Global Capital Market

Global Capital Market
3.1 Global Capital Markets

3.2 Participants in Global Capital Market
3.3 Disintermediation, Deregulation,
Securitization and Globalization
3.4 Various Methods of Raising Resources by
Borrower in International Market
Introduction
 The international debt markets may be described as Eurobond or note markets in
which issues in bearer form are underwritten or bought by an international syndicate
of investment houses and/or banks.
 The securities are placed with investors internationally, but sometimes will specifically
exclude nationals of the currency in which the securities are denominated. For
example, there are strict prohibitions on the sale of US dollar Eurobonds to US
citizens.
 Generally, there are no official queuing requirements for timing consents for
Eurobonds.
 An important feature of Eurobond issues is the absence of withholding taxes. Indeed,

if withholding tax was applied to such instruments and introduced as a new measure,
then it would effectively terminate any meaningful Eurobond activity within that
country.
Global Capital Markets has an enormous database and a worldwide network of relationships. Together,
they provide an excellent and effective solution to target definition. Global Capital Markets will help define
the criteria, locate suitable matches, facilitate discussions and negotiations, and assist in the financing.
A) Historical Perspective and Development of the Global Capital Market:
1) History:
On 1 July 1963, the first euro bond was issued by Autos trade under the guarantee of IRI, a holding
company owned by the Italian state. The important factors which contributed for expansion of
Euromarkets were as under:
 The Interest Equalization Tax (IET) which was introduced in the United States in September 1964 in
order to eliminating the interest differentials between domestic and foreign bonds.
 Imposition of Regulation Q in 1966, whereby rates of interest paid by United States banks to foreign
depositors were fixed.
 Voluntary foreign credit restraint programme to stop capital flows, which was later replaced in 1968
by controls imposed by the Office of Foreign Direct Investments.
2) Development:
Going forward, our research suggests that global capital markets are entering a new era in which the
forces fueling growth have changed. For the past 30 years, most of the overall increase in financial
depth the ratio of assets to GDP was driven by the rapid growth of equities and private debt in mature
markets.
• Trading
• Capital Markets
• Hedging Techniques
• Global Service
Development of
global capital
• Investment Flows
market • Raising Funds
• Development of the Asset
2) Development:
a) Trading:
Advances in computer and communications technology have dramatically changed the trading
environment. Communication systems provide banners, brokers and money managers with instant
access to market information from around the world.
b) Capital Markets:
Although restriction still exist in some markets on size, credit quality, maturity or timing,
issuers can now borrow with relative freedom in most major capital markets and in most major
currencies.
c) Hedging Techniques:
The explosive growth of the interest rate and currency swap markets allows issuers to take
advantage of arbitrage opportunities between capital markets to achieve the funding cost and
currency closest to their needs.
d) Global Service:
The relaxation of controls on foreign institutions operating in the major capital markets, for example,
in Switzerland, Germany and the Netherlands, allows banks to offer their clients the full range of
funding opportunities with limited need to involve unrelated domestic institutions in the transaction
2) Development:
e) Investment Flows:
The changing pattern of investment has been very influential on the structure of the financial markets.
f) Raising Funds:
These shifts in savings and investment have allowed the capital markets to expand, a situation of which
borrowers have been quick to take advantage.
g) Development of the Asset:
The Euro-commercial paper market, became a second flexible alternative to bank loans. Banks
themselves have had to change their funding and investment patterns.
B) Objectives of Global Capital Market:
1) Expanding the Money Supply for Borrowers:

 Companies unable to obtain funds from investors in the domestic market seek financing in the
international capital market.
 Essential for firms in countries with small or developing capital markets or emerging stock markets.
 An expanded supply of money benefits small companies that might not get financing under intense
competition for capital.
B) Objectives of Global Capital Market:
Following are the important Objectives of Global Capital Market:
1) Reducing the Cost of Money for Borrowers:
 An expanded money supply reduces the cost of borrowing. The “price” reflects supply and demand.
Excess funds create a buyer’s market, forcing interest rates lower.
 Projects regarded as infeasible because of low expected returns might be viable at a lower financing
cost.
2) Reducing Risk for Lenders:
 The international capital market expands the available set of lending opportunities. Investors
reduce portfolio risk by spreading their money over many debt and equity instruments.
 Investing in international securities benefits investors because some economies are growing while
others are in decline.
C) Factors Responsible for Causing the Emergence of Global Financial Markets:
The factors responsible for causing the emergence of global financial markets are:
a) Deregulation :
Deregulation or liberalization of markets and the activities of market participants in key financial
centers of the world
b) Science and Technology:
Technological advances for monitoring world markets. executing orders. and analyzing financial
opportunities.
c) Institutionalization :
Shift from retailing to increased institutionalization of investors in financial markets.
C) Factors Responsible for Causing the Emergence of Global Financial Markets:
Information
Deregulation
Flow
Science and
Competition
Technology:
Institutionali
z--ation
d) Competition :
Global competition which forces governments to deregulate various aspects of their financial
markets
e) Information Flow:
Free and unrestricted flow of market information around the world owing to advancement in
telecommunication systems.
D) Classification of Global Capital Market:
Global financial markets may be classified into internal and external markets as described below:
1) Internal Market :
Internal market also called national or domestic market is a market where the capital issues and
issuers are domiciled within the boundaries of a particular country.
2) External Market :
External market also called foreign market or international market or Euro market or offshore
market deals with issue of securities not domiciled in the country but are sold and traded throughout
the world.
E) Types of Debt Instruments in Global Capital Market:
Types of Debt Instruments include following:
a) Bearer Securities:
In bearer securities, there is no holder's register and the security does not mention the name of
the investor. Ownership of bearer stock passes on delivery to the purchaser.
b) Registered Securities :
Following US tax changes introduced in January 1984 all capital debt issues in the USA, yankee and
domestic, are generally issued in registered rather than in bearer form. Most dom.
c) Straight Debt:
Straight debt may be described as fixed interest bonds or debentures, which do not convey any
option for the investor to convert into equity. A debenture is an acknowledgement of indebtedness
usually given by an incorporated company either under seal or under hand.
d) Partly Paid Issues:
It is quite a normal procedure for UK domestic loan stock to be issued on a partly paid basis with,
say, 20 per cent or 25 per cent payable initially and the balance usually in one subsequent installment
within, say, six months. Eurobonds and notes have also been issued on a deferred purchase basis
e) Zero Coupon and Deep Discount Issues:
Sometimes known as ‘streakers' the bonds are issued at a deep discount, which is generally
calculated, to give slightly lower equivalent annual yield to maturity than conventional interest-
bearing paper. Deep discount bonds and zeros are fixed interest securities and are attractive to the
more speculative investors.
f) Convertible Stocks:
Fixed interest securities that are exchangeable at a later date into ordinary shares on
predetermined terms are called ‘convertibles’. The cost of buying what is, in effect, an equity option is
measured by the difference between the yield on the convertible and the yield on an alternatives fixed
interest .
g) Warrants:
A warrant represents a tradeable instrument giving the holder to purchase from, or sell to, the issuer
an underlying security (e.g. equity) under specified conditions at a specified time in future. Bonds may
be issued with debt warrants or with equity warrants which in most cases may be detached and traded
separately or traded with the bond. A warrant conveys the right for the holder to subscribe for a
specified type and quantity of security at a stated price and within a given period. The types of
