International Equity Markets

– International equity markets are an important platform for global finance. They
not only ensure the participation of a wide variety of participants but also offer
global economies to prosper.
– To understand the importance of international equity markets, market
valuations and turnovers are important tools. Moreover, we must also learn
how these markets are composed and the elements that govern them. Cross-
listing, Yankee stocks, ADRs and GRS are important elements of equity markets.
Cross-listing

– Cross-listing refers to having the shares listed on one or more foreign exchanges. In particular, MNCs do
this generally, but non-MNCs also cross-list. A firm may decide to cross-list its shares for the following
reasons −
– Cross-listing provides a way to expand the investor’s base, thus potentially increasing its demand in a new
market.
– Cross-listing offers recognition of the company in a new capital market, thus allowing the firm to source
new equity or debt capital from local investors.
– Cross-listing offers more investors. International portfolio diversification is possible for investors when
they trade on their own stock exchange.
– Cross-listing may be seen as a signal to investors that improved corporate governance is imminent.
– Cross-listing diminishes the probability of a hostile takeover of the firm via the broader investor base
formed for the firm’s shares.
Yankee Stock Offerings

– In 1990s, many international companies, including the Latin Americans, have

listed their stocks on U.S. exchanges to prime market for future Yankee stock
offerings, that is, the direct sale of new equity capital to U.S. public investors.
One of the reasons is the pressure for privatization of companies. Another
reason is the rapid growth in the economies. The third reason is the expected
large demand for new capital after the NAFTA has been approved.
American Depository Receipts (ADR)

– An ADR is a receipt that has a number of foreign shares remaining on deposit with the U.S.
depository’s custodian in the issuer’s home market. The bank is a transfer agent for the ADRs
that are traded in the United States exchanges or in the OTC market.
– ADRs offer various investment advantages. These advantages include −
– ADRs are denominated in dollars, trade on a US stock exchange, and can be purchased through
the investor’s regular broker. This is easier than purchasing and trading in US stocks by entering
the US exchanges.
– Dividends received on the shares are issued in dollars by the custodian and paid to the ADR
investor, and a currency conversion is not required.
– ADR trades clear in three business days as do U.S. equities, whereas settlement of underlying
stocks vary in other countries.
American Depository Receipts (ADR)

– ADR price quotes are in U.S. dollars.

– ADRs are registered securities and they offer protection of ownership rights.
Most other underlying stocks are bearer securities.
– An ADR can be sold by trading the ADR to another investor in the US stock
market, and shares can also be sold in the local stock market.
– ADRs frequently represent a set of underlying shares. This allows the ADR to
trade in a price range meant for US investors.
– ADR owners can provide instructions to the depository bank to vote the rights.
American Depository Receipts (ADR)

– There are two types of ADRs: sponsored and unsponsored.

– Sponsored ADRs are created by a bank after a request of the foreign company.
The sponsoring bank offers lots of services, including investment information
and the annual report translation. Sponsored ADRs are listed on the US stock
markets. New ADR issues must be sponsored.
– Unsponsored ADRs are generally created on request of US investment banking
firms without any direct participation of the foreign issuing firm.
Global Registered Shares (GRS)

– GRS are a share that are traded globally, unlike the ADRs that are
receipts of the bank deposits of home-market shares and are
traded on foreign markets. The GRS are fully transferrable — GRS
purchased on one exchange can be sold on another. They usually
trade in both US dollars and euros.
– The main advantage of GRS over ADRs is that all shareholders have
equal status and the direct voting rights. The main disadvantage is
the cost of establishing the global registrar and the clearing facility.
International Equity Market Benchmark

– A benchmark is an unmanaged group of securities which are

considered as a 'benchmark' to measure a fund's/stock's
performance. Benchmarks are generally broad market indices like
BSE Sensex, CNX Nifty of the Indian stock market with which
mutual fund returns are compared.
– A benchmark indicates directly the fund manager's performance.
For instance, a mutual fund which outperforms the benchmark is a
sign of an efficient fund manager.
International Equity Market Benchmark
 ADRs are additionally categorized into three levels,
depending on the extent to which the foreign company has
accessed the U.S. markets:

Level I - This is the most basic type of ADR where foreign companies either don't
qualify or don't want to have their ADR listed on an exchange. This type of ADR can be
used to establish a trading presence but not to raise capital. Level I ADRs found only on
the over-the-counter market have the loosest requirements from the Securities and
Exchange Commission (SEC) – and they are typically highly speculative. While they are
riskier for investors than other types of ADRs, they are an easy and inexpensive way for
a foreign company to gauge the level of U.S. investor interest in its securities.
– Level II – As with Level I ADRs, Level II ADRs can be used to establish a trading
presence on a stock exchange, and they can’t be used to raise capital. Level II
ADRs have slightly more requirements from the SEC than do Level I ADRs, but
they get higher visibility and trading volume.
– Level III – Level III ADRs are the most prestigious. With these, an issuer floats a
public offering of ADRs on a U.S. exchange. They can be used to establish a
substantial trading presence in the U.S. financial markets and raise capital for
the foreign issuer. Issuers are subject to full reporting with the SEC.
Depositary
Receipts
Depositary
A depository is like a bank wherein the deposits are
securities (viz. shares, debentures, bonds,
government securities, units etc.) in electronic form
at the request of the shareholder through the
medium of a Depository Participant

If an investor wants to utilize the services offered by a

Depository, the investor has to open an account with
the Depository through a Depository Participant.
 Depositary Receipt
A Depositary Receipt is a negotiable security that represents an ownership interest in
securities of a foreign issuer typically trading outside its home market.

Depositary Receipts are created when a broker purchases a foreign company's shares on
its home stock market and delivers the shares to the depositary's local custodian bank,
and then instructs the depositary bank to issue Depositary Receipts.

In addition, Depositary Receipts may also be purchased in the secondary trading market.

They may trade freely, just like any other security, either on an exchange or in the over-
the-counter market and can be used to raise capital.

ADRs were the first type of depositary receipt to evolve. They were introduced in 1927 in
response to a law passed in Britain, which prohibited British companies from registering
shares overseas without a British-based transfer agent.
• DRs are traded on Stock Exchanges in the US,
Singapore, Luxembourg, London, etc.

• DRs listed and traded in US markets are

known as American Depository Receipts
(ADRs) and those listed and traded elsewhere
are known as Global Depository Receipts
(GDRs). In Indian context, DRs are treated as
FDI
 INTERNATIONAL CAPITAL MARKET

INTERNATIONAL BOND MARKET INTERNATIONAL EQUITY MARKET

FOREIGN
EURO BOND BOND GDR ADR
 Types of DRs

Sponsored DRs Unsponsored DRs

Issued by one depository Set up at the request of 3rd

appointed by the
company
under a Deposit Agreement
or service contract
May be issued in different
levels (level I, II or III)
party without any formal
agreement with company
Issued by one or more
depositories in response to
market demand

Company bears all expenses 3rd party pays all set up and
maintenance expenses
New capital may also
No new capital is raised
be
raised under this option
 Issuer

Existing Shares Only Selling New Shares

(Non-Capital Raising Transactions) (Capital Raising Transactions)

Level I ADR
Over-the-Counter (OTC) Traded

Level I GDR Level III ADR

Unlisted
U.S. Listed

Level II ADR
U.S. Listed Level III GDR
Internationally Listed
Level II GDR
Internationally Listed

Rule 144A - Rule 144A ADR, or restricted ADR (RADR) are simply privately placed depositary
receipts which are issued and traded in accordance with Rule 144A. Under this program, DRs are
privately placed in the U.S. to Qualified Institutional Buyers (QIBs)

