Key Terms and Concepts

Eurocurrency market consists of banks that accept deposits and make loans in foreign
currencies outside the country of issue.

Eurodollar could be broadly defined as dollar-denominated deposits in banks all over

the world except the United States.

Certificate of deposit (CD) is a negotiable instrument issued by a bank.

Revolving credit is a confirmed line of credit beyond one year.

London interbank offered rate (LIBOR) is British Banker's Association average of

interbank offered rates for dollar deposits in the London market based on quotations at
16 major banks.

Euro interbank offered rate (EURIBOR) is European Banking Federation-sponsored

rate among 57 euro-zone banks.

Euronote issue facilities (EIF) are notes issued outside the country in whose currency
they are denominated.

Euronotes are short-term debt instruments underwritten by a group of international

banks called a "facility".

Euro commercial paper (ECP) are unsecured short-term promissory notes sold by
finance companies and certain industrial companies.

Euro-medium-term notes (EMTNs) are medium-term funds guaranteed by financial

institutions with the short-term commitment by investors.

Contagion, is where problems at one bank affect other banks in the market.

Bank for International Settlements is a bank in Switzerland that facilitates

transactions among central banks.

Federal funds are reserves traded among US commercial banks for overnight use.

Universal bank is one in which the financial corporation not only sells a full scope of
financial services but also owns significant equity stakes in institutional investors.

Keirutsu is a Japanese word that stands for a financially linked group of companies that
play a significant role in the country's economy.

Asian Currency Units (ACUs) is a section within a bank that has authority and
separate accountability for Asian currency market operations.
International capital market consists of the international bond market and the
international equity market.

International bonds are those bonds that are initially sold outside the country of the
borrower.

Foreign bonds are bonds sold in a particular national market by a foreign borrower,
underwritten by a syndicate of brokers from that country, and denominated in the
currency of that country.

Eurobonds are bonds underwritten by an international syndicate of brokers and sold

simultaneously in many countries other than the country of the issuing entity.

Global bonds are bonds sold inside as well as outside the country in whose currency
they are denominated.

European Currency Unit (ECU) was a weighted value of a basket of 12 European

Community currencies and the cornerstone of the European Monetary System; the euro
replaced the ECU as a common currency for the European Union in January 1999.

Currency-option bonds are bonds whose holders are allowed to receive their interest
income in the currency of their option from among two or three predetermined
currencies at a predetermined exchange rate.

Currency-cocktail bonds are those bonds denominated in a standard "currency

basket" of several different currencies.

Amortization method refers to the retirement of a long-term debt by making a set of

equal periodic payments.

Warrant is an option to buy a stated number of common shares at a stated price during
a prescribed period.
Zero-coupon bonds provide all of the cash payment (interest and principal) when they
mature.

Primary market is a market where the sale of new common stock by corporations to
initial investors occurs.

Secondary market is a market where the previously issued common stock is traded
between investors.

Privatization is a situation in which government-owned assets are sold to private

individuals or groups.
 Internationalization of Capital Markets in the Late 1990s

One of the most important developments since the 1970s has been the
internationalization, and now globalization, of capital markets. Let's look at some of the
basic elements of the international capital markets.

1. The International Capital Market of the Late 1990s was composed of a Number
of Closely Integrated Markets with an International Dimension:

Basically, the international capital market includes any transaction with an international
dimension. It is not really a single market but a number of closely integrated markets
that include some type of international component.

The foreign exchange market was a very important part of the international capital
market during the late 1990s. Internationally traded stocks and bonds have also been
part of the international capital market. Since the late 1990s, sophisticated
communications systems have allowed people all over the world to conduct business
from wherever they are. The major world financial centres include Hong Kong,
Singapore, Tokyo, London, New York, and Paris, among others.

Foreign bonds are a typical example of an international security. A bond sold by a

Korean company in Mexico denominated in Mexican pesos is a foreign bond.
Eurobonds are another example.

Of course, the foreign exchange market, where international currencies are traded, was
a tremendously large and important part of the international capital market in the late
1990s.
2. The Need to Reduce Risk Through Portfolio Diversification Explains in Part the
Importance of the International Capital Market During the Late 1990s:

A major benefit of the internationalization of capital markets is the diversification of risk.

Individual investors, major corporations, and individual countries all usually try to
diversify the risks of their financial portfolios. The reason is that people are generally
risk-averse. They would rather get returns on investments that are in a relatively narrow
band than investments that have wild fluctuations year-to-year. All portfolio investors
look at the risk of their portfolios versus their returns. Higher risk investments generally
have the potential to yield higher returns, but there is much more variability.

