International

Sources of Fund
International Money Market
 Eurocurrency is a time deposit in an
international bank located in a country different
than the country that issued the currency.
 For example, Eurodollars are U.S. dollar-
denominated time deposits in banks located abroad.
 Euroyen are yen-denominated time deposits in
banks located outside of Japan.
 The foreign bank doesn’t have to be located in
Europe.

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 Eurocurrency Market
 Most Eurocurrency transactions are interbank transactions in
the amount of $1,000,000 and up.
 The rate charged by banks with excess funds is referred as
Interbank offered rate. They accept interbank deposits at
Interbank bid rate
 Common reference rates include
 LIBOR the London Interbank Offered Rate
 PIBOR the Paris Interbank Offered Rate
 SIBOR the Singapore Interbank Offered Rate
 A new reference rate for the new euro currency
 EURIBOR the rate at which interbank time deposits of
are offered by one prime bank to another. 3
 Eurocredits
 Eurocredits are short- to medium-term loans of
Eurocurrency (International currency).
 The loans are denominated in currencies other than
the home currency of the Eurobank (Prime Banks).
 Often the loans are too large for one bank to
underwrite; a number of banks form a syndicate to
share the risk of the loan.
 Eurocredits feature an adjustable rate. On Eurocredits
originating in London the base rate is LIBOR.

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 Forward Rate Agreements
 FRA is an interbank contract that allows the Eurobanks to
the interest rate risk in mismatched deposits and credit,
involves two parties, a buyer and a seller.
 The buyer agrees to pay the seller the increased interest
cost on a notational amount if interest rates fall below an
agreed rate.
 The seller agrees to pay the buyer the increased interest
cost if interest rates increase above the agreed rate.

5
 Euronotes
 Euronotes are short-term notes underwritten by
a group of international investment banks or
international commercial banks.
 They are sold at a discount from face value and
pay back the full face value at maturity.
 Maturity is typically three to six months.

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 Euro commercial Paper
 Unsecured short-term promissory notes issued by
corporations and banks.
 Placed directly with the public through a dealer.
 Maturities typically range from one month to six
months.
 Eurocommercial paper, while typically U.S. dollar
denominated, is often of lower quality than U.S.
commercial paper—as a result yields are higher.

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The World’s Bond Markets
 A statistical Perspective:
 The total market value of the world’s bond
markets are about 50% larger than the world’s
equity markets.
 Most issues are denominated in U.S. dollars,
Japanese Yen are second, followed by
Deutchmarks in a distant third.

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 Foreign Bonds and Eurobonds
Foreign Bond:
- Issued by a foreign borrower to investors in another country
and denominated in the currency of that country.
- Investors view it as a debt instrument issued by a foreign
instead of a domestic borrower.
- Ford issues offers a bond denominated in SFs to Swiss
investors.

Eurobond:
- Denominated in a specific currency, but sold to investors in
a national capital market other than the country of the
denominated currency.
- Swiss borrower issues $-denominated bonds to investors in
UK, India,and Japan. 9
 Example
 State Bank of India 's €750 million ($1.02 billion) five-year bond, the largest
euro-denominated bond from an Indian borrower, is the latest sign that
issuers from Asia's third-largest economy are growing more ambitious in the
offshore bond market. (The WSJ 2010)

 The deal follows last month's $1 billion offering of 10-year offshore bonds
from ICICI Bank Ltd., the longest maturity to date for an Indian issuer and
an indication that investors are becoming more comfortable with India
credits. (The WSJ 2010)

10
 Global Bonds
 A global bond is a very large international bond
offering by a single borrower that is simultaneously
sold in North America, Europe and Asia.
 Mostly institutional investors are the purchasers so
far.
 SEC Rule 415 and 144A have likely facilitated global
bond offerings, and more can be expected in the
future.

