Capital markets: Meaning: Capital markets are markets where people, companies, and governments with more funds

than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income). Stock and bond markets are two major capital markets. Capital markets promote economic efficiency by channelling money from those who do not have an immediate productive use for it to those who do. Capital markets carry out the desirable economic function of directing capital to productive uses. The savers (governments, businesses, and people who save some portion of their income) invest their money in capital markets like stocks and bonds. The borrowers (governments, businesses, and people who spend more than their income) borrow the savers investments that have been entrusted to the capital markets. !or e"ample, suppose # and $ make %s. &',''' in one year, but they only spend %s.(',''' that year. They can invest the )',''' * their savings * in a mutual fund investing in stocks and bonds all over the world. They know that making such an investment is riskier than keeping the )',''' at home or in a savings account. $ut they hope that over the long*term the investment will yield greater returns than cash holdings or interest on a savings account. The borrowers in this e"ample are the companies that issued the stocks or bonds that are part of the mutual fund portfolio. $ecause the companies have spending needs that e"ceeds their income, they finance their spending needs by issuing securities in the capital markets.

The Structure of Capital Markets Primary markets: The primary market is where new securities (stocks and bonds are the most common) are issued. The corporation or government agency that needs funds (the borrower) issues securities to purchasers in the primary market. $ig investment banks assist in this issuing process. The banks underwrite the securities. That is, they guarantee a minimum price for a business s securities and sell them to the public. Since the primary market is limited to issuing new securities only, it is of lesser importance than the secondary market. Secondary market: The vast majority of capital transactions, take place in the secondary market. The secondary market includes stock e"changes (like the +ew ,ork Stock -"change and the Tokyo +ikkei), bond markets, and futures and options markets, among others. #ll of these secondary markets deal in the trade of securities. Securities: The term .securities. encompasses a broad range of investment instruments. /nvestors have essentially two broad categories of securities available to them0 ). -1uity securities (which represent ownership of a part of a company) 2. 3ebt securities (which represent a loan from the investor to a company or government entity). Equity securities: Stock is the type of e1uity security with which most people are familiar. 4hen investors (savers) buy stock, they become owners of a .share. of a company s assets and earnings. /f a company is successful, the price that investors are willing to pay for its stock will often rise and shareholders who bought stock at a lower price then stand to make a profit. /f a company does not do well, however, its stock may decrease in value and shareholders can lose money. Stock prices are also subject to both general economic and industry*specific market factors. /n our e"ample, if Carlos and #nna put their money in stocks, they are buying e1uity in the company that issued the stock. Conversely, the company can issue stock to obtain e"tra funds. /t must then share its cash flows with the stock purchasers, known as stockholders.

Debt securities: Savers who purchase debt instruments are creditors. Creditors, or debt holders, receive future income or assets in return for their investment. The most common e"ample of a debt instrument is a bond. 4hen investors buy bonds, they are lending the issuers of the bonds their money. /n return, they will receive interest payments (usually at a fi"ed rate) for the life of the bond and receive the principal when the bond e"pires. +ational governments, local governments, water districts, global, national, and local companies, and many other types of institutions sell bonds. Internationali ation of Capital Markets in the !ate "##$s 5ne of the most important developments since the )67's has been the internationali8ation, and now globali8ation, of capital markets. 9et s look at some of the basic elements of the international capital markets. ). The International Capital Market of the !ate "##$s %as composed of a &umber of Closely Integrated Markets %ith an International Dimension: $asically, the international capital market includes any transaction with an international dimension. /t is not really a single market but a number of closely integrated markets that include some type of international component. The foreign e"change market was a very important part of the international capital market during the late )66's. /nternationally traded stocks and bonds have also been part of the international capital market. Since the late )66's, sophisticated communications systems have allowed people all over the world to conduct business from wherever they are. The major world financial centres include :ong ;ong, Singapore, Tokyo, 9ondon, +ew ,ork, and <aris, among others. !oreign bonds are a typical e"ample of an international security. # bond sold by a ;orean company in =e"ico denominated in =e"ican pesos is a foreign bond. -urobonds are another e"ample. 5f course, the foreign e"change market, where international currencies are traded, was a tremendously large and important part of the international capital market in the late )66's.

'( The &eed to )educe )isk Through Portfolio Di*ersification E+plains in Part the Importance of the International Capital Market During the !ate "##$s: # major benefit of the internationali8ation of capital markets is the diversification of risk. /ndividual investors, major corporations, and individual countries all usually try to diversify the risks of their financial portfolios. The reason is that people are generally risk*averse. They would rather get returns on investments that are in a relatively narrow band than investments that have wild fluctuations year*to*year. #ll portfolio investors look at the risk of their portfolios versus their returns. :igher risk investments generally have the potential to yield higher returns, but there is much more variability.

:ere is an e"ample0 Suppose Corporation >,? in )66@ had the following portfolio0

)''' shares of Aapanese utility company stockB )''' shares of =e"ican petroleum company stockB Cerman government bonds valued at D''' deutsche marks (today
called EeurosF)B

)''' shares of a =oroccan mutual fundB Canadian municipal bonds valued at D''' Canadian dollars.
Suppose Corporation #$C in )66@ had the following portfolio0

)',''' shares of Swedish steel company.

/f the steel company in Sweden has a poor year for sales and profits, its stock value decreases. Corporation #$C, which has not diversified, will have a terrible return on its portfolio. The ne"t year, the steel company may have a great year, so #$C will have a terrific portfolio return. Corporation >,?, with a diversified portfolio, can overcome a single poor return and still have a good overall return on the portfolio. /f utilities in Aapan have a poor year, but =orocco is e"periencing strong economic growth, the =oroccan gain can offset the Aapanese stock loss. Then, the ne"t year, perhaps the reverse would occur (=orocco e"periences a slowdown while the Aapanese

