1.

Many Indian Companies are not listed in US stock market because the procedure of
listing is not easy, What are the other ways to raise capital in USD? Explain their types
in details.

Answer: Methods to raise fund from the US market

Global Depository Receipt (GDR)

GDRs are used in world Equity offering to international investors. It can be considered as
global finance instrument that makes an investor to raise capital at the same time from two or
more financial markets. Depositing receipts helps in cross-border trading and settlement helps
to reduce transaction costs and increases the investment base among the institutional
investors. GDR is a negotiable certificate that represents a company’s publicly traded equity
or debt. They are created when a broker purchases the company’s shares on domestic stock
market and deliver them to the depository’s local custodian bank who instructs the depository
bank to issue GDRs. They are traded on a stock exchange where they are listed and in OTC
market.

Features of GDRs
The following are the features of GDR:
• GDRs can be listed on any American and European Stock exchange
• One GDR can represent more than one share
• The holder of the GDRs can get them converted into shares
• The holder of the GDR has not right to vote in the company. However, the shareholders do
have this right. The dividend on the GDRs is quite like the dividend on shares
• GDRs are in the US dollar

American Depository Receipt (ADR)

It represents ownership in the shares of a non-US company and trades in the American stock
markets. ADRs enable American investors to buy shares in foreign company without any
issue of cross-border and cross-currency transactions. ADRs carry price in American dollar,
pay dividend in the same currency and can be traded like any other share of US-based
companies. Each ADR is issued by a US depository bank and can represent one share. The
owner of ADR has the right to obtain the foreign stock it represents, but US investors are
more interested in owning ADR as they can diversify their investments across the globe.
ADR falls within the regulatory framework of the US and requires registration of the ADRs
and the underlying shares with the SEC.

Features of ADRs
 ADR can be listed on American Stock Exchange.
 A single ADR can represent more than one share. One ADR can be two shares or any
fraction also.
 The holder of the ADRs can get them converted into shares.
 The holders of ADR have no right to vote in the company.

Process of issue of ADR

Investors can purchase ADRs from brokers. These brokers obtain ADR s for their clients in
two ways. They can either purchase already issued ADRs on a US exchange. This is similar
to buying a share in secondary market or they can create a new ADR. Let us understand this
with the help of an example. To create an ADR, a US based broker purchases shares of the
issuer in the issuer’s home market. The US broker then deposits those shares in a bank in that
market. The bank then issues ADRs representing those shares to the broker’s custodian which
can then apply them to the client’s account.

Foreign currency convertible bond

Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company
expressed in foreign currency, and the principal and interest in respect of which is payable in
foreign currency. Further, the bonds are required to be issued in accordance with the scheme
viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depositary
Receipt Mechanism) Scheme, 1993”, and subscribed by a non resident in foreign currency
and convertible into ordinary shares of the issuing company in any manner, either in whole,
or in part, on the basis of any equity related warrants attached to debt instruments. The policy
for ECB is also applicable to FCCBs.

Following are some common features of the Foreign Currency Convertible Bonds:
 FCCB are of two types i.e. secured as well as unsecured. Mostly the FCCB issued by
the Indian Companies are unsecured.
 Credit rating of Bonds is not mandatory, since corporations having excellent track
record mostly issue such Bonds. However, rating done by the Credit Rating Agency
certainly adds value to the bonds issued.
 Indian Companies, eligible to issue shares to persons residents outside India under the
Foreign Direct Investment Scheme (including Sectoral Cap and Sectors where FDI is
permissible) can raise foreign currency resources aboard through the issue of
American Depository Receipts (ADRs) or Global Depository Receipts (GDRs).
 The ‘bond to equity’ convertible option attached to the FCCBs is subject to the
Reserve bank of India guidelines. Such FCCBs can be converted by exercising the
‘Call option’ and ‘Put option’ to suit the structure of the Bond.
 FCCBs are generally listed on the national and regional stock exchanges to improve
liquidity.

