1. Euromoney Markets 1 Euro-money Markets

2. Euromoney Markets2 (concept of euromoney)  Eurodollar is a dollar deposit outside the US  Euroyen is a yen deposit outside Japan  Eurosterling is a sterling deposit outside the UK  The key point to note here is that these deposits are outside the regulation of the respective central banks

3. Euromoney Markets3 Origins of the Euromarket  A most unlikely source  The former Soviet Union, a big importer of food grains from the US  Had dollars ready for payment to the US exporter  Deposited these dollars in a French bank in Paris, rather than in a bank in the US  This is supposed to have been the origin of eurodollars

4. Euromoney Markets4 Major stimuli for the growth of euro-markets  Excessive regulation of banking in the US and the UK  Growth of transnational corporations  Convertibility of currencies

5. Euromoney Markets5 Euro-markets (Contd.,)  A large and efficient market, in which a firm can raise large amounts (say $ 500 million) in about three months, as compared with :  World Bank : 2-3 years  Bilateral Loans : 2-3 years

6. Euromoney Markets6 Eurocurrency Market  Involves a chain of deposits and a chain of borrowers and lenders  There is a chain of ownership between the original dollar depositor and the US bank  There is a changing control over the deposit and the use to which the money is put

7. Euromoney Markets7 Question How does the euro-market survive, as a market, separate from the domestic dollar market?

8. Euromoney Markets8 Possible answer to question on the previous slide  Absence of central bank regulation enables euro- banks to survive on a lower spread than banks in the domestic dollar market

9. Euromoney Markets9 How the Euro-money Market Survives  Assume domestic interest rate of 10 % and a reserve requirement of 5%  Effective cost of domestic credit = 10 / 95 = 10.53%  Which means that the euro-bank can afford to pay up to 53 basis points more on euro-dollar deposits  And charge a slightly lower interest on eruo dollar loans  In other words, euro-banks work on a thinner spread

10. Euromoney Markets10 Possible reasons for euro deposit rates being higher  Must be higher to attract domestic deposits  Euro-banks can afford to pay higher rates based on their lower regulatory costs  Euro-banks not subject to the interest rate ceilings that prevail in many countries  A larger percentage of deposits can be lent

11. Euromoney Markets11 Possible reasons for eurocurrency lending rates being lower  Larger lending base due to lack of reserve requirements  Lower regulatory expenses (eg. No deposit insurance on euro-deposits)  No targeted lending  Well-known borrowers, reducing the cost of credit appraisal  Larger average loan size and standardized loan arrangements

12. Euromoney Markets12 Loan Syndications  Loan syndications are common in the euro-market A loan syndicate normally consists of the following  A lead bank  Co-managers  Participating banks

13. Euromoney Markets13 Element of cost  Front-end fee (paid upfront to the lead bank)  Commitment fee (charged on the un-drawn amount)  Spread over the base rate (normally Libor) In the case of euro-loans, this reflects country risk, in addition to credit risk  Question : What should be the bargaining posture of a borrowing firm? Where to give in and where to stand firm?

14. Euromoney Markets14 Example of Euro-loan raised by NALCO  India’s first major euro-loan, $ 680 million  Lead Bank : Bank National de Paris  Co-managers: State Bank of India, Bank of America and Credit Agricole  Participating Banks : A total of 52

15. Euromoney Markets15 Nalco’ s euro-loan (Contd.,) Fee Structure  Front-end fee : 5/8 %  Commitment Fee : 1/4 %  Spread over Libor : 1/2 % over Libor  Guaranteed by the Government of India

16. Euromoney Markets16 Government Policy In recent years, the Indian government has encouraged the use of euro-loans by Indian companies, particularly in infrastructure and other priority sectors of the economy Government’s major concerns seem to be to minimize short-term ( maturity less than one year ) loans and to encourage end use in terms of expansion, modernization and up-gradation of technology A liberal policy regime that permits companies to borrow ( or to prepay ) upto $ 500 million on the automatic route