utility reali8es higher profits than anticipated). The year*to*year return would fluctuate much less for Corporation >,? than for #$C. ,( The Principal -ctors in the International Capital Markets of the !ate "##$s %ere .anks/ &on0.ank 1inancial Institutions/ Corporations/ and 2o*ernment -gencies: Commercial banks powered their way to a place of considerable influence in international markets during the late )66's. Commercial banks undertook a broad array of financial activities during the late )66's. They granted loans to corporations and governments, were active in the bond market, and held deposits with maturities of varying lengths. Special asset transactions, like underwriting were undertaken by commercial banks. +on*bank financial institutions became another fast*rising force in international markets during the late )66's. /nsurance companies, pension and trust funds, and mutual funds from many countries began to diversify into international markets in the )66's. Together, portfolio enhancement and a widespread increase in fund contributors have accounted for the strength these funds had in the international marketplace. Covernment agencies, including central banks, were also major players in the international marketplace during the late )66's. Central banks and other government agencies borrowed funds from abroad. Covernments of developing countries borrowed from commercial banks, and state*run enterprises also obtained loans from foreign commercial banks. 3( Changes in the International Marketplace )esulted in a &e% Era of 2lobal Capital Markets during the !ate "##$s/ %hich %ere Critical to De*elopment( =any observers say we entered an era of global capital markets in the )66's. The process was attributable to the e"istence of offshore markets, which came into e"istence decades prior because corporations and investors wanted to escape domestic regulation. The e"istence of offshore markets in turn forced countries to liberali8e their domestic markets (for competitive reasons). This dynamic created greater internationali8ation of the capital markets. Three primary reasons account for this phenomenon. !irst, citi8ens around the world (and especially the Aapanese) began to increase their personal savings. Second, many governments further deregulated their capital markets since )6D'. This allowed domestic companies more opportunities abroad, and foreign companies had the opportunity to invest in the deregulated countries. !inally, technological advances made it easier to access global markets. /nformation could be retrieved 1uicker, easier, and cheaper than ever before.

3eveloping countries, like all countries, must encourage productive investments to promote economic growth. Thus, foreign savings, which many people simply call foreign investment, can benefit developing countries. In Indian conte+t: The international capital market as it has been evolving provides an opportunity for developing countries like /ndia to attract the re1uired capital inflow for accelerating their pace of development, manage their foreign e"change assets and liabilities to their advantage and develop e"port capabilities in the field of financial services. #ctive participation in this market would not only improve their access to the market but also indicate the institutional and policy framework essential for developing effective and efficient domestic financial markets. The possibilities of such participation would be enhanced if the developing countries like /ndia take a constructive stand with regard to the multilateral negotiations in respect of trade in services under the Gruguay %ound. )ecent situation %ecent financial problems in emerging economies have led to calls for a new international financial architecture. Some of the problems are0 ). /nflation concerns are increasingly taking hold of the international capital marketsB there are fears of a repetition of the )67's, when industriali8ed countries endured double*digit rates of inflation. 2. :igher energy and food prices, rising wages in emerging markets and the weak GS dollar which is driving up GS import prices. H. /n emerging markets like /ndia inflation is being driven above all by rising food prices. (. /n recent months oil has breached the )H' GS dollar per barrel mark, and thus been a main driver of global inflationary pressure. 3eclining reserves in the oil* producing countries, and low levels of investment and political problems could tighten the supply situation still further, countering any efforts to improve energy efficiency and further develop alternative energy sources. <roduction will not be able to keep pace with growing demand, especially from #sia. So the oil price is likely to remain high and continue rising in the long term.. &. Still it is believed that there may not be a recession in the GS#, but a there may not be a 1uick recovery either. /n the -uro 8one we are likely to see a cooling*off of the economy in 2''D and 2''6. -merging markets should be able to decouple further from the GS economy and consolidate their growth at a high level.

/n the above conditions, /nternational capital flows should not be restrictedB they benefit entrepreneurs and savers alike, with lower borrowing costs and greater returns. The international flow of capital improves risk management, allows consumption smoothing, improves financial*sector efficiency, and leads to greater overall market discipline. !urthermore, capital flows have a stabili8ing effect on financial markets. %estricting international investment denies a country those benefitsB the result is slower growth and reduced standards of living. Importance of capital market: ). The capital market serves as an important source for the productive use of economyIs savings. /t mobili8es the saving of the people for further investment and thus avoids their wastage in unproductive uses. 2. /t provides incentives to saving and facilitates capital formation by offering suitable rates of interest as the price of capital. H. /t provides an avenue for investors, particularly the household sector to invest in financial assets which are more productive than physical assets. (. /t facilitates increase in production and productivity in the economy and thus, enhances the economic welfare of the society. Thus it facilitates Ethe movement of stream of command over capital to the point of highest yieldF towards those who can apply them productively and profitably to enhance the national income in the aggregate. &. The operations of different institutions in the capital market induce economic growth. They give 1uantitative and 1ualitative directions to the flow of funds and bring about rational allocation of scarce resources. @. # healthy capital market consisting of e"pert intermediaries promotes stability in values of securities representing capital funds. 7. =oreover, it serves as an important source for technological up gradation in the industrial sector by utili8ing the funds invested by the public. Thus, a capital market serves as an important link between those who save and those who aspire to invest their savings.

D)-4.-C5S 61 16)EI2& C-PIT-! )) !oreign capital usually does not produce an efficient because of the microeconomic distortions and macro economics instability it generates. /n fact it has been found that the increasing volume of international financial flows has been associated with a decline in the trade volume due to higher costs. 2) #nother harmful impact of these flows has been to increase the instability of volatility in the e"change rates, assets prices, interest rates and the whole economical system of the recipient countries. H) The global capital flows reduce the effectiveness of monetary policy they are associated with the loss of monetary control at home. The current surge in these flows has created a major worry for the regulatory authorities about the global money. () The cost of foreign is rather difficult to measure and it is subject to a great variability. !oreign currency borrowings imply a series of uncertainties due to floating interest and vary margins. This is an important reason for e"ercising utmost restraint while seeking to raise funds abroad. &) The non economical costs of the foreign capital are also unaffordable. /t is well known but conveniently forgotten that the foreign capital creates a larger number of very serious problems of foreign ownership and control dumping of technology loss of autonomy of domestic policies dependence hegemony and neo*colonialism. @) The e"istence of a contrary belief notwithstanding the foreign capital is not nor free the costs and harmful effects discussed above. /n fact the relevance of what has just been said is all the greater in its case. 7) The debt capital has its own problems e"pressions like debt trap debt crisis debt bomb are now commonly used to convey the dangerous situation in which the developing countries land themselves when they depend in the foreign debt capital.

