Raising Funds from

UNIT 10 RAISING FUNDS FROM International Market

INTERNATIONAL MARKET
Objectives

After going through this unit, you should be able to :

1. Understand how resources are raised in international market by Indian
companies
2. Explain the different instruments for raising funds from international markets.

Struture
10.1 Introduction
10.2 Euro Issue
10.2.1 Depository Receipts (DRs)
10.2.2 Global Depository Receipts (GDRs)
10.2.3 American Depository Receipts (ADRs)
10.2.4 Foreign Currency Convertible Bonds (FCCBs)
10.2.5 Foreign Currency Option
10.2.6 Other InternationalInstruments
10.3 Global Depository Receipts (GDRs)
10.4 American Depository Receipts (ADRs)
10.5 External Commercial Borrowings (ECBs)
10.6 Advantages and Disadvantages of Overseas Financial Markets
I0.7 Summary
10.8 Self Assessment Questions
10.9 Further Readings

10. INTRODUCTION
With the opening up of Indian Economy, the corporate sector has got the opportunity
to raise resources from International market for two specific purposes:
1. To meet the requirements of foreign currency for import, expansion and other
business purposes;
2. To lower the overall cost of capital as international resources are likely to be
cheaper than in India.

10.2 EURO ISSUE

The term `euro' denotes that the issue is listed on a European Stock Exchange. A euro
issue is a issue where the securities are issued in a currency different from the
currency of the country of issue and the securities are sold in international market to
individual and institutional investors. Euro securities are negotiable and transferable
securities distributed by a syndicate of market intermediaries and underwriters, By an
euro issue, a company is able to raise funds at a cheaper rate, Euro bond is an
international bond issued to investors from throughout the world. These are issued as
unsecured obligations. Indian Companies issue foreign currency convertible bonds
(FCCB) which are equity linked debt instruments, convertible into equity at a
specified later date. They carry a fixed rate of interest which is lower than the rate 5
International Financing
Decisions on any other similar nonconvertible debt instrument. FCCBs are freely transferable,
tradable and the issuer has no control over the transfer.

The table 10.1 highlights EURO issues in the recent past.

Table 10.1: Euro Issues by Indian Companies

(Rs. crore)
Year Amount Raised No. of Euro Issues
(1) (2) (3)
1992-93 10232 2
1993-94 7,897.82 27
1994-95 6,743.23 31
1995-96 1,296.69 5
1996-97 5,59427 16
1997-98 4,009.46 7
1998-99 1,147.78 3
1999.00 3,48721 6
2000-01 4197.07 13
2001-02 234.50 5
Total 37,417.35 115
Source: Handbook of Statistics on Indian Economy, RBI, various issues,

It suggests the quantum jump in the amount raised over ten years.

It will be interesting to note that the foreign investment in the country has also
increased significantly during this period as suggested by figures in Table 10.2.

The following instruments are used to raise resources from international market.

10.2.1 Depository Receipts (DRs)

A depository receipt is basically a negotiable certificate denominated in US dollars,

that represents a non-US company's publicly traded, local currency (Indian Rupee)
shares. Currently. the underlying shares can only be equity shares. In theory, though a
DR can also represent debt instruments, in practice it rarely does.

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DRs are created when the local currency shares of an Indian Company are delivered Raising Funds from
to the depository's local custodian bank, against which the depository bank issues International Market
DRs in US dollars. These DRs may trade freely in the overseas markets like any
other dollar denominated security, either on a stock exchange or in the over-the-
counter market or among a restricted group such as Qualified Institutional Buyers
(QIB). Whenever a DR holder wishes, for whatever reason, not to hold the DR or to
trade it overseas, he always has the option to approach the depository bank for the
cancellation of the DR and the release of the underlying share(s) by the bank in India
into the Indian Stock Market for sale. The custodian releases the shares into the
Indian Market and remits the proceeds abroad.

Dividend payments are made by the company in rupees which the depository
converts into dollars and pays to the investor after deducting the withholding tax.

The issue of DRs is very simple. First, a board resolution has to be passed to adopt
the issue. An application is then made to the Ministry of Finance. The approval from
the Ministry only specifies the price range at which the issue is to be made. Pricing is
finalised only at the last stage. A prospectus, called the red herring, is then prepared.
Prospectus leaves a blank space for the issue price. The underwriter then markets the
issue by organising roadshows. Shares are issued by the Company to the depository
but delivered to the custodian:

10.2.2 Global Depository Receipts (GDRs)

GDRs are traded and settled outside the United States. Rule 144A of the Securities
and Exchange Commission (SEC) of U.S.A., however, permits the companies from
outside USA to offer their GDRs to Qualified Institutional Buyers (QIB). American
Depository Receipts (ADR) are DRs issued in the United States and have to be in
accordance with the stringent provisions stipulated by the Securities and Exchange
Commission.

