparation time
– Can take 3-6 months
– Disclosure of Information
– Filings with SEC generally public and
comprehensive
– Must be willing to live with 55
transparency
Advantages of Private Placement

– Faster than IPO

– Transaction costs tend to be
lower than IPO because
Advantages
Advantages – Offering document (private
placement memorandum) is
simpler
– No advertising
– Less public disclosure or
transparency

56
Disadvantages of Private Placement
– Higher cost of money to compensate
for lack of liquidity of security
• Higher interest on debt securities
– Restrictive covenants or loss of some
control over company
Disdvantages
Disdvantages • Fewer investors mean that they can
exercise more control over issuer and its
operations
– Restrictions on Resale of Securities
• Necessary to retain exemption from
registration

57
US Bond Market Alternatives--Rule 144A
Underwritten Rule 144A
– Adopted in 1990, rule 144A of the 1933 Securities
Act is a safe harbour provision which allows
resales of privately placed securities to qualified
institutional buyers (QIBs)--specified institutions
which own or manage at least $100m of specified
types of securities
– As in the “public” market, the securities are
underwritten as opposed to being distributed as
privately placed securities on a best efforts basis

58
Underwritten Rule 144A

– Securities are more liquid than privately held

securities
• Buyers can resell the securities in the US to other QIBs
or outside US pursuant to Reg. S of the SEC
– A detailed offering circular is prepared by the
issuer, the underwriters and their lawyers
• Financial statements are somewhat simpler than those
for an IPO (full reconciliation with US GAAP not
required)
• Basically, issuer must supply the type of information that
it would normally make public in its own country

59
Advantages of Rule 144A Offering
– Greater Liquidity for security than private
placement
– Better cost of money than private
placement
– Less expensive in terms of transaction
Advantages
Advantages costs than IPO
– Accounting may be done in accordance
with GAAP other than US GAAP (only
description of the accounting differences
required)
– More control left with company in
comparison to private placement - fewer
restrictive covenants
60
 Disadvantages of Rule 144A Offering
– Offering document is almost as
complicated and rigorous as for IPO
– Information covenants more
burdensome than private placement
• Requirement to provide ongoing information
Disadvantages
Disadvantages – Underlying purpose to protect purchasers of
securities on resale
– Require company to provide information it
normally makes public in home county
– Higher initial transaction costs
– Greater marketing costs - roadshows,
printing, etc.

61
BASIC CONSIDERATION OF SUCCESSFUL
BOND ISSUE
 Careful selection of Lead Manager
 Company Fundamentals
 Modest Issue size : Optimal Size
US$ 50- 100Million
 Timing of the issue
 Careful pricing strategy
 Savvy Marketing & Road shows
 Innovative Options in terms of financial instrument
offered
 After issue development with investors
 Adherence to objectives for which ECB raised
62
Other Fund Raising Options
Medium Term Notes (MTNs)
• Senior debt securities with fixed coupons and
investment grade ratings
• Non-callable and unsecured
• Differ from bonds
– Money raised in small pieces
– Money raised in a continuous process with a shelf
offering
• Issuers announce a schedule of yields and
maturities
• While not always medium term, they tend to have
maturity of 1 to 10 years
• Market making activity
64
Floating Rate Notes
Maturity Up to 7 years (although 5 years is a more popular maturity)
Investors Banks and Institutional Investors
Pricing FRN Investors normally demand approx. 20-30 bps more than Syndicated Loans
Ratings Not necessary but can help
Documentation Standard Euromarket
Disclosure Sufficient to meet London or Luxembourg SE requirements (more accommodating
than SEC)
Timing 4-6 weeks
Profile Wide international publicity
End Use Subject to RBI/MoF approval

Example – FRN Issue

65
Floating Rate Notes
– Next cheapest margin to Libor
Advantages after syndicated loans
Advantages
– Speedy Arrangement
– Wider profile via investor base
and secondary market

– Limited maturity possibilities

Limitations
Limitations – Roadshow required for new
borrowers

66
Other Instruments / Facilities
• MTN Programme

• Refinancing

• USPP

• Examples – PFC MTN & Refinancing of

Syndicated loan & USPP Issue

67
Pricing
 Secondary Trading Levels of Indian
Eurobonds
Indian US$ Bonds
ICICI '07 bps
Reliance Ind '05
1000
Reliance Ind '16
Reliance Ind '26-08
Reliance Ind '46-26900
Tata Electric '07
Power Fin Corp '09800

