Ways to raise finance from international market:-

A financial market is where people and institutions who are in need of money meet
those who have excess money and want to deploy it for productive purpose. Thus it is a
place where borrowers interact with lenders and negotiate a deal with mutual
agreement.

Most financial markets have periods of heavy trading and demand for securities; in these
periods, prices may rise above historical norms. The converse is also true – downturns may
cause prices to fall past levels of intrinsic value, based on low levels of demand or other
macroeconomic forces like tax rates, national production or employment levels.

With rapid growth in globalization and foreign trade, need has arisen to procure finance
from the international markets as well. There could be various reasons to raise finance
from the international market. These could be reasons such as inadequate domestic
finance, technology gap, development of basic infrastructure etc.

Some of the ways in which finance can be raised in the international market are as
below:

1) Foreign Collaboration: In India joint participation of foreign and domestic capital

has been quite common. Foreign collaboration could be either in the form of joint
participation between private firms, or between foreign firms and Indian
Government, or between foreign governments and Indian Government.

2) Bilateral Government Funding Arrangement: Aids provided by the developed

countries in the form of loans and advances, grants, subsidies to the
governments of under-developed and developing countries. The aid is provided
usually for financing government and public sector projects. Funds are provided
at concessional terms in respect of cost (interest), maturity, and repayment
schedule.
3) World Bank: An MNC Financial institution provides long term capital for
reconstruction and development of member countries. It comprises of three
related financial institutions:-

a) International Bank for reconstruction and redevelopment (IBRD): Makes

loans at nearly conventional terms for projects of high economic priority. A
government guarantee is necessary for World Bank funding. Its main
emphasis is on infrastructure development.

b) International Financial Corporation (IFC): The purpose of IFC is to finance

various projects in the private sector through loans and equity participations
and to serve as catalyst for flow of additional private capital investments to
developing countries. Its emphasis is on providing risk capital to
manufacturing firms that have reasonable chance of earning the investors
required rate of return and that which will provide economic benefits to the
nation.
c) International Development Association: The poorest of the less developed
countries normally access funds from the IDA. IDA is authorized to make soft
loans and does not require government guarantees

4) External Commercial Borrowings: These include funds raised in the form of

borrowings from agencies like US EXIM Bank, Japanese EXIM Bank, ECGC of
UK etc usually for financing government and public sector projects. Funds are
provided at concessional terms in respect of cost (interest), maturity, and
repayment schedule.

5) The Foreign Bond Market: It is a bond issued in a country's national bond

market by an issuer not domiciled in that country where those bonds are
subsequently traded. This is an important part of the international financial
markets. It includes that portion of the domestic bond market that represents
issues floated by foreign companies or Governments. They are subject to local
laws and must be denominated in local currency. E.g.: Dollar denominated
foreign bonds sold in US markets is Yankee bond; Yen Bonds sold in Japanese
banks are called Samurai bonds, in U.K. market it is Bulldog bond.
 Some of its characteristics:-

 Regulatory authorities in the country where the bond is issued impose

rules governing the issuance of foreign bonds.

 They can be denominated in any currency.

 They can be publicly issued or privately placed.

6) Euro Issues After the onset of the process of globalization of Indian economy,
the govt. thought it imperative to allow the companies in India to raise funds from
foreign market in foreign exchange. In case of foreign capital, since foreign
exchange is involved, it is controlled and regulated by the RBI and the govt. In
November1993, the govt. announced the scheme of issue of securities by Indian
companies in capital markets abroad. This scheme is known as “issue of foreign
currency convertible bonds and ordinary shares scheme 1993”. The scheme has
been reviewed and several amendments have been made in the scheme from
time to time.

The scheme has permitted Indian companies to two types of securities:

a) Foreign Currency Convertible Bonds (FCCBs): The FCCB means bonds issued
in accordance with the relevant scheme and subscribed by a non-resident in foreign
currency and convertible into depositary receipts or ordinary shares of the issuing
company in any manner, either in whole or in part, on the basis of any equity related
warrants attached to debt instruments. A company seeking to issue FCCBs should
have consistent track record of good performance for a period of three years. The
FCCBs are unsecured; carry a fixed rate of interest and an option for conversion into
affixed number of equity shares of the issuer company. Interest on redemption price
(if conversion option is no exercised) is payable in dollars. Interest rates are very low
by Indian domestic standards. FCCBs are denominated in any freely convertible
foreign currency, generally in US $.
b) Depository Receipts (DRs): A DR means any instrument in the form of depository
receipt or certificate created by the overseas depository bank outside India and
issued to non-resident investors against the issue of ordinary shares. In depository
receipt, negotiable instrument evidencing a fixed number of equity shares of the
issuing company generally denominated in U.S. $. DRs are commonly used by the
company which sells their securities in international market and expanding their
share holdings abroad. These securities are listed and traded in international stock
exchanges. These can be either American depository receipt (ADR) or global
depositary receipt (GDR). ADRs are issued in case the funds are raised through
retail market in United States. In case of GDR issue, the invitation to participate in
the issue cannot be extended to retail US investors. While DR is denominated in any
freely convertible foreign currency, generally in US dollars are issued by the
depository in the international market, the underlying shares denominated in Indian
rupees are issued in the domestic market by the issuing company.