Global Depository Receipt is in the nature of a depository receipt or certificate

created by an overseas depository bank (authorised by the issuing company) outside
India and is issued to non-resident investors against the issue of FCCB's or shares of
the issuer company. It is a negotiable certificate in US dollars, and traded freely in
foreign markets like other securities and can be issued by way of private placement
also. Prior permission of Ministry of Finance, Government of India, is required for
issue of GDRs.

Since the start of the practice of issue of ECBs and GDRs by Indian Companies,
substantial foreign investment has come to India and Indian Stocks are now listed on
London and Luxembourg Stock Exchanges.

10.2.3 American Depository Receipts (ADR)

ADR's are depository receipts issued in United States of America (USA) in

accordance with the provisions of Securities and Exchange Commission. Since US
market exposes to a higher level of responsibility, disclosures, costs and liability,
Indian Companies have resorted to GDR's only. Listing provisions in USA are very
stringent. Issue of ADR is costlier. Legal fees, underwriting, road show costs,
investor relations and registration fees are also higher. The broader the investor base
in USA, the higher is the potential of legal liability for inadequate disclosures.

ADRs are US dollar denominated negotiable instruments issued in the US by a

depository bank, representing ownership in non-US securities (underlying ordinary
shares). In case of ADR issues, companies have to comply with strict reporting`
requirements of SEC and US GAAP which requires the total issue cost to be written
off in the year of issue. ADRs are subject to two-way fungibility and apprehends
large capital inflows.
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International Financing
Decisions ADRs can be listed on New York Stock Exchange, American Stock Exchange or
NASDAQ.

Depository receipts permit investors to trade in foreign securities and at the same
time giving the issuing companies an access to major international markets.
American Depository Receipts are an offshoot of DR's and are US dollar
denominated negotiable instruments issued in the US by a depository bank,
representing ownership in non-US securities. ADR's provide non-US companies with
access to the US capital markets which has the world's largest domestic investor base.

10.2.4 Foreign Currency Convertible Bonds (FCCBs)

Foreign Currency Convertible Bond is an equity linked debt security which can be
converted into shares or into DRs. It is a foreign currency debt instrument that an
Indian Company issues. The investor in the FCCB has the option to convert it into
equity usually in accordance with a predetermined formula and sometimes also at a
predetermined exchange rate. This offers capital appreciation on sale. He has also the
option to retain it as a bond. Investors have an option to convert the bond if the
market price of the stock goes up beyond a percentage of the share price at the time
of issue at a predetermined premium. Alternatively, some companies retain the right
to convert compulsorily.

FCCBs are bonds which are convertible into underlying equity, shares of the
company, at a predetermined price, at any time at the investor's option, but after 1-2
years after the issue. The maturity of bond can be upto 10-12 years and if the option
to convert equity is not exercised, the bond is redeemed. Most FCCB issues are listed
at London or Luxembourg stock exchanges. These are bearer securities and generally
such issues incorporate put and call options.

10.2.5 Foreign Currency Options

Authorised dealers of foreign exchange are permitted to write and trade in cross
currency options, to facilitate hedging of foreign exchange risk subject to Reserve
Bank of India guidelines, dated 13th September, 1993.

10.2.6 Other International Instruments

Instruments such as Yankee Bonds, Samurai Bonds etc. which are found in US and
Japanese markets are also being considered now by Indian Companies. Reliance
Industries Ltd. issued Yankee bonds in August 1996. The opportunities in the Indian
Capital Markets has also attracted foreign investors. With the opening up of Indian
market to the world investors, the following instruments have been recognised as
essential instruments for trading in the secondary market, These are options, futures
and derivatives.

Yankee Bonds: Reliance Industries Ltd, had issued Yankee Bonds in US markets
with longest ever maturity offering by any sovereign or corporate entity with Baa 3
rating from Moody's in August 1996. The maturity of these bonds is 50 years. The
major terms and conditions are

a) Final maturity at 50 years for the first time from an Asian/Indian Issuer.

b) Size: US dollar 100 million.

c) Coupon: 1.0.5 per cent.

d) No road shows, deals done on phone and screen.

Now we examine GDR, ADR and ECB in details.

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10.3 GLOBAL DEPOSITARY RECEIPTS (GDRs) Raising Funds from
International Market
GDR is a security issud abroad and is listed and traded on a foreign stock exchange.
GDR holder can at any time convert it into shares represented by it. Till conversion,
GDRs do not carry any voting right. Depository receipts facilitate cross border
trading and settlement, minimise transaction cost and broaden the potential investor
base.