Here is an example:

Suppose Corporation XYZ in 1996 had the following portfolio:

 1000 shares of Japanese utility company stock;

 1000 shares of Mexican petroleum company stock;

 German government bonds valued at 8000 deutsche marks (today called

“euros”);

 1000 shares of a Moroccan mutual fund;

 Canadian municipal bonds valued at 8000 Canadian dollars.

Suppose Corporation ABC in 1996 had the following portfolio:

 10,000 shares of Swedish steel company.

If the steel company in Sweden has a poor year for sales and profits, its stock
value decreases. Corporation ABC, which has not diversified, will have a terrible return
on its portfolio. The next year, the steel company may have a great year, so ABC will
have a terrific portfolio return.

Corporation XYZ, with a diversified portfolio, can overcome a single poor return
and still have a good overall return on the portfolio. If utilities in Japan have a poor year,
but Morocco is experiencing strong economic growth, the Moroccan gain can offset the
Japanese stock loss. Then, the next year, perhaps the reverse would occur (Morocco
experiences a slowdown while the Japanese utility realizes higher profits than
anticipated). The year-to-year return would fluctuate much less for Corporation XYZ
than for ABC.
3. The Principal Actors in the International Capital Markets of the Late 1990s were
Banks, Non-Bank Financial Institutions, Corporations, and Government Agencies:

Commercial banks powered their way to a place of considerable influence in

international markets during the late 1990s. Commercial banks undertook a broad array
of financial activities during the late 1990s. They granted loans to corporations and
governments, were active in the bond market, and held deposits with maturities of
varying lengths. Special asset transactions, like underwriting were undertaken by
commercial banks.

Non-bank financial institutions became another fast-rising force in international markets

during the late 1990s. Insurance companies, pension and trust funds, and mutual funds
from many countries began to diversify into international markets in the 1990s.
Together, portfolio enhancement and a widespread increase in fund contributors have
accounted for the strength these funds had in the international marketplace.

Government agencies, including central banks, were also major players in the
international marketplace during the late 1990s. Central banks and other government
agencies borrowed funds from abroad. Governments of developing countries borrowed
from commercial banks, and state-run enterprises also obtained loans from foreign
commercial banks.

4. Changes in the International Marketplace Resulted in a New Era of Global

Capital Markets during the Late 1990s, which were Critical to Development.

Many observers say we entered an era of global capital markets in the 1990s. The
process was attributable to the existence of offshore markets, which came into
existence decades prior because corporations and investors wanted to escape
domestic regulation. The existence of offshore markets in turn forced countries to
liberalize their domestic markets (for competitive reasons). This dynamic created
greater internationalization of the capital markets. Three primary reasons account for
this phenomenon.

First, citizens around the world (and especially the Japanese) began to increase their
personal savings. Second, many governments further deregulated their capital markets
since 1980. This allowed domestic companies more opportunities abroad, and foreign
companies had the opportunity to invest in the deregulated countries. Finally,
technological advances made it easier to access global markets. Information could be
retrieved quicker, easier, and cheaper than ever before.

Developing countries, like all countries, must encourage productive investments to

promote economic growth. Thus, foreign savings, which many people simply call foreign
investment, can benefit developing countries.
INTERMEDIARIES INVOLVED IN INTERNATIONAL CAPITAL MARKET:

Lead & co-lead managers:

The responsibilities of a lead manager include undertaking due diligence & preparing
the offered document , marketing the issues , arrangement & conducting road shows.
Mandate is given by the issuer to the lead manager.

Underwriters:
The lead manager & co managers act as underwriters to the issue , taking on the risk of
interest rates /markets moving against them before they have placed bonds/DRs. Lead
Managers may also invite additional investment banks to act as sub-underwriters , thus
forming a larger underwriting group. The underwriters undertake to subscribe to the
unsubscribed portion of the issue .

Agents & Trustees:

These intermediaries are involved in the issue of bonds/convertibles. The issuer of
bonds convertible in association with the lead manager must appoint ‘paying agents’ in
different fifnacial centers, who will arrange for the payment of interest & principal due to
investor under the terms of the issue. These paying agents will be banks.

Lawyers & Auditors:

The lead manager will appoint a prominenet firm of solicitors to draw up documentation
evidencing the bond/DRs issue. The various draft documents will vetted by the
solicictors acting for the issuer. Many of these documents are prepared in standard
forms with a careful review to the satisfaction of the parties. The legal advisors will
advise the issuer pertaining to the local & foreign laws.
Similarly, Auditors are required for preparation of the financial statements, cash flows,
and audit reports. The Auditors provide a comfort letter to the lead manager on the
financial health of the company. They also prepare the financial statement as per GAAP
requirements wherever necessary.