Regulation S – Regulation S programs provide for the placement of Depository Receipts offshore
to Non-US investors in compliance with SEC Regulation S
 AMERICAN DEPOSITORY
RECEIPTS
• ADR is a dollar-denominated negotiable
certificate. It represents a non-US company’s
publicly traded equity. It was devised in the late
1920s to help Americans invest in overseas
securities and to assist non-US companies
wishing to have their stock traded in the
American Markets.
• ADR were introduced as a result of of the
complexities involved in buying shares in foreign
countries and the difficulties associated with
trading at different prices and currency values.
Levels of ADR
• Level Level 1 depositary receipts are the lowest
level
1- of sponsored ADRs that can be issued. When a
company issues sponsored ADRs, it has one
designated depositary who also acts as its transfer
agent.
• Level 1 shares can only be traded on the OTC market
and the company has minimal reporting requirements
with the U.S. Securities and Exchange Commission
[SEC].
• Level 2- Level 2 depositary receipt programs are more
complicated for a foreign company. When a foreign
company wants to set up a Level 2 program, it must
file a registration statement with the U.S. SEC and is
under SEC regulation.
• The advantage that the company has by upgrading
their program to Level 2 is that the shares can be
listed on a U.S. stock exchange. These exchanges
include the New York Stock Exchange (NYSE),
NASDAQ, and the American Stock Exchange (AMEX).

• Level 3- A Level 3 American Depositary Receipt

program is the highest level a foreign company can
sponsor. Because of this distinction, the company is
required to adhere to stricter rules that are similar to
those followed by U.S. companies.

• Foreign companies with Level 3 programs will often

issue materials that are more informative and are
more accommodating to their U.S. shareholders
because they rely on them for capital
 What is a GDR?

• It is an instrument in the form of a depository

receipt or certificate created by the Overseas
Depository Bank outside India and issued to
Non- resident investor against the issue of
ordinary shares or Foreign Currency
Convertible Bonds of Issuing Company.
DIFFERNCE BETWEEN ADR & GDR
ADR
American depository receipt (ADR) is
compulsory for non –us companies to
trade in stock market of USA.
ADRs can get from level 1 to level III.
ADRs up to level –I need to accept only GDRs can only be issued under rule
general condition of SEC of USA.
ADR is only negotiable in USA .
Investors of USA can buy ADRs from
New york stock exchange (NYSE)
or NASDAQ
GDR
Global depository receipt (GDR) is
compulsory for foreign company to
access in any other country’s share
market for dealing in stock.
GDRs are already equal to high
preference receipt of level II and level
III.
144 A after accepting strict rules of
SEC of USA .
GDR is negotiable instrument all over
the world
Investors of UK can buy GDRs from London
stock exchange and luxemberg stock
exchange and invest in Indian companies
without any extra responsibilities .
ADVANTAGES OF ADR/GDR
• Can be listed on any of the overseas
stock exchanges /OTC/Book entry transfer
system.
• Freely transferable by non-resident.
• They can be redeemed by ODB.
• The ODB should request DCB to get the
corresponding underlying shares released in
favor of non resident of investors.
(Shareholders of issuing companies).
 Benefits to the Company

• Expanded market share through broadened and

more diversified investor exposure with potentially
greater liquidity, which may increase or stabilize the
share price
• Enhanced visibility and image for the company’s
products, services and financial instruments in a
marketplace outside its home country
 Company Benefits
(cont’d)

• Flexible mechanism for raising capital and a vehicle

or currency for mergers and acquisitions

• Enables employees of U.S. subsidiaries of non-U.S.

companies to invest more easily in the parent
company
 Benefits to the
Investor
• Quotation in U.S. dollars and payment of dividends or interest
in U.S. dollars (or in general, a persons home currency)

• Diversification without many of the obstacles that mutual

funds, pension funds and other institutions may have in
purchasing and holding securities outside of their local market
 Investor Benefits
(cont’d)

• Elimination of global custodian safekeeping charges,

potentially saving Depositary Receipt investors up to 10 to
40 basis points annually

• Familiar trade, clearance and settlement procedures

 Investor Benefits (cont’d)

• Competitive U.S. dollar/foreign exchange rate conversion for

dividends and other cash distributions

• Ability to acquire the underlying securities directly upon

cancellation
A prospectus is the company’s information and sales document which enables
market participants to create opinions and decide whether to participate in the
offering.
A DR prospectus must include the necessary information that enables investors to make an
informed assessment of
the assets and liabilities, financial position, profits and losses and prospects of the Company and,
the rights attached to the DRs.