C-PIT-! M-)5ET I& I&DI-: 0 Coming to /ndian conte"t, the term capital market refers to only stock markets as per the common man s ideology, but the capital markets have a much broader sense. 4here as in global scenario, it consists of various markets such as0 ). Covernment securities market 2. =unicipal bond market H. Corporate debt market (. Stock market &. 3epository receipts market @. =ortgage and asset*backed securities market 7. !inancial derivates market D. !oreign e"change market India7s presence in International Markets: /ndia has made its presence felt in the /!=s only after )66)*62. #t present there are over &' companies in /ndia, which have accessed the C3% route for raising finance. The change in situation has been due to the following factors0 ). /mproved perception of /ndiaIs economic reforms. 2. /mproved e"port performance. H. :ealthy economic indicator. (. /nflation at single digit. &. /mproved fore" reserves. @. /mproved performance of /ndian companies. 7. /mproved confidence of !//s. %eliance was the first /ndian company to issue C3% in )662. Since )66H, number of /ndian companies successfully tapped the global capital markets J raised capital through C3% or foreign currency bond issues. Though there was a temporary setback due to #sian crisis in )667. Since )666 even /T majors have stepped the bandwagon of international markets J raised capital. The average si8e of the issue was around 7&GS3. #nd the total amount raised was around GS3 @.&billion. /ndia has the distinction of having the largest number of C3%K#3% issues by any country. I&TE)MEDI-)IES I&86!8ED I& I&TE)&-TI6&-! C-PIT-! M-)5ET: !ead 9 co0lead managers0 The responsibilities of a lead manager include undertaking due diligence J preparing the offered document , marketing the issues , arrangement J conducting road shows. =andate is given by the issuer to the lead manager.

:nder%riters: The lead manager J co managers act as underwriters to the issue , taking on the risk of interest rates Kmarkets moving against them before they have placed bondsK3%s. 9ead =anagers may also invite additional investment banks to act as sub*underwriters , thus forming a larger underwriting group. The underwriters undertake to subscribe to the unsubscribed portion of the issue . -gents 9 Trustees0 These intermediaries are involved in the issue of bondsKconvertibles. The issuer of bonds convertible in association with the lead manager must appoint Lpaying agentsI in different fifnacial centers, who will arrange for the payment of interest J principal due to investor under the terms of the issue. These paying agents will be banks. !a%yers 9 -uditors0 The lead manager will appoint a prominenet firm of solicitors to draw up documentation evidencing the bondK3%s issue. The various draft documents will vetted by the solicictors acting for the issuer. =any of these documents are prepared in standard forms with a careful review to the satisfaction of the parties. The legal advisors will advise the issuer pertaining to the local J foreign laws. Similarly, #uditors are re1uired for preparation of the financial statements, cash flows, and audit reports. The #uditors provide a comfort letter to the lead manager on the financial health of the company. They also prepare the financial statement as per C##< re1uirements wherever necessary. !isting -gents 9 Stock E+changes: The listing #gent helps facilitate the documentation J listing process for listing on stock e"change J keep file information regarding the issuer such as #nnual reports, depository agreements, articles of association,etc. The stock e"change reviews the issuers application for listing of bondsKC3%s J provides comments on offering circular prior to accepting the security for listing. Depository .ank: /t is involved only in the issue of C3%s. /t is responsible for issuing the actual C3%s ,disseminating information from the issuer to the 3% holders, paying any dividends or other distributions J facilitating the e"change of C3%s into underlying shares when presented for redemption. Custodian: The Custodian holds the shares underlying the C3%s on behalf of the depository Jis responsible for collecting rupee dividends on the underlying shares J repatriation of the same to the depository in GS dollarsKforeign currency.

Sources of Capital There are two sources of capital0 ). <rivate sources 2. <ublic sources $oth sources are very important to the economies of the world. Capital flows result when funds are transferred across bordersB the flows are recorded in the balance of payments account. %ead on for definitions, e"amples, and trends in capital flows.

"( Pri*ate Sources of Capital( /mportant sources of private capital are a. !oreign direct investment b. <ortfolio investment (both debt and e1uity flows) -ach is defined below. a( 1oreign Direct In*estment ;1DI<: !oreign direct investment is capital invested by corporations in countries other than their places of domicile (their home countries). 3irect investment is not nearly as li1uid as portfolio investment and is therefore less volatile. The normal re1uirement to 1ualify as foreign direct investment is for the foreign firm to own at least ten percent of voting stock. #n e"ample of foreign direct investment is a Aapanese company that starts a joint venture (&'*&') in =e"ico with a =e"ican company. The Aapanese company has a long*term investment in the assets of the joint venture and not merely a passive investment like portfolio investors, who can remove their money from a country almost instantaneously. !3/ or !oreign 3irect /nvestment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. !3/s re1uire a business relationship between a parent company and its foreign subsidiary. !oreign direct business relationships give rise to multinational corporations. !or an investment to be regarded as an !3/, the parent firm needs to have at least )'M of the ordinary shares of its foreign affiliates. The investing firm may also 1ualify for an !3/ if it owns voting power in a business enterprise operating in a foreign country.

Types of 1oreign Direct In*estment: -n 6*er*ie% !3/s can be broadly classified into two types0 ). 5utward !3/s 2. /nward !3/s. This classification is based on the types of restrictions imposed, and the various prere1uisites re1uired for these investments. #n outward*bound !3/ is backed by the government against all types of associated risks. This form of !3/ is subject to ta" incentives as well as disincentives of various forms. %isk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward !3/s, which are also known as Edirect investments abroad.F 3ifferent economic factors encourage inward !3/s. These include interest loans, ta" breaks, grants, subsidies, and the removal of restrictions and limitations. !actors detrimental to the growth of !3/s include necessities of differential performance and limitations related with ownership patterns. 5ther categori8ations of !3/ e"ist as well. Nertical 1oreign Direct In*estment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the =+C. =ori ontal foreign direct in*estments happen when a multinational company carries out a similar business operation in different nations. !oreign 3irect /nvestment is guided by different motives. !3/s that are undertaken to strengthen the e"isting market structure or e"plore the opportunities of new markets can be called >market0seeking 1DIs(? >)esource0seeking 1DIs? are aimed at factors of production which have more operational efficiency than those available in the home country of the investor. Some foreign direct investments involve the transfer of strategic assets. !3/ activities may also be carried out to ensure optimi8ation of available opportunities and economies of scale. /n this case, the foreign direct investment is termed as >efficiency0seeking(?

.enefits of 1DIs: 5ne of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for the economically developing countries. 3uring the decade of the 6's foreign direct investment was one of the major e"ternal sources of financing for most of the countries that were growing from an economic perspective. /t was observed during the financial problems of )667*6D that the amount of foreign direct investment made in these countries was pretty steady. The other forms of cash inflows in a country like debt flows and portfolio e1uity had suffered major setbacks. !oreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. /t also assists in the promotion of the competition within the local input market of a country. The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. !oreign direct investment helps in the creation of new jobs in a particular country. /t also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. !oreign direct investment assists in increasing the income that is generated through revenues reali8ed through ta"ation. /t also plays a crucial role in the conte"t of rise in the productivity of the host countries. /t also opens up the e"port window that allows these countries the opportunity to cash in on their superior technological resources. /t has been possible for the recipient countries to keep their rates of interest at a lower level. /t becomes easier for the business entities to borrow finance at lesser rates of interest. The biggest beneficiaries of these facilities are the small and medium*si8ed business enterprises.