External Commercial Borrowings (ECB)

ECBs occupy a very important position as a source of funds for corporate. ECBs are required
for expansion of existing as well as for fresh investment. Infrastructure and development
sectors such as Power, Oil exploration, Telecom, Railways, Roads and Bridges, Ports,
Industrial Parks, Urban infrastructure and the export sector need huge resources which Indian
Corporates and Government are unable to finance. Hence, there is an obvious need for
external commercial borrowings. ECBs are needed in India to keep borrowing costs low.

Advantages of ECBs
i) The cost of borrowing being higher in India compared with the international market, Indian
corporate can have access to foreign funds at comparatively cheaper rates of interest under
the ECBs.
ii) ECBs will boost the development of infrastructure and export sectors as large amount can
be raised from foreign lenders.
iii) ECBs occupy a very important position as a source of funds for corporate. Huge sum of
funds can be raised through ECBs.
iv) ECBs provide foreign currency funds to corporate that are required for import of capital
goods.
v) There is no need for credit rating while raising ECBs.

Challenges in raising funds from US market

  Extensive disclosure and online filing
 Reconciliation with US GAAP
 High issuance costs
 Limited investors
 Limited liquidity
 Limited access to US capital

2. Foreign exchange exposure is said to exist for a business or a firm when the value of
its future cash flows is dependent on the value of foreign currency / currencies. If a
British firm sells products to a US Firm, cash inflow of British firm is exposed to foreign
exchange and in a case of the US based firm cash outflow is exposed to foreign
exchange. What are the different types of exposure in foreign Exchange transaction?
How to reduce it?

Answer: Foreign exchange risk management is intended to preserve the value ofcurrency
inflows, investments and loans, while enabling international banksto compete abroad. Even
though it is impossible to eradicate all risks,negative exchange outcomes can be predicted and
managed effectively byindividuals and corporate entities.Although the foreign exchange risk
management is different for variousbanks based on the nature and complexity of their foreign
exchangeactivities, a foreign exchange risk management plan requires:
 Establishing and executing comprehensive and prudent foreign exchange risk
management policies.
 Evolving and applying suitable and effective foreign exchange risk management and
control procedures.

The objectives of foreign exchange risk management are as follows:

 To minimise the possible currency losses.
 To reduce the variability of the cash flows of business.
 To assist individuals involved in foreign exchange management in the implementation
of updated procedures of foreign exchange risk.
 To develop possible solutions to avoid the negative influence of adverse currency
movements in foreign exchange.
 To outline enhanced procedural guidelines for ongoing control and management of
foreign exchange risk.

Key exposures in foreign exchange management

Transaction exposure
Transaction exposure also referred to as conversion exposure or cash flowexposure deals with
the actual cash flows involved in settling transactionsdenominated in a foreign currency.
These include:
 Sales receipts.
 Payment for the goods and services.
 Dividends payment/receipt.
 Servicing loan arrangements with respect to interest and capital.

Any variation in the currency rates, between the time the transaction startsand the time the
transaction settles down, possibly alters the originallyapparent financial result of the
transaction. It is therefore important to startmonitoring the exposure from the time a foreign
currency commitmentbecomes a possibility. The financial gain or loss is the difference
betweenthe actual cash flow in the national currency and the cash flow calculated atthe time
of starting the transaction.

Translation exposure
Translation exposure, also termed as accounting exposure or balance sheetexposure relates
the restatement of foreign currency financial statements interms of a reporting currency.
Translation exposure is calculated at the timeof translating foreign financial statements for
reporting purposes andspecifies the likelihood that the foreign currency denominated
financialstatement elements may change and lead to further translation gains orlosses,
depending on the movement that takes place in the currencies afterthe reporting date.

Economic exposure
Economic exposure, also termed as operational exposure, relates with thestrategic evaluation
of foreign transactions and relationships. Economicexposure is concerned with the changes in
future cash flows on specifictransactions due to changes in exchange rates, or on the
operating positionwithin chosen markets. Determination of economic exposure requires
anunderstanding of the structure of the markets in which a bank and itscompetitors obtain
capital, labour, materials, services and customers. Thus,economic exposure denotes the
probability that the value of the enterprise,known as the net present value of future after tax
cash flows, will alter whenexchange rates change. Economic exposure is the effect of future
cashflows of unpredicted future movements in exchange rates. This affects afirm’s
competitive position across the various markets and products andhence the firm’s real
economic value.