securities may be fixed interest or floating rate loan stock/debentures or perhaps shares which may or
may not convey voting rights.
h) American Depositary Receipt (ADR):
An ADR is a negotiable receipt for foreign securities. Its purpose is to simplify the procedures and
practices for US resident investors relating to their purchase, holding and sale of investments
denominated in foreign currencies. They are treated for ownership and transfer purposes in the same
way as US share certificates An ADR certificate will show the depository bank in the USA and indicate
the liability of that bank to pay dividends declared, as well as matters relating to proxies, rights issues
and fees relating to the underlying shares.
Partly Paid Issues
Fig: Types of Debt Instruments in
Global Capital Market Zero Coupon and Deep Discount Issues
Convertible Stock
Warrants
American Depositary Receipt (ADR):
Bearer Securities
Registered Securities
Straight Debt
The participants of global capital market are mainly those who have a surplus of funds and those who have
a deficit of funds. The persons having surplus money want to invest in global capital market in hope of
getting high returns on their investment. Thetwo kinds of activities keep the capital market going. Global
capital markets players can be broadly divided into three core categories:
A) Issuers:
Following are the important issuers in global capital market:
1) Mutual Funds:
A mutual fund is an investment vehicle that pools money from many investors and invests in a
diversified portfolio of securities that can include stocks, bonds, short-term money market instruments
or other assets.
2) Hedge Funds:
A hedge fund can be defined as an actively managed, pooled investment vehicle that is open to only
a limited group of investors and whose performance is measured in absolute return units.
3) Pension Funds:
A pension fund is any plan, fund, or scheme which provides retirement income. Pension funds are
important to shareholders of listed and private companies.
4) Unit Trusts:
A unit trust is a special kind of trust which, in addition to being subject to the laws governing trusts,
is also subject to the laws governing mutual funds. A unit trust may be registered as a mutual fund if
the trust units are redeemable at the option of the investor.
B) Investors:
The investors of global capital market include the investment banks, brokerage houses and
independent analysts etc.
1) Investment Banks:
Investment banks offer services in equity capital markets, leveraged debt capital
markets, commercial real estate, asset finance and leasing, and corporate lending services.
The major functions of investment banks are raising funds, asset management, mergers
and acquisitions advisory services, brokerage services, and market making. Investment
banks help companies with sourcing funds by selling financial instruments in the capital
market.
2) Brokerage Houses:
A brokerage house, also called a brokerage firm, is a company licensed to buy and sell
stocks or securities. Acting as an intermediary between buyers and sellers, this company
typically employs brokers who carry out the wishes of the firm's clients as they pertain to
the trading of stocks. Broker services are usually provided on a commission basis.
C) Intermediaries:
Financial intermediary’s plays vital important role in the process of global capital market
and these are the major participant in global capital market it includes- Stock exchanges,
clearing houses, and custodian banks etc. Following are the important functions perform by
the global capital market intermediaries;
C) Intermediaries:
Following are the important functions perform by the global capital market intermediaries;
a) Advising the Companies:
Investment banks, securities houses and some other organizations advise companies
and other organizations on primary market issues, and will arrange the issue and either
sell the securities to investors or underwrite the issue.
b) Primary and Secondary Market Operations:
Various organizations act as brokers, market makers or broker dealers in the secondary
markets.
c) Trading of Securities:
Stock exchanges provide a forum and trading system within which trading in securities
can take place. A stock exchange also has a regulatory function to ensure that trading in
securities is conducted properly.
d) Settlement of Transactions:
Some intermediaries provide a system for the settlement of transactions in securities,
whereby transactions are confirmed, and the securities are delivered to the buyer in
exchange for payment
e) Provide Custody Services:
Some organizations provide a custody service and hold securities on behalf of investor
clients.
C) Intermediaries:
The important functions perform by the global capital market intermediaries;
Advising the Companies
Primary and Secondary Market Operations:
Trading of Securities
Settlement of Transactions:
Provide Custody Services:

3.3 Disintermediation, Deregulation, Securitization and
Globalization
Globalization of capital markets means that national markets tend to become better integrated
as deregulation; disintermedizition, securitization, and financial innovation relentlessly erode
segmentation barriers.
A) Disintermediation:
It is commonplace for a business to go through a cycle of start up, growth, maturity and
sometimes, stagnation or worse. In the past as part of this cycle the business could be
expected to use and then seek to discard intermediaries.
Meaning:
In finance disintermediation means bank customers directly engage in financial activities
without the guidance and support of bank personnel. One specific area where
disintermediation has emerged is in the investment world, namely the market mechanism
individuals must follow to buy, sell or hold financial products.
Advantages of Disintermediation:
There are three important advantages of disintermediation these are as follows.
a) Cost Advantage:
If there are agents, brokers or other middleman between the producer and the
consumer each one adds to the price of the goods. Traditionally, this has been explained
away as paying for a provided service.
Globalization
A) Disintermediation:
Advantages of Disintermediation:
b) Speed Advantage:
Eliminating the middleman not only eliminated the middleman's price hikes it eliminated the
middleman's handling time. This is not only true for the shipping time from producer to
consumer; it is true for the time to place an order.
c) Control Advantage:
Disintermediation puts the consumer and producer in control of the supply chain.
Middlemen often manipulated the process to their advantage. The direct contact-via a
web page between producer and consumer makes it possible for each to see clearly what
the other wants.
Development of Disintermediation:
The process of disintermediation in the developed world, began almost a century back, but the
last fifty years have been the era of innovation, engineering, and re-engineering.
a) Period 1985-91:
The period 1985-91, can be said to be the prelude to the post-1991 era. These six years have
been eventful in many way and more so in providing a platform for the economic reforms
to take off. In the international scenario, 1986, Uruguay round of GATT, formation of the
Cooke Committee in 1987 capital adequacy requirement of banks, recessionary trends in
the developed countries
Globalization
2) Development of Disintermediation:
b) Period 1988-91:
The year 1988-91 saw many established companies approaching the capital market with
issues valued at hundreds of crores and getting over subscribed. The common investor
who invested at this stage in the primary market, reaped a bonanza in 1992 and again in
1994, when many of the shares procured at par or at nominal premium during 1988-91
period, fetched very high returns.
c) Period 1985-91:
The period 1985-91, could be treated as a period when banks at macro level
experienced the impact of disintermediation - both from the savers and the borrowers
d) Post-1991:
The post-1991 period has been a full-blown period for the banking industry as the
process of disintermediation came on its own. To remain competitive banks had to keep on
redefining their role again and again. More number of private mutual funds began
competing with the existing public sector ones; and lean and technologically upgraded
new private banks were added to the existing ones.
Globalization
B) Deregulation:
Deregulation can refer to a variety of changes in the law which allows financial institutions
more freedom in how they compete. Whether such changes are beneficial or harmful to the
economy as a whole has been widely debated, it is important to note that financial
deregulation does not mean removing all rules or regulations.
Meaning:
One of the effects of the process of liberalisation is deregulation. The term deregulation,
in the context of banking and financial systems, has a wider meaning than its literal one.
Historically, worldover, banking systems have been among the most heavily regulated sectors
of most economies
Characteristics:
Following are the important characteristics of deregulation:
a) Elimination of regulatory barriers to entry:
The complete removal of obstacles to entry into and exit from a market would not
seem advisable in the case of non-sustainable natural monopoly, where freedom of
entry would disrupt an efficient market structure.
b) "Sunk" costs reduction and deregulation:
Often sunk costs consist of investments in common facilities which give rise to
economies of scale and scope as well as to externalities.
Globalization
B) Deregulation:
Characteristics:
c) Strategic behaviour and the role of anti-trust:
Obstacles to contestability derive not only from the existence of regulatory or
technical barriers to entry but also from the behaviour of market agents. When a
previously monopolistic sector is deregulated, an incumbent that retains a dominant
position may try to prevent entry of competitors by adopting strategic pricing policies.
Factors Causing Deregulations:
Deregulation is the effect of two causes - liberalisation and financial innovation. To some
extent these two causes are separate, although they are interrelated.
a) Liberalisation:
It has proceeded internationally as well as domestically. In India, one of the
reasons for opening access to foreign banks and financial institutions has been to
attempt to promote its own banking and financial system in the face of globalisation
which threatens to overwhelm the entire world markets.
b) Financial Innovation:
It is now a fact and experienced by all countries, including India, that financial
deregulation is sweeping through the world's financial markets and revolutionising the
financial services industry in most countries.
Globalization
B) Deregulation:
Deregulation: Globally and in India:
a) Deregulation Globally:
It is said that, globally, the deregulation of financial markets began in the mid-
1960s, accelerated in the 1970s and exploded in the 1980s. It cut across national
borders, cultures, and governments strategies and philosophies.
b) Deregulation in India:
The amendment to the Banking Regulation Act ln 1984, permitting commercial
banks in India to float mutual funds and merchant banking subsidiaries, is the first
milestone towards deregulation in the backdrop of advocating a socialistic pattern of