Disad*antages of 1oreign Direct In*estment The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. The situations in countries like /reland, Singapore, Chile and China corroborate such an opinion. /t is normally the responsibility of the host country to limit the e"tent of impact that may be made by the foreign direct investment. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country. The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret O something that is not meant to be disclosed to the rest of the world like defense. #t times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. !oreign direct investment may entail high travel and communications e"penses. The differences of language and culture could also pose problems in case of foreign direct investment. ,et another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. #t times it has been observed that the governments of the host country are facing problems with foreign direct investment. /t has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company. This leads to serious issues. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. #t times there have been adverse effects of foreign direct investment on the balance of payments of a country.

 1oreign Institutional In*estors ;1II< : !// means an entity established or incorporated outside /ndia which proposes to make investment in /ndia. #n investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. /nstitutional investors include hedge funds, insurance companies, pension funds and mutual funds. /n countries like /ndia, statutory agencies like S-$/ have prescribed norms to register !//s and also to regulate such investments flowing in through !//s. !-=# norms includes maintenance of highly rated bonds (collateral) with security e"change.

1ollo%ing entities @ funds are eligible to get registered as 1II: ). <ension !unds 2. =utual !unds H. /nsurance Companies (. /nvestment Trusts &. $anks @. Gniversity !unds 7. -ndowments D. !oundations 6. Charitable Trusts K Charitable Societies

!urther, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as !//s0 ). #sset =anagement Companies 2. /nstitutional <ortfolio =anagers H. Trustees (. <ower of #ttorney :olders

Parameters on %hich SE.I decides 1II applicants7 eligibility a. #pplicantIs track record, professional competence, financial soundness, e"perience, general reputation of fairness and integrity. (The applicant should have been in e"istence for at least one year) b. whether the applicant is registered with and regulated by an appropriate !oreign %egulatory #uthority in the same capacity in which the application is filed with S-$/ c. 4hether the applicant is a fit J proper person.

b( Portfolio in*estment: debt flo%s and equity flo%s ( <ortfolio debt flows result from foreign investors buying domestic debt securities. # Cerman investor buying bonds in Canada is an e"ample. Commercial bank lending (loans from private financial institutions) is also portfolio debt. <ortfolio e1uity flows occur, similarly, when foreign investors purchase e1uity securities domestically. # Aapanese investor who purchases stock in the $ra8ilian stock market is creating an e1uity capital flow into $ra8il. #3%s and C3%s also fit into this category.

!3/ NKS !//F =otive !3/ =otive behind !3/ is to ac1uire controlling interest in a foreign entity or set up an entity with controlling interest. !3/ investment comes from =+CIs and corporate so as to derive benefit of new market, cheaper resources (labor), efficiency and skills, strategic asset seeking (oil fields) and time geography ($<5 O Transcriptions) !3/ investment is more enduring and has longer time stability. !3/ generally comes as subsidiary or a joint venture. !3/ is made with core thought of business philosophy of diversification, integration, consolidation, and e"pansion andKor core business formation. Calculation of gains is always prime criteria but never the sole criteria. !// =otive behind !// is to make (capital) gains from investments. There is no intention to control the entity. !// investment come from investors, mutual funds, portfolio management companies and corporate with pure motive of investment gains. !// is highly volatile. !// comes mainly through stock markets. !//Is sole criteria and motive is gains on investments.

Source

3uration !orm <urpose

'( Public Sources of Capital( <ublic sources of capital include a. 5fficial non*concessional loans of both multilateral and bilateral aid b. 5fficial development assistance (53#). -ach is discussed in turn below.

a( 6fficial non0concessional loans: multilateral 9 bilateral aid( 5fficial non*concessional multilateral aid consists of loans from the 4orld $ank, regional development banks, and other intergovernmental agencies such as multilateral organi8ations. The term .non*concessional. refers to the fact that these loans are based on market rates, must be repaid, and are not partly grants. $y contrast, official non*concessional bilateral aid is loans from governments and their central banks or other agencies. -"port credit agency loans are also included here. .$ilateral. refers to the fact that the entities providing the funding provide aid only in their home country.

b( 6D-: official grants and concessional loans( 53# refers in part to official public grants that are legally binding commitments and provide a specific amount of capital available to disburse (give out) for which no repayment is re1uired. Concessional bilateral aid refers to aid from governments, central banks, and e"port credit agencies that contains a partial grant element (2&M or more), or partially forgives the loan. Similarly, concessional multilateral aid contains a partial grant, or forgiveness of the loan. =ultilateral aid comes from the 4orld $ank, regional development banks and intergovernmental agencies.

Instruments in capital markets

Instruments in International Capital Markets:

International Bond Market

International Equity Markets

FOREIGN BOND

GDRs

EURO BOND

ADRs

FCCB

ECB

International Equity Markets: !unds can be raised in the primary market from the domestic market as well as from international markets. #fter the reforms were initiated in )66), one of the major policy changes was allowing /ndian companies to raise resources by way of e1uity issues in the international markets. -arlier, only debt was allowed to be raised from international markets. /n the early )66's foreign e"change reserves had depleted and the countryIs rating had been downgraded. This resulted in a foreign e"change crunch and the government was unable to meet the import re1uirement of /ndian companies. :ence allowing companies to tap the e1uity and bond market /n -urope seemed a more sensible option. This permission encourages /ndian companies to become global. /ndia companies have raised resources from international capital markets through ). Clobal depository receipts (C3%s) K 2. #merican 3epository %eceipts (#3%s) H. !oreign Currency Convertible $onds (!CC$s) (. -"ternal Commercial $orrowings (-C$s). Depository )eceipts ;2D)s and -D)s< EClobal 3epositary %eceipts mean any instrument in the form of a depositary receipt or certificate (by whatever name it is called) created by the 5verseas 3epositary $ank outside /ndia and issued to non*resident investors against the issue of ordinary shares or !oreign Currency Convertible $onds of issuing company.F # C3% issued in #merica is an #merican 3epositary %eceipt (#3%). /ssue of e1uity in the form of C3%K#3% is possible only for the few top notch corporates of the country. #mong the /ndian companies, %eliance /ndustries 9imited was the first company to raise funds through a C3% issue. Introduction: #3% stands for #merican 3epository %eceipt. Similarly, C3% stands for Clobal 3epository %eceipt. -very publicly traded company issues shares O and these shares are listed and traded on various stock e"changes. Thus, companies in /ndia issue shares which are traded on /ndian stock e"changes like $S- (The Stock -"change, =umbai), +S- (+ational Stock -"change), etc. These shares are sometimes also listed and traded on foreign stock e"changes like +,S(+ew ,ork Stock -"change) or +#S3#P (+ational #ssociation of Securities 3ealers #utomated Puotation).$ut to list on a foreign stock e"change, the company has to comply with the policies of those stock e"changes.