Listing Agents & Stock Exchanges:

The listing Agent helps facilitate the documentation & listing process for listing on stock
exchange & keep file information regarding the issuer such as Annual reports,
depository agreements, articles of association,etc. The stock exchange reviews the
issuers application for listing of bonds/GDRs & provides comments on offering circular
prior to accepting the security for listing.

Depository Bank:
It is involved only in the issue of GDRs. It is responsible for issuing the actual GDRs
,disseminating information from the issuer to the DR holders, paying any dividends or
other distributions & facilitating the exchange of GDRs into underlying shares when
presented for redemption.
Custodian:
The Custodian holds the shares underlying the GDRs on behalf of the depository &is
responsible for collecting rupee dividends on the underlying shares & repatriation of the
same to the depository in US dollars/foreign currency.

Short term debt instrument

1.Banker’s acceptance BA

This instrument is used to finance domestic as well as international trade. On

completing the transaction, the exporter hands over the shipping documents and letter
of credit LC issued by the importer’s bank to its own bank. At the same time, the
exporter draws a draft (or bill) on the importer’s bank and gets paid the discounted value
of the draft. A banker’s acceptance (BA) is created when the exporter’s bank presents
the draft to the importers bank which accepts it. This BA may be sold (or discounted) as
a money market instrument or the exporter may keep it as an asset with himself. Bas
are highly standardized negotiable instruments and are available in varying amounts.
They permit importers and other users to obtain credit on better terms than simple
borrowing.

2. Euro commercial paper

Euro commercial paper is a short term Euro note issued by corporates on a discount–
to-yield basis. Investor in ECP may be money market funds, insurances companies,
pension funds and other corporate bodies having short-term cash surpluses. For
investor s, it represents an attractive short-term investment opportunity, unlike a time
deposit with financial institution. For borrowers, it is a cheap and flexible source of
funds, cheaper than bank loans. As mentioned above, a CP or ECP is a discount
redeemed at face value on maturity. For example, an ECP issued at $952.4 with a
maturity of 180 days will have a face value of $1,000, if the discount rate is 10 % pa.

3. EURO CERTIFICATE OF DEPOSIT (ECD)

A certificate of deposit is an evidence of a deposit with a bank. CD is a negotiable or

marketable instrument. Unlike a bank term deposit, a CD can be sold in the secondary
market whenever cash is needed. Who ever is holding it at the time of maturity receives
its face value in addition to the interest due. Euro CDs are issued by London banks. The
interest on floating rate CDs is indexed to LIBOR and Treasury Bill rate, etc. These
instruments may be issued in sum like $1, 00,000 or more. For fixed rate CDs, usually
there is a single period maturity when principal and interest are paid.
4. REPURCHASE OBLIGATION ( REPO)

This is a form of short-term borrowing in which the borrower sells securities to the
lender with an agreement to buy them back at a later date. That is why it is called
REPO. The repurchase price and selling price are the same. But the original seller has
to pay interest while repurchasing the securities. The amount of interest depends on
demand–supply conditions. Repos may be overnight repos or of longer maturity.

DOCUMENTATION:

The following are the documents generally needed for an euro issue:

1. Prospectus:

The prospectus is a major document containing all the relevant information concerning
the issues viz investment consideration, terms & conditions, use of proceeds,
capitalization details, information about the promoters, directors, industry review, share
information etc.. Generally the terms are grouped into financial & non-financial
information, issue particulars & others viz statement of accounting showing the
significant differences between Indian accounting & US/UK GAAP. The non financial
part includes the background of the company, promoters, directors, activity, etc.. The
issue particulars talks about the issue size, the domestic ruling price, the number of
shares for each GDR etc..

2. Depository Agreement:

This is the agreement between the issuing company & the overseas depository
providing a set of rules for withdrawal of depositors & for their conversion into shares.
Voting rights are also defined.

3. Underwriting agreement:

The underwriters play the role of ‘assurers’ as they undertake to pick up the GDRs at a
predetermined price depending on the market response.

4. Subscription Agreement:

The Lead manager & the syndicated members form a part of the investors who
subscribe to GDRs or bonds as per this agreement.

5. Custodian Agreement:
It is an agreement between the depository & the custodian. The depository & the
custodian determine the process of conversion of underlying shares into DRs & vice
versa.

6. Trust Deed & Paying & Conversion Agreement:

While the trust deed is a standard document which provides for duties & responsibilities
of trustees, this agreement enables the paying & conversion agency ( performing
banking function) undertaking to service the bonds till conversion.

