LONG TERM FUNDS

GLOBAL COST AND AVAILABILITY OF CAPITAL

• Global integration of capital markets has given many firms

access to new and cheaper sources of funds beyond those
available in their home markets.

• These firms can accept more long-term projects and invest

more in capital in improvements and expansion.

• If a firm is located in a country with illiquid and / or segmented

capital markets, it can achieve this lower global cost and
greater availability of capital by properly designed and
implemented strategy.
Dimensions of the Cost and Availability of Capital Strategy
Local Market access Global Market
access

Firm-specific Characteristics

Firm`s securities appeal Firm`s securities appeal to

only to domestic international portfolio
investors investors

Market Liquidity for Firm`s Securities

Illiquid domestic securities Highly liquid domestic

market and limited securities market and broad
international liquidity international participation

Effect of Market segmentation on

Firm`s Securities and Cost of
Capital

Segmented domestic Access to global securities

securities market that market that prices shares
prices shares according according to international
to domestic standards standards
• A firm that must source its long-term debt and equity in a highly illiquid
domestic securities market will probably have :

• a relatively high cost of capital and

• will face limited availability of such capital ,
• which in turn will lower its competitiveness both internationally and vis
a vis foreign firms entering its home market .

This category of firms include both :

firms resident in emerging countries , where the capital mkt remains
undeveloped and
firms too small to gain access to their own national securities market.

Many family-owned firms find themselves in this category because they

choose not to utilize securities market to source their long – term capital
needs.
• Firms resident in industrial countries with small capital market
often source their long-term debt and equity at home in these
partially liquid domestic securities market.

• The firm` cost and availability of capital is better than that of

firms in countries with illiquid capital mkt.

• However if these firms can tap the highly liquid global market ,
they can also strengthen their competitive advantage in
sourcing capital.
• Firms resident in countries with segmented capital markets must devise a
strategy to escape dependence on that market for their long-term debt and
equity needs.
• A national capital mkt is segmented if the required rate of return on
securities in that market differs from the required rate of return on
securities of comparable expected return and risk traded on other
securities market.
• Capital market become segmented because of factors such as:
excessive regulatory control ;
perceived political risk ;
anticipated foreign exchange risk;
lack of transparency;
asymmetric availability of information ,
cronyism ;
insider trading ;
corporate governance differences and many other market
imperfections.
Firms constrained by any of these conditions must develop a
strategy to escape their own limited capital market and source
some of their long-term capital abroad.
 MNE s have a higher or Lower WACC than their Domestic
Counterparts?
• The cost of equity required by investors is higher for
multinational firms than for domestic firms. Possible
explanations are:
higher level of political risk,
foreign exchange risk and
higher agency costs of doing business in a
multinational managerial environment .

• However, at relatively high levels of the optimal capital

budget , the MNE would have a lower cost of capital.
 SOURCING EQUITY GLOBALLY

• Indian companies are allowed to raise equity capital in the international mkt
through the issue of GDR/ADR/Foreign Currency Convertible Bond
[ FCCB].

• These are not subject to any ceilings on investment an applicant

company seeking govt`s approval in this regard should have a consistent
track record for good performance for a minimum period of 3 years.

• This condition can be relaxed for infrastructure projects such as power

generation , telecommunication , petroleum exploration and refining ,
ports airports and roads.

• There is no restriction on the number of GDR/ADR/FCCB to be floated

by a company or a group of companies in a financial year.
• There is no end-use of GDR/ADR issue proceeds include: financing capital
goods import ; capital expenditure ; pre-payment or scheduled repayment of
earlier ECB; approved investments abroad; equity investment in JVs ; 25%
of the proceeds can be used for general corporate restructuring and
working capital requirements and ban on investment in real estate and
stock markets.

• The FCCB issue proceeds need to conform to external commercial

borrowing end-use requirements.