=any times, the policies of these e"changes in GS or -urope are much more stringent than the policies of the e"changes in /ndia. This deters these companies from listing on foreign stock e"changes directly. $ut many good companies get listed on these stock e"changes indirectly O using #3%s and C3%s. Process of issue of -D)@2D): ). The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fi"ed number of shares as an underlying (Gsually 2 or (). 2. These receipts are then sold to the people of this foreign country (and anyone who are allowed to buy shares in that country). These receipts are listed on the stock e"changes. H. They behave e"actly like regular stocks O their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. (. These receipts, which are traded like ordinary stocks, are called 3epository %eceipts. -ach receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares O that is, it stores the shares on behalf of the receipt holders.

). -D) 0 -merican Depositary )eceipt Definitions: /t is a receipt for shares bought in the GS of a foreign*based corporation in an overseas market. The receipt is held by a GS bank, but shareholders are entitled to any dividends and capital gains. Security representing the ownership interest in a foreign company s common stock. #3%s allow foreign shares to be traded in the Gnited States Certificates issued by a GS depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. 5ne #3% may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation.

Meaning: #merican 3epository %eceipts (#3%s) are certificates that represent shares of a foreign stock owned and issued by a G.S. bank. The foreign shares are usually held in custody overseas, but the certificates trade in the G.S. Through this system, a large number of foreign*based companies are actively traded on one of the three major G.S. e1uity markets (the +,S-, #=-> or +asda1). #n #merican 3epositary %eceipt (#3%) is how the stock of most foreign companies trades in Gnited States stock markets. -ach #3% is issued by a G.S. depositary bank and represents one or more shares of a foreign stock or a fraction of a share. /f investors own an #3% they have the right to obtain the foreign stock it represents, but G.S. investors usually find it more convenient to own the #3%. The price of an #3% is often close to the price of the foreign stock in its home market, adjusted for the ratio of #3%s to foreign company shares.

3epository banks have numerous responsibilities to the holders of #3%s and to the non*G.S. company the #3%s represent. The largest depositary bank is The $ank of +ew ,ork. /ndividual shares of a foreign corporation represented by an #3% are called #merican 3epositary Shares (#3S). Pricing of -D): The prices of #3%s in the secondary market are, of course, determined by supply and demand, but the price will not deviate too much from the price of the underlying stock. /f the #3% is trading at a higher price than the e1uivalent foreign shares of the company, then more shares of the company will be bought and held in the custodian bank, and more #3%s will be created. /f the #3%

trades below the e1uivalent price, then some #3%s will be canceled, and the corresponding shares of the company will be released by the custodian bank. This maintains parity between the price of the #3% and the foreign shares, after accounting for the currency e"change rate. Di*idend payments: 4hen dividends are paid, the custodian bank receives it and withholds any foreign ta"es, e"changes it for G.S. dollars, then sends it to the depositary bank, which then sends it to the investors. The depositary bank, being a G.S. bank, handles most of the interaction with the G.S. investors, such as rights offerings, stock splits, and stock dividends, but sponsored #3% investors may receive communications, such as financial statements, directly from the company. )isks in*ol*ed: #lthough #3% transactions are in G.S. currency, there still is a currency e"change risk. /f the dollar falls, for instance, then the amount of dividend in G.S. dollars will be reduced, and the market price of the #3% will drop. There is also political risk because the #3% still derives its value from the foreign stock, which could be adversely affected by unfavorable changes in politics or the law of the country. =o% It 4orks@E+ample: /nvestors can purchase #3%s from brokerKdealers. These brokerKdealers in turn can obtain #3%s for their clients in one of two ways0 they can purchase already* issued #3%s on a G.S. e"change, or they can create new #3%s. To create an #3%, a G.S.*based brokerKdealer purchases shares of the issuer in 1uestion in the issuer s home market. The G.S. brokerKdealer then deposits those shares in a bank in that market. The bank then issues #3%s representing those shares to the brokerKdealer s custodian or the broker*dealer itself, which can then apply them to the client s account. # brokerKdealer s decision to create new #3%s is largely based on its opinion of the availability of the shares, the pricing and market for the #3%s, and market conditions. $rokerKdealers don t always start the #3% creation process, but when they do, it is referred to as an unsponsored #3% program (meaning the foreign company itself has no active role in the creation of the #3%s). $y contrast, foreign companies that wish to make their shares available to G.S. investors can initiate what are called sponsored #3% programs. =ost #3% programs are sponsored,

as foreign firms often choose to actively create #3%s in an effort to gain access to #merican markets. #3%s are issued and pay dividends in G.S. dollars, making them a good way for domestic investors to own shares of a foreign company without the complications of currency conversion. :owever, this does not mean #3%s are without currency risk. %ather, the company pays dividends in its native currency and the issuing bank distributes those dividends in dollars ** net of conversion costs and foreign ta"es ** to #3% shareholders. 4hen the e"change rate changes, the value of the dividend changes. !or e"ample, let s assume the #3%s of >,? Company, a !rench company, pay an annual cash dividend of H euros per share. 9et s also assume that the e"change rate between the two currencies is even ** meaning one -uro has an e1uivalent value to one dollar. >,? Company s dividend payment would therefore e1ual QH from the perspective of a G.S. investor. :owever, if the euro were to suddenly decline in value to an e"change rate of one euro per Q'.7&, then the dividend payment for #3% investors would effectively fall to Q2.2&. The reverse is also true. /f the euro were to strengthen to Q).&', then >,? Company s annual dividend payment would be worth Q(.&'. !e*els of -D)s There are three levels of #3%s depending on their adherence to Cenerally #ccepted #ccounting <rinciples !or a 9evel / #3% program the receipts issued in the GS are registered with the S-C, but the underlying shares are held in the depositary bank are not registered with the S-C. They must partially adhere to Cenerally #ccepted #ccounting <rinciples (C##<) used in the GS#. 9evel // #3%s are those in which both the #3%s and the underlying shares (that already trade in the foreign companyIs domestic market) are registered with the S-C. They must also partially adhere to the Cenerally #ccepted #ccounting <rinciples. 9evel /// #3%s must adhere fully to the C##< and the underlying shares held at the 3epositary $ank are typically new shares not those already trading in the foreign companyIs domestic currency.