7. Listing Agreement:

Most of the companies prefer Luxemburg stock exchange for listing purposes, as the
modalities are simplest. The listing agents have the responsibility of fulfilling the listing
requirement of a chosen stock exchange.

What are some reasons for a company to cross list its shares?

A company hopes to: (1) allow foreign investors to buy their shares in their home
market; (2) increase the share price by taking advantage of the home country’s rules
and regulations; (3) provide another market to support a new issuance in the foreign
market; (4) establish a presence in that country in the instance that it wishes to conduct
business in that country; (5) increase its visibility to its customers, creditors, suppliers,
and host government; and (6) compensate local management and employees in the
foreign affiliates.
Instruments in capital markets
International Equity Markets:

Funds can be raised in the primary market from the domestic market as well as from
international markets. After the reforms were initiated in 1991, one of the major policy
changes was allowing Indian companies to raise resources by way of equity issues in
the international markets. Earlier, only debt was allowed to be raised from international
markets. In the early 1990s foreign exchange reserves had depleted and the country’s
rating had been downgraded. This resulted in a foreign exchange crunch and the
government was unable to meet the import requirement of Indian companies. Hence
allowing companies to tap the equity and bond market In Europe seemed a more
sensible option. This permission encourages Indian companies to become global.
India companies have raised resources from international capital markets through

1. Global depository receipts (GDRs) /

2. American Depository Receipts (ADRs)

3. Foreign Currency Convertible Bonds (FCCBs)

4. External Commercial Borrowings (ECBs).

Depository Receipts (GDRs and ADRs)

“Global Depositary Receipts mean any instrument in the form of a depositary receipt or
certificate (by whatever name it is called) created by the Overseas Depositary Bank
outside India and issued to non-resident investors against the issue of ordinary shares
or Foreign Currency Convertible Bonds of issuing company.” A GDR issued in America
is an American Depositary Receipt (ADR). Issue of equity in the form of GDR/ADR is
possible only for the few top notch corporates of the country.
Among the Indian companies, Reliance Industries Limited was the first company to
raise funds through a GDR issue.

Introduction:

ADR stands for American Depository Receipt. Similarly, GDR stands for Global
Depository Receipt. Every publicly traded company issues shares – and these shares
are listed and traded on various stock exchanges. Thus, companies in India issue
shares which are traded on Indian stock exchanges like BSE (The Stock Exchange,
Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed
and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or
NASDAQ (National Association of Securities Dealers Automated Quotation).But to list
on a foreign stock exchange, the company has to comply with the policies of those
stock exchanges.
Many times, the policies of these exchanges in US or Europe are much more stringent
than the policies of the exchanges in India. This deters these companies from listing on
foreign stock exchanges directly. But many good companies get listed on these stock
exchanges indirectly – using ADRs and GDRs.

Process of issue of ADR/GDR:

1. The company deposits a large number of its shares with a bank located in the
country where it wants to list indirectly. The bank issues receipts against these
shares, each receipt having a fixed number of shares as an underlying (Usually 2 or
4).

2. These receipts are then sold to the people of this foreign country (and anyone who
are allowed to buy shares in that country). These receipts are listed on the stock
exchanges.

3. They behave exactly like regular stocks – their prices fluctuate depending on their
demand and supply, and depending on the fundamentals of the underlying
company.

4. These receipts, which are traded like ordinary stocks, are called Depository
Receipts. Each receipt amounts to a claim on the predefined number of shares of
that company. The issuing bank acts as a depository for these shares – that is, it
stores the shares on behalf of the receipt holders.
1. ADR - American Depositary Receipt

Definitions:

 It is a receipt for shares bought in the US of a foreign-based corporation in an

overseas market. The receipt is held by a US bank, but shareholders are entitled to
any dividends and capital gains.
 Security representing the ownership interest in a foreign company's common stock.
ADRs allow foreign shares to be traded in the United States
 Certificates issued by a US depository bank, representing foreign shares held by the
bank, usually by a branch or correspondent in the country of issue. One ADR may
represent a portion of a foreign share, one share or a bundle of shares of a foreign
corporation.

Meaning:

American Depository Receipts (ADRs) are certificates that represent shares of a foreign
stock owned and issued by a U.S. bank. The foreign shares are usually held in custody
overseas, but the certificates trade in the U.S. Through this system, a large number of
foreign-based companies are actively traded on one of the three major U.S. equity
markets (the NYSE, AMEX or Nasdaq).