17. Euromoney Markets17 International Bonds  All international bonds are sold initially to investors outside the country of the borrower Major Instruments  Euro-bonds  Foreign bonds  Floating rate notes (FRNs)  Euro-commercial paper

18. Euromoney Markets18 Eurobond  Is underwritten by an international syndicate of bankers and security firms  Is sold exclusively in countries other than the one in whose currency the issue is denominated Example : IBM issuing dollar bonds in Europe and Japan

19. Euromoney Markets19 Foreign Bond  Is underwritten by a syndicate composed of members from a single country  Sold principally within that country  Denominated in the currency of that country Example : A Swedish company issuing dollar bonds in the US Proliferation of terms in this area: Example: Yankee Bonds, Samurai Bonds, and Bull- dog Bonds

20. Euromoney Markets20 Floating Rate Notes  Are issued by sovereign nations, state enterprises and other high-quality borrowers  Underwritten by investment bankers, as an alternative to medium and long-term syndicated bank loans  Sells at lower interest margins over Libor, and have slightly longer maturities than syndicate loans

21. Euromoney Markets21 A borrower’s graduation  Stage 1 : Syndicate Loans  Stage 2 : Floating Rate Notes  Stage 3 : Fixed Rate Bonds As a borrower’s credit rating improves and he becomes better known, he moves up the ladder from syndicated loans to FRNs to fixed rate bonds. (Example : ONGC)

22. Euromoney Markets22 Global Depositary Receipts ( GDR )  A depository receipt is basically a negotiable certificate denominated in US dollars that represents a non-US company’s publicity traded local currency (eg. Indian rupee) equity shares GDR Process :  Issuing company delivers local currency shares to depositary’s local custodian bank  Against these, the depositary bank issues depositary receipts in US dollars  These DRs then traded freely in overseas markets, like any other dollar-denominated security

23. Euromoney Markets23 GDRs (contd.,)  DRs are issued not by the company but an international bank acting as a depositary bank (the Bank of New York, in the case of most Indian issues)  Each DR represents a specified number of the company’s shares which are physically held by a custodian appointed by the depositary bank ( say 2 Infosys shares per GDR )  In the company’s books, the depositary bank’s name appears as the holder of the shares

24. Euromoney Markets24 GDRs (contd.,)  The Depositary gets the dividends from the company in local currency and distributes them to DR holders after converting into dollars at the going rate of exchange  Like eurobonds, GDRs are bearer securities and trading / settlements are done by book entries through Cedel (Luxembourg) or Euroclear (Brussels), which are both large clearing houses in the eurobond market

25. Euromoney Markets25 GDRs (contd.,)  The DRs are exchangeable with the underlying shares either at any time or after the lapse of a specified period of time ( say one year )  The exchanged shares could then be traded in the local stock market  The issue price depends on the market price of the underlying shares at the time of issue  Underwriting fees and commission typically work out to around 4% with other expenses being similar to those in the case of bond issues

26. Euromoney Markets26 Question What are the major roles of a depositary bank ?

27. Euromoney Markets27 The roles of a depositary bank Programme manager Custodian Issuer of depositary receipts Registrar and transfer agent Paying agent ( dividends, proceeds on sale of DRs etc) Information agent

28. Euromoney Markets28 Question What are the likely benefits of a GDR issue to the issuer ?

29. Euromoney Markets29 GDR : Potential benefits to issuers  Access to global markets  Raising foreign currency equity  Perceived advantages of raising equity over debt :  No repayment of principal  Generally lower servicing costs  (In quite a few cases) Higher prices than would have been possible in a domestic issue  No currency risk to issuer  The convenience of dealing with one shareholder, the depository bank

30. Euromoney Markets30 Question What are some of the potential benefits to investors in a GDR issue?

31. Euromoney Markets31 GDR :Potential benefits to investors Portfolio diversification ( regional returns are cyclical, much of the long-term growth is outside the developed world b/o demographics, many global markets outperform indices such as the S & P 500 ) Instrument denominated in a convertible currency Traded in developed stock markets ( contd.. Next slide )

