This action might not be possible to undo. Are you sure you want to continue?
FOREIGN DIRECT INVESTMENT (FDI) Foreign direct investment (FDI) or foreign investment refers to long term participation by country A into country B. It usually involves participation in management, jointventure, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. “Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (“direct investor”) in an entity resident in an economy other than that of the investor (“direct investment enterprise”). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise”
Flow of FDI in India In the year 1991, the government if India was sanctioned in its new Industrial Policy, large number ofconcessions and incentives, to attract the flow of the foreign capital to India. Factors like prospectopportunities in industries, favorite government policy, political stability in the country etc., wereranked India as second favorite country in the world, following China, in terms of attractiveness of FDI.AT Kearney’s 2007 Global Services Location Index ranked India as the most preferred destination interms of financial attractiveness, people and skills availability and business environment.The positiveperceptions as a result of strong economic fundamentals driven by 19 years of reforms has helpedFDI inflows grow at about 20 times since the opening up of the economy to foreign investment since 1991. Foreign Direct Investment in India India has continually sought to attract FDI from the world’s majorin ve sto rs. In 1998 and 1999, theIndian national government announced a number of reforms designed to encourage FDI and presenta favorable scenario for investors. In India, Foreign Direct Investment Policy allows for investment only in case of the following form of investments: • Through financial alliance • Through joint schemes and technical alliance • Through capital markets, via Euro issues • Through private placements or preferential allotment Foreign Direct Investment in India is not allowed under the following industrial sectors: •Arms and ammunition
sulfur.Foreign investors can buy up to 40% of the equity in privateba n ks. with opportunities for foreign investors. Up to 45% of the shares ofcompanies in the global mobile personal communication by satellite services (GMPCSS) sector canalso be purchased. . copper. The Indian national government also provided permission to FDIs to provide up to 100% of thefinancing required for the construction of bridges and tunnels. •Insurance •Telecommunication •Hospitality and tourism •Pharmaceuticals • Software and Information Technology.•Atomic Energy •Coal and lignite •Rail Transport • Mining of metals like iron. FDI is allowed in financial services. These services include the non-banking financial services sector. gold. although there is condition thatstipulates that these banks must be multilateral financial organizations.500 crores. Currently. as well as the development of roads and highways. gypsum.5m. FDI in major sectors in India The major sectors of the Indian economy that have benefited from FDI in India are •Financial sector (banking and non-banking). chrome. approximately $352. including thegrowing credit card business. diamonds. but with a limit on foreign equity of INR1. distribution andtransmission. zinc A number of projects have been announced in areas such as electricity generation. manganese.
The money.FOREIGN INSTITUTIONAL INVESTMENT The term foreign institutional investment denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. which is coming through the foreign institutional investment is referred as 'hot money' because the money can be taken out from the market at anytime by these investors. Foreign institutional investment is a common term in the financial sector of India. The promise of rapid growth of the investable fund is tempting the investors and so they are coming in huge numbers to these countries. Some important facts about the foreign institutional investment: • • • • The number of registered foreign institutional investors on June 2007 has reached 1042 from 813 in 2006 US $6 billion has been invested in equities by these investors The total amount of these investments in the Indian financial market till June 2007 has been estimated at US $53. • The foreign investment market was not so developed in the past. are becoming hot favorite investment destinations for the foreign institutional investors. the diversified global market became united. The Securities and Exchange Board of India looks after the foriegn institutional investments in India. Because of this the investment sector became very strong and at the same time allowed the foreigners to enter the national financial market.06 billion The foreign institutional investors are preferring the construction sector. But once the globalization took the whole world in its grip. SEBI has imposed several rules and regulations on these investments. These markets have the potential to grow in the near future . Although the foreign direct investments are long term investments but the foreign institutional investments are unpredictable. At the same time the developing countries understood the value of foreign investment and allowed the foreign direct investment and foreign institutional investment in their financial markets. These are actually the outsiders in the financial markets of the particular company. The type of institutions that are involved in the foreign institutional investment are as follows: • Mutual Funds • Hedge Funds • Pension Funds Insurance Companies The economies like India. which are growing very rapidly. banking sector and the IT companies for the investments . This is the prime reason behind the growing interests of the foreign investors.