• Two-way fungibility of ADR/GDR is allowed by RBI

• Allowed to invest 100% of the proceeds of ADR/GDR issues for the

acquisitions of foreign companies and direct investment in joint
ventures and wholly-owned subsidiaries overseas.

• Permission to retain ADR/GDR proceeds abroad for future foreign

exchange requirements.
 ADR’s Vs GDR’s
ADR
• Traded in American stock exchanges
• Mostly in NYSE, AMEX and NASDAQ
• Traded in US Dollars
• Issuance of ADR’s is relatively more difficult because of more
stringent US GAAP disclosure norms. Thus issuing ADR’s is
more expensive and time consuming than GDR’s

GDR
• Traded in European stock exchanges
• London and Luxemburg
• Traded in Euros or US Dollars
• GDR’s follow European IAS ( International Accounting
Standards) which have less stringent norms
 Salient Characteristics of ADR’s and GDR’s

• DR Ratio is the number of ordinary domestic shares

underlying each DR
• A company may list DR’s without listing its shares in
the domestic market
• DR’s too have a Face Value( in USD / Euro)
• DR holders enjoy the same rights as the ordinary
domestic shareholders.
 Benefits To The Company Issuing DR’s

• Adds considerable credibility to the company

• Helps diversify investor base
• Offers new avenues for raising capital at competitive
rates
• M&A currency: companies use ADR’s and GDR’s to
swap stocks during mergers and acquisitions. Without
them international mergers and acquisitions would be
a much costlier affair
 How ADR’s and GDR’s Work

Indian Company

Foreign Bank

Indian
Shareholders
Custodian Bank

Depository

Foreign
Shareholders or
Arbitrage DR Holders
 DEFINITION OF ECB
External Commercial Borrowings (ECB) are defined to include :

• commercial bank loans,

• buyer’s credit,
• supplier’s credit,
• securitized instruments such as floating rate notes, fixed
rate bonds etc.,
• credit from official export credit agencies,
• commercial borrowings from the private sector window of
multilateral financial institutions such as IFC, ADB, AFIC,
CDC etc. and
• Investment by Foreign Institutional Investors (FIIs) in
dedicated debt funds
 ECB
The policy also seeks to give greater priority for
projects in the infrastructure and core sectors such as
:
• Power,
• Oil Exploration,
• Telecom, Railways,
• Roads & Bridges,
• Ports,
• Industrial Parks and
• Urban Infrastructure etc. and
• the export sector
 TYPES OF EBC

ECB can be accessed under two routes:

(i) Automatic Route: ECB under Automatic Route

do not require approval of Government of India
/ RBI.

(ii) Approval Route: ECB under approval route

requires approval by the government.
 AVERAGE MATURITIES FOR ECB

Time in Years ECB Sectors

Permitted
Min average Equal to or less All Sectors
maturity of 3 than 20 million Except 100%
yrs USD EOU’s
Min average Greater than All Sectors
maturity of 5 USD 20 million Except 100%
yrs EOU’s
Min average Any amount 100% EOU’s
maturity of 3
yrs
 END-USE REQUIREMENTS
(A)External commercial loans are to be utilised for import of
capital goods and services and for project reletated
expenditure in all sectors subject to following conditions :

(a) ECB raised for project-related rupee expenditure

must be brought into the country immediately.

(b) ECB raised for import of capital goods and services

should be utilised at the earliest and corporate
should strictly comply with RBI's extant guidelines
on parking ECBs outside till actual imports.
 END-USE REQUIREMENTS
(B) Corporate borrowers will be permitted to raise ECB to
acquire ships / vessels from Indian shipyards.