An American Depositary Receipt (ADR) is how the stock of most foreign companies
trades in United States stock markets. Each ADR is issued by a U.S. depositary bank
and represents one or more shares of a foreign stock or a fraction of a share. If
investors own an ADR they have the right to obtain the foreign stock it represents, but
U.S. investors usually find it more convenient to own the ADR. The price of an ADR is
often close to the price of the foreign stock in its home market, adjusted for the ratio of
ADRs to foreign company shares.

Depository banks have numerous responsibilities to the holders of ADRs and to the
non-U.S. company the ADRs represent. The largest depositary bank is The Bank of
New York. Individual shares of a foreign corporation represented by an ADR are called
American Depositary Shares (ADS).

Pricing of ADR:

The prices of ADRs in the secondary market are, of course, determined by supply and
demand, but the price will not deviate too much from the price of the underlying stock. If
the ADR is trading at a higher price than the equivalent foreign shares of the company,
then more shares of the company will be bought and held in the custodian bank, and
more ADRs will be created. If the ADR trades below the equivalent price, then some
ADRs will be canceled, and the corresponding shares of the company will be released
by the custodian bank. This maintains parity between the price of the ADR and the
foreign shares, after accounting for the currency exchange rate.

Dividend payments:

When dividends are paid, the custodian bank receives it and withholds any foreign
taxes, exchanges it for U.S. dollars, then sends it to the depositary bank, which then
sends it to the investors. The depositary bank, being a U.S. bank, handles most of the
interaction with the U.S. investors, such as rights offerings, stock splits, and stock
dividends, but sponsored ADR investors may receive communications, such as financial
statements, directly from the company.

Risks involved:

Although ADR transactions are in U.S. currency, there still is a currency exchange risk.
If the dollar falls, for instance, then the amount of dividend in U.S. dollars will be
reduced, and the market price of the ADR will drop. There is also political risk because
the ADR still derives its value from the foreign stock, which could be adversely affected
by unfavorable changes in politics or the law of the country.

How It Works/Example:

Investors can purchase ADRs from broker/dealers. These broker/dealers in turn can
obtain ADRs for their clients in one of two ways: they can purchase already-issued
ADRs on a U.S. exchange, or they can create new ADRs.

To create an ADR, a U.S.-based broker/dealer purchases shares of the issuer in

question in the issuer's home market. The U.S. broker/dealer then deposits those
shares in a bank in that market. The bank then issues ADRs representing those shares
to the broker/dealer's custodian or the broker-dealer itself, which can then apply them to
the client's account.

A broker/dealer's decision to create new ADRs is largely based on its opinion of the
availability of the shares, the pricing and market for the ADRs, and market conditions.

Broker/dealers don't always start the ADR creation process, but when they do, it is
referred to as an unsponsored ADR program (meaning the foreign company itself has
no active role in the creation of the ADRs). By contrast, foreign companies that wish to
make their shares available to U.S. investors can initiate what are called sponsored
ADR programs. Most ADR programs are sponsored, as foreign firms often choose to
actively create ADRs in an effort to gain access to American markets.

ADRs are issued and pay dividends in U.S. dollars, making them a good way for
domestic investors to own shares of a foreign company without the complications of
currency conversion. However, this does not mean ADRs are without currency risk.
Rather, the company pays dividends in its native currency and the issuing bank
distributes those dividends in dollars -- net of conversion costs and foreign taxes -- to
ADR shareholders. When the exchange rate changes, the value of the dividend
changes.

For example, let's assume the ADRs of XYZ Company, a French company, pay an
annual cash dividend of 3 euros per share. Let's also assume that the exchange rate
between the two currencies is even -- meaning one Euro has an equivalent value to one
dollar. XYZ Company's dividend payment would therefore equal $3 from the perspective
of a U.S. investor. However, if the euro were to suddenly decline in value to an
exchange rate of one euro per $0.75, then the dividend payment for ADR investors
would effectively fall to $2.25. The reverse is also true. If the euro were to strengthen to
$1.50, then XYZ Company's annual dividend payment would be worth $4.50.

Levels of ADRs

There are three levels of ADRs depending on their adherence to Generally Accepted
Accounting Principles

 For a Level I ADR program the receipts issued in the US are registered with the
SEC, but the underlying shares are held in the depositary bank are not registered
with the SEC. They must partially adhere to Generally Accepted Accounting
Principles (GAAP) used in the USA.
 Level II ADRs are those in which both the ADRs and the underlying shares (that
already trade in the foreign company’s domestic market) are registered with the
SEC. They must also partially adhere to the Generally Accepted Accounting
Principles.
 Level III ADRs must adhere fully to the GAAP and the underlying shares held at the
Depositary Bank are typically new shares not those already trading in the foreign
company’s domestic currency.
2. GDRs Global Depository Receipts

Definitions:

 A Global Depository Receipt or Global Depositary Receipt (GDR) is a certificate

issued by a depository bank, which purchases shares of foreign company
 Global Depository Receipts (GDRs) may be defined as a global finance vehicle that
allows an issuer to raise capital simultaneously in two or markets through a global
offering. GDRs may be used in public or private markets inside or outside US. GDR,
a negotiable certificate usually represents company’s traded equity/debt. The
underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.