S.S. or ADR. Investors attempting to enter the emerging markets or other foreign stock exchanges have to go through expensive commissions and currency exchange before successfully investing in a foreign market. History and reasons for using ADRs Depositary Receipts (DRs) were created in 1927. of a non-U. or vice versa. companies. Each ADR could represent multiple shares of the foreign company. is a security issued by a U. With ADRs. the price of the ADR changes in tandem with the price of the foreign stock. Citigroup. depository bank to domestic buyers as a substitute for direct ownership of stock in foreign companies. CLSA American Depository Receipt (ADR) An American Depository Receipt. however. Some ADRs are traded on major stock exchanges such as the Nasdaq Stock Market (NDAQ) and the New York Stock Exchange. Since each ADR represents a share or shares of the foreign company. Merrill Lynch. any change in . exchanges. as these receipts can be traded on U.• Most active foreign institutional investors in India are HSBC.S. Therefore. An ADR is a convenient way for companies whose stock is listed on a foreign exchange to cross-list their stock in the United States and make their stock available for purchase by U. company.S.S stock markets. An ADR can represent one or more shares. or a fraction of a share. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADSs). investors can take advantage of foreign markets while trading in U. The bank choosing to issue the ADR controls the number of foreign shares each ADR represents. investors.S. primarily to circumvent the difficulties associated with different currencies in the foreign market. which require these foreign companies to conform to many of the same reporting and accounting standards as U. Stock dividends and similar adjustments to the underlying shares are paid in cash or ADR dividends by the bank. Other ADRs are traded on over-the-counter exchanges that impose fewer listing requirements.
They have slightly more requirements from the SEC.These are found on Over the counter market and have the loosest requirements from Securities and Exchange Commission. Level 3 .The issuer floats a public offering of ADRs on a U. its ADR would rapidly decrease in real value. More details about depositary receipts (ADRs) can be found in the dedicated website for depositary receipts by Deutsche Bank . Different type of ADR issues Level 1 . Deutche Bank is one of the largest depositary banks handling depositary services. Level 2 . Should there be rampant inflation in the nation of the foreign company. but they have greater visibility and trading volume.price in the foreign company's stock applies to the change in price of the ADR. In this way. Investors do have to worry about inflation and currency changes in the foreign nation despite not having to convert currency to buy foreign shares.S. investors can benefit from price changes without worrying about currency conversion. . exchange.These are listed on an exchange or Nasdaq. ADRs take into account currency fluctuations and foreign inflation.
and specifies the duties and rights of each party. especially on the London and Luxembourg stock exchanges. with more than 2. ADRs allowed companies domiciled outside of the United States to tap the United States capital markets. There are more than 900 GDR’s listed on exchanges worldwide. Depositary receipts are structured to resemble typical stocks on the exchanges that they trade so that foreigners can buy an interest in the company without worrying about differences in currency. but that are marketed outside of the company’s home country to increase its visibility in the world market and to access a greater amount of investment capital in other countries. Although ADRs were the most prevalent form of depositary receipts. A GDR is based on a Deposit Agreement between the depositary bank and the corporate issuer. both to the other . A GDR is similar to an ADR. and the use of United States currency for the sale and purchase of ADRs and for dividend payments. or has branches. and Citibank. shareholder notifications in English. or language barriers. in the countries in which the GDR will be traded. although some trade in Euros or British sterling.Global Depositary Receipts (GDRs) Depositary receipts (DRs) are certificates that represent an ownership interest in the ordinary shares of stock of a company. Most GDRs are. the number of GDRs has recently surpassed ADRs because of the lower expense and time savings in issuing GDRs. The Global Depositary Receipt As A Financial Instrument A GDR is issued and administered by a depositary bank for the corporate issuer. accounting practices.100 issuers from 80 countries. regardless of the geographic market. The depositary bank is usually located. the Bank of New York Mellon. or be concerned about the other risks in investing in foreign stock directly. denominated in United States dollars. ADRs were structured to resemble other stocks on the American exchanges with comparable prices per share. but is a depositary receipt sold outside of the United States and outside of the home country of the issuing company. The largest depositary banks in the United States are JP Morgan. American depositary receipts (ADRs) were the 1st depositary receipts issued—JP Morgan issued the 1st ADR in 1927.
avoids risky settlement procedures. The DR shares actually bought or sold are called depositary shares. The voting provisions in most deposit agreements stipulate that the depositary bank will vote the shares of a GDR holder according to his instructions. The custodian bank is generally selected by the depositary bank rather than the issuer. GDRs offer most of the same corporate rights. like ADRs. There are also no foreign . without instructions. the depositary bank will not vote the shares. allow investors to invest in foreign companies without worrying about foreign trading practices.party and to the investors. the sharing of fees. and the execution and delivery or the transfer and the surrender of the GDR shares. which then sends them to the GDR holders. which is usually the United States dollar (USD). The depositary bank buys the company shares and deposits the shares in the custodian bank. then issues the GDRs representing an ownership interest in the shares. such as shareholders’ meetings and rights offerings. different laws. the payment of dividends in the GDR currency. voting the issuer’s underlying shares. to the holders of GDRs that investors of the underlying securities enjoy. are in English. and collects and remits dividends and forwards notices received from the issuer to the depositary bank. or cross-border transactions. otherwise. depositing the issuer’s shares in the custodian bank. Provisions include setting record dates. and corporate notifications. GDRs also overcome limits on restrictions on foreign ownership or the movement of capital that may be imposed by the country of the corporate issuer. especially voting rights. even when they may be restricted by law or investment objective from buying shares of foreign companies. A separate custodian bank holds the company shares that underlie the GDR. Another major benefit to GDRs is that institutional investors can buy them. Other benefits include easier trading. The custodian bank is located in the home country of the issuer and holds the underlying corporate shares of the GDR for safekeeping. and eliminates local or transfer taxes that would otherwise be due if the company’s shares were bought or sold directly. GDR Advantages And Disadvantages GDRs. The custodian bank also increases or decreases the number of company shares held per instructions from the depositary bank.