'( 2D)s 2lobal Depository )eceipts Definitions: # Clobal 3epository %eceipt or Clobal 3epositary %eceipt (C3%) is a certificate issued by a depository bank, which purchases shares of foreign company Clobal 3epository %eceipts (C3%s) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering. C3%s may be used in public or private markets inside or outside GS. C3%, a negotiable certificate usually represents companyIs traded e1uityKdebt. The underlying shares correspond to the C3%s in a fi"ed ratio say ) C3%R)' shares. Meaning: # 2lobal Depository )eceipt or C3% is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. C3%s represent ownership of an underlying number of shares. Clobal 3epository %eceipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets * especially %GSS/#. <rices of C3%s are often close to values of related shares, but they are traded and settled independently of the underlying share. +ormally ) C3% R )' Shares Several international banks issue C3%s, such as A< =organ Chase, Citigroup, 3eutsche $ank, $ank of +ew ,ork. They trade on the /nternational 5rder $ook (/5$) of the 9ondon Stock -"change. !isting of the 2lobal Depositary )eceipts The Clobal 3epository %eceipts issued may be listed on any of the 5verseas Stock -"changes, or 5ver the Counter -"changes or through $ook -ntry Transfer Systems prevalent abroad and such receipts may be purchased, possessed and freely transferable Issue structure of the 2lobal Depositary )eceipts ()) # Clobal 3epository %eceipt may be issued for one or more underlying shares or bonds held with the 3omestic Custodian $ank. (2) The !oreign Currency Convertible $onds and Clobal 3epository %eceipts may be denominated in any freely convertible foreign currency. (H) The ordinary shares underlying the Clobal 3epository %eceipts and the

shares issued upon conversion of the !oreign Currency Convertible $onds will be denominated only in /ndian currency. (() The following issue will be decided by the issuing company with the 9ead =anager to the issue, namely0* (a) <ublic or private placementB (b) +umber of Clobal 3epository %eceipts to be issuedB (c) The issue priceB (d) The rate of interest payable on !oreign Currency Convertible $ondsB and (e) The conversion price, coupon, and the pricing of the conversion options of the !oreign Currency Convertible $onds. (&) There would be no lock*in*period for the Clobal 3epository %eceipts issued under this scheme =istory of 2D)s in India /ndia entered the international arena in =ay )662, with the first C3% issue by %eliance /ndustries 9imited, which collected GS bQ)&' million. This was followed by Crasim /ndustriesI offer of GS Q6' million in +ovember. Then, the C3% markets witnessed a lull till )66H*end in the wake of the securities scam and the conse1uent fall in the domestic markets, during which time the only /ndian offering came from :/+3#9C5 in Auly )66H, which raised GS Q72 million. The end of )66H saw a flood of /ndian paper hit the -uro markets with $ombay 3yeing, =ahindra and =ahindra, S</C and Sterlite /ndustries raising funds. This boom continued till mid*)66&, after which a combination of factors O political instability, falling markets, reduced profitability due to a li1uidity crunch * pulled down the C3% market again, till the end of )66@, during which time, the only notable e"ception was the GS QH7' million offering by the State $ank of /ndia. Procedure for an Initial Issue of 2D) C3%s are marketed through a syndication process which is the responsibility of lead managers. The lead manager is involved in the issue structuring, pricing and obtaining market feedback on the issue timing. The lead manager also prepares in*depth research and offer documents for circulation to prospective institutional investors. :eKshe also assists in the selection of the foreign depository, foreign legal advisors and compliance with the listing re1uirements of the stock e"changes. The steps in -uro issue management in chronological order are as follows0

<re*issue0 3iscuss strategy, obtain approvals, obtain legal advice. <repare tentative plan and si8e of the issue. 4eek '*(0 +ominate lead manager. 3iscuss plan and other roles with lead managerK co*manager. 3epositoryKbankersKauditors to the issue provide information to the lead manager for drafting of offer documents and agreements. 4eek &*70 =eetings between lead managers, legal advisors and auditors and the issuers e"ecutives. <reparation of offer circular completed. 4eek D0 9ead manager completes and sends preliminary offer documents to co* managers and other * underwriters. 4eek 60 %oad shows, investor meets abroad. 9ead managers and is seller decide to*send different teams to focus on geographical locations. #greement documentation finali8ed after final discussions between concerned parties. 4eek )' 9aunch and syndication by the lead managers and. co*managers. !oreign listing and trading approvals received. .enefits and :ses of a 2D) .enefits to an Issuing Company Currently, there are over )@'' 3epository %eceipt programmes for companies from over @' countries. Companies have round that the establishment of a depository receipt programme offers numerous advantages. The primary reasons why a company would establish a depository receipt programme can be divided into. the following considerations0 #ccess to capital markets outside the home market to provide a mechanism for raising capital or as a vehicle for an ac1uisition. -nhancement of company visibility by. enhancement of image of the companyIs products, services or financial instruments in a marketplace outside its home country. -"panded shareholder base which may increase or stabili8e the share price S=ay increase local share, price as a result of global demandK trading through a broadened and a more diversified investor e"posure. S/ncrease potential li1uidity by enlarging the market for the companyIs shares. S#djust share price to trading market comparables through %atio -nhance shareholder communications and enable employees to invest easily in the parent company.

.enefits to an In*estor They facilitate diversification into foreign securities.Trade, clear and settle in accordance with re1uirements of the market in which they trade. -liminate custody charges. Can be easily compared to securities of similar companies. <ermit prompt dividend payments and corporate action notifications. /f C3%s are e"change listed, investors also benefit from accessibility of price and trading information and research. /n addition to the benefits C3%s have to offer to the issuing company and the investor, they are also increasingly being used by governments to facilitate the process of privati8ation. They have also been used to raise capital in the process of ac1uisition of other companies by the issuer. 4hat is the difference bet%een -D) and 2D)A $oth #3% and C3% are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded./f the depository receipt is traded in the Gnited States of #merica (GS#), it is called an #merican 3epository %eceipt, or an #3%. /f the depository receipt is traded in a country other than GS#, it is called a Clobal 3epository %eceipt, or a C3%. 4hile #3%s are listed on the GS stock e"changes, the C3%s are usually listed on a -uropean stock e"change.