The shares are issued by a company to an intermediary called the depository in

whose name, the shares are registered. This depository subsequently issues the
GDRs. The physical possession of equity shares is entrusted to another intermediary
called the custodian who acts as an agent of depository .The advantage in GDR issue
is that company does not assume any exchange risk. The dividend outflow from the
company is in Rupees only but depository converts these rupee payments and pays
the dividend in US dollar to the ultimate investors after deducting a withholding tax
of 10 per cent on deposit. Once a GDR has been issued, it can be freely traded among
international investors. GDR plays a crucial role in international corporate finance.
GDR's are used to:

(i) raise debt or equity capital;

(ii) diversify shareholder base;
(iii) increase demand for securities;
(iv) enhance global image; and
(v) create dollar-denominated securities.

The depository performs the following functions:

(i) Issuing depository receipts upon delivery of the underlying security to its
custodian account and releasing the underlying security into the home market
upon cancellation of DR.
(ii) Processing DR transfers, maintaining records of registered holders, paying
dividends and responding to shareholder enquiries.
(iii) Holding. consultations with the issuer to promote its DR programme, reporting
on the progress, supplying trading and shareholding information and-providing
assistance in ensuring regulatory compliance.
Cost of GDR issues

Cost of issue of GDR comprises of following components:

(i) Brokerage.
(ii) Underwriter commission.
(iii) Management fee.
(iv) Legal fee
(v) Travel and road shows.
(vi) Printing and stationery,
(vii) Listing fee.
(viii) Stamp duty.
(ix) Accounting fees.

In a size of $ 50 million euro issue, cost would be around 4 to 6 per cent whereas in a
issue of equivalent size in domestic market, the cost would be between 14-18 per 9
cent.
International Financing
Decisions Procedure for GDR issue

In a GDR issue, the issuing company issues ordinary shares as per the scheme and
delivers the ordinary shares to domestic custodian bank, which will, in terms of the
agreement, instruct the overseas depository bank to issue global depository receipt. or
certificate to the non-resident investors against the shares held by domestic custodian
bank. GDR is normally issued in negotiable form and may be listed on any
international stock exchange for trading outside India. Most companies list GDRs in
Luxembourg or Dublin Stock Exchanges. The shares underlying the GDRs will be
registered in the name of the overseas depository bank, which will be the holder in
the books of the company.

The non-resident holder of GDR may transfer those receipts, or may ask the overseas
depository bank (ODB) to redeem those receipts. In case of redemption, the ODB
shall request domestic custodian bank (DCB) to get the corresponding shares released
in favour of the non-resident investors for being sold directly on behalf of the non-
resident investors or being transferred in the books of account of the issuing company
in the name of the nonresident.

In case of redemption of GDRs into underlying shares, a request will be transmitted

by the ODB to the DCB with a copy to the company. The cost of acquisition of the
shares shall be the cost on the date on which the ODB advises the DCB for
redemption. The price of the shares on the stock exchange shall be taken as the cost.
Holders of GDRs will have no voting rights or other direct rights of a shareholder
with respect to the shares underlying such GDRs. Registered holders of shares
withdrawn from the depository arrangement will be entitled to vote and exercise
other direct shareholders' rights in accordance with the Indian law. Withdrawn shares
cannot be redeposited.

Holders of GDRs will be entitled to receive dividends paid on the underlying shares,
subject to the tenns of the issue. So long as the GDRs are not withdrawn, the relevant
ODB will, in connection with such outstanding shares, convert Rupee dividend into
dollars. The outstanding shares of the company under the GDR issue will be listed on
Indian Stock Exchanges. Table 10.3 lists the GDR issues by Selected Indian
Companies in the recent past.

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 Raising Funds from
International Market

11
International Financing
Decisions 10.4 AMERICAN DEPOSITORY RECEIPTS (ADRs)
Introduced to the financial market in 1927, an American Depository Receipt (ADR)
is a stock that trades in the Untied States but represents a specified number of shares
in a foreign corporation ADRs are bought and sold on American markets just like
regular stocks, and are issued / sponsored in the U.S. by a bank or brokerage.

ADRs were introduced as a result of the complexities involved in buying shares rn

foreign countries. Primarily, the difficulties are associated with trading at different
prices and currency values. For this reason, U.S. Banks simply purchase a lot of
shares from the company, bundle the shares into groups, and reissue them on the
NYSE, AMEX, or NASDAQ. The depository bank sets the ratio of U.S. ADRs per
home country share. This ratio can be anything less than or greater than 1. The reason
they do this is because they wish to price the ADR high enough so as to show
substantial value, yet low enough, so that the individual investors can purchase these
shares. The majority of ADRs range between $10 and $100 per share. If, in the home
country, the shares were worth considerably less, then each ADR would represent
several real shares.