more GDRs will be created to meet increasing demand or more will be canceled if demand is lacking or the price of the underlying company shares rises significantly. the investor turns in the shares to the depositary bank. which then cancels the GDRs and instructs the custodian bank to transfer the shares to the GDR investor. more GDRs will either be created or canceled to bring the GDR price back within the optimum range determined by the depositary bank. . which can range from 10 to 35 basis points per year for foreign stock bought directly. When shares are created. depending on whether the GDR is priced higher or lower than corporate shares. since any differences will be eliminated through arbitrage. Typically. When shares are canceled. have foreign exchange risk if the currency of the issuer is different from the currency of the GDR. GDRs are liquid because the supply and demand can be regulated by creating or canceling GDR shares. The ability to create or cancel depositary shares keeps the depositary share price in line with the corporate stock price.custody fees. Hence. which usually garners increased research coverage in the new markets. GDRs do. If the GDR price moves too far from the optimum range. 1 GDR may represent an ownership interest in many shares of corporate stock or fractional shares. Most GDRs are priced so that they are competitive with shares of like companies trading on the same exchanges as the GDRs. which then issues new GDRs based on the newly acquired shares. The price of a GDR primarily depends on its depositary ratio (aka DR ratio). which can range widely depending on how the GDR is priced in relation to the underlying shares. a larger and more diverse shareholder base. which is usually USD. GDR prices range from $7 $20. and the ability to raise more capital in international markets GDR Market As derivatives. depositary receipts can be created or canceled depending on supply and demand. more corporate stock of the issuer is purchased and placed in the custodian bank in the account of the depositary bank. however. The main benefit to GDR issuance to the company is increased visibility in the target markets. which is the number of GDRs to the underlying shares.
Many GDR issuers also issue privately placed ADRs to tap institutional investors in the United States. and also have a T+3 settlement time in most jurisdictions. However. Singapore Stock Exchange. Most GDRs trade on the London or Luxembourg exchanges because they were the 1st to list GDRs and because it is cheaper and faster to issue a GDR for those exchanges. Luxembourg Stock Exchange. Currently. 4. London Stock Exchange. a 144A offering must. On most exchanges GDRs trade just like stocks. Dubai International Financial Exchange (DIFX). . and market conditions. Companies choose a particular exchange because it feels the investors of the exchange’s country know the company better. The international status of the company is also a major factor. thus saving both time and expense. An offering based on SEC Rule 144A eliminates the need to register the offering under United States security laws. 3. Hong Kong Stock Exchange. 2. because the country has a larger investor base for international issues. The exchanges on which the GDR trades are chosen by the company. or because the company’s peers are represented on the exchange. The market for a GDR program is broadened by including a 144A private placement offering to Qualified Institutional Investors in the United States. relative valuations and analysts’ recommendations. 5. where a trade must be settled in 3 business days of the trading exchange. provide a home country disclosure in English to the SEC or the information must be posted on the company’s website. the stock exchanges trading GDRs are the: 1. under Rule 12g3-2(b).Most of the factors governing GDR prices are the same that affects stocks: company fundamentals and track record.
(2) An issuing company seeking permission under sub-paragraph (1) shall have a consistent track record of good performance (financial or otherwise) for a minimum period of three years. Corporates issue FCCB's to raise money in foreign currencies. IAS 32 and IFRS 7 Eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company. 3. on the basis of which an approval for finalising the issue structure would be issued to the company by the Department of Economic Affairs. Government of India. Investors are hedge-fund arbitrators or foreign nationals. FCCB's are quasi-debt instruments and tradable on the stock exchange. Ministry of Finance. (3) On completion of finalisation of issue structure in consultation with the Lead Manager to the issue. FCCB's appear on the liabilities side of the issuing company's balance-sheet Under IFRS provisions. These bonds assume great importance for mutli-nationals and in the current business scenario of globalisation where companies are constantly dealing in foreign currencies. . FCCB's are issued in currencies different from the issuing company's domestic currency.Foreign Currency Convertible Bonds Foreign Currency Convertible Bonds commonly referrred to as FCCB's are a special category of bonds. These bonds retain all features of a convertible bond making them very attractive to both the investors and the issuers. the issuing company shall obtain the final approval for proceeding ahead with the issue from the Department of Economic Affairs. Ministry of Finance. a company must mark-to-market the amount of it's outstanding bonds The relevant provisions for FCCB accounting are IAS 39. (1) An issuing company desirous of raising funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depository Receipts is required to obtain prior permission of the Department of Economic Affairs.