(C) Under no circumstances, ECB proceeds will be utilised

for
( i) Investment in stock market; and
(ii) Speculation in real estate.
INTERNATIONAL DEBT MARKET
 INTERNATIONAL DEBT MARKET

Bank Loans and International Bank Loans

Syndications
(floating rate , short to Eurocredits
medium term)
Syndicated Credits

Euro notes Facilities

Euro note Market
(floating rate , short to Euro Commercial Paper [ECP]
medium term)
Euro Medium term Notes
[EMTNs]
International Bond Market
(fixed & floating rate , Eurobond
medium to long term)
Foreign Bonds
 Bank Loans and Syndications

International Bank Loans

• Traditionally sourced in the Eurocurrency market .
• The key factor attracting both depositors and borrowers is the
narrow interest rate spread within the market.
• The difference between deposit and loan rates is often less
than 1%.

EuroCredits :
• These are bank loans to MNEs , sovereign govt , international
institutions and bank denominated in Eurocurrencies and
• extended by banks in countries other than the country in
whose currency the loan is denominated .
 Syndicated Credits

• The syndication of loans has enabled banks to spread the risk

of very large loans among a number of banks.

• Syndication is particularly important because many large MNEs

need credit in excess of a single bank's loan limit.

• Lead bank - participating banks - underwriters

 Euro Note Market

Euro Note facilities :

• this includes issuance of short term , negotiable promissory
notes and revolving underwriting facilities.
• these are provided by international investment and commercial
banks.
• these are cheaper source of short term funds than syndicated
loans , because the notes were placed directly with the investor
public and the securitized and underwritten form allowed the
ready establishment of liquid secondary markets.

Euro Commercial Paper [ECP] :

• short – term obligation of a corporation with maturity of 1, 3, 6
months.
• Euro Medium term Notes [EMTNs]: these bridge the gap
between the ECP and long-term and less flexible international
bonds.
Similarity with Bonds:
• Their basic characteristics are similar to that of bonds .
maturity period from 9 months to a maximum of 10 years.
• Coupons are paid semi-annually and the rate are
comparable to the bond issues.
Difference with Bonds:
• Allows continuous issuance over a period of time , unlike
bond issue , which essentially is sold all at once.
• As EMTNs are sold continuously , in order to make debt
service manageable , coupons are paid on set calendar
dates regardless of the date of issuance.
• EMTNs are issued in relatively small denominations from
$2 million , making medium –term debt acquisition much
more flexible than the large minimum customarily needed
in the international bond market.
International Bond Market
 II BOND MARKET

A bond is a debt security issued by the borrower , purchased by

the investor , usually through the intermediation of a group of
underwriters.

Straight Bond
• a fixed maturity period ,
• a fixed coupon which has
• a fixed periodic payment usually expressed as percentage
of the face or par value.
• Callable Bond
This can be redeemed by the issuer , at the issuer’s choice ,
prior to maturity.

Puttable Bond
• It allows the investor to sell it back to the issuer prior to
maturity, at investor’s discretion, after a certain number of
years from the issue date .
• The investor pays for this privilege in the form of the lower yield.
 Sinking Fund Bond
• It is a device , often used by small risky companies to assure
the investors that they will get their money back.
• Instead of redeeming the entire issue at maturity , the issuer
would redeem a fraction of the issue each year so that only a
small amount remains to be redeemed at maturity.

Floating Rate Note

• It is a bond with varying coupon .
• Periodically the interest rate payable for the next six months is
set with reference to a market index such as Libor.

Zero coupon Bond

• The bond is purchased at a substantial discount from the face
value and redeemed at the face value on maturity.
• There is no interim interest payment .
Convertible Bonds
The bonds that can be exchanged for equity shares of the
issuing company.

Foreign Bonds
Is issued by a foreign borrower to the investors in a national
capital market and denominated in that nation’s currency.

E.g. a German MNC issuing dollar denominated bonds to

the US investors .
Global Bond
A bond denominated in a particular currency but sold to
investors in national capital market other than the country that
issued the denominating currency.

E.g. a Dutch company issuing dollar denominated bonds to

investors in U.K. , Switzerland, Japan .

Bearer Bond
Possession is the evidence of ownership.

Registered Bonds
The owner’s name is on the bond and it is also recorded by the
issuer.
Thank you