There are three different types of ADR issues:

• Level 1 This is the most basic type of ADR where foreign companies either
don't qualify or don't wish to have their ADR listed on an exchange. Levell
ADRs are found on the OTC market and are an easy and inexpensive way to
gauge interest for its securities in North America. Levell ADRs also have the
loosest requirements from the SEC.
• Level 2: This type of ADR is listed on an exchange or quoted on NASDAQ.
These ADRs have slightly more rigorous requirements from the SEC but they
also get higher visibility and trading volume.
• Level 3: The most prestigious of the three, this is when an issuer floats a public
offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital at
low cost and gain substantial visibility in the U.S. financial markets.
The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost

effective way to buy shares in a foreign company. They save considerable money by
reducing administration costs and avoiding foreign taxes on each transaction. Foreign
entities like ADRs because they get more U.S. exposure and allow them to tap into
the wealthy North American equity markets. In return, the foreign company must
provide detailed financial information to the sponsoring bank.

A significant portion of public offering by non-US companies (and we're most

concerned with Indian companies) in the US is in the form of ADRs, or American
Depository Receipts (also called American Depository Shares or ADS).

ADRs are negotiable receipts issued to investors by an authorised depository,

normally a US bank or depository, in lieu of shares of the foreign company which are
actually held by the depository.

ADRs can be listed and traded in a US-based stock exchange and help the Indian
company to be known in the highly liquid US stock exchanges.

ADRs also help the US-based and other foreign investors to have the twin benefits of
having shareholdingin a high growth Indian company and the convenience of trading
in a highly liquid and well-known stock market.

Companies go through the depository route

Indian companies are prohibited by law from listing rupee-denominated shares

directly in foreign stock markets. Therefore, they issue such shares to a depository
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which has an office within India. These shares remain in India with a custodian. Raising Funds from
Against the underlying shares, the depository issues dollar-denominated receipts to International Market
the foreign investors. The foreign investors can then sell these receipts in the foreign
stock exchanges or back to the depository and get delivery of the underlying rupee-
denominated shares which can then be sold in Indian markets. This is generally done
if institutional investors with a presence in both India and the US see an arbitrage
opportunity arising out of a difference in prices on the US and Indian exchanges.

Difference between ADRs & GDRs

ADRs are listed on an American stock exchange. The issue process is governed by
American laws and Securities and Exchange Commission (SEC) - the market
regulator monitors the issue. GDRs or global depository receipts are listed in a stock
exchange other than American stock exchanges, say Luxembourg or London. A
listing in America involves adhering to very stringent disclosure and accounting
norms. The accounts of the company have to be represented according to US GAAP
or generally accepted accounting principles. US GAAP requires representing a
combined balance sheet of all group companies, and not just the company which is
going for the issue.

Typically, a good company can expect its reported profits according to Indian
accounting rules to be eroded by 20-30 per cent under US GAAP. Against this, the
disclosure requirements for GDR issues are widely thought less stringent.

An ADR listing also allows the famed American retail investors to part-take in the
offering and leads to wider interest and better valuations of a company's stock, thus
enhancing shareholder value. Also, the Indian company can acquire US companies
against issue of shares. The GDR market is mainly an institutional market with lower
liquidity.

Characteristics of an ADR

ADRs are quoted in US dollars and are generally structured so that the number of the
foreign company's securities will result in a trading price for each ADR in the range
of $10-$30. The.multiple or fraction that an ADR is of the underlying shares is
determined with this price range in mind. The depository receives dividends directly
from the Indian company in rupees and issues dividend cheques to ADR holders in
dollars. When an ADR is sold back to the depository, it is considered as cancelled
and the stock of ADRs is not replenished.

Procedure of ADR issue

The company planning to issue ADRs must get its group accounts consolidated and
audited according to US GAAP by an independent agency. It also has to appoint a
team of legal and compliance experts as well as Iead managers and investment
bankers to the issue.

The teams will then have to prepare the draft prospectus or the registration statement
which will be submitted to SEC. SEC reverts with its comments and requirements,
and this goes on till SEC is satisfied with the information given. Now the draft
prospectus is ready to be distributed to prospective investors.

Simultaneously, the company will also have to start the application process to list
with the particular stock exchange. With the draft prospectus ready, the company can
launch its road shows or the selling exercise for getting subscription to the issue.
Prospective investors give their price and amount to the lead managers to the issue.
Based on investor response, the lead managers fix the price of the issue, which is
intimated to the SEC and the concerned stock exchange.

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International Financing
Decisions With their concurrence, the issues is listed Table 10, 4 lists some ADR Issues made
by Indian Companies

Guidelines for ADR/GDR issues by the Indian Companies.

A Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depository Receipts Mechanism) was notified by the Government of India
in November, 1993. Revisions/modifications in the operative guidelines for Euro-
issues are announced from time to time.