Tools to reduce foreign exchange risk

Various financial instruments are used by companies in India and abroad in order to hedge
the exchange risk. Such kinds of instruments are available to the company at varying costs.
The various tools that hedge the different kinds of risks are given below:
• Forward contracts: A forward contract is a non-standardized contract that takes place
between two parties for the purpose of selling or buying an asset at a specified future time at
a price that has already been agreed. The party who buys the underlying position assumes a
long position and the party who sells the asset assumes a short position. Delivery price is the
price that has been agreed upon. It is one of the most common means of hedging transactions
in foreign currencies. It offers the ability to the users to lock in a sale price or a purchase
without the involvement of any direct cost. It is also used by speculators who use forward
contracts so as to place bets on the price movements of the underlying asset. Banks and many
multinational corporations also use it to hedge the price risk by the elimination of uncertainty
about prices.
• Futures contracts: It is a standardized contract that takes place between two parties for
buying and selling a specified asset of standardized quality and quantity for a price that has
been agreed at the present date. The payment and delivery takes place at a future specified
date which is also known as the delivery date.
• Option contracts: In this type of contract, the buyer of the option has the right but not the
obligation to fulfill the transaction while the seller has the responsibility of fulfilling the
conditions stated in the contract through the delivery of the shares to the appropriate party.
An option can be distinguished as a call option or a put option. The option conveying the
right to buy the underlying asset at a specific price is called a call and the option conveying
the right to sell the underlying asset at a specific price is known as the put option.
• Currency Swap: The agreement that takes place between two parties through which they
exchange a series of cash flows in one currency for a series of cash flows in another currency
is known as currency swap. It takes place at agreed intervals and over an agreed period of
time. Law doesn’t require it to be shown on a company’s balance sheet as it is considered to
be a foreign exchange transaction.

3. Punjab National Bank on Monday detected fraudulent transactions worth Rs 11,300

crore at its Brady House branch in Mumbai. The PNB in its cautionary note to other
public and private sector banks said that the suspected fraud was carried out by the
perpetrators in collusion with the staff. It went on to explain the modus operandi of the
scam and said: "It was found through SWIFT trail that one junior level branch official
unauthorisedly and fraudulently issued Letters of Undertaking (LoU) on behalf of some
companies belonging to Nirav Modi Group for availing buyers' credit from overseas
branches of Indian Banks." It further said that none of the transactions were routed
through the Core Banking Solution or CBS system, thus avoiding early detection of
fraudulent activity.
a. What is the CBS that the bank official bypassed to issue fake LoU by using SWIFT?
b. What was the role of Punjab National Bank‘s Officials in this fraud? How they use
NOSTRO account of Punjab national Bank?

Answer: a) Core banking solution is a software component which is designed to solvethe

problems that are faced by the present banking market.Core banking solutions are banking
applications on a platform enablingstrategic approach that allows individuals to improve
operations, reducecosts and prepare for growth. Implementing a modular, component-
basedenterprise solution assures strong integration with existing technologies.Core banking
solution allows banks to transform their business.Core banking solution addresses the core
banking consumer and corporatee-banking, mobile banking and web based cash management
requirements.Core banking solutions are leaving an unforgettable mark as banks embarkon a
total repair of their legacy platforms.

The advanced technology infrastructure which supports the core bankingsolution and high
standard of business functionality provides financialinstitutions a competitive advantage.
Hence, Core banking solution is a setof integrated core banking components, as mentioned
earlier which could betailored to fit the institution’s individual business requirements.For
example, let us take two branches of XYZ bank one at Bangalore andthe other at Guwahati. It
is assumed that these branches are connected tothe central server through CBS system. In this
case, the customer ofGuwahati branch can withdraw money from the Bangalore branch
withoutany hassle. Any banking transaction of the Guwahati branch customer canbe carried
out at Bangalore in one go.

