Sources of International Financing

What is International Financing?

When LPG (Liberalisation, Privatisation And Globalisation) was accepted by the country in
1991, the aspect of Globalisation broadened the avenues with which businesses can
arrange funds. Prior to this policy, firms were constrained only to the four walls of the
country. But after Globalisation came into the picture, the scope for raising money expanded
widely. Now the firms of our country can look up to external funders as well to replenish their
financial needs which was not allowed earlier. Now, they are not restricted to the boundaries
of the country rather the reach has increased and the local market is now exposed to the
global capital market.

International Financing (also referred to as International macroeconomics) is the branch of

financial economics broadly concerned with monetary relationships at a global level. It
examines the dynamics of foreign direct investment, exchange rates, balance of payments,
allocation of funds at the global level and other aspects of financial management.

International financing encourages monetary transactions between two or more countries.

There are different sources around the world from which money might be obtained, and that
will be discussed in detail.

Sources of International Financing

When money required for carrying out business activities is raised from international
Sources, it is called International Financing. • Various Sources of International Financing are:
1. Depository Receipts like GDR, ADR, IDR
2. Commercial Banks
3. International Agencies and Development Banks
4. Foreign Currency Convertible Bonds (FCCB)

Mainly these are classified into three categories which are as follows:

A. Commercial Banks
Commercial banks not only fund businesses and firms in the home country rather it extends
to the global level. Commercial banks provide foreign currency loans and advances all over
the world. Loans are generally provided for business purposes and are a very famous
source for funding non-trade operations internationally. Different banks across countries offer
a different and wide range of loans/advances and services to firms. The market of
international finances and the export-import industry is incomplete without commercial
banks. Commercial banks have a lot to offer in international financing.
● Global commercial banks all over provide loans in foreign currency to companies.
● They are crucial in financing non-trade international operations.
● The different types of loans and services provided by banks vary from country to
country.
● One example of this is Standard Chartered emerged as a major source of foreign
currency loans to the Indian industry.
● It is the most used source of international financing.
B. International Agencies and Developmental Banks

These are named Developmental banks because these were introduced by the government
for developmental purposes only. International Agencies and Developmental banks have
emerged throughout the years with the goal to fund finance internationally. These institutions
were set up by governments of developed countries to uplift and develop the weaker section
of the economy by making loans easily available. These loans are usually advanced for a
medium and long period of time. These financial institutions are developed at local, regional
and global levels. Very common examples are EXIM Bank, European Investment Bank
(EIB), European Bank for Reconstruction and Development (EBRD), Asian Developmental
Banks (ADB), etc.
Many development banks and international agencies have come forth over the years for the
purpose of international financing.
● These bodies are set up by the Governments of developed countries of the world at
national, regional and international levels for funding various projects.
● The more industrious among them include International Finance Corporation (IFC),
EXIM Bank and Asian Development Bank.

Important Role Played by EXIM Bank of India in International Business

Export–Import Bank of India is a finance institution in India, established in 1982 under
Export-Import Bank of India Act 1981. Since its inception, Exim Bank of India has been both
a catalyst and a key player in the promotion of cross border trade and investment.

C. International Capital Market

International Capital Market exists with the aim of enhancing efficiencies in economies and
generating economies of scale. It is the most consumed source of financing. Organisations
in current times, including global corporations, are dependent on a large amount of funds in
rupees in addition to foreign currency. Under this source of international financing, there are
several financial avenues available which are as follows:

Depository Receipts
A depositary receipt is a negotiable financial instrument issued by a bank to represent a
foreign company's publicly traded securities. • The depositary receipt trades on a local stock
exchange. • Depositary receipts facilitates buying shares in foreign companies, because the
shares do not have to leave the home country.

1. Global Depository Receipts (GDRs)

Earlier in a country, generally finances were raised domestically, but now it can be raised
from foreign as well. This can happen by issuing securities and shares in foreign countries.
To make this process convenient, there exist a financial instrument called GDR. The shares
are first issued in the currency of the domestic country. These shares are forwarded to a
depository bank, and this depository bank is then responsible for issuing depository receipts
in exchange of these shares.
The denomination for these depository receipts or GDR is US Dollars. When it comes to
India, GDR is considered to be a financial instrument issued to raise foreign exchange, i.e.,
in foreign denominations than in Rupees.
It is a negotiable instrument that can be traded like any other instrument freely. Just like any
other security, GDR can exchange hands very easily.
GDRs are listed on the foreign stock exchange.
The righteous entity is authorised to claim any dividend and bonus receivable on account of
GDRs but does not hold any right to vote.
It provides the facility of transferring depository receipts anytime into the total of shares it
stands for. The investor can not only easily transfer GDR into equity shares, but can also sell
shares these shares mentioned in the GDR through the depository or so-called local
custodian. Once issued GDR, the facility for converting them into shares gets activated after
45 days, i.e., 45 days from the date of issue.
The main motive of issuing GDR is to attract investors globally. Issuing GDR provides a
low-cost mechanism where investors can take easily part in. Apart from their local capital
market, foreign investors get a chance to participate in or access the capital markets
globally.
Corporations like ICICI, Wipro, Reliance & Infosys in India raise foreign exchange through
GDRs.
A few of the international banks like Citigroup, and JPMorgan issue GDR in replace of
shares.
In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise
funds in some foreign currency and is listed and traded on a foreign stock exchange.
● A holder of GDR can at any time convert it into the number of shares it represents.
● The holders of GDRs do not carry any voting rights but only dividends and capital
appreciation.
● Many Indian Companies like Infosys, Reliance and Wipro raise funds through GDR

