8741596 [ojklsorjnturyurces of foreign capital
DESCRIPTION
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Kalyan Teja Nimushakavi
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FDI
FII
ADR/GDR
Foreign Currency Loans
ECB
FCCB
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• History – 1927
• What are DRs ?
• Why DR s?
• Mechanisms
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• DR s are US Negotiable Securities issued by a depositary bank that represent the ownership of certain underlying shares of a non US Company.
• DR Programs allow the non US companies to get their shares listed and traded in the US market. Some structures allow them to raise capital even.
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• For Company
Overseas capital markets’ access
Enhances visibility
Increased liquidity
Fair Valuation
Mergers & Acquisitions
Privatization
• For Investors
To Diversify their portfolio
Transactions in local currency
Information easily available
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• DRs are frequently identified by the markets in
which they are available or the rules and regulations
associated with the structure.
• ADRs – Traded in US markets
• GDR s – Typically traded in one or more markets
• EDR s – Traded in Euro markets
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OTC Market
Exchange Listed
Capital Raising
Privately Placed
OTC Market
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1. Purchase request
2. Contact to purchase
3. Shares Purchase
4. Depositing Shares
5. Confirmation
6. Issue of DR s
7. Transfer of DR s
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Foreign Investors
Foreign Stock Exchange
Issuer Company
DTC/EuroClear/ Clear sream
Local Custodian
Depositary Bank
DividendsMoney
Underlying SharesAgreement
Listing Requirements
Money DR sDividends
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Sale of DRs:
Intra market trading
Cancellation (Cross border trading)
1. Cancellation Request
2. Surrender DR s
3. Confirmation
4. Release of Shares into home market
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• Due to the mechanisms involved , DR s are prone to following
risks
Inflation Risks of the respective countries
Exchange Rate risks
Political risks
Finally Performance of the company
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ADR
• Higher Valuation
• Higher participation
• Wide research Coverage
• More processing time i.e. 5-6
months
• Stringent regulatory requirements
• US GAAP
• Higher Costs associated
GDR
• Lower Valuation
• Lower participation
• Limited research coverage
• Less processing time
• Relaxed requirements
• IAS
• Relatively Lower costs
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• Foreign currency loans are given by the domestic banks to
Corporates.
• These loans are given from the deposits of the Foreign
currency accounts Non Resident Indians.
• However Credit rating of the company plays an important role
• Terms differ for different banks in terms of requirements
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• These funds are primarily available to
Export Oriented Units (Project Financing)
Importing companies (Payments)
Pubic Sector Units (For purchase of capital goods)
• Relatively Cheaper Funds
• Lesser Processing time
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• Funds can be used for following:
Working Capital Management (3-18 Months)
Project Financing
New Capacity augmentation – Capital goods
Importers for meeting import obligations
• End Use Restrictions:
Investment in Capital Markets
Investment in Real Estate Sector
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• Indian companies/entities other than individuals, trusts and
non‐profit making organisations can raise money from abroad
• These include buyer’s credit, bank loans, securities issued,
credits from official export credit agencies
• These funds are made available by foreign banks, financial
institutions abroad like IMF, World Bank, UBS, ADB etc.
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• The regulations are subject to change from time to time
• There is a cap on the total amount that can be taken in a year
through the route of ECB s
• Generally three years of good financial performance and
prudent debt management are prerequisites for ECB
• ECB s - approved by RBI.
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• Usage Specifications:
Raised only for Investment (Capital Goods, Capacity augmentation)
Permitted for Overseas Acquisitions (JVs or Subsidiaries)
Permitted for acquisition of shares in PSUs (Disinvestment)
• Restrictions:
Investment in Capital Markets
Investment in Real Estate Sector
On Lending of funds
Domestic Companies Takeover
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• Quasi Debt instrument with an option of conversion
• All the transactions happen in currency other than the local
currency Receipts from issue of FCCB Coupon Payments Redemption
• Advantages of both debt and equity instrument
• Companies issuing FCCB s need to hedge (Till maturity
period)
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• FCCBs are generally of two types
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• Due to the option of conversion,
Associated with low Coupon rates (30-40 % lesser)
Associated with Premium offerings (30-70 % higher)
• Availability of Zero Coupon Bonds
• Redemption based on future expected cash flows
• Intention of conversion both from lender and issuer
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• Approvals
• Processing time
• Ease of availability
• Purpose of borrowing
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