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Types of Instruments
 Straight Fixed Rate Debt
 Floating-Rate Notes
 Equity-Related Bonds
 Zero Coupon Bonds
 Dual-Currency Bonds
 Composite Currency Bonds

12
 Straight Fixed Rate Debt
 These are “plain vanilla” bonds with a
specified coupon rate and maturity and no
options attached.
 Since most Eurobonds are bearer bonds,
coupon dates tend to be annual rather than
semi-annual.
 The vast majority of new international bond
offerings are straight fixed-rate issues.
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 Floating-Rate Notes
 Just like an adjustable rate mortgage.
 Common reference rates are 3-month and 6-month
U.S. dollar LIBOR
 Common reference rates are 3-month and 6-month
U.S. dollar LIBOR
 Coupon Payment (6mo.) = 0.5 x (LIBOR + X)
X = default risk premium(%); LIBOR resets.
 Since FRN reset every 6 or 12 months, the
premium or discount is usually quite small…as long
as there is no change in the default risk. 14
 Equity-Related Bonds
 Convertibles
 Convertible bonds allow the holder to surrender
his bond in exchange for a specified number of
shares in the firm of the issuer.
 Bonds with equity warrants
 These bonds allow the holder to keep his bond
but still buy a specified number of shares in the
firm of the issuer at a specified price.
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 Zero Coupon Bonds
 Zeros are sold at a large discount from face value
because there is no cash flow until maturity.
 In the U.S., investors in zeros owe taxes on the
“imputed income” represented by the increase in
present value each year, while in Japan, the gain is
a tax-free capital gain.
 Pricing is very straightforward: PV  PAR
(1  r )T

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 Dual-Currency Bonds
 A straight fixed-rate bond, with
interest paid in one currency, and
principal in another currency.
 Japanese firms have been big issuers with
coupons in yen and principal in dollars.
 Good option for a MNC financing a foreign
subsidiary.
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Composite Currency Bonds
 Denominated in a currency basket, like
the SDRs or ECUs instead of a single
currency.
 Often called currency cocktail bonds.
 Typically straight fixed rate debt.

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 Characteristics of International
Bond Market Instruments
Instrument Frequency of Size of Payoff at
Payment Coupon Maturity
Straight Fixed-Rate Annual Fixed Currency of issue

Floating Rate Note Every 3 or 6 months Variable Currency of issue

Convertible Bond Annual Fixed Currency of issue

or conversion to
equity shares.
Straight fixed rate Annual Fixed Currency of issue
with equity warrants plus conversion to
equity shares.
Zero none zero Currency of issue

Dual Currency Bond Annual Fixed Dual currency

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International Bond Market
Credit Ratings
 Fitch IBCA, Moody’s and Standard &
Poor’s sell credit rating analysis.
 Focus on default risk, not exchange rate
risk.
 Assessing sovereign debt focuses on
political risk and economic risk.

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International Bond Market Indices
 There are several international bond market
indices.
 J.P. Morgan and Company
 Domestic Bond Indices
 International Government bond index for 18
countries.
 Widely referenced and often used as a
benchmark.
 Appears daily in The Wall Street Journal
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Trading in International
Equities
 Magnitude of International Equity
Trading
 Cross-Listing of Shares
 Yankee Stock Offerings
 The European Stock Market
 American Depository Receipts

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Magnitude of International
Equity Trading
 During the 1980s world capital markets
began a trend toward greater global
integration.
 Diversification, reduced regulation,
improvements in computer and
communications technology, increased
demand from MNCs for global issuance.

23
Cross-Listing of Shares
 Cross-Listing refers to a firm having its
equity shares listed on one or more
foreign exchanges.
 The number of firms doing this has
exploded in recent years.

24
Advantages of Cross-Listing
 It expands the investor base for a firm.
 Establishes name recognition for the firm
in new capital markets, paving the way
for new issues.
 May offer marketing advantages.
 May mitigate possibility of hostile
takeovers.