An operating and financial review, audited financial information for the last three financial
years or such shorter period as the Company has been in operation. In case the prospectus is
more than nine months after the end of last financial year, unaudited half year accounts will
also be included.
The prospectus also requires details of any material contracts.
Prospectus should also include a summary describing the Company that includes any risks
associated with investing in the Company.
 Indian Companies using
ADR/GDR
COMPANY ADR GDR

Bajaj Auto No Yes

Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
VSNL Yes Yes
WIPRO Yes Yes
Why do Indian Co’s opt for
GDR

– Through an ADR, companies can only tap the American markets, while GDRs
give the companies more flexibility in terms of markets.
– European markets are more liberal than the American markets.
– Companies get more flexibility in terms of currencies as well.
– Companies here want to capitalise on foreign investor interest as much as
possible.
– The need of Indian corporates for funds is so huge and with debt being very
expensive.
 IDR
Indian Depository Receipts (IDRs), the Indian counterparts of ADRs or GDRs
were introduced in 2004, stipulated in the Companies (Issue of Indian
Depository Receipts) Rules, 2004. IDR is a derivative instrument in the form of
depository receipt created by the domestic depository in India against the
underlying equity shares of the issuing company.

In the year 2000, Section 605 A of the Companies Act, 1956 was introduced
and it is the first step to give foreign companies access to raise capital via the
Indian stock market was taken.
Issuers Eligibility Criteria.
Must have an average; turn over of US$ 500 million during the previous 3
financial years.
Must have capital and free reserves which must aggregate to atleast US$100
million.
Must be making a profit for the previous 5 years and must have declared a
dividend of 10% in each such year.
The pre issue debt-equity ratio must be not more than 2:1.
Must be listed in its home country.
Must not be prohibited by any regulatory body to issue
securities
Must have a good track record with compliance
with securities market
regulations.
Must comply with any additional criteria set by SEBI.
Who can Invest?
Indian Companies
Qualified Institutional Buyers
NRI’s and FII’s with permission of the Reserve Bank Of India.
The Issue
The minimum issue size is Rs. 50 crores,
90% of the issue must be subscribed.
Automatic fungibility is not permitted.
The following conditions would also apply:
In one financial year the market cap cannot exceed 15 % of the
paid up capital and free reserves of the issuer
Redemption into underlying shares is prohibited for 1 year,
beginning the issue date.
Repatriation of proceeds is subject to Indian foreign exchange
laws, prevailing at time of repatriation.
The issue must be in rupees.
The issuer is subject to Clause 49 of the listing agreement.
Rights of IDR holders
An IDR holder will be entitled to rights on an equitable
basis vis-à-vis the rights of shareholders of the issuer
company in its home country.
Some of the rights of the IDR holders include:
−Voting.
−Entitlement to bonus issues.
−Entitlement to dividends.
−Participation in rights issues.
−Participation in sub-divisions and consolidations of
underlying equity shares.
−Participation in other distributions and corporate
actions.
Major Countrywide ADR-GDR Issues
Amount of Capital Raised ( In Billion USD)
Countrywide
Global Depositary Receipt (GDR) Stock Prices
This list gives you a Current Market Price (US $), P/E, Change (US $) and % Change.

Company CMP(US$) PE Chg(US$) Chg(%)

Dr. Reddy's (A) 38.70 58.85 0.11 0.3
GAIL (G) 32.35 17.73 1.09 3.5
Grasim Industries (G) 44.22 13.03 2.13 5.0
ICICI Bank (A) 32.11 28.02 0.93 3.0
Infosys Tech (A) 49.15 28.98 0.25 0.5
Instanex Skindia DR Index 2,077.79 23.81 41.38 2.0
ITC (G) 5.48 35.58 [0.01] [0.1]
L & T (G) 13.35 12.46 0.67 5.3
Mahindra & Mah. (G) 13.88 16.71 0.47 3.5
Ranbaxy Labs (G) 5.85 -23.71 0.29 5.2
Reliance (G) 27.55 18.73 1.10 4.2
Satyam Computers (A) 2.64 4.60 0.00 0.0
State Bank of India (G) 54.00 10.52 1.44 2.7
Sterlite Industries (A) 6.22 54.55 0.00 0.0
Tata Communications (A) 4.50 9.29 0.00 0.0
Tata Motors (A) 28.01 52.73 0.71 2.6
INTERNATIONAL BOND MARKET