2. With a view to further liberalising the operational guidelines and in particular

track record scrutiny of the ADRIGDR proposals and approval mechanism
various options were considered by the Government of India. Given the fact that
investments through ADRIGDR being risk capital, it has been decided that the
track record scrutiny process for ADRIGDR issues and the two stage approval by
the Ministry of Finance, Department of Economic Affairs could be dispensed
with.

3. The following guidelines for ADRIGDR issues, in continuation of the

Notification of November, 1993 (amended in November, 1999) shall come into
effect from the date of issue of these guidelines. These guidelines will also
extend to proposals which have already been filed with the Ministry of Finance
as also in cases where an `in principle' approval has been issued by the Ministry
of Finance, Department of Economic Affairs. These modified guidelines will,
however, not extend to Foreign Currency Covertible Bond (FCCB) issues which
will continue to be governed by existing guidelines. Further, the issue of ADRs/
GDRs under the liberalised guidelines would be only against expansion of the
existing capital base through issuance of fresh equity shares as underlying shares
for ADRs/GDRs.

4. Approvals

4.1 Indian companies raising money through ADRs/GDRs through registered

exchanges would hence for be free to access the ADRIGDR markets through
an automatic route without the prior approval of the Ministry of

14
 Finance, Department of Economic Affairs. Private placement of ADRs/ Raising Funds from
GDRs would also be eligible for the automatic approval provided the issue International Market
is lead managed by an investment banker. (For the purpose of this scheme,
an Investment Banker would be defined as an Investment Banker registered
with the Securities and Exchange Commission in the USA, or under
Financial Services Act in U.K., or the appropriate regulatory authority in
Europe, Singapore or in Japan.) The track record condition will not be
operative for ADR/GDR issues.

5. Mandatory Approval Requirements:

5.1 In all cases of automatic approval mentioned above, the mandatory

approval requirement under FDI policy, approvals such as under the
Companies Act, approvals for overseas investments/business acquisition
(where ADR/GDR proceeds are utilised for overseas investments), etc.
would need to be obtained by the company prior to the ADR1GDR issues.
5.2 The issuer company would need to obtain RBI approval under the
provisions FERA/FEMA prior to the overseas issue.
6. End uses
While no detailed end uses are specified, the existing bar on investments in
stock markets and real estate would continue to be operative.
7. Issue related expenses:
The issue related expenses (covering both fixed expenses like underwriting
commissions, lead managers charges, legal expenses and other reimbursible
expenses) shall be subject to a ceiling of 4% in the case of GDRs and•7% in the
case of listing on US Exchange. Issue expenses beyond the ceiling would need
the approval of RBI.

Tax Impllication of ADR/GDR

Taxation of income arising out of ADRs, the underlying shares and of ESOPs linked
to ADRs is governed by the provisions of the Income Tax Act, 1961 (1-T Act), read
with the provisions of the guidelines contained in the Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depositary Mechanism) Scheme,
1993 and Fresh Guidelines for Euro Issues, 1994 .as amended from time to time.

Accordingly, there is no tax in India on transfer of ADRs between two non-residents

outside India. Redemption of ADRs into underlying shares is exempt in India,
dividend income received by ADR holder or the holder of underlying shares is not
taxed in their hands. Sections 1 15AC and 115CA of the I-T Act, specifically provide
for taxation of long term capital gains on sale of underlying shares. However, as
explained later, this aspect is fraught with ambiguity.

10.5 EXTERNAL COMMERCIAL BORROWINGS (ECBs)

External Commercial Borrowings (ECBs) include:

• Commercial bank loans;

• Buyer's credit;
• Supplier's credit;
• Securitized instruments (floating rates notes and fixed rate bonds);
• Credit from official export credit agencies; and
• Borrowings from Multilateral financial institutions such as international finance 15
corporation, ADB, etc.
International Financing
Decisions ECB refer to commercial loans [in the form of bank loans, buyers' credit, suppliers'
credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed
from nonresident lenders with minimum average maturity of 3 years. ECB can be
accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route.

(A) AUTOMATIC ROUTE

Under the extant policy, ECBs for investment in real sector -industrial sector and,
especially, infrastructure sector-in India, are under Automatic Route, i.e. do not
require RBI/Government approval. In case of doubt as regards eligibility to access
Automatic Route, applicants may take recourse to the Approval Route.

i) Eligible borrowers

(a) Corporates registered under the Companies Act except financial intermediaries
(such as banks, financial institutions (Fls), housing finance companies and
NBFCs) are eligible. Individuals, Trusts and Non-Profit making Organisations
are not eligible to raise ECB.