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Yankee Stock Offerings
 The direct sale of new equity capital to
U.S. public investors by foreign firms.
 Privatization in South America and Eastern
Europe
 Equity sales by Mexican firms trying to cash
in on NAFTA

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The European Stock Market
 There is not as yet a single European stock
market that comprises all national markets.
 NASDAQ Europe hopes to become a pan-

European stock market that operates

independently of any national European
exchange.
 All trading is denominated in the euro.

 It expects to offer trading in both European and

U.S. stocks.
www.NasdaqEurope.com
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American Depository Receipts
 Foreign stocks often trade on U.S.
exchanges as ADRs.
 It is a receipt that represents the number
of foreign shares that are deposited at a
U.S. bank.
 The bank serves as a transfer agent for
the ADRs

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American Depository Receipts
 There are many advantages to trading
ADRs as opposed to direct investment in
the company’s shares:
 ADRs are denominated in U.S. dollars, trade
on U.S. exchanges and can be bought
through any broker.
 Dividends are paid in U.S. dollars.
 Most underlying stocks are bearer
securities, the ADRs are registered.
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North American Equity Market
Benchmarks
Name Symbol
Dow Jones Industrial Average DJIA

NASDAQ Combined CCMP

Composite
S&P 500 SPX

TSE 300 TS300

Mexico BOLSA Index MEXBOL

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European Equity Market
Benchmarks
Name Symbol

FT-SE 100 UKX

CAC 40 CAC

Frankfurt DAX Index DAX

IBEX Index IBEX

Milan MIB30 MIB30

BEL20 Index BEL20

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Asia/ Pacific Rim Equity Market
Benchmarks
Symbol
Name
NIKKEI 225 Index NKY

Hang Seng Index HSI

Sing Straits Times Index STI

ASX All Ordinaries Index AS300

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World Equity Benchmark
Shares
 World Equity Benchmark Shares (WEBS)
 Country-specific baskets of stocks designed
to replicate the country indexes of 14
countries.
 WEBS are subject to U.S. SEC and IRS
diversification requirements.
 Low cost, convenient way for investors to
hold diversified investments in several
different countries.

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 Indian ADRs listed on NYSE
Indian Company Symbol Industry Year of ADR issue Amount raised
Dr. Reddy’s RDY Pharmaceutical 2001, 132 mn,
Laboratories Ltd 2006 228 mn
HDFC Bank Ltd HDB Banks 2001, 172 mn,
2005, 300 mn,
2007 607 mn
ICICI Bank Ltd IBN Banks 2000, 152 mn,
Mar 2005, 466 mn,
Dec 2005, 433 mn,
2007 2.46 bn
Patni Computers PTI Software 2005 160 mn
Ltd
Satyam Computer SAY Technology 2001, 162 mn,
Services Limited Services 2005 322 mn

Sterlite Industries SLT Metallurgy 2007, 2.0 bn,

Ltd 2009 1.60 bn
WIPRO WIT Technology 2000 500 mn
Technologies Ltd Services 34
 Indian ADRs listed on NASDAQ
Indian Year of ADR Amount
Company Symbol Industry issue raised
Infosys INFY Technology 2005, 883 mn,
Technologies Services 2006 1.60 bn
Limited

Rediff.com REDF Technology 2000, 55 mn,

India Ltd Services 2005 48 mn

SIFY Ltd SIFY Technology 2000 44.3 mn

Services
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 Fund Raising by Indian Co. (2013)
• India Inc raised over $ 3.71 billion from overseas markets in July
2013 through external commercial borrowings (ECBs) and foreign
currency convertible bonds (FCCBs).

• In June 2013, the Indian companies had raised $ 1.95 billion through
the ECB and FCCB route.