– An international bond is a debt obligation that is issued in a country by a non-domestic

entity in its native currency.
– International bonds are usually corporate bonds.
– International bonds can offer portfolio diversification, but are highly subject to
currency risk.
– A bond market is much larger than equity markets, and the investments are huge too.
However, bonds pay on maturity and they are traded for short-time before maturity in
the markets.
– Bonds also have risks, returns, indices, and volatility factors like equity and money
markets.
TYPES OF BONDS

BONDS

DOMESTIC FOREIGN EURO

DOMESTIC BONDS

– Domestic bonds trade is a part of the international bond market. Domestic

bonds are dealt in local basis and domestic borrowers issue the local bonds.
Domestic bonds are bought and sold in local currency.
– For example: A British company issues debt in the United Kingdom with the
principal and interest payments based or denominated in British pounds.
Foreign Bonds

– In foreign bond market, bonds are issued by foreign borrowers. Foreign bonds normally
use the local currency. The concerned local market authorities supervise the issuance and
sale of foreign bonds.
– Foreign bonds are traded in the foreign bond markets. Some special characteristics of the
foreign bond markets are −
– Issuers of bonds are usually governments and private sector utilities.
– It is a standard practice to underwrite and organize underwriting the risks.
– Issues are generally pledged by the retail and the institutional investors.
– In the past, Continental private banks and old merchant houses in London linked the
investors with the issuers.
Eurobonds

– Eurobonds are not sold in any specific national bond market. A group of
multinational banks issue Eurobonds. A Eurobond of any currency is sold
outside the nation that has the currency. A Eurobond in the US dollar would not
be sold in the United States.

– The Euromarket is the trading place of Eurobonds, Eurocurrency, Euronotes,

Eurocommercial Papers, and Euroequity. It is commonly an offshore market.
Fixed Rate Bond

A fixed rate bond is a bond that pays the same level of interest over its entire term. An
investor who wants to earn a guaranteed interest rate for a specified term could
purchase a fixed rate bond in the form of a Treasury, corporate bond, municipal bond,
or certificate of deposit (CD). Because of their constant and level interest rate, these
are known broadly as fixed-income securities.
– Fixed rate bonds can be contrasted with floating or variable rate bonds.
– Upon maturity of the bond, holders will receive back the initial principal amount in
addition to the interest paid.
– Typically, longer-term fixed-rate bonds pay higher interest rates that short-term
ones.
Floating-rate Note (FRN

– A floating-rate note (FRN) is a debt instrument with a variable interest rate. The
interest rate for an FRN is tied to a benchmark rate. Benchmarks include the
U.S. Treasury note rate, the Federal Reserve funds rate—known as the Fed
funds rate—the London Interbank Offered Rate (LIBOR), or the prime rate.

– Floating rate notes or floaters can be issued by financial institutions,

governments, and corporations in maturities of two-to-five years.
Convertible Bonds

– Convertible bonds are corporate bonds that can be exchanged for common stock in
the issuing company.
– Companies issue convertible bonds to lower the coupon rate on debt and to delay
dilution.
– A bond's conversion ratio determines how many shares an investor will get for it.
– Companies can force conversion of the bonds if the stock price is higher than if the
bond were to be redeemed.
– Because convertibles can be changed into stock and, thus, benefit from a rise in the
price of the underlying stock, companies offer lower yields on convertibles. If the
stock performs poorly, there is no conversion and an investor is stuck with the
bond's sub-par return—below what a non-convertible corporate bond would get.
Zero-coupon Bond

– A zero-coupon bond is a debt security instrument that does not pay interest.
– Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at
maturity.
– The difference between the purchase price of a zero-coupon bond and the par
value, indicates the investor's return.
– Some bonds are issued as zero-coupon instruments from the start, while others
bonds transform into zero-coupon instruments after a financial institution strips
them of their coupons, and repackages them as zero-coupon bonds. Because they
offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price,
much more so than coupon bonds.
Stripped Bond

