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Kalyan Teja Nimushakavi

FDI

Foreign Currency Loans

FII

ECB

ADR/GDR

FCCB

History 1927

What are DRs ?

Why DR s?

Mechanisms

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.

For Company

For Investors

Overseas capital markets access

To Diversify their portfolio

Enhances visibility

Transactions in local currency

Increased liquidity

Information easily available

Fair Valuation
Mergers & Acquisitions
Privatization

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

OTC Market

OTC Market

Exchange Listed

Capital Raising

Privately Placed

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

Agreement

Issuer
Company

Underlying Shares

Local
Custodian

Dividends

Money
Depositary
Bank

Money

Listing Requirements
DR s
Dividends

Foreign
Investors

Foreign Stock
Exchange

DTC/EuroClear
/ Clear sream

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

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

ADR

GDR

Higher Valuation

Lower Valuation

Higher participation

Lower participation

Wide research Coverage

Limited research coverage

More processing time i.e. 5-6

Less processing time

months

Relaxed requirements

Stringent regulatory requirements

IAS

US GAAP

Relatively Lower costs

Higher Costs associated

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

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

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

Indian companies/entities other than individuals, trusts and


nonprofit making organisations can raise money from abroad

These include buyers 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.

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.

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

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)

FCCBs are generally of two types

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

Approvals

Processing time

Ease of availability

Purpose of borrowing