 American Depositary Receipt: - It represents ownership in the shares of a

non-U.S. company that trades in U.S. financial markets. The stock of many
non-US companies trade on US stock exchanges through the use of ADRs.
ADRs enable U.S. investors to buy shares in foreign companies without the
hazards or inconveniences of cross-border & cross-currency transactions.
ADRs carry prices in US dollars, pay dividends in US dollars, and can be
traded like the shares of US-based companies.

Each ADR is issued by a U.S. depositary bank and can represent a fraction

of a share, a single share, or multiple shares of the foreign stock. An owner
of an ADR has the right to obtain the foreign stock it represents, but US
investors usually find it more convenient simply to own the ADR. The price of
an ADR often tracks the price of the foreign stock in its home market,
adjusted for the ratio of ADRs to foreign company shares.

Types of ADR program

When a company establishes an American Depositary Receipt program, it
must decide what exactly it wants out of the program, and how much time,
effort and resources they are willing to commit. For this reason, there are
different types of programs that a company can choose.

Unsponsored shares

Unsponsored shares are a form of Level I ADRs that trade on the over-the-

counter (OTC) market. These shares are issued in accordance with market
demand, and the foreign company has no formal agreement with a
depositary bank. Unsponsored ADRs are often issued by more than one
depositary bank. Each depositary services only the ADRs it has issued.
Due to a recent SEC rule change making it easier to issue Level I depositary
receipts, both sponsored and unsponsored, hundreds of new ADRs have
been issued since the rule came into effect in October 2008. The majority of
these were unsponsored Level I ADRs and now approximately half of all
ADR programs in existence are unsponsored.

Level I (OTC)

Level 1 depositary receipts are the lowest level of sponsored ADRs that can
be issued. When a company issues sponsored ADRs, it has one designated
depositary who also acts as its transfer agent.
A majority of American depositary receipt programs currently trading are
issued through a Level 1 program. This is the most convenient way for a
foreign company to have its equity traded in the United States.
Level 1 share can only be traded on the OTC market and the company has
minimal reporting requirements with the U.S. Securities and Exchange
Commission (SEC). The company is not required to issue quarterly or annual
reports in compliance with U.S. GAAP. However, the company must have a
security listed on one or more stock exchange in a foreign jurisdiction and
must publish in English on its website its annual report in the form required
by the laws of the country of incorporation, organization or domicile.
Companies with shares trading under a Level 1 program may decide to
upgrade their program to a Level 2 or Level 3 program for better exposure in
the United States markets.

Level II (listed)

Level 2 depositary receipt programs are more complicated for a foreign

company. When a foreign company wants to set up a Level 2 program, it
must file a registration statement with the US SEC and is under SEC
regulation. In addition, the company is required to file a Form 20-F annually.
Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S.
company. In their filings, the company is required to follow U.S. GAAP
standards.
The advantage that the company has by upgrading their program to Level 2
is that the shares can be listed on a U.S. stock exchange. These exchanges
include the New York Stock Exchange (NYSE), NASDAQ, and the American
Stock Exchange (AMEX).
While listed on these exchanges, the company must meet the
exchange’s listing requirements. If it fails to do so, it may be delisted and
forced to downgrade its ADR program.

Level III (offering)

A Level 3 American Depositary Receipt program is the highest level a foreign
company can sponsor. Because of this distinction, the company is required to
adhere to stricter rules that are similar to those followed by U.S. companies.
Setting up a Level 3 program means that the foreign company is not only
taking steps to permit shares from its home market to be deposited into an
ADR program and traded in the U.S.; it is actually issuing shares to raise
capital. In accordance with this offering, the company is required to file
a Form F-1, which is the format for an Offering Prospectus for the shares.
They also must file a Form 20-F annually and must adhere to U.S. GAAP
standards. In addition, any material information given to shareholders in the
home market, must be filed with the SEC through Form 8K.
 Foreign companies with Level 3 programs will often issue materials that are
more informative and are more accommodating to their U.S. shareholders
because they rely on them for capital. Overall, foreign companies with a
Level 3 program set up are the easiest on which to find information.

 Global Depository Receipt:- It is a certificate issued by a depository bank,

which purchases shares of foreign companies and deposits it on the account.
GDRs represent ownership of an underlying number of shares.

Global Depository Receipts facilitate trade of shares, and are commonly used
to invest in companies from developing or emerging markets.

Prices of GDR are often close to values of related shares, but they are traded
and settled independently of the underlying share.