– Stripped bond: Bond that can be subdivided into a series of zero-coupon bonds.
– A bond, especially a U.S. Treasury security, that is traded separately from its coupons
such that it pays no interest. Strip bonds are sold at a significant discount from par
and mature at par. They fluctuate in price, sometimes dramatically, because changes
in interest rates make them more or less desirable. They can be placed in IRAs and
other pension accounts; however, unlike other Treasury securities, they are subject to
federal taxes. Generally speaking, strip securities are quoted according to their yields
rather than their prices. In 1985, the U.S. Treasury began issuing its own strip bonds,
called STRIPS, which replaced other vehicles, such as CATS and TIGRS, that had been
issued by the Treasury and stripped by another party.
Dual-Currency Bond

– A debt security that pays coupon interest in one currency and the principal in a 
different currency. Several variations of dual-
currency bonds are issued, including some that specify the exchange rate at whi
ch currencies are converted for payments.
– A dual currency bond is a synthetic security that is redeemed in one currency
while interest payments over the life of the bond are made in another currency.
For example, a bond issued in U.S. Dollars (USD) that pays interest in Japanese
Yen (JPY) is considered a dual currency bond.
Composite Currency Bonds

– Composite currency bonds are denominated in a currency basket, such as SDRs

or ECUs, instead of a single currency. They are frequently called currency
cocktail bonds. They are typically straight fixed-rate bonds. The currency
composite is a portfolio of currencies: when some currencies are depreciating
others may be appreciating, thus yielding lower variability overall.
EURO BONDS
EURO BONDS

– A eurobond issue may be used to finance a company's expansion into a foreign

market.
– The bond raises the money needed in the currency that is needed, without the
forex risk.
– An investor may gain exposure to a foreign market while investing in an
established domestic company.
Advantages of Eurobonds:

The Eurobonds market possesses several advantages for borrowers and investors.
– The advantages of Eurobonds to borrowers are:
• The size and depth of the market are such that it can absorb large and frequent
issues.
• The Eurobond market has freedom and flexibility not found in domestic
markets.
• The cost of the issue of Eurobonds, around 2.5 percent of the face value of the
issue.
• Maturities in the Eurobond market are suited to long-term funding
requirements.
• A key feature of the Eurobond market is the development of a sound
institutional framework for underwriting, distribution, and the placing of
The advantages of Eurobonds to
investors are
– Euro bonds are issued in such a form that interest can pay free of income or
withholding taxes of the borrowing countries. Also, the bonds issued in bearer
form and are held outside the country of the investor, enabling the investor to
evade domestic income tax.
– Issuers of Eurobonds have a good reputation for creditworthiness.
– A special advantage to borrowers as well as lenders provides by convertible
Eurobonds. Holders of convertible debentures give an option to exchange their
bonds at a fixed price.
– The Eurobond market is active both as a primary and as a secondary market.
The following Eurobonds features are:

– The issuing technique takes the form of a placing rather than formal issuing, this
avoids national regulations on new issues.
– Eurobonds place simultaneously in many countries through syndicates of
underwriting banks. Which sells them to their investment clientele throughout
the world.
– Unlike foreign bonds, Eurobonds sale in countries other than that of the currency
of denomination; thus dollar-denominated Eurobonds sale outside the U.S.A.
– The interest on Eurobonds is not subject to withholding tax.
– Advantages of Eurobonds:
– This bond is subject to the regulations imposed on all securities traded in the national market and sometimes to special
regulations and disclosure requirements governing foreign borrowers. Many of these issues have colorful nicknames such as:

– Yankee bonds: dollar-denominated bonds which are issued by non-American borrowers in the U.S. market.

– Samurai bonds: yen-denominated bonds which are issued by non-Japanese borrowers in the Japanese market.

– Bulldog bonds: pound sterling-denominated bonds which are issued by non-British borrowers in the British market.

– Heidi bonds: franc-denominated bonds which are issued by non-Swiss borrowers in the Swiss market.