=o% can you use an -D) @ 2D)A #3%s and C3%s are not for investors in /ndia O they can invest directly in the shares of various /ndian companies. $ut the #3%s and C3%s are an e"cellent means of investment for +%/s and foreign nationals wanting to invest in /ndia. $y buying these, they can invest directly in /ndian companies without going through the hassle of understanding the rules and working of the /ndian financial market O since #3%s and C3%s are traded like any other stock, +%/s and foreigners can buy these using their regular e1uity trading accountsT

4hich Indian companies ha*e -D)s and @ or 2D)sA

Some of the best /ndian companies have issued #3%s and K or C3%s. $elow is a partial list. Company $ajaj #uto 3r. %eddys :3!C $ank :indalco /C/C/ $ank /nfosys Technologies /TC 9JT =T+9 <atni Computers %anba"y 9aboratories Tata =otors State $ank of /ndia NS+9 4/<%5 #3% +o ,es ,es +o ,es ,es +o +o ,es ,es +o ,es +o ,es ,es C3% ,es ,es ,es ,es ,es ,es ,es ,es ,es +o ,es +o ,es ,es ,es

,( 1CC. ;1oreign Currency Con*ertible .onds<0 !CC$s are quasi0debt instruments issued by a company to the investors of some other country denominated in a currency different from that of domestic country. <rincipal and interest both are payable in the foreign currency. They carry an option for the investor to convert them into ordinary e1uity shares of the company at a later stage in accordance with the terms of the issue. /n /ndia !CC$ are issued in accordance with guidelines and regulations framed under !-=# #ct by the %$/ and schemes notified by the =inistry of !inance, Covernment of /ndia. #n !CC$ issue by a company is governed by !-= (Transfer or /ssue of any !oreign Security) %egulations, 2''( ( hereinafter %egulationsI) and /ssue of !oreign Currency Convertible $onds and 5rdinary Shares (through 3epository %eceipt =echanism) Scheme, )66H ( hereinafter Lthe SchemeI). The comprehensive guidelines issued on -"ternal Commercial $orrowings (-C$) vide #.<. (3/% Series) Circular +o. & dated #ugust ), 2''& (hereinafter -C$ CuidelinesI) are also applicable to !CC$ issue. /n other words the !CC$ are re1uired to be issued in accordance with the Scheme. They will also have to adhere to the %egulations. !urther they must be meeting the re1uirements of the -C$ guidelines.

3( E+ternal Commercial .orro%ings ;EC.s<: /ndian corporate companies are allowed to raise foreign loans for financing infrastructure projects. The last are used as a residual source after e"hausting e"ternal e1uity as a main source of finance for large value projects.

International .ond Markets: 4hat is a bondU $onds are debt. They are debt because when an investor buys a bond they are effectively loaning the bondIs issuer a sum of money and that issuer is incurring a debt. So the issuer O or seller of the bond * is a borrower and the investor * or buyer of the bond * is a lender.

The price paid for the bond is the money the investor is loaning the issuer. #nd, like most other loans, when you buy a bond the borrower pays you interest for as long as the loan is outstanding and then O at the end of the agreed period of the loan O pays you the loan back.

The .ond Market The bond market (also known as the debt, credit, or fi+ed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. #s of 2''@, the si8e of the international bond market is an estimated Q(& trillion, of which the si8e of the outstanding G.S. bond market debt was Q2&.2 trillion. #verage daily trading volume in the G.S. bond market takes place between broker*dealers and large institutions in a decentrali8ed, over*the* counter (5TC) market. :owever, a small number of bonds, primarily corporate, are listed on e"changes.

Market structure: $ond markets in most countries remain decentrali8ed and lack common e"changes like stock, future and commodity markets. This has occurred, in part, because no two bond issues are e"actly alike, and the number of different securities outstanding is far larger. :owever, the +ew ,ork Stock -"change (+,S-) is the largest centrali8ed bond market, representing mostly corporate bonds. The +,S- migrated from the #utomated $ond System (#$S) to the +,S- $onds trading system in #pril 2''7 and e"pects the number of traded issues to increase from )''' to @'''. The bonds can be broadly classified as: "( 1oreign bonds0 These bonds are issued within a particular country and denominated in the currency of that country, but the issuer is a non*resident. 3ollar denominated bonds issued in GS domestic markets by non GS companies are known as ,ankee bonds ,en denominated bonds issued in Aapanese domestic markets by non Aapanese companies are known as Samurai bonds <ound denominated bonds issued in G; domestic markets by non G; companies are known as $ulldog bonds '( Eurobonds: These are bonds issued outside the country of the currency in which such bonds are denominated. !or instance GS dollars denominated bonds issued in -urope, called as E-urodollar $onds.F 4hat is the difference bet%een Eurobonds and foreign bondsA -urobonds are bonds which are underwritten by a multinational syndicate of banks and sold simultaneously in many countries other than the country of the issuing entity. !oreign bonds are bonds which are sold in a particular country by a foreign borrower, and underwritten by a syndicate of members from that countryB foreign bonds are denominated in the currency of that country. E*olution of euro currency 3uring )6&'s, %ussians were earning dollars from the sell of gold and other commodities and wanted to use them to buy grains and other products from the

west, mainly from the GS. :owever, they didnIt want to keep these dollars on deposits with the banks in +ew ,ork, as they were apprehensive that the GS government might free8e the deposits if the cold war intensified. They approached the banks in $ritain and !rance who accepted these dollar deposits. These deposits were in -urope, so LeuroI and were dollar deposits so, L-uro3ollarI deposits. 9ater on till )6D's, such deposits were by and large in -urope only. Since )66', the markets have e"panded geographically and also in volume, but the prefi" L-uroI has still remained. /t strictly and really means LoffshoreI and not necessarily always referred to -urope. Eurodollar or Eurocurrency refers to bank time deposits in a currency other than that of the country in which the bank or bank branch is located. -uro currency market is the market for such deposits. Euronotes are notes issued outside the country in whose currency they are denominated. -uronotes consist of -uro*commercial paper (-C<s) and -uro* =edium*term notes (-=T+s). Commercial papers are unsecured short*term promissory notes issued by finance companies and some industrial companies. -=T+S are medium*term funds guaranteed by financial institutions with the short*term commitment by investors. Clobal bonds are bonds sold inside as well as outside the country in whose currency they are denominated. !or e"ample, dollar*denominated bonds sold in +ew ,ork and Tokyo are called dollar global bonds. E:)6C:))E&CB M-)5ETS: # -urocurrency is a dollar or other freely convertible currency deposited in a bank outside the country of its origin. Thus GS dollars on deposit in 9ondon become -urodollars. The -urocurrency market consists of those banks O called -uro banks* that accept deposits and make loans in foreign currencies. The -urocurrency markets enables investors to hold short*term claims on commercial banks, which then act as intermediaries to these deposits into long term claims on final borrowers. The dominant euro currency is GS dollars with dollar weakness other currency particularly the 3eutcshe mark and Swiss !rank* increased in importance. /n -urodollar markets, banks accept deposits from depositors, mainly corporate depositors. They also place these -urodollars to other banks. !or instance, Citibank may accept deposit from a company #lcoa. Citibank would place this as a deposit to $arclays bank. $arclays to Chase bank. Chase may ultimately lend it to Gnilever group, a corporate house. -urocurrency transactions may be classified as corporate to bank on one hand and bank to another bank on the other hand.

