INTRODUCTION TO

INTERNATIONAL
CAPITAL MARKETS
(CHAPTER 2)
GLOBAL CAPITAL MARKETS

 International capital markets thrive on favourable

investment climate and destinations which
encourage free capital flows.
 International capital market originated in London
but spread to all developed economies through the
euro market.
 International listing centres – US, London and EU
centres, Tokyo, Hong Kong, Singapore and
NASDAQ Dubai. Other centres are emerging fast.
ROLE AND IMPORTANCE

 International market brings global best practices to

capital markets around the globe by integrating
them.
 Efficient dissemination of information,
 Better price discovery
 Reinforcement of institutional processes
 Better investment management for global investors
 Efficient resource mobilisation
 Better distribution of capital
 Prevention of mispricing and asset bubbles
 Improves market regulation by improving co-ordination
among market regulators across the globe.
INTERNATIONAL BOND MARKET

 Pure Bond markets – Bonds are usually medium to long

term unsecured securities issued as promissory notes.
 Domestic Bond
 Foreign Bond
 Euro Bond
 Convertible Bonds – FCCBs in Indian context
 Exchangeable Bonds
 Masala Bonds – Indian context

 Bond Structures –
 Long term bonds and features
 Securitised Debt Instruments and Structured Debt
Products
INTERNATIONAL BOND MARKETS

 Domestic Bonds – Bonds issued by domestic issues in domestic markets

designated in local currency.
 Foreign Bonds – Bonds issued by foreign issues in domestic markets
designated in local currency. Yankee bond, Samurai, Shibosai, Shogun
Bull Dog, Rembrandt bonds are examples.
 Eurobonds - These are bonds that are issued and sold in a jurisdiction
outside the country of denomination. Euro bonds are denominated in a
currency other than the local currency. By their nature, eurobonds are
multi-jurisdictional. Born in 1964 due to stiff regulatory and tax
requirements in US markets, eurobonds are the largest in international
bond markets.
 Bond Structures – usually long terms bonds and medium term notes,
highly rated and unsecured floating rate notes. Perpetual bonds are
also found.
 Exotic structures such as inverse floaters, yield curve notes, bond with
caps and collars etc.
 Securitised debt products in international markets – brief overview
FOREIGN CURRENCY CONVERTIBLE BONDS

 FCCB is a bond issued by an Indian company expressed in foreign

currency, and the principal and interest in respect of which is
payable in foreign currency.
 FCCBs are required to be issued in accordance with the scheme
notified by the Government of India, Ministry of Finance,
Department of Economic Affairs viz., „Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depositary
Receipt Mechanism) Scheme, 1993‟.
 They are subscribed to by a non-resident in foreign currency and
convertible into equity shares of the issuing either in whole or in
part. A warrant structure is also permitted.
FOREIGN CURRENCY EXCHANGEABLE BONDS

Exchangeable Bond Issue Structure

Issues EBs
Holding Co. Holding Co.

Ownership of X% EB
Holders
Ownership of
(X-t)% retained
Ownership
Sub. Co. of t%

Sub. Co.

At the time of Issue of EBs At the time of Exchange of EBs

INTERNATIONAL EQUITY MARKETS
 Global Registered Shares –
 A security that is issued in the United States but is registered
in multiple markets around the world and trades in multiple
currencies.
 GRS have same rights as the home shareholders in terms of
voting and economic benefits.
 DaimlerChrysler formed out of the acquisition of Chrysler
Corporation by Daimler Benz of Germany was the first non-
American company to issue GRS in the USA by listing its
shares on NYSE. This was done to ensure that its American
shareholders had tradable shares along with the German
counterparts.
 GRS lost its relevance and gave way to depository receipts
offers as GRS requires real time clearing house operations and
dissemination of data. With newer technologies, it is expected
to become popular again.
DEPOSITORY MECHANISM

 A depository is a security that represents ownership

in a foreign security. Therefore they are negotiable
securities in a foreign jurisdiction that represent are
generally used for a company‟s publicly traded
domestic equity.
 An ADR is an American security that is issued
through a public offering in the US which requires
SEC registration.
 A GDR is issued anywhere in the world through a
public offer but only through private placement
(Rule 144A) in the US.
DEPOSITORY MECHANISM

 DRs are issued through a global depository who is a service

provider. The depository‟s function is to administer the DRs
for individual investors and related administrative work.
 DRs are listed and traded on the exchange and also in the
OTC market in other territories.
 The depository mechanism creates two distinct pools of
securities for the same issuance, one in the parent
jurisdiction and one in the foreign jurisdiction.
 In the domestic jurisdiction, the shares are held with the
custodian. The custodian acts as an interface between the
two depositories in each jurisdiction.
 There would be investment banks associated with the issue
in both the jurisdictions.
ADR / GDR ISSUES
DEPOSITORY MECHANISM

 DRs facilitate trading for foreign investors in their

local jurisdictions.
 Facilitates compliance with local regulation.
 There would be no incidence of capital gain in the
local jurisdiction of the issuer.
 DR investors need not be involved in corporate
decisions.
 No foreign exchange risk.
American Depository Receipts

 Level I – no listing, company does not raise funds,

no compliance with SEC regulations, no
compliance with US GAAP.
 Level II – listing allowed, company does not raise
funds, registration statement to be filed with SEC,
no compliance with US GAAP.
 Level III - listing allowed, company raises funds,
registration statement to be filed with SEC,
compliance with US GAAP.
 Rule 144A - no listing, company raises funds, no
compliance with SEC regulations, no compliance
with US GAAP.
International Derivatives Market

 Two Segments –
 Exchange traded – constitutes about one-fifth of the
notional outstandings
 OTC derivatives – largely unregulated till the Global
Financial Crisis 2008
 All three prerequisites for a well-functioning market, i.e.
safety, efficiency and innovation are present in the global
derivative market in the exchange traded segment.
 Risks are particularly well controlled in this segment, where
central counterparties (CCPs) operate very efficiently and
mitigate the risks for all market participants.
PREMIER STOCK MARKETS

 NYSE Euronext –
 Formed 1792, demutualised and listed in 2006, merged
Euronext with itself in 2007.
 World’s largest by market cap
 Stringent criteria for listing
 The NASDAQ OMX
 Founded 1971, first in the world to start screen based
trading.
 Merged with OMX in 2007, listed in 2008
 LSE, Paris, Frankfurt and Luxembourg are other major
European stock markets.
 Outside of the above, Tokyo, Hong Kong, Singapore,
Shanghai, Abu Dhabi are the major exchanges.
INDIA’S OFFSHORE FINANCIAL CENTRES
 Definition –
 “A country or jurisdiction that provides financial services
to non-residents on a scale that is incommensurate with
the size and the financing of its domestic economy‟”
 The objective of an OFC is to generate export
revenue from financial services.
 In India OFCs are set up under the Special
Economic Zones Act 2005. The International
Financial Services Centres Authority Act, 2019
provides regulatory oversight on OFCs.
 Equity shares, debt securities, derivative
instruments and depository receipts can be listed
and traded on OFC stock exchanges.
INDIA’S OFFSHORE FINANCIAL CENTRES
 Gujarat International Financial Tec-City (GIFT) is
India‟s first OFC.
 The India International Exchange (India INX) was
floated in GIFT City as a wholly owned subsidiary
of the BSE. It has set up what is regarded as the
most advanced technological trading platform in
the world.
 INX offers foreign currency bonds, masala bonds,
green bonds and other types of permitted debt
securities to be issued and listed on it
 NSE IFSC Limited (NSE International Exchange), a
wholly owned subsidiary of the NSE was set up in
GIFT City as the second stock exchange.