(b) Non-Government Organisations (NGOs) engaged in micro finance activities are

eligible to avail ECB. Such NGOs (i) should have a satisfactory borrowing
relationship for at least 3 years with a scheduled commercial bank authorised to
deal in foreign exchange and (ii) would require a certificate of due diligence on
`fit and proper' status of the board/committee of management of the borrowing
entity from the designated Authorised Dealer (AD),

ii) Recognised Lenders

(a) Borrowers can raise ECB from internationally recognised sources such as (i)
international banks, (ii) international capital markets, (iii) multilateral financial
institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v)
suppliers of equipment, (vi) foreign collaborators and (vii) foreign equity
holders. Furthermore, overseas organisations and individuals complying with
following safeguards may provide ECB to NGOs engaged in micro finance
activities.

(b) Overseas organisations planning to extend ECB would have to furnish a

certificate of due diligence from an overseas bank which in turn is subject to
regulation of host-country regulator and adheres to Financial Action Task Force
(FA TF) guidelines to the designated AD: The certificate of due diligence should
comprise the following (i) that the lender maintains an account with the bank for
at least a period of two years, (ii) that the lending entity is organised as per the
local law and held in good esteem by the business/local community and (iii) that
there is no criminal action pending against it.

(c) Individual Lender has to obtain a certificate of due diligence from an overseas
bank illdicating that the lender maintains an account with the bank for at least a
period of two years. Other evidence /documents such as audited statement of
account and income tax return which the overseas lender may furnish need to be
certified and forwarded by the overseas bank. Individual lenders from countries
wherein banks are not required to adhere to Know Your Customer (KYC)
guidelines are not permitted to extend ECB.

(d) The key operative part in the credential of the overseas lender is that ECB
should be availed from an internationally recognised source and one of the
recognized categories is "foreign equity holder" as indicated above. It is clarified
that for a "foreign equity holder" to be eligible as "recognized lender" under the
automatic route would require minimum holding of equity in the borrower's
company as under:

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(d. i) ECB up to USD 5 million minimum equity of 25 per cent held directly by the Raising Funds from
lender, International Market

(d. ii) ECB more than USD 5 million - minimum equity of 25 per cent held directly
by the lender and debt-equity ratio not exceeding 4: l(i.e. the proposed ECB
not exceeding four times the direct foreign equity holding).

iii) Amount and Maturity

a) ECB up to USD 20 million or equivalent with minimum average maturity of

three years

b) ECB above USD 20 million and up to USD 500 million or equivalent with
minimum average maturity of five years

c) The maximum amount of ECB which can be raised by a corporate is USD 500
million during a financial year.

d) NGOs engaged in micro finance activities can raise ECB up to USD 5 million
during a financial year.

e) ECB up to USD 20 million can have call/put option provided the minimum
average maturity of 3 years is complied before exercising call/put option.

iv) All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency
except commitment fee, pre-payment fee, and fees payable in Indian Rupees.
Moreover, the payment of withholding tax in Indian Rupees is excluded for
calculating the all-incost.

The all-in-cost ceilings for ECB are indicated from time to time. The following
ceilings are valid till reviewed.
Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*
Three years and up to five years 200 basis points
More than five years 350 basis points

* for the respective currency of borrowing or applicable benchmark.

v) End-use

a) ECB can be raised only for investment (such as import of capital goods, new
projects, modernization/expansion of existing production units) in real sector
industrial sector including small and medium enterprises(SME) and
infrastructure sector - in India. Infrastructure sector is defined as (i) power, (ii)
telecommunication, (iii) railways, (iv) road including bridges, (v) ports, (vi)
industrial parks and (vii) urban infrastructure (water supply, sanitation and
sewage projects);
b) ECB proceeds can be utilised for overseas direct investment in Joint Ventures
(JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on
Indian Direct Investment in JV/WOS abroad.
c) Utilisation of ECB proceeds is permitted in the first stage acquisition of shares
in the disinvestment process and also in the mandatory second stage offer to the
public under the Government's disinvestment programme of PSU shares.
d) NGOs engaged in micro finance activities may utilise ECB proceeds for lending
to self-help groups or for micro-credit or for bonafide micro finance activity
including capacity building. 17
International Financing
Decisions e) Utilisation of ECB proceeds is not permitted for on-lending or investment in
capital market or acquiring a company (or a part thereof) in India by a corporate.

f) Utilisation of ECB proceeds is not permitted in real estate. The term `real estate'
excludes development of integrated township as defined by Ministry of
Commerce and Industry, Department of Industrial Policy and Promotion, SIA
(FC Division), Press Note 3 (2002 Series, dated 04.01.2002).

g) End-uses of ECB for working capital, general corporate purpose and repayment
of existing Rupee loans are not permitted.