700

600

500

400

300

200
Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00

69
 Asian Comparables for USD Issuance

Secondary Trading Levels of Selected Comparable Issues

Spread vs.
Issuer Ratings Amount Coupon Maturity Launch Date Govt*
China Development Bank Baa1/BBB USD 500m 8.250% May-09 May-99 UST+155
China (PRC) A3/BBB+ USD 1,000m 7.300% Dec-08 Dec-98 UST+125
Kingdom of Thailand Ba1/BBB- USD 300m 7.750% Apr-07 Apr-97 UST+160
Republic of Korea Ba1(+)/BBB- USD 3,000m 8.875% Apr-08 Apr-98 UST+180
ICICI Ba2/BB USD 150m 7.125% Feb-03 Jan-96 UST+210
ICICI Ba2/BB USD 150m 7.55% Aug-07 Aug-97 UST+300
Power Finance Corp Ba2/BB USD 100m 7.50% Jul-09 Jul-97 UST+315
Reliance Industries Ltd Ba2/BB USD 150m 8.13% Sep-05 Sep-95 UST+280
Malaysia Baa2/BBB USD 1,000m 8.75% Jun-09 May-99 UST+210
Tenaga Baa3/BBB USD 600m 7.625% Apr-11 Mar-01 UST+318
Republic of Philippines Ba1/BB+ USD 600m 9.875% Mar-10 Mar-00 UST+540

70
Issue Strategy and Schedule
Offering Circular
• Forms the basis of the investors’ investment
decision
• Content fairly standard
– Listing particulars
– Terms & conditions of the bonds
– Use of proceeds
– Description of the issuer
• Business activities
• Management
• Financial information
• Tax
– Selling restrictions
72
Why and Where to List?
• Why?
– Reasons more commercial than legal
– Investors prefer to invest in listed securities
– Listed securities far more liquid

• Where?
– Easy procedures (Luxembourg)

73
Due Diligence
• Verification of information contained in the
Offering Circular
• Helps limit liability risk of lead manager in
connection with underwriting
• Content
– No material omissions
– No potential developments which may need to be
disclosed
– No projections (difficult to verify such info)
– Auditor’s certification

74
Fiscal Agent vs Trustee
• Trustee • Fiscal Agent
– Representative of – Merely a principal
the bondholders paying agent for
the issuer
– Monitors
– No powers, duties,
performance by
discretion and
issuer of its
immunities of the
obligations under
trustee
the bond
– No control over
rights of
bondholders
75
Advantages of a Trustee
• For the Issuer
– Only Trustee may
accelerate bonds and
not individual bondholder
– Trustee certification may
be required that any
event (of default) is
materially prejudicial
– Trustee can approve
restructuring etc
– Trustee can approve
alternative listing
A trustee gives the corporate more
flexibility
• For the holder
– Sophisticated
representative
– Legal proceedings on
individual basis costly
and impracticable
– Helps apportion any
settlements among
bondholder
76
Disadvantages of a Trustee
• For the Issuer • For the holder
– More costly and requires – Bondholders prevented
own lawyers from taking action unless
– Results in inclusion of trustee is obliged to act
certain protective but fails
covenants e.g provision
of financial info, access
to books, certification
that no even of default
etc
– Trust deed is lengthy
and complicated

77
EQUITY INSTRUMENTS…

GDR / ADR ISSUES

78
Introduction to Global Depository Receipts
(GDRs)

• GDRs are bearer instruments.

• Are denominated in US$.
• Each GDR represents a certain number of
underlying shares …
• ….. which are held by the depository.
• Depository issues receipts to investors which are
traded offshore.
• GDRs are usually listed on a stock exchange.
• However, most trading is OTC; average transaction
size of US $ 150.00 – 200.00.
• Investors can withdraw shares from the GDR
programme & hold equity. 79
Advantages to the Investor
 Offer exposure to underlying stock.
 No capital gains tax.
 Investors bypass problems of :
 alien market environment.
 cumbersome trading and settlement.
 direct foreign ownership restrictions.
 funds’ own restrictive investment guidelines.
 absence of FII status.
 Avoidance of stamp duly on transfer.
 Global trading day and US $ settlement.
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Advantages to the Issuers
 Raises the profile of the issuer.
 Method of financing foreign exchange
requirements.
 Is usually structured without voting rights.
 No currency risk; dividends paid in Rupees.
 Administratively simpler.
 Broadens investor base.
 Cost of raising funds in international markets is
lower than domestic market.
 Market related pricing reduces the dilution to
equity.
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Accessing the GDR Market-Practical Consideration

Investor Preference :-
 Proven blue chip credentials.
 Credible and proven management with consideration
for minority shareholders.
 Advised issue size of up to 30-35% of pre-issue
market capitalisation.
 Minimum issue size of US $ 60-80 Million due to
liquidity consideration.
 Clearly defined use of proceeds, projects and
expansion plans.
 Fully diluted EPS growth of at least 15-20% over 3
years horizon.
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Accessing the GDR Market -Practical Consideration

 Favorable peer group comparisons – RoE, PER,

EPS Growth, Debt-equity, Market Share.
 Companies in high technology growth sectors.
 Value adding manufacturing companies with
limited exposure to commodity cycles.
 Companies in sectors under-represented or
unrepresented in the Indian Euro market.