– Rembrandt bonds: guilder (now euro)-denominated bonds which are issued by non-Dutch borrowers in the Dutch market.

– Matador bonds: peseta (now euro)-denominated bonds which are issued by non-Spanish borrowers in the Spanish market.

For example, in the United States, Yankee bonds are registered with the Securities and Exchange Commission (SEC), and like other
U.S. bonds, their interest is paid semiannually. Sovereign government issues or issues guaranteed by sovereign governments tend to
denominate the Yankee bond market.
 FCCB

– A FCCB is issued as a bond by an Indian company is expressed in foreign currency and the principal
and interest too are payable in foreign currency.
– The maximum tenure of the bond is 5 years. FCCB is a quasi-debt investment, which can be converted
into equity shares at the choice of investors either immediately after issue, or upon maturity or during
a set period, at a predetermined strike rate or a conversion price.
– It acts like a bond by making regular interest and principal payments, but these bonds also
– The investor benefits if the conversion price is higher than the traded price and vice versa. give the
bond holder an option to convert the bond into shares.
– The conversion price is set at a premium over the current stock price, or is set by a formula based on
the price at the time of redemption.
FEATURES OF FCCBS

– The convertibility of the bond is akin to a put option to the bond holder, as he can redeem the bond
while opting for conversion.
– As an investor in the equity, the bond holder has a call option, in the sense that he has the right to
buy equity at the set price.
– This hybrid product offers many of the advantages of both equity and debt.
– It gives the investor much of the upside of investment in equity and the debt element protects the
downside.
– The FCCB is a quasi-equity instrument which accords the benefit of debt market.
– The FCCB may carry a coupon rate or can be zero coupon.
In case the bond is not a zero coupon, the issuer would be under obligation to pay the coupon rate at
agreed intervals.
 ADVANTAGES OF FCCB

To Issuing Company:
– 1. The company gains high leverage as debt is reduced and equity capital is enhanced upon conversion.
– 2. The impact on cash flow is positive as most companies issue FCCB with a redemption premium, which is payable
on maturity, only if the stock price is less than the conversion price.
– 3. FCCB do not dilute ownership immediately, as the holder of ADR/GDR do not have voting rights.
– 4. The conversion premium adds to the capital reserve of the company.
– 5. The coupon rate is lower than the traditional bank finance, thereby reducing the debt financing costs.
– 6. The issue of FCCBs do not receive credit rating.

To Investors:
– 1. FCCB offers dual advantage of debt and equity to the investors. Thus, guaranteed returns in the form of coupon
or YTM, and at the same time, an option to take advantage of upside in the price of the stock.
 DISADVANTAGES OF FCCB

1. FCCB when converted into equity brings down the earnings per share, and will also dilute the
ownership.
2. In a falling stock market, there will be no demand for FCCB.
3. FCCB may remain as debt and not get converted at all.
4. FCCB is shown as debt on balance sheet until conversion.
5. In case of redemption, cash outflow is heavy in one financial year, unlike traditional debt which has
regular repayment.
6. Any depreciation in rupee against the designated foreign currency may make the interest and
principal repayment costly.
7. The end use of proceeds is restricted.
8. The issuer does not control conversion.
9. The book value of converted shares depends on prevailing exchange rates.
10. The cost ultimately dependent on share price development.
 Foreign Currency Exchangeable Bonds (FCEB)

– A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different than the issuer’s
domestic currency.
– In other words, the money being raised by the issuing company is in the form of foreign currency.
– A convertible bond is a mix between a debt and equity instrument. 
– It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the
option to convert the bond into stock.
– For example, an American listed company that issues a bond in India in rupees has, in effect, issued an FCCB.
– Foreign currency convertible bonds are typically issued by multinational companies operating in a global space and
looking to raise capital in foreign currencies.
– FCCB investors are usually hedge fund arbitrators and foreign nationals.
– These bonds can be issued along with a call option (whereby the right of redemption lies with the bond issuer) or put
options (whereby the right of redemption lies with bondholder).
 FEATURES OF FCEB