2. American Depository Receipts (ADRs)

The American Depository Receipts are quite similar to the Global Depository Receipts.
The process of issuing shares in local currency and then sending the shares to the
depository bank to convert them into depository receipts remains as it is.
The prime difference between both of the depository lies in the fact that ADRs can only be
issued in the USA.
The sale and purchase of ADRs can only happen in the capital market of America. These
depository receipts are listed only on the stock exchange of the USA and nowhere else.
American Depository Receipts like GDRs are negotiable certificates issued by a U.S.
depository bank.
With the issuance of ADRs, US investors get an opportunity to invest in overseas
companies, which would otherwise be not available to them. So this widens the horizons of
investing opportunities.
Before any investor could invest in companies globally, they are required to access financial
information. So, US banks are required to provide correct knowledge of the financial health
of the company.
Unlike Global depository receipts, American depository receipts can’t be offered for
sale-purchase to any random foreign country rather can only be issued to residents of the
United States of America.
There are two types of ADRs: sponsored ADR and unsponsored ADR.
ADRs are just like any other ordinary stock for the Americans who are dealing out there in
the capital market of the USA.
It is similar to a GDR except that it can be issued only to American citizens and can be listed
and traded on a stock exchange of the United States of America. ADRs can be bought and
sold in American markets like regular stocks.

3. Indian Depository Receipts (IDRs)

As the name implies, Indian Depository Receipts are exclusively available in the Indian
markets.
Just like for GDRs, here also the shares are forwarded to the depository banks to get
depository receipts in exchange for those respective shares. But it is slightly different from
the GDRs because the depository here is of Indian origin. The depository receipts are
denominated in Indian rupees. Hence it allows any foreign investors to raise funds from
India’s capital market in the form of IDRs as a replacement for shares/securities.
An Indian Depository Receipt is a negotiable financial instrument.
IDRs are nothing, but an Indian version of Global Depository Receipts.
The depository in India is none other than the Securities and Exchange Board of India, which
is the watchdog of all the securities listed on the stock board.
There is an interesting aspect of IDRs that these are available to Indian investors too, as in
they can also access IDRs, just like any normal security of the Indian capital market.
Residents of India are invited to the bidding process the same way they are called for the
issuance of Indian shares.
The company need not necessarily follow the listing and regulatory requirements of every
country where it is willing to sell shares.
Investing in IDRs is a successful alternative to buying stock on a foreign exchange.
Standard Chartered Bank was the first foreign corporation to issue any kind of IDR.
Indian Depository Receipt is a financial instrument denominated in Indian Rupees in the form
of a depository receipt. The IDR is a specific Indian version of the similar global depository
receipts.

4. Foreign Currency Convertible Bonds (FCCBs)

Foreign Currency Convertible Bonds are a combination of debt and equity instruments.
Just like any other convertible securities, these bonds are also convertible meaning thereby
that on a nearby future date after a passage of a stipulated time these bonds can be
changed to any depository receipt or some equity shares.
The bearer of the bond can exchange their FCCBs with some equity shares for whom the
price is already decided or for any exchange rate.
The bearer can also opt for holding back their FCCBs with them.
FCCBs are always bought and sold in foreign financial markets.
The fixed rate of interest over foreign currency convertible bonds is generally lesser as
compared to any other debt instruments, which are non-convertible in nature.
At the time of maturity, the whole complete face value of the bond is redeemed. And usually,
the time period for redemption of Foreign Currency Convertible Bonds is around 5 years.
Its functioning is quite similar to the Indian convertible financial avenues.
Issuance of Foreign Currency Convertible Bonds dilutes the ownership, and earnings per
share decrease for other shareholders.
Here, holders cannot control the conversion rate.
Overall, it can be said that there are various external sources of funding through which
money can be raised, but it is important to choose the best financial alternative among all.
But, as we all know, no avenue is perfect, they all have some limitations so sometimes it is
required to form a portfolio of all the funds, i.e., a mix of two or more than two avenues.
Certain factors, like purpose and duration of business, risk-taking capacity, benefits of the
tax, the financial strength of the investor and many more, help firms to decide what will be
the best from all the available options.
Foreign currency convertible bonds are equity-linked debt securities that are to be converted
into equity or depository receipts after a specific period.
● A holder of FCCB has the option of either converting them into equity shares at a
predetermined price or exchange rate or retaining the bonds.
● The FCCB’s are issued in a foreign currency and carry a fixed interest rate which is
lower than the rate of any other similar nonconvertible debt instrument.
● FCCB’s resemble convertible debentures issued in India.