RAISING FUNDS FROM OFF SHORE SOURCES

Off shore sources funds Domestic financial system – helps raise finance from domestic funds International financial markets transfer funds across countries Main sources are - Eurocurrency loans - Euro bonds - ADRs & GDRs

Eurocurrency Loans Is freely convertible currency deposited outside the country of origin These loans are of high volume & are usually syndicated by more than bank. Loans are on basis of floating rate of interest ie LIBOR + floating rate of interest Can be borrowed in a variety of currencies & can be repaid in similar currencies

Euro bonds & Foreign bonds Are sold outside the country in whose currency they are denominated. Eg an Indian co issusing dollar bonds in Japan. Eurodollar, euroyen etc Foreign bond is denominated in the currency of country where issued. Eg Indian co issuing dollar bonds in US.

Euro Convertible Bonds/Foreign Currency Convertible Bonds Unsecured Debt. Sold in any freely convertible currency. Carry a fixed rate of interest (single digit coupon) Option to convert into a fixed number of Equity Shares: upon conversion becomes GDR’s and then equity if desired. Interest and redemption (when not converted) in convertible currency.

Depositary Receipts Difficult for co’s from developed countries to raise equity funds from developed countries due to strict disclosure norms Is an indirect method of raising funds thro equity route Is the no of equity shares deposited with a foreign bank ADR in American market & GDR in UK market An Indian company issues a no of shares to a FI in the foreign country called depositary. This bundles the shares and sells the same as DR

Domestic Custodian bank Investment Banker (overseas depository Bank) issuer Of ADR/ GDR 1.Public 2.Private 3.Number of ADR/GDR 4.Issue price 5.Rate of Interest 6.conversion Price 7.coupon Rate Pricing of conversion option Issu’g Co

For Eg Nagarjuna Company wants to issue 10 lakh ADRs of face value Rs 10. And conversion rate is 1 INR=$ 50. The company is raising Rs 1 crore. As 1INR=$ 50, the company will issue 5 equity shares as 1 ADR

Who can issue An Indian co meeting eligibility norms for IPO Not barred by SEBI Unlisted co cannot unless simultaneous ipo proposed Shall appoint eligible intermediaries Consistent track record for 3 years Regulations of FDI fulfilled Intermediaries should be registered in that country

Legal framework Approvals from Ministry of Finance, Ministry of Corporate Affairs, RBI, Stock Exchanges, Financial Institutions, Board of Directors, shareholders Regarding quantum of issue, country, time etc

Intermediaries Lead mgr Co lead mgr Overseas depositary bank Domestic custodian bank Printers Legal Underwriters Listing agents Auditors Process of issue the same

Advantages of ADR/GDR Can be listed on any of the overseas stock exchanges/OTC/Book entry transfer system Freely transferable by non resident They can be redeemed by ODB The ODB should request DCB to get the corresponding underlying shares released in favour of non resident investors.(Share holder of issuing company)

Company’s point of view Enhancement of corporate image of the company. A host of foreign fund managers are speculating on how best to cash in on the appetite for Indian shares. Prepayment of foreign currency and rupee loans facilitated. Low cost of issuance(4 to 5%) of the issue size. Company not concerned with foreign exchange rate fluctuations as these are to the account of the investor

Advantages of FCCB/ECB Low interest rate Fixed interest Unsecured Option to convert into fixed no of shares No voting rights

Disadvantages of FCCBs Limit on deployment of funds No projection of cap structure No projection of cash flows

Advantages and Disadvantages of Key Financing Alternatives Ideal situation to issue ADR’s Large current and future needs involved in International Industries. GDR’s Specialized Regional base. Not a frequent visitor to International Capital Markets. ECB’s Fast-rising price Tremendous Growth prospects in near future Advantages Ideal situation to issue ADR’s Large current and future needs involved in International Industries. GDR’s Specialized Regional base. Not a frequent visitor to International Capital Markets. ECB’s Fast-rising price Tremendous Growth prospects in near future

Disadv Extensive timing, disclosure & On- going filling requirements Recognition with US GAAP Higher issuance cost More limited investor Universe More limited liquidity Moderate valuation Some timing and disclosure needs increase debt- equity ratio Limits access to US capital markets if not $ denominated or US registered Lowest level of liquidity after conversion

ADRGDRecb Advantages Broad investor and distribution Pricing premium and prestige Best liquidity and research coverage More stable after market performance Maximum flexibility in accessing various equity and debt markets postoffering No US SEC disclosure requirements and liability issues with ADRs Can be executed more quickly and easily than ADRs Lower issuance cost than ADRs Sell equity at premium Incremental investor base Minimizes dilution Shortest timing schedule Lowest issuance cost