Meaning:

A Global Depository Receipt or GDR is a certificate issued by a depository bank,

which purchases shares of foreign companies and deposits it on the account. GDRs
represent ownership of an underlying number of shares.
Global Depository Receipts facilitate trade of shares, and are commonly used to invest
in companies from developing or emerging markets - especially RUSSIA.

Prices of GDRs are often close to values of related shares, but they are traded and
settled independently of the underlying share. Normally 1 GDR = 10 Shares

Several international banks issue GDRs, such as JP Morgan Chase, Citigroup,

Deutsche Bank, Bank of New York. They trade on the International Order Book (IOB) of
the London Stock Exchange.

Listing of the Global Depositary Receipts

The Global Depository Receipts issued may be listed on any of the Overseas Stock
Exchanges, or Over the Counter Exchanges or through Book Entry Transfer Systems
prevalent abroad and such receipts may be purchased, possessed and freely
transferable
Issue structure of the Global Depositary Receipts

(1) A Global Depository Receipt may be issued for one or more underlying shares or
bonds held with the Domestic Custodian Bank.

(2) The Foreign Currency Convertible Bonds and Global Depository Receipts may be
denominated in any freely convertible foreign currency.

(3) The ordinary shares underlying the Global Depository Receipts and the shares
issued upon conversion of the Foreign Currency Convertible Bonds will be denominated
only in Indian currency.
(4) The following issue will be decided by the issuing company with the Lead Manager
to the issue, namely:-

(a) Public or private placement;

(b) Number of Global Depository Receipts to be issued;

(c) The issue price;

(d) The rate of interest payable on Foreign Currency Convertible Bonds; and

(e) The conversion price, coupon, and the pricing of the conversion options of the
Foreign Currency Convertible Bonds.

(5) There would be no lock-in-period for the Global Depository Receipts issued under
this scheme

History of GDRs in India

India entered the international arena in May 1992, with the first
GDR issue by Reliance Industries Limited, which collected US b$150 million. This was
followed by Grasim Industries’ offer of US $90 million in November. Then, the GDR
markets witnessed a lull till 1993-end in the wake of the securities scam and the
consequent fall in the domestic markets, during which time the only Indian offering
came from HINDALCO in July 1993, which raised US $72 million. The end of 1993 saw
a flood of Indian paper hit the Euro markets with Bombay Dyeing, Mahindra and
Mahindra, SPIC and Sterlite Industries raising funds. This boom continued till mid-1995,
after which a combination of factors – political instability, falling markets, reduced
profitability due to a liquidity crunch - pulled down the GDR market again, till the end of
1996, during which time, the only notable exception was the US $370 million offering by
the State Bank of India.

Procedure for an Initial Issue of GDR

GDRs are marketed through a syndication process which is the responsibility of lead
managers. The lead manager is involved in the issue structuring, pricing and obtaining
market feedback on the issue timing. The lead manager also prepares in-depth
research and offer documents for circulation to prospective institutional investors.
He/she also assists in the selection of the foreign depository, foreign legal advisors and
compliance with the listing requirements of the stock exchanges. The steps in Euro
issue management in chronological order are as follows:

Pre-issue: Discuss strategy, obtain approvals, obtain legal advice.

Prepare tentative plan and size of the issue.
Week 0-4: Nominate lead manager.
Discuss plan and other roles with lead manager/ co-manager.
Depository/bankers/auditors to the issue provide information to the lead manager for
drafting of offer documents and agreements.
Week 5-7: Meetings between lead managers, legal advisors and auditors and the
issuers executives. Preparation of offer circular completed.
Week 8: Lead manager completes and sends preliminary offer documents to co-
managers and other - underwriters.
Week 9: Road shows, investor meets abroad. Lead managers and is seller decide to-
send different teams to focus on geographical locations.
Agreement documentation finalized after final discussions between concerned parties.
Week 10 Launch and syndication by the lead managers and. co-managers. Foreign
listing and trading approvals received.