vi) Parking of ECB proceeds overseas

ECB proceeds should be parked overseas until actual requirement in India. It is

clarified that ECB proceeds parked overseas can be invested in the following liquid
assets (a) deposits or Certificate of Deposit or other products offered by banks rated
not less than AA (-) by Standard and PoorlFitch IBCA or Aa3 by Moody's; (b)
deposits with overseas branch of an authorised dealer in India; and (c) Treasury bills
and other monetary instruments of one year maturity having minimum rating as
indicated above. The funds should be invested in such a way that the investments can
be liquidated as and when funds are required by the borrower in India.

vii) Prepayment

Prepayment of ECB up to USD 200 million may be allowed by ADs without prior
approval of RBI subject to compliance with the stipulated minimum average maturity
period as applicable to the loan.

viii) Procedure

Borrower may enter into loan agreement complying with ECB guidelines with
recognised lender for raising ECB under Automatic Route without prior approval of
RBI. The borrower may note to comply with the reporting arrangement under
paragraph I(C)(i). The primary responsibility to ensure that ECB raised/utilised are in
conformity with the ECB guidelines and the Reserve Bank regulations/directions/
circulars is that of the concerned borrower and any contravention of the ECB
guidelines will be viewed seriously and may invite penal action. The designated AD
is also required to ensure that raising/utilisation of ECB is in compliance with ECB
guidelines at the time of certification.

(B) APPROVAL ROUTE

The following types of proposals for ECB are covered under the Approval Route

i) Eligible borrowers

a) Financial institutions dealing exclusively with infrastructure or export finance

such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation,
IRCON and EXIM Bank are considered on a case by case basis.

b) Banks and financial institutions which had participated in the textile or steel
sector restructuring package as approved by the Government are also permitted
to the extent of their investment in the package and assessment by RBI based on
prudential, norms. Any ECB availed for this purpose so far are deducted from
their entitlement.

c) Cases falling outside the purview of the automatic route limits and maturity
period indicated at paragraphs IA(iii) (a) and IA(iii) (b).

d) ECB with minimum average maturity of 5 years by non-banking financial

companies (NBFCs) from multilateral financial institutions, reputable regional

18
 financial institutions, official export credit agencies and international banks to Raising Funds from
finance import of infrastructure equipment for leasing to infrastructure projects, International Market

e) Foreign Currency Convertible Bonds (FCCB) by housing finance companies

satisfying the following minimum criteria: (i) the minimum net worth of the
financial intermediary during the previous three years shall not be less than Rs,
500 crore, (ii) a listing on the BSE or NSE, (iii) minimum size of FCCB is US$
100 million, (iv) the applicant should submit the purpose / plan of utilization of
funds.

ii) Recognised Lenders

Borrowers can raise ECB from internationally recognised sources such as (i)
international banks, (ii) international capital markets, (iii) multilateral financial
institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v)
suppliers of equipment, (vi) foreign collaborators and (vii) foreign equity
holders.

From `foreign equity holder', where the minimum equity held directly by the
foreign equity lender is 25 per cent but debt-equity ratio exceeds 4: 1(i.e. the
proposed ECB exceeds four times the direct foreign equity holding).

iii) All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency
except commitment fee, pre-payment fee, and fees payable in Indian Rupees.
Moreove-, the payment of withholding tax in Indian Rupees is excluded for
calculating the all-in-cost. The all-in-cost ceilings for ECB are indicated from time to
time. The following ceilings are valid till reviewed.
Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*
Three years and up to five years 200 basis points
More than five years 350 basis points

* for the respective currency of borrowing or applicable benchmark

iv) End-use

a) ECB can be raised only for investment (such as import of capital goods, new
projects, modernization/expansion of existing production units) in real
sectorindustrial sector including small and medium enterprises (SME) and
infrastructure sector-in India. Infrastructure sector is defined as (1) power, (ii)
telecommunication, (iii) railways, (iv) road including bridges, (v) ports, (vi)
industrial parks and (vii) urban infrastructure (water supply, sanitation and
sewage projects);
b) ECB proceeds can be utilised for overseas direct investment in Joint Ventures
(JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on
Indian Direct Investment in JV/WOS abroad,
c) Utilisation of ECB proceeds is permitted in the first stage acquisition of shares
in the disinvestment process and also in the mandatory second stage offer to the
public under the Government's disinvestment programme of PSU shares.
d) Utilisation of ECB proceeds is not permitted for on-lending or investment in
capital market or acquiring a company (or a part thereof) in India by a corporate
except for banks and financial institutions eligible.
e) Utilisation of ECB proceeds in real estate is not permitted. The term `real estate'
excludes development of integrated township as defined by Ministry of
Commerce and Industry, Department of Industrial Policy and Promotion, SIA 19
(FC Division), Press Note 3 (2002 Series, dated 04.01.2002).
International Financing
Decisions f) End-uses of ECB for working capital, general corporate purpose and repayment
of existing Rupee loans are not permitted.