• Under the automatic route, as many as 72 companies raised $ 1.39

billion through the automatic route which does not require approval
from the Reserve Bank of India (RBI) or the government on Sept 3
2013

• Under the approval route, ten companies raised around $ 2.32 billion
through ECBs/FCCBs
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 Fund Raising by Indian Co.
Reliance Industries raised a total of $ 2.15 billion in two separate tranches of $ 2
billion and $ 150 million through the ECB route for import of capital goods under
the approval route.
Also under the approval route, Delhi International Airport raised $ 108 million for
refinancing of rupee loans and Datamatics Global Services raised $ 10 million for
overseas acquisition.
Under the automatic route, Indian Oil Corporation raised $ 500 million for rupee
expenditure,
Dr Reddy's Laboratories raised $ 150 million for overseas acquisition and
NTPC Limited raised $ 124.29 million power projects.
Ultratech Cement raised $ 50 million for modernisation and Kindle Engineering &
Constructions raised $ 48 million for import of capital goods.
Shreya Life Sciences and Honda Cars India raised $ 30 million each for overseas
expenditure and rupee expenditure respectively under the automatic route.

37
 Fund Raising by Indian Co.
 The $1.5 billion (Rs.7,305 crore) ADS issue of Sterlite Industries, a subsidiary of London-
listed Vedanta Resources Plc. and India’s largest copper producer, closed in just six hours
on 16th July 2009. It was the largest U.S. share sale

 Earlier, India’s largest private sector bank ICICI Bank had raised $2.46 billion through ADS
offering in June 2007.

 The other big fund raisers through ADR/GDR route is, by the world’s sixth largest steel
maker Tata Steel Ltd($500 million), India's largest private power producing company Tata
Power ($335 million) and the world's fifth-largest wind-turbine maker Suzlon Energy
Ltd($110 million).

 Tata Steel’s $500 million GDR issue is not only the largest ever Indian Global Depository
Receipt (GDR) offering in London, but also one of the biggest new equity issues to be
conducted by a company outside its home market on any global exchange.

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 Fund Raising by Indian Co.
Source: Prime database GDRs / ADRs Issues
Year No. of Amount Amount
Issues (Rs.Crore) ($ mln)

2004-2005 14 4435.45 915.47

2005-2006 56 15895.91 3280.89
2006-2007 21 4922.50 1016.00
2007-2008 33 30949.26 6387.88
2008-2009 12 893.42 184.40
2009-2010 7 11990.47 2474.81
(Till Jul,09)
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 Regulations for ADR in India
• The company issuing ADRs have to take approval from only the Reserve
Bank of India (RBI) under the Foreign Exchange Regulation Act (FERA),
1973.
• The company need not approach Ministry of Finance for any clearances.
• There is no upper limit for an Indian company to raise funds through
ADRs / GDRs.
• Indian companies can raise foreign currency resources by issuing ADRs
under the FCCB scheme of 1993.
• Any listed company that is either banned by SEBI or RBI is not eligible to
go for ADRs.
• Any unlisted company that has not raised funds through ADRs, can go for
ADRs but needs to be simultaneously listed on American and Indian
stock exchanges.
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 Regulations for ADR in India
• Any unlisted company which has already raised funds through ADRs
needs to be listed within 3 years or on making profits.

• The companies that raise funds through ADRs are banned from investing
in real estate or investing in stock markets.

• Employees of the resident company can purchase or invest in ADRs to the

extent of US $50,000 only within a span of 5 years, without obtaining any
approval by RBI, under the ESOPs scheme.

• Employees belonging to any company in that sector can invest in the

ADRs. This is as per the guidelines issued by SEBI, act of 1999.

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Global Registered Shares
 DaimlerChrysler AG is a German firm, whose
stock trades as a GRS.
 GRS are one share traded globally, unlike ADRs,
which are receipts for banks deposits of home-
market shares and traded on foreign markets.
 They trade in both dollars and euros.
 All shareholders have equal status and voting
rights.

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Factors Affecting
International Equity Returns
 Macroeconomic Factors
 Exchange Rates
 Industrial Structure

43
Thank You


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