Benefits and Uses of a GDR

Benefits to an Issuing Company

Currently, there are over 1600 Depository Receipt programmes for companies from
over 60 countries. Companies have round that the establishment of a depository receipt
programme offers numerous advantages. The primary reasons why a company would
establish a depository receipt programme can be divided into. the following
considerations:
 Access to capital markets outside the home market to provide a mechanism for
raising capital or as a vehicle for an acquisition.
 Enhancement of company visibility by. enhancement of image of the company’s
products, services or financial instruments in a marketplace outside its home
country.
 Expanded shareholder base which may increase or stabilize the share price
 May increase local share, price as a result of global demand/ trading through a
broadened and a more diversified investor exposure.
 Increase potential liquidity by enlarging the market for the company’s shares.
 Adjust share price to trading market comparables through Ratio
 Enhance shareholder communications and enable employees to invest easily in the
parent company.
Benefits to an Investor

 They facilitate diversification into foreign securities.Trade, clear and settle in

accordance with requirements of the market in which they trade.
 Eliminate custody charges. Can be easily compared to securities of similar
companies.
 Permit prompt dividend payments and corporate action notifications.
 If GDRs are exchange listed, investors also benefit from accessibility of price and
trading information and research.
 In addition to the benefits GDRs have to offer to the issuing company and the
investor, they are also increasingly being used by governments to facilitate the
process of privatization. They have also been used to raise capital in the process of
acquisition of other companies by the issuer.

What is the difference between ADR and GDR?

Both ADR and GDR are depository receipts, and represent a claim on the underlying
shares. The only difference is the location where they are traded.If the depository
receipt is traded in the United States of America (USA), it is called an American
Depository Receipt, or an ADR. If the depository receipt is traded in a country other
than USA, it is called a Global Depository Receipt, or a GDR. While ADRs are listed
on the US stock exchanges, the GDRs are usually listed on a European stock
exchange.

How can you use an ADR / GDR?

ADRs and GDRs are not for investors in India – they can invest directly in the shares
of various Indian companies. But the ADRs and GDRs are an excellent means of
investment for NRIs and foreign nationals wanting to invest in India. By buying
these, they can invest directly in Indian companies without going through the hassle
of understanding the rules and working of the Indian financial market – since ADRs
and GDRs are traded like any other stock, NRIs and foreigners can buy these using
their regular equity trading accounts!
Which Indian companies have ADRs and / or GDRs?

Some of the best Indian companies have issued ADRs and / or GDRs. Below is a partial
list.

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
3. FCCB (Foreign Currency Convertible Bonds):

FCCBs are quasi-debt instruments issued by a company to the investors of some

other country denominated in a currency different from that of domestic country.
Principal and interest both are payable in the foreign currency. They carry an option for
the investor to convert them into ordinary equity shares of the company at a later stage
in accordance with the terms of the issue.

In India FCCB are issued in accordance with guidelines and regulations framed under
FEMA Act by the RBI and schemes notified by the Ministry of Finance, Government of
India. An FCCB issue by a company is governed by FEM (Transfer or Issue of any
Foreign Security) Regulations, 2004 (hereinafter ‘Regulations’) and Issue of Foreign
Currency Convertible Bonds and Ordinary Shares (through Depository Receipt
Mechanism) Scheme, 1993 (hereinafter ‘the Scheme’). The comprehensive guidelines
issued on External Commercial Borrowings (ECB) vide A.P. (DIR Series) Circular No. 5
dated August 1, 2005 (hereinafter ‘ECB Guidelines’) are also applicable to FCCB issue.
In other words the FCCB are required to be issued in accordance with the Scheme.
They will also have to adhere to the Regulations. Further they must be meeting the
requirements of the ECB guidelines.

4. External Commercial Borrowings (ECBs):

Indian corporate companies are allowed to raise foreign loans for financing
infrastructure projects. The last are used as a residual source after exhausting external
equity as a main source of finance for large value projects.
Bond market volatility:

For market participants who own a bond, collect the coupon and hold it to maturity,
market volatility is irrelevant; principal and interest are received according to a pre-
determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks,
most importantly changes in interest rates. When interest rates increase, the value of
existing bonds falls, since new issues pay a higher yield. Likewise when interest rates
decrease, the value of existing bonds rise since new issues pay a lower yield. This is
the fundamental concept of bond market volatility: changes in bond prices are inverse to
changes in interest rates. Fluctuating interest rates are part of a country's monetary
policy and bond market volatility is a response to expected monetary policy and
economic changes.

