International Financial Markets & Sources of funding for MNCs

Discussion Plan
Types of Exposures Sources of Long Term Funds Sources of Short Term Funds and Cash Management in MNCs

International Financial Environment

International Monetary Fund

International Monetary System Foreign Exchange Market

MNCs

International Banks

International Capital markets International Financial Institutions

Financial Intermediaries

Euro Money Market

Euro Money Market

Euro Currency Euro Deposits Euro Loans

Loan syndication Euro Banking and Central Banks

Euro Banking

International Capital Markets

International Bond Market
Foreign Bonds Yankee Bonds Samurai Bonds Bulldog Bonds Euro Bonds Euro/Dollar Euro/Yen Euro/Pounds

International Equity Market

Foreign Equity Euro Bonds

ADR

GDR

International Bond Market

Foreign Bonds Vs Euro Bonds International Debt Instruments

Straight Euro Bonds Convertible Euro Bonds Bonds with warrants Currency cocktail Yankee Bonds Samurai Bonds Floating Rate Notes (FRN) Bulldog Bonds

International Equity Market

GDR ADR EDR Portfolio Investment vs FDI

Shares

Depository

Custodian

Luxemburg Stock Exchange

GDRs

Company

GDRs

Lead managers & Syndicate

GDRs
Investors

Mechanism of GDRs

Shares
Depository
Depository Agreement

GDRs

Custodian
English Legal Counsel
Luxemborg listing Agent Listing Agreement

Indian Legal Counsel

PR consultant

Company
Subscription Agreement

Euro clear Cedel & DTC

Auditor

English Legal Counsel

Luxemborg Stock Exchange

Lead managers & Syndicate

Indian Legal Counsel

Investors

Mechanism of GDRs

GDRs
Pre Issue
Week 0-4 Week 5-7 Week 8

Week 9 Week 10

Discuss Strategy, Obtain legal advice, prepare tentative plan of issue Nominate Lead Manager, co managers, depository, bankers etc. Meetings between LM, auditors, legal advisors, preparation of official circular LM completes & sends preliminary offer offer document to co-managers & underwriters. Road shows and investor meets Launch & syndication by LM, foreign listing, trading approval etc.

GDRs
Advantages

Easy access to foreign capital markets

Lower leverage and reduces interest rate burden No Cash redemption Free of foreign exchange risk Stabilisation effect from enhancing trading facility Immediate EPS dilution Dividends not tax deductible No downside protection for investors

Disadvantages

FCCBs
Advantages

Sell Shares at Premium No immediate EPS dilution Appeals to defensive investor No bond repayment if converted Increase leverage Increase interest burden Foreign exchange risk

Disadvantages

External Commercial Borrowings (ECBs)

Automatic Route Approval Route

Working Capital Management in MNCs

INTERNATIONAL CASH MGMT ACCOUNTS RECEIVABLE MGMT INVENTORY MANAGEMENT SHORT-TERM FINANCING

Working Capital Management in MNCs

Objective of Cash Management in MNCTo maximize return by proper allocation of short term investments To minimize cost of borrowing by accessing different money markets

INTERNATIONAL CASH MGMT

Key Areas: 1. Organization 2. Collection/Fund Disbursement 3. Interaffiliate Payments Netting 4. Excess-Funds Investment 5. Optimal Global Cash Balances 6. Cash Planning/Budgeting 7. Bank Relations

Centralised Vs Decentralised CM
Advantages Efficient liquidity levels Enhanced profitability Quicker headquarter action Decision making enhanced Better volume currency quotes Greater cash management expertise Less political risk

Centralised Vs Decentralised CM
Disadvantages Complete centralization is practically impossible Local problems in dealing with customers Conflict of interest among parent and subsidiary

Techniques to optimise cash flows

Accelerating cash inflows Managing blocked funds Leading and Lagging Netting Transfer Pricing Investing excess cash

Netting
Offset payments of affiliate receivables/ payables so that net amounts only are transferred Bi lateral Netting Multilateral Netting

Transfer Pricing
China China

4m$ 1m$ 3.5 m $

India India

1.75 m $ 6m$
UK UK

2m$ 2m$ 1m$ 5.25m $

Parent USA Parent USA

Sources of short term funds

Trade Credit
Pre Shipment Post Shipment

Bill Discounting Export Financing