1. FCEBs are financial instruments similar to FCCBs in nature.

2. FCEBs will allow corporate to raise money from overseas markets by issuing bonds.
3. In case of FCCBs, bonds can be converted into equity shares of the issuing company. But in case FCEBs, the bonds can
be converted into shares of a group company of the issuer.
4. The issuing company shall be part of the promotor group of the offered company.
5. The offered company mean an Indian company whose equity shares shall be offered in exchange of FCCB.
6. The issuing company mean an Indian company whose equity shares shall be offered in exchange of FCCB.
7. The offered company shall be a listed company which is engaged in a sector eligible to receive Foreign Direct
Investment (FDI) and eligible to issue or avail of FCCB or External Commercial Borrowing (ECBs).
8. Wherever needed prior approval of Foreign Investment Promotion Board (FIPB) shall be obtained under Foreign
Direct Investment Policy.
 There are following differences between
FCCBs and FCEBs
1. The essentials differences between an FCCB and FCEB lies in their convertibility. Unlike an FCCB which is convertible into new
shares of the issuing company, an FCEB is convertible into existing shares of the offered company held by the issuing company.
2. The shares issued on conversion of FCCB would be issued a fresh by issuing company on conversion, whereas when the
investor in FCEB want shares in exchange, he has to approach to issuing company which has already hold shares of offered listed
company.
3. The Company that issue FCCB and the Company that issue shares on conversion are same and one whereas in case of FCEB the
Company that issue FCEB and the Company whose shares are offered on exchange will be different but should belong to the
same promoter group.
4. FCCBs are issued by an Indian Company to a person resident outside India giving them an option to convert them into shares
of the company at a pre determined price. On the other hand, FCEBs are issued by Indian Investment Company or Holding
Company of a group to non-resident which are exchangeable for the shares of a specified group company at a pre determined
price.
5. In case of FCCBs issue, there is a change in the shareholding of issuing company on the other hand, in case of FCEBs issue
there is no changes in the shareholding of issuing company.
 Participatory Notes (P Notes)

– Participatory notes also referred to as P-Notes, or PNs, are financial instruments required by investors or
hedge funds to invest in Indian securities without having to register with the Securities and Exchange
Board of India (SEBI). P-Notes are among the group of investments considered to be Offshore Derivative
Investments (ODIs). Citigroup (C) and Deutsche Bank (DB) are among the biggest issuers of these
instruments.
– Any dividends or capital gains collected from the securities goes back to the investors. Indian regulators
are generally not in support of participatory notes because they fear that hedge funds acting through
participatory notes will cause economic volatility in India's exchanges.
P-Notes

– Foreign institutional investors (FIIs), issue the financial instruments to investors in

other countries who want to invest in Indian securities. An FII is an investor or
investment fund registered in a country outside of the one in which it is investing.
– This system lets unregistered overseas investors buy Indian shares without the
need to register with the Indian regulatory body. These investments are also
beneficial to India. They provide access to quick money to the Indian capital
market. Because of the short-term nature of investing, regulators have fewer
guidelines for foreign institutional investors. To invest in the Indian stock markets
and to avoid the cumbersome regulatory approval process, these investors trade
participatory notes.
 Advantages of participatory notes

– Anonymity: Any entity investing in participatory notes is not required to register with SEBI, whereas all
FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations
without disclosing their identity.
– Ease of trading: Trading through participatory notes is easy because they are like contract notes
transferable by endorsement and delivery.
– Tax saving: Some of the entities route their investment through participatory notes to take advantage of
the tax laws of certain preferred countries.
 Disadvantages of P-notes

– Indian regulators are not very happy about participatory notes because they
have no way to know who owns the underlying securities. It is alleged that a lot
of unaccounted money made its way to the country through the participatory
note route.

– SEBI has no jurisdiction over participatory note trading. Although foreign

institutional investors must register with the Indian regulatory board, the
participatory notes trading among foreign institutional investors are not
recorded. (Mar 31, 2020)
– https://www.youtube.com/watch?v=OfnM4x8Qg58

– https://www.youtube.com/watch?v=WIJMkoMoPUI