Bond indices:

A number of bond indices exist for the purposes of managing portfolios and measuring
performance, similar to the S&P 500 or Russell Indexes for stocks. The most
common American benchmarks are the Lehman Aggregate, Citigroup BIG and
Merrill Lynch Domestic Master. Most indices are parts of families of broader
indices that can be used to measure global bond portfolios, or may be further
subdivided by maturity and/or sector for managing specialized portfolio Issuing
bonds

SYNDICATED LENDING:

Syndicated lending is a form of lending in which a group of lenders collectively extend

a loan to a single borrower. The group of lenders is called a syndicate. The loan is
called a syndicated loan, in contrast to a bilateral loan, which is a loan made by a
single lender to a single borrower. Syndicated loans are routinely made to corporations,
sovereigns or other government bodies. They are also used in project finance and to
fund leveraged buyouts.
Syndicated loans are primarily originated by banks, but a variety of institutional
investors participate in syndications. These include mutual funds, collateralized loan
obligations, insurance companies, finance companies, pension plans, and hedge funds.

Syndicate members play different roles. Some just lend money. Others also facilitate
the process. It is common to speak of an arranger, lead bank or lead lender that
originates the loan, forms the syndicate and processes payments.

Most syndicated loans are floaters, paying a spread over Libor, but other structures
abound. Fixed-rate term loans, revolving lines of credit and even letters of credit are
syndicated. Loans may be structured specifically to appeal to institutional investors.

Players in the syndication process:

1. Arranger / lead manager

The bank that:
 Is awarded the mandate by the prospective borrower, and
 Is responsible for placing the syndicated loan with other banks and ensuring that
the syndication is fully subscribed.
 arrangement fee
 reputation risk

2. Underwriting bank
The bank that
 Commits to supplying the funds to the borrwoer -if necessary from its own
resources if the loan is not fully subscribed.
 May be the arranging bank or another bank.
 Not all syndicated loans are fully underwritten.
 Risk: the loan may not be fully subscribed.

3. Participating bank

 The bank that participates in the syndication by lending a portion of the total
amount required.
 Interest and participation fee.
 Risks: Borrower credit risk (as normal loans).
 A participating bank may be led into passive approval and complacency

4. Facility manager / agent

 The one that takes care of the administrative arrangements over the term of the
loan (e.g. disbursements, repayments, compliance).
  Acts for the banks.
 May be the arranging/underwriting bank.
 In larger syndications co-arranger and co-manager may be used.

Benefits to the borrower

 Deals with a single bank.
 Quicker and simpler than other ways of raising capital (e.g. issue of bonds or
equity).

Benefits to the lead banks

 Good arrangement and other fees can be earned without committing capital.
 Enhancement of bank’s reputation.
 Enhancement of bank’s relationship with the client.

Benefits to the participating banks

 Access to lending opportunities with low marketing costs.
 Opportunities to participate in future syndications.
 In case the borrower runs into difficulties, participant banks have equal treatment.
 Participant banks do not find themselves at a disadvantage vis-à-vis a dominant
bank or one with high leverage over the client.

Stages in syndication

1. Pre-mandate phase
 The prospective borrower may liaise with a single bank or it may invite
competitive bids from a number of banks.
 the lead bank needs to:
 Identify the needs of the borrower.
 Design an appropriate loan structure.
 Develop a persuasive credit proposal.
 Obtain internal approval.
 Milestone: award of the mandate.
2. Placing the loan
 The lead bank can start to sell the loan in the marketplace.
 The lead bank needs to:
 Prepare an information memorandum
 Prepare a term sheet
 Prepare legal documentation
 Approach selected banks and invite participation
 Negotiations with the borrower may be needed if prospective participants raise
concerns.
 Milestone: closing of the syndication, including signing.

3. Post-closure phase
 The agent now handles the day-to-day running of the loan facility.

Pricing

 fees for “front-end activities”

 Arrangement and underwriting fees.
 Interest (margin over base rate).
 Commitment fees for available but undrawn funds.
 Agency fees -payable for administrative activity during the term of the loan.

Examples:

 Aphrodite hills -cyp30m

Arranger/agent: HSBC
 Take over of the shares of Hilton hotel by Louis group -cyp16m -arranger/agent:
hsbc.
 Take over of Rocl shares by Louis -usd30m
Agent/arranger: hsbc.
 acquisition of the vessel emerald by Louis -usd20m
Arranger: hsbc
Agent: societe general
 Construction of Elysium beach resort -arranger/agent: Cyprus popular bank.

Syndicated loans, like most loans, pose credit risk for the lenders. This can be extreme,
as with some leveraged buyouts or loans to some sovereigns. Credit risk is assessed as
with any other bank loan. Lenders rely on detailed financial information disclosed by the
borrower. As syndicated loans are bank loans, they have higher seniority in insolvency
than bonds.