Short term debt instrument "(.anker7s acceptance .This instrument is used to finance domestic as well as international trade. 5n completing the transaction, the e"porter hands over the shipping documents and letter of credit 9C issued by the importerIs bank to its own bank. #t the same time, the e"porter draws a draft (or bill) on the importerIs bank and gets paid the discounted value of the draft. # bankerIs acceptance ($#) is created when the e"porterIs bank presents the draft to the importers bank which accepts it. This $# may be sold (or discounted) as a money market instrument or the e"porter may keep it as an asset with himself. $as are highly standardi8ed negotiable instruments and are available in varying amounts. They permit importers and other users to obtain credit on better terms than simple borrowing. 2. Euro commercial paper -uro commercial paper is a short term -uro note issued by corporates on a discountOto*yield basis. /nvestor in -C< may be money market funds, insurances companies, pension funds and other corporate bodies having short*term cash surpluses. !or investor s, it represents an attractive short*term investment opportunity, unlike a time deposit with financial institution. !or borrowers, it is a cheap and fle"ible source of funds, cheaper than bank loans. #s mentioned above, a C< or -C< is a discount redeemed at face value on maturity. !or e"ample, an -C< issued at Q6&2.( with a maturity of )D' days will have a face value of Q),''', if the discount rate is )' M pa. ,( E:)6 CE)TI1IC-TE 61 DEP6SIT ;ECD< # certificate of deposit is an evidence of a deposit with a bank. C3 is a negotiable or marketable instrument. Gnlike a bank term deposit, a C3 can be sold in the secondary market whenever cash is needed. 4ho ever is holding it at the time of maturity receives its face value in addition to the interest due. -uro C3s are issued by 9ondon banks. The interest on floating rate C3s is inde"ed to 9/$5% and Treasury $ill rate, etc. These instruments may be issued in sum like Q), '',''' or more. !or fi"ed rate C3s, usually there is a single period maturity when principal and interest are paid. 3( )EP:)C=-SE 6.!I2-TI6& ; )EP6< This is a form of short*term borrowing in which the borrower sells securities to the lender with an agreement to buy them back at a later date. That is why it is called %-<5. The repurchase price and selling price are the same. $ut the original seller has to pay interest while repurchasing the securities. The amount of interest depends on demandOsupply conditions. %epos may be overnight repos or of longer maturity.

D6C:ME&T-TI6&: The following are the documents generally needed for an euro issue0 ). Prospectus: The prospectus is a major document containing all the relevant information concerning the issues vi8 investment consideration, terms J conditions, use of proceeds, capitali8ation details, information about the promoters, directors, industry review, share information etc.. Cenerally the terms are grouped into financial J non*financial information, issue particulars J others vi8 statement of accounting showing the significant differences between /ndian accounting J GSKG; C##<. The non financial part includes the background of the company, promoters, directors, activity, etc.. The issue particulars talks about the issue si8e, the domestic ruling price, the number of shares for each C3% etc.. '( Depository -greement: This is the agreement between the issuing company J the overseas depository providing a set of rules for withdrawal of depositors J for their conversion into shares. Noting rights are also defined. ,( :nder%riting agreement: The underwriters play the role of LassurersI as they undertake to pick up the C3%s at a predetermined price depending on the market response. (. Subscription -greement: The 9ead manager J the syndicated members form a part of the investors who subscribe to C3%s or bonds as per this agreement. &. Custodian -greement: /t is an agreement between the depository J the custodian. The depository J the custodian determine the process of conversion of underlying shares into 3%s J vice versa. @. Trust Deed 9 Paying 9 Con*ersion -greement0 4hile the trust deed is a standard document which provides for duties J responsibilities of trustees, this agreement enables the paying J conversion agency ( performing banking function) undertaking to service the bonds till conversion.

7. !isting -greement: =ost of the companies prefer 9u"emburg stock e"change for listing purposes, as the modalities are simplest. The listing agents have the responsibility of fulfilling the listing re1uirement of a chosen stock e"change. 4hat are some reasons for a company to cross list its sharesU # company hopes to0 ()) allow foreign investors to buy their shares in their home marketB (2) increase the share price by taking advantage of the home countryIs rules and regulationsB (H) provide another market to support a new issuance in the foreign marketB (() establish a presence in that country in the instance that it wishes to conduct business in that countryB (&) increase its visibility to its customers, creditors, suppliers, and host governmentB and (@) compensate local management and employees in the foreign affiliates.

Types of bond markets: The Securities /ndustry and !inancial =arkets #ssociation classifies the broader bond market into five specific bond markets.

Corporate Covernment J #gency =unicipal =ortgage $acked, #sset $acked, and Collaterali8ed debt obligation !unding

Bond market participants $ond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. <articipants include0

/nstitutional investorsB CovernmentsB TradersB and /ndividuals

$ecause of the specificity of individual bond issues, and the lack of li1uidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. /n the Gnited States, appro"imately )'M of the market is currently held by private individuals.

Bond market volatility: !or market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevantB principal and interest are received according to a pre*determined schedule. $ut participants who buy and sell bonds before maturity are e"posed to many risks, most importantly changes in interest rates. 4hen interest rates increase, the value of e"isting bonds falls, since new issues pay a higher yield. 9ikewise when interest rates decrease, the value of e"isting bonds rise since new issues pay a lower yield. This is the fundamental concept of bond market volatility0 changes in bond prices are inverse to changes in interest rates. !luctuating interest rates are part of a country s monetary policy and bond market volatility is a response to e"pected monetary policy and economic changes.

Bond indices: # number of bond indices e"ist for the purposes of managing portfolios and measuring performance, similar to the S9P C$$ or )ussell Inde+es for stocks. The most common #merican benchmarks are the !ehman -ggregate, Citigroup .I2 and Merrill !ynch Domestic Master . =ost indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity andKor sector for managing speciali8ed portfolio Issuing bonds

$onds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. /n underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re*sell them to investors. Covernment bonds are typically auctioned.