society with focus on mixed economy and where the major banks were nationalised
C) Securitization:
Securitisation is a financing technique that involves the conversion of usually illiquid assets
with predictable cash flows into marketable securities. Essentially, it is the process of
creating securities backed by pools of assets with the securities then being sold to
institutional investors.
Meaning:
Securitization is a complex series of financial transactions designed to maximize cash flow
and reduce risk for debt originators. A list of the types of financial debt instruments that
have been securitized is included in these materials.
Globalization
C) Securitization:
Development of Securitization:
Securitisation of non-mortgage assets has expanded dramatically. Automobile loans and
leases, computer leases, credit card balances, and trade receivable have all been used for
Asset Backed Securities issues. Securitisation separates the risks inherent in any corporate
finance transaction and transfers these risks from the seller to the purchaser of assets.
Benefits of Secularization:
Following are the importance benefits of Securitization
a) Availability of New Loans:
The existence of a liquid secondary market for home mortgages and other
financial debt instruments increases the availability of capital to make new loans. This
increases the availability of credit.
b) Decreases the Cost of Credit:
Securitization also helps to decrease the cost of credit by lowering originator’s
financing costs by offering lenders a way to raise funds in the capital market with lower
interest rates.
c) Shifting the Credit Risk:
Finally, securitization reallocates risk by shifting the credit risk associated with
securitized assets to investors, rather than leaving all the risk with the financial
institutions.
Globalization
B) Deregulation:
Benefits of Secularization:
The importance benefits of Securitization
Availability of
New Loans
Decreases
Shifting the
the Cost of
Credit Risk
Credit
Globalization
B) Deregulation:
Players in Securitization Process:
The primary players in the securitization of any particular pool of assets can vary. Included in
these materials is a flow chart for the MBS (mortgage backed securities) issue identified as
“Meritage Mortgage Loan Trust 2005-2, Asset-Backed Certificates, Series 2005-2.” The flow
chart illustrates the roles of and the relationships between the various primary parties in a
typical issue. Each party is addressed below:
a) Originators :
The parties, such as mortgage lenders and banks, that initially create the assets
to be securitized.
b) Aggregator ;
Aggregator purchases assets of a similar type from one or more Originators to
form the pool of assets to be securitized.
c) Depositor :
Depositor creates the SPV/SPE for the securitized transaction. The Depositor
acquires the pooled assets from the Aggregator and in turn deposits them into the
SPV/SPE.
d) Issuer :
Acquires the pooled assets and issues the certificates to eventually be sold to the
investors. However, the Issuer does not directly offer the certificates for sale to the
investors.
Globalization
B) Deregulation:
Players in Securitization Process:
e) Underwriter :
Usually an investment bank, purchases all of the SPV’s certificates from the
Depositor with the responsibility of offering to them for sale to the ultimate investors.
f) Investors :
Purchase the SPV’s issued certificates. Each Investor is entitled to receive monthly
payments of principal and interest from the SPV. The order of priority of payment to
each investor, the interest rate to be paid to each investor and other payment rights
accorded to each investor
g) Trustee :
The party appointed to oversee the issuing SPV and protect the Investors’ interests
by calculating the cash flows from the pooled assets and by remitting the SPV’s net
revenues to the Investors as returns.
h) Servicer :
The party that collects the money due from the borrowers under each individual
loan in the asset pool, the Servicer remits the collected funds to the Trustee for
distribution to the Investors.
Globalization
D) Globalization:
The world economy has been emerging as a global or transnational economy. A global or
transnational economy is one which transcends the national borders unhindered by artificial
restrictions like Govt restrictions on trade and fator movements.
Meaning:
Globalization in simple words means expansion of businesses globally and giving up the
consideration of regional or national boundaries for expansion of business activities. In
simple words, it means developing a global outlook or approach of business. The word
‘Globalization’ shows the 'Broad attitude' and 'Long vision' of entrepreneurs in the market.
Definitions:
a) Russi Mody :
“Globalization is a two way traffic, first it means free competition, high productivity
using new technology and second, selling goods in a single market of the whole
world.”
b) International Monetary Fund:
“Globalization is the growing economic interdependence of countries worldwide
through increasing volume and variety of cross border transactions in goods and
services and of international capital flows and also through the more rapid and
widespread diffusion of technology.”
Globalization
D) Globalization:
Factors Favouring Globalization:
Factors Favouring Globalization are as follows:
a) Human Resources:
Manpower is very important for any country. If a country has educated, technically
skilled labour force then it is easy to introduce globalization. India is lucky to have a
largest pool of scientific and technical manpower.
b) Growing Market:
If the domestic market is growing then the local companies can make good business
and consolidate their position.
c) Broad Industrial and Resource Base:
Globalization requires broad industrial base and plenty of resources. This enables the
firms to diversify their business.
d) Dynamic Entrepreneurship :
The entrepreneurs if dynamic are able to face the competition arising out of
globalization. Traditional entrepreneurs are orthodox and do not introduce innovations.
Hence, they decline in the changing world market.
e) Economic Liberalization :
Globalization needs economic freedom. It requires import liberalization, foreign capital,
fast moving government machinery.
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Globalization
D) Globalization:
4) Obstacles to Globalization:
Obstacles to Globalization are as follows:
a) Bureaucracy :
Procedure delays, unco- operative staff and concentration of authority are the hurdles.
Corrupt machinery, vested interests discourage the dynamic entrepreneurs.
b) Use of Traditional Techniques:
Outdated technology is used in many units. It increases the cost of production and makes
the prices uncompetitive.
c) Inadequate Infrastructure:
Poor and expensive infrastructure affects the growth adversely.
d) Small Size and Resources:
Many companies are uneconomic in size, their resources are limited. Hence, they cannot
compete with the giant sized MNCs.
e) Lack of Business Honesty:
Many companies cheat the buyers. They cheat in quality of the products. They hardly
maintain time-schedule. There is no follow up of the complaints. So, they lose
customers and have bad reputation in the world.
Globalization
D) Globalization:
Impact of Globalization:
Ever since the dawn of civilization, trade and commerce initially between people and
thereafter, between countries has been increasing, the pace of increase has always been a
growing trend through the centuries. In the last few decades the pace of growth has been
phenomenal.
a) Impact on Indian Economic Scenario:
India also could not remain immune from the effects of these phenomenons.
Despite practising closed economic policies since independence, for almost four
decades, India gradually started opening its doors to the world economies.
b) Impact of Globalisation on the Indian Financial Sector:
As world trade grows, there is pressure on India to increase its share, both exports
and imports. The financial system in general, and the banking system in particular,
provide the backbone, i.e. the finance for it to grow. Exports of any country can only
grow when its products and services meet the international standards.
c) Impact on the Banking Industry:
Globalisation coupled with the awareness generated by electronic and print media
made the consumer more aware of their rights and availability of various banking and
financial services. Traditionally, Indian bankers have been used to walk-in business.
Borrower in International Market:
A financial market is where people and institutions who are in need of money meet those who
have excess money and want to deploy it for productive purpose. Thus it is a place where
borrowers interact with lenders and negotiate a deal with mutual agreement. Most financial
markets have periods of heavy trading and demand for securities; in these periods, prices may
rise above historical norms. Some of the ways in which finance can be raised in the
international market are as below:
1) Foreign Collaboration:
In India joint participation of foreign and domestic capital has been quite common.
Foreign collaboration could be either in the form of joint participation between private
firms, or between foreign firms and Indian Government, or between foreign governments
and Indian Government.
2) Bilateral Government Funding Arrangement:
Aids provided by the developed countries in the form of loans and advances, grants,
subsidies to the governments of under—developed and developing countries. The aid is
provided usually for financing government and public sector projects.
Aids provided by the developed countries in the form of loans and advances, grants,
subsidies to the governments of under—developed and developing countries. The aid is
provided usually for financing government and public sector projects.
a) International Bank for reconstruction and redevelopment (IBRD):
It makes loans at nearly conventional terms for projects of high economic priority.
A government guarantee is necessary for World Bank funding. Its main emphasis is on
infrastructure development
b) International Financial Corporation (IFC):
The purpose of IFC is to finance various projects in the private sector through
loans and equity participations and to serve as catalyst for flow of additional private
capital investments to developing countries.
4) International Development Association:
The poorest of the less developed countries normally access funds from the IDA. IDA is
authorized to make soft loans and does not require government guarantees
5) External Commercial Borrowings:
These include funds raised in the form of borrowings from agencies like US EXIM Bank,
Japanese EXIM Bank, ECGC of UK etc usually for financing government and public sector
projects.
6) The Foreign Bond Market:
It is a bond issued in a country's national bond market by an issuer not domiciled in
that country where those bonds are subsequently traded. This is an important part of the
international financial markets.
7) Euro Issues:
After the onset of the process of globalization of Indian economy, the govt. thought it
imperative to allow the companies in India to raise funds from foreign market in foreign
exchange. The scheme has permitted Indian companies to two types of securities.
permitted Indian companies to two types of securities:
a) Foreign Currency Convertible Bonds (FCCBs):
The FCCB means bonds issued in accordance with the relevant scheme and subscribed
by a non-resident in foreign currency and convertible into depositary receipts or
ordinary shares of the issuing company in any manner, either in whole or in part, on the
basis of any equity related warrants attached to debt instruments.
b) Depository Receipts (DRs):
A DR means any instrument in the form of depository receipt or certificate created by
the overseas depository bank outside India and issued to non-resident investors against
the issue of ordinary shares. In depository receipt, negotiable instrument evidencing a
fixed number of equity shares of the issuing company generally in US dollars are issued
by the depository in the international market, the underlying shares denominated in
Indian rupees are issued in the domestic market by the issuing company.
 American Depositary Receipt:
It represents ownership in the shares of anon-U.S. company that trades in U.S.
financial markets.
b) Depository Receipts (DRs):
 Global Depository Receipt:
It is a certificate issued by a depository bank, which purchases shares of foreign
companies and deposits it on the account. GDRs represent ownership of an
underlying number of shares. Global Depository Receipts facilitate trade of shares,
and are commonly used to invest in companies from developing or emerging
markets.
E) Domestic Foreign Currency Loans out of Foreign Currency Resources:

The availability of foreign currency loans to domestic borrowers has expanded as a natural
result of increased global liquidity and the liberalization of domestic financial systems.
1) FCNR (B):
FCNR accounts under the scheme are opened and maintained in terms of Non-
resident (External) Accounts Rules, 1970 (See Appendix II in Volume II). The authorized
dealers are allowed to accept deposits from NRIs and OCBs in such currencies as specified
by Reserve Bank from time to time. The salient features of the scheme are as under :
a) Features:
 Reserve Bank will not provide exchange rate guarantee to banks for deposits of any
maturity ((under the Scheme.
1) FCNR (B):
a) Features:
 FCNR (B) accounts are permitted to be opened only in the form of term deposits.
The deposits may be accepted for three maturities viz. one year and above but less
than 2 years, two years and above but less than 3 years and three years only.
 In respect of liabilities representing amounts received under the scheme authorized
dealers are required to comply with CRR/SLR requirements as laid down by Reserve
Bank from time to time.
 Lending of resources mobilized under the Scheme will not be subject to any interest
rate stipulations.
 Advances outstanding against the accounts under this Scheme will not be considered
as part of net bank credit for the purpose of determining priority sector lending.
b) Opening of and Utilisation of Funds in FCNR (B) Accounts 43:
 FCNR (B) term deposit accounts may be opened with funds remitted from abroad in
convertible foreign currency through normal banking channel or funds received in
rupees.
 Instructions contained in paragraph 13B.21 to 13B.23 are applicable, mutatis
mutandis, to FCNR (B) accounts also.
1) FCNR (B):
c) Mode of Remittance:
 Remittances from abroad for opening/crediting to FCNR (B) accounts would ordinarily
be made only in the designated currency in which the account is desired to be
opened/ maintained.
 In case a customer with any convertible currency other than a designated currency
desires to place a deposit under the Scheme, authorised dealers can undertake a fully
covered swap in that currency against the desired designated currency with the
depositor. There is no objection also for such a swap being done between two
designated currencies.
d) Conversion of Rupees into Designated Currencies and vice versa:
 Remittances received in Indian rupees for opening FCNR (B) accounts in conformity
with should be converted by authorized dealers into the designated foreign currency
at the clean T.T. selling rate for that currency ruling on the date of conversion.
 Maturity proceeds of FCNR(B) accounts or premature withdrawal thereof for purpose
of meeting 400-4 local disbursements including investment requirements of account
holder in India should be converted into rupees at the authorized dealer's clean T.T.
buying rate for the relative currency ruling on the date of withdrawal.
1) FCNR (B):
e) Inland Movement of Funds:
Any inland movement of funds for the purpose of operating FCNR(B) Accounts as
well as for repatriation abroad of balances held in FCNR(B) accounts will be free of
inland exchange or commission for the non-resident depositors. of withdrawal.
f) Manner of Payment of Interest:
 Interest on balances held in FCNR (B) accounts may be paid half-yearly or on an
annual basis as desired by the depositor.
 Interest may be credited to a new FCNR (B) account or an existing/new NRE/NRO
account in the -500-5 name of the account holder, at his option.
g) Loans/overdrafts against FCNR (B) deposits:
In case of loans/overdrafts against FCNR (B) deposits, the margin requirement shall
be calculated on the rupee equivalent of the deposits at the prevailing notional rate of
exchange for the relative currency.
h) Transfer of Funds held in FCNR (B) Accounts:
Authorized dealers may allow transfer of funds held in FCNR (B) accounts of
different persons maintained with themselves or with other authorized dealers
1) FCNR (B):
i) FCNR(B) Deposits of NRIs on Return to India:
The FCNR (B) deposits of persons of Indian nationality/origin who return to India
for permanent settlement may be allowed to be continued till maturity at the
contracted rate of interest, if desired.
j) Statement of Inflow, Outflow and Outstanding Deposits under FCNR Accounts (Banks)
Scheme:
Authorized dealers should submit a monthly statement for the bank as a whole, in form
STAT 5 showing the inflow, outflow and outstanding deposits under the Foreign
Currency (Non-Resident) Accounts (Banks) Scheme during the month.
k) Part C Foreign Currency (Ordinary - Non-Repatriable) Deposit (FCONR) Scheme:

Foreign Currency (Ordinary - Non-repatriable) Deposit (FCONR) Accounts in the
names of non-residents denominated in U.S. dollar were allowed to be opened by
authorized dealers out of funds transferred to India in an approved manner in
convertible foreign currency from abroad or by transfer of funds from NRE/FCNR
accounts.
2) EEFC (Exchange Earners Foreign Currency):
Reserve Bank, by its Notification No F.E.R.A. 183/98-RB dated 22nd April, has permitted
exporters of goods and services and other beneficiaries of inward remittances in
convertible foreign currency, other than those remittances received pursuant to
undertakings given by them or those received for meeting specific obligations, to open
and maintain with authorised dealers in India accounts expressed in foreign currency and
titled 'Exchange Earners Foreign Currency (EEFC) Accounts'
a) Credits to EFFC Accounts:
 Authorized dealers may also allow credits to EEFC accounts in the following cases:
 Up to 50%/70% of the inward remittances, as the case may be, received towards
export advance in freely convertible currencies subject to monitoring of the advances
received by the authorised dealers concerned in terms of paragraph 6C.6.
 Up to 50% of the payments received by exporters by debit to U.S. Dollar Escrow
accounts maintained in India as also under the foreign currency debt repayment
route, towards value of goods exported by them.
 Up to 50% of the payments received by hotels from Credit Card Servicing
Organisations (CCSO) in India in rupees against goods/services sold/supplied to
foreign tourists against international credit cards issued abroad
b) EEFC Accounts not permitted in certain cases:
 Exporters maintaining foreign currency accounts in terms of paragraph 6A.12 are not
eligible to maintain EEFC accounts.
 Authorised dealers may maintain EEFC account in any convertible foreign currency and
in any form (current, savings or term deposit accounts). Savings bank accounts in the
names of firms, companies, etc. should, however, not be permitted.
c) Rate of Interest:
The rate of interest payable on the balances in savings/term deposit accounts will
be determined by the banks taking into account the interest rates prevailing in
international markets. No interest is payable on the balances held in the form of current
accounts.
d) Liquidation of Export Credit:
In case the exporter has obtained any export credit from a bank against shipment
in respect of which a percentage of the proceeds is sought to be credited to the EEFC
account, authorised dealers should ensure that the export credit has been liquidated
fully before affording any credit out of export proceeds to the EEFC account.
e) Issue of Cheques against EEFC Balances:
 Authorised dealers may allow EEFC account holders the facility of making payments
from such accounts for eligible purposes by issue of cheques to the beneficiaries of
the payment. In order to facilitate easy identification of cheques drawn on EEFC
accounts, authorised dealers may issue to their constituents maintaining EEFC
accounts
 EEFC account holders should immediately after issue of the cheque, but in any case
not later than seven days, submit an application to authorised dealer on form A1 or
A2, as the case may be, together with supporting documents giving full particulars of
transaction for which cheque was issued.
 While making payment of cheques issued on EEFC account, authorised dealers
should satisfy themselves that the transaction in question is permissible under the
current exchange control regulations. Any payment made by issue of a cheque for a
purpose for which use of funds held in EEFC account is not permissible should be
reported to Reserve Bank promptly.
 The transaction should be reported in appropriate 'R' return when the cheque is
cleared for payment.
f) Facilities against the Security of Deposits:
Credit facilities whether fund based or non fund based, in rupees or in foreign
exchange, may be granted either in India or abroad, against the security of funds held in
the EEFC accounts. The repayment of such credit facilities should be made out of the
balance in the EEFC account of the concerned depositor. The facility should be used for
normal business purposes only and not for any on-lending or for investment in shares,
securities, etc.
Credits to EFFC Accounts
EEFC Accounts not permitted in certain
cases
Rate of Intere
Liquidation of Export Credit:
Issue of Cheques against EEFC Balances:
Facilities against the Security of

Deposits

Global Capital Market

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Global Capital Market

3.1 Global Capital Markets

 An important feature of Eurobond issues is the absence of withholding taxes. Indeed,

B) Objectives of Global Capital Market:

1) Expanding the Money Supply for Borrowers:

American Depositary Receipt (ADR):

Advising the Companies

Primary and Secondary Market Operations:

Provide Custody Services:

E) Domestic Foreign Currency Loans out of Foreign Currency Resources:

k) Part C Foreign Currency (Ordinary - Non-Repatriable) Deposit (FCONR) Scheme:

Issue of Cheques against EEFC Balances:

Facilities against the Security of

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