Features of the core banking system

 24X7 Banking
 Anywhere Banking
 Integration with strategic sectors
 Strengthening MIS, DSS and EIS
 Business Process Re-engineering (BPR)

Impact of core banking

The Core banking systems have to satisfy the requirements of all theentities that form part of
the eco-system of the bank.
Bank Employee: Head office, regional offices, branches etc: Using Corebanking system.
With appropriate authority employee as given above canhelp customers do their financial
transaction.
Bank Management: Executives/managers at respective locations, headoffice, regional
offices, branches etc. can obtain the financial position fromcore banking systems related the
respective sphere of banking operationsand thus help pinpoint potential problems so as to
avoid crises.
Bank Customers: can operate any of their accounts from any branch orpreferred delivery
channel and have access to his funds any time 24 hours aday.
Bank Auditors: ones accounts audited, they operate the same year on yearthus enabling
auditors to focus more on systems and procedures at deliverychannels like branches, call
center etc.
Bank Regulators: core banking systems produce the required reports forregulatory bodies
like the central bank, financial statement, asset andliability reports, non-performing assets
reports, large currency transactionreports etc. are all produced by either the deposits, or the
loan or acombination of deposit, loan and general ledger system.
Bank Shareholders: core banking provides the desired return toshareholders from banking
operations. Trends overtime on such datainforms shareholders about how the banks is doing
and help take timelyaction to accelerate or improve performance.

b) PNB, the second largest state-run bank, had on February 14 informed the exchanges of
detecting $1.8 billion worth fraudulent transactions at its Brady House branch in Horniman
Circle area of south Mumbai and named the firms led by Nirav Modi and his uncle Mehul
Choksi's Gitanjali Group and some other diamond and jewellery merchants as suspects.The
bank has also filed criminal complaints with CBI and the ED, both of which launched
nationwide searches on dozens of offices and residences of the alleged fraudsters.

"How the checks and balances are appropriately operated by the bank at the highest level of
operation, and how RBI arms were a mute spectator, are the subject matter of investigation. It
said the exposure to the gem & jewellery sector and also foreign exchange dealings are
reported to the board, which has representatives of both the RBI as well as
government.Wondering how the scam went undetected, it said a branch dealing with foreign
exchange is subjected to a "foreign exchange audit" by the bank as well as by the Reserve
Bank regularly.Apart from that, there are a host of audits including internal audit, concurrent
audit, snap audit, recovery audit, statutory audit, external audit and stock audit which are
conducted regularly.The Union said it is unfair to blame the public sector banks if PNB has
not linked its core banking system with the international payment gateway system of Swift.

Many officials arrested by the police in this case. Some of them are already retired as well
and all the officials are of the same branch. The two main employees who were arrested,
Gokulnath Shetty and Manoj Kharat, are suspected of steering fraudulent loans to companies
linked to billionaire jeweller Nirav Modi and to entities tied to jewellery retailer Gitanjali,
which is led by Modi's uncle, Mehul Choksi. The accusations against the two relatively junior
officials at PNB were detailed in the lender's disclosure, and were also contained in a
preliminary police report.Police also arrested a third person, Hemant Bhat, whom the source
described as the “authorised signatory” of the companies tied to Nirav Modi.
In the Nirav Modi case, these fraudulent PNB officials sent messages on the SWIFT system
(Society for Worldwide Interbank Financial Telecommunication, a global provider for secure
financial messaging services) to the overseas branches of a host of banks, including Axis
Bank and Allahabad Bank, totally side-stepping PNB's core banking system which would
have, in normal course, reflected these transactions. The overseas branches of Indian banks
transfer the money to PNB's Nostro account (meant to park overseas money meant for PNB's
customers), but even they overlook the mandatory requirements. No goods were imported.
Instead, the money extended to Modi was used to retire former outstanding bills or renew the
already existing loans, a process termed "evergreening".