v) Guarantees

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of

comfort by banks, financial institutions and NBFCs relating to ECB is not normally
permitted. Applications for providing guarantee/standby letter of credit or letter of
comfort by banks, financial institutions relating to ECB in the case of SME will be
considered on merit subject to prudential norms.

vi) Parking of ECB proceeds overseas

ECB proceeds should be parked overseas until actual requirement in India. It is

clarified that ECB proceeds parked overseas can be invested in the following liquid
assets (a) deposits or Certificate of Deposit or other products offered by banks rated
not less than AA(-) by Standard and PooriFitch mCA or Aa3 by Moody's; (b)
deposits with overseas branch of an authorised dealer in India; and (c) Treasury bills
and other monetary instruments of one year maturity having minimum rating as
indicated above. The funds should be invested in such a way that the investments can
be liquidated as and when funds are required by the borrower in India.

vii) Prepayment
a) Prepayment of ECB up to USD 200 million may be allowed by ADs without
prior approval of RBI subject to compliance with the stipulated minimum
average maturity period as applicable to the loan.
b) Pre-payment of ECB for amounts exceeding USD 200 million would be
considered by the Reserve Bank under the Approval Route.
viii) Refinance of existing ECB

Prepayment of ECB up to USD 200 million may be allowed by ADs without prior
approval of RBI subject to compliance with the stipulated minimum average maturity
period as applicable to the loan.

ix) Debt Servicing

The designated AD has the general permission to make remittances of instalments of

principal, interest and other charges in conformity with ECB guidelines issued by
Government/RBI from time to time.

10.6 ADVANTAGES AND DISADVANTAGES OF

OVERSEAS FINANCIAL MARKETS
ADRs GDRs ECBs
Ideal Situation to issue
Large current & future Specialized, regional base Fast rising stock price
funding needs
Involved in international Not a frequent visitor to Tremendous growth
industries international capital markets prospects in near future.
Advantages
Broad investor base and No US SEC disclosure Sell equity at premium
distribution requirements and liability
issues with ADRs
Incremental investor
Pricing premium and prestige Can be executed more base
quickly and easily than
ADRs

20

Best liquidity and research
coverage
More stable aftermarket
performance
Maximum flexibility in
accessing various equity
& debt markets post
offering.
Disadvantages
Extensive disclosure and
ongoing filing
Reconciliation with US
GAAP
Higher issuance costs
Raising Funds from
Lower issuance cost than Minimises dilution International Market
ADRs.
Shortest time schedule
Lowest Issuance cost
More limited investor Limit access to US capital
universe markets if not dollar
denominated or US
registered
More limited liquidity Low level of liquidity
after conversion
Moderate valuation

10.7 SUMMARY
During the last decade and a half we have seen that the Indian companies are
increasingly tapping the international financial markets to raise funds. The various
instruments through which the companies can raise funds from international markets
are ADRs, GDRs, ECB and FCCB. Although there are significant differences among
companies in their methods and sources of finance, in their methods and sources of
finance, the emerging trend appears to be that of bypassing financial intermediaries
mainly commercial banks. Another factor which has fostered raising of funds from
international markets is the relative cheap sources of funds and greater international
visibility.

10.8 SELF ASSESSMENT QUESTIONS

1. Discuss the objectives of raising of resources from international market.
2. Discuss the trends in Euro Issues by Indian companies.
3. Examine ADR/ GDR, Issue guidelines.
4. What do you mean by ECB? What is procedure for ECB? Explain.
5. Explain - ADR, ADS & Tax implication on ADR.
6. Compare ADR, GDR and ECBs.

10.9 FURTHER READINGS

1. Agarwal, Sanjiv, 1997. Manual of Indian Capital Market, Bharat Law House,
New Delhi.

2. Alan C Shaprio, 1995 Multinational Financial Management, PHI (4th Ed.) .

3. Kothari & Dutta, 2005. Contemporary Financial Management, Macmillan India

Ltd., New Delhi.

4. Murice Levi, 1988. International Finance, McGraw-Hill Book Company.

5. P.K. Jain, Josette Peyraid and Surendra S. Yadav, 1998. International Financial
Management, Macmillan India, New Delhi.

6. Rita M. Rodriguez and E. Eugene Carter, 1976. International Financial

21
International Financing
Decisions 7. Rita M. Rodriguez and E. Eugene Carter, 1976. International Financial
Management, Prentice-Hall.

8. Surendra S. Yadav, P.K. Jain and Max Peyraid, 2001. Foreign Exchange
Markets: Understanding Derivatives and Other Instruments, Macmillan-India,
New Delhi.

WEB - REFERENCES
1. www.finmin.nic.in
2. www.indiabudget.nie.in
3. www.indiainfoline.com
4. www. indiainbusiness.nic.in 5,
5. www.sify.com

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