32. Euromoney Markets32 GDR :Potential benefits to investors On the other hand : Currency risk Risks inherent in equity investments ( dividend uncertainty and capital loss) Withholding taxes ( not in India ) Tax on capital gains ( now limited to 10% on ST capital gains ), applicable only in case of conversion to underlying shares and sale in the secondary market

33. Euromoney Markets33 American Depositary Receipt (ADR) What is an ADR? A negotiable certificate or “receipt” issued in the US representing ownership of securities of a non- US based company issued in a foreign market They are considered a US domestic security under US law and are quoted and traded in US dollars offering a convenient and simple means to invest in overseas companies (contd. Next slide)

34. Euromoney Markets34 American Depositary Receipt (ADR) ADRs offer the benefit of protections and transparency offered by US securities regulations ADRs normally offer lower trading and custody costs than shares bought directly in the foreign market

35. Euromoney Markets35 A brief history of ADRs 1927 : First DR progamme created. Selfridges, UK- based Department Store, established to facilitate investment in overseas stocks by large US institutions 1950s : Several large MNCs in Western Europe, Australia and Japan, started to list in the US 1970s : Dozens of ADR programmes developed for mining companies (contd. Next slide)

36. Euromoney Markets36 A brief history of ADRs 1980s : Market experienced tremendous growth 1990s : Established in global markets ( ADRs and GDRs) 2004 : ADRs accounted for 35% of global equities ( total global USD 2.4 trillion) 2009 : More than 2000 sponsored DR programmes from over 77 countries

37. Euromoney Markets37 American Depositary Receipt (ADR) Issuer ( say Infosys Technologies ) assigns a bank ( say the Bank of New York ) as depositary for its sponsored DR programme Depositary issues and cancels ADRS and acts as registrar, transfer agent and paying agent for the DR programme Investor generally uses broker or depositary’s direct investment plan as the intermediary to issuer ( eg. Bank of New York – Direct Programme )

38. Euromoney Markets38 ADR structures Objective: Broaden investor base Level 1 : over-the-counter ( eg. Deutsche Bank, a large bank as well as depositary ) Level 2 : Exchange-listed Objective : Raise capital Level 3 : Public offering Level 4 : Rule 144 A ( Private placement) Levels 2 and 3 must comply with US GAAP and full disclosure

39. Euromoney Markets39 Where do ADRs trade? Like other US securities, ADRs can trade on the NYSE, NASDAQ and AMEX, or may be over the counter ( OTC). NYSE –Euronext is by far the largest,with over 60% of volumes If an ADR is listed, you can benefit from readily available price and trading information An ADR can represent any number or fraction of underlying shares ( say 2 Infosys shares for every ADR )

40. Euromoney Markets40 ADR Trends At end of year 2008, a record 2132 sponsored DR programmes were available to investors DR liquidity reached an all-time high in 2008 Trading value reached nearly $ 4.4 trillion

41. Euromoney Markets41 Benefits of ADRs to investors Convenience Quoted and traded in US dollars Trade, clear and settle in accordance with US regulations permitting prompt dividend payments and timely corporate action notifications Easy access to markets that have some of the world’s best companies Contd. Next slide

42. Euromoney Markets42 Benefits of ADRs to investors Opportunity to diversify portfolio while using US dollars ADRs tend to outperform their home markets ADRs offer lower trading and custody charges

43. Euromoney Markets43 Benefits of ADRs to Issuer Adhere to transparency and disclosure standards of the world’s largest equity market Increase retail and institutional investor acceptance Access to US investors who are unable to invest overseas

44. Euromoney Markets44 Benefits of ADRs to Issuer Enhance share valuation Increase liquidity by enlarging the market for the company’s share Stock option programme for US employees

45. Euromoney Markets45 Question What might be some of the risks involved in investing in ADRs?

46. Euromoney Markets46 Possible Risks Investing in any security involves a certain amount of risk, along with rewards As ADRs are backed by non-US securities, the following specific risks apply: Currency risk Country risk – political, economic and social conditions in the home market may impact the stock price Also accounting standards vis-à-vis US GAAP