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 Regulatory Procedures
Approvals Required
 Final approval from MoF Stating
 Lead manager
 Overseas depository institution.
 Indian custodian.
 Green-shoe option.
 Settlement procedures.
 Overseas listing.
 Sales commission, underwritting and management fees.
 Government laws.
 Legal expenses, printing expenses, depository fees and
other out-of-pocket expenses.
 There is no time limit on validity of the Final Approval. :

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 Issuing a GDR
 Successful offering for a Euro issuer achieves.
 Attractive terms for the issuer.
 Strong aftermarket.
 Lowest cost to the issuer.
 In the primary market, these objectives are reflected by
 Full subscription.
 Optimum pricing.
 Creation of long-term investor base.
 Raised corporate profile amongst international investors.
 And in the secondary market through
 Active trading and high liquidity.
 Lack of flowback to the domestic market.
 Stable price performance.
 Minimal impact on underlying equity.
 Content and loyal investor base.

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 GDR Execution – Key Parties
 Lead manager
 Syndicate banks
 Auditors to issuer
 Legal advisers to the Company
 As per Indian Law
 As per International Law (optional)
 Legal advisers to the managers
 As per Indian Law
 As per International Law
 Depository
 Custodian
 Listing agent
 Printers
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Functions of Key Parties
 Lead Managers
 Form Syndicate
 Develop Strategy
 Decide Issue Timing
 Global Syndicate Co-ordination & Discipline
 Prepare Documentation
 Global Test Marketing
 Publish Research
 Arrange Road show
 Book building
 Underwriting and Selling
 Pricing and Allocation
 Market Making
 Syndicate Members
 Publish Research
 Market Making
 Underwriting and Selling

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 Functions of Key Parties
 Depository
 Issue GDRs in the system
 Pay dividend to GDR holders
 Distribute annual reports, Chairman’s speech etc.
 Record transactions between QIBs under 144A
and rest of the World.
 Cancellation and Reissuance of GDRs.
 Custodian
 Safe custody of the Master Share Certificate.
 At the time of cancellation, issues the Share
Certificate to the GDR holder.

88
 Functions of Key Parties
 Listing Agent
 Liaise with the international stock exchange for listing.
 Solve queries that may arise at the prospectus drafting stage.
 Confirm that listing requirements are completed.
 Obtain GDR listing on the relevant Stock Exchange.
 Auditors to issuer
 Audit accounts.
 Verify financial information included in Offering Circular.
 Provide comfort to the managers on accounts.
 Legal advisers to the Company and GoI
 As per Indian Law – advise on approvals, Company Law issues, lock-up
provisions, etc.
 As per international law (optional), preparation of subscription agreement.

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 Functions of Key Parties
 Legal advisers to the managers
 As per Indian Law – review prospectus,
approvals, agreements and other documentation
for consistency with Indian Law.
 As per International Law – due diligence and
drafting of prospectus, subscription agreement,
depository agreement, closing agenda, etc.

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 Global Depository Receipts
Execution, Documentation & Materials
 Preliminary offering circular – printed for roadshows without
pricing information.
 Final Prospectus – printed after pricing, contains information such
as issue size, issue price, date of pricing, foreign exchange rate,
etc.
 Roadshow material – co-ordinated by lead managers and issuers,
would include
 Roadshows presentation.
 Corporate video.
 Corporate brochure.
 Annual reports.
 Research reports.
 Questions & Answers

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 Book building Mechanism &
Pricing & Allocation

Book building Process

“Book building derives the optimum price for an
equity issue in any given set of market
conditions by achieving the correct balance
between investor demand and supply of shares,
commensurate with a healthy aftermarket”.

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THANK
YOU
93
RISK MANAGEMENT

94
 AGENDA

Foreign Currency Borrowings have fundamentally

•Forex Risk
•Interest Risk

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 EXCHANGE MARKETS

•Is in fact a misnomer in as much as there is no

market place as such.
•It is a facilitating mechanism through which one
currency can be exchanged for the other.
•No geographic location.
• Comprises of all the F x traders connected to each
other throughout the world through the telecom
network.

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THE PARTICIPANTS IN AN EXCHANGE MARKET

• Customers.
• Commercial Banks.
• Central Banks.
• Exchange Brokers.
• Speculators.

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 FUNDAMENTAL FACTORS AFFECTING
EXCHANGE RATES
• GDP Growth, Employment in Different Economies
• Interest Rates in Each Currency and Relative Changes
• Inflation
• Balance of Payment and Balance of Trade
• Monetary Policy
• Exchange Control and Central Bank intervention
• Speculation

Market Focus on a Particular Factor Changes From Time to Time

Market Reaction to Any Given News Varies From Occasion to Occasion

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EFFICIENT MARKETS

• Liquidity
• Low Transaction Costs
• Same Information With All Participants
• An Efficient Market Does Not Mean That the Pricing Is
‘Correct’ , Only That No One Can Consistently Beat the
Market

99
FACTORS AFFECTING RUPEE

• Political / Economic Influences

• Demand Supply Mismatches
• Reserve Bank of India
• Global Scenario

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EXCHANGE RATE QUOTES
• DIRECT QUOTE.
- Where the domestic currency is quoted against a unit of
the Foreign Currency(home currency is variable).
Example : 1 US $ = Rs. 48.70
100 JPY = Rs. 40.40
• INDIRECT QUOTE.
- Where the foreign currency is quoted against a unit of
the home Currency(foreign currency is variable).
Example : 2 .05 US $ = Rs. 100
264.90 JPY = Rs. 100

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102
DIRECT AND CROSS RATES

• In the case of the Rupee, it is quoted against the

US $ .
• The parity between the Rupee and the other
currency is obtained by using the cross rate.
Example: 1 US $ = Rs. 47.80/47.81
1 EURO = $ 0.9000/.9010
The Euro buying rate would be
Rs.47.80*.9000 = Rs. 43.02

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 VALUE DATES

• Is the day on which the cash flows are to take place.

-Spot (settlement on 2nd business day).
-Tom (next business day).
-Cash (same day).
-Forward (after 2 business days).
The rates being available for up to a year.

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 CROSS CURRENCY RATES

COUNTRY USD GBP JPY EUR SGD CHF

U.S. 0.6989 121.59 1.1315 1.8010 1.7306
BRITIAN 1.4308 173.97 1.6190 2.5769 2.4762
JAPAN 0.0082 0.0057 0.0093 0.0148 0.0142
EUROPE 0.8838 0.6177 107.46 1.5917 1.5295
SINGAPORE 0.5552 0.3881 67.51 0.6283 0.9609
SWITZERLZND 0.5778 0.4038 70.26 0.6538 1.0407
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FORWARD PREMIUM

U.S. 0.6989 121.59 1.1315 1.8010 1.7306

BRITIAN 1.4308 173.97 1.6190 2.5769 2.4762
JAPAN 0.0082 0.0057 0.0093 0.0148 0.0142
EUROPE 0.8838 0.6177 107.46 1.5917 1.5295
SINGAPORE 0.5552 0.3881 67.51 0.6283 0.9609
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FOREIGN EXCHANGE RISK

• Risk Is Destabilization of (Budgeted) Cash Flows

• Greater the Volatility, Greater the Risk
• Variance, or Standard Deviation Is the Accepted
Measure of Volatility and Therefore of Risk

107
WHY MANAGE RISK

• Prevent Business Failure

• Increase performance of business by seeking
opportunities to minimize cost of debt/ equity
• Reduce the volatility in returns on assets / capital
- stable returns are more attractive to investors
- reduces interest rate margins

108
Exchange Risk Management
Key Issues
• Availability of Information
– Internal
– External
• Risks to be managed
• Objectives of risk management
• Strategies
• Implementation, MIS & Review
• Products available for risk management

109
Availability of Information

• Internal
– Details of exposures to be covered
– System to ensure that all exposures are intimated
to the risk manager immediately after they have
been assumed
– Differentiate between confirmed exposure and
potential exposure
• External
– Information on various markets
– Product Knowledge

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Risks to be Managed

• Fluctuations in the following exch.. rates

– Dollar/Rupee Spot and the Forward Premium
– Dollar/Cross Currencies
• Mismatches between export and Import
realisation - cashflows

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Instruments for Exchange risk
management.
• Forward Purchase /sale
• Principal only swap
• Currency swap
• Coupon swap
• Natural hedge through foreign
currency Assets/revenues

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Instruments for Exchange risk
management.
• Forward Purchase /sale
• Principal only swap
• Currency swap
• Coupon swap
• Natural hedge through foreign
currency Assets/revenues

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Instruments for Interest Rate risk
management.
• Interest Rate Swaps
• Forward Rate Agreements (FRAs)

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Interest Rate Swaps of Major Currencies

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USD FRAs

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THANK
YOU
117
ISDA DOCUMENTATION

• ISDA

• SCHEDULE

• CONFIRMATION

• TERM SHEET

– Sample Agreements
118