Agenda
Introduction
Genesis of International Market
Classification of International Instruments
Concept & Mechanism - ADR/GDR/IDR
360° Perspective of ADR/GDR/IDR
Case Study – Infosys ADR Issue
Timeline of ADR/GDR/IDR
Debt Instruments
Hybrid Instruments
Conclusion
International Finance
International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits.
Trends in International Finance International financial market are influenced by the structural changes in the world
economy it is possible to differentiate four phases relevant for the analysis of financial markets globalization.
First phase (1960) Second phase (1970) Third phase (1980) Fourth (1990)
Features
Scale and structure of financial resources
Structure of the basic groups of countries' share on the market
Institutional and sector share
Degree of joining home with foreign markets ("osmosis")
Positive effects, risks and control
Classification of Instuments
DRs - what are they and how do they work? Company - comply policies of stock exchanges
Investing directly - expensive, risky,
problematic
Investing indirectly - DRs
Receipt - predefined number of shares
Listed on stock exchanges
ADR - Infosys
GDR - RIL
IDR
Players in International Market
Borrowers/Issuers Corporates Government Supranational organizations
Lenders/Investors Institutional investors HNIs QIBs Insurance companies
Intermediaries Lead managers/Co-lead managers - offer circular,
marketing the issues
Underwriters - for the issue
Agents and Trustees - issue of bonds/convertibles
Lawyers and Auditors - Indian/English/American law
and financial information
Listing Agents and Stock exchanges - facilitate the
documentation
Depository bank - only issue DRs
Custodian - holds the shares underlying DRs
How DRs are issued and cancelled
Mechanism for ADR, GDR and IDR ADR Programs
Unsponsored shares
Level I
Level II (listed)
Level III (offering)
Restricted programs - 144-A and Regulation
S
Issuance of GDR
Shareholder Approval Needed Offering memorandum Fixation of issue price Opening of bank account outside India Notifying the stock exchange
Appointment of a Lead Manager Vital link - government and investors with the issuers Advises the company The industry - engaged The international monetary and securities market The economic conditions and The terms, quantum of issue, stages of conversion, price of
equity, shares on conversion
Finalization of issue structure - government
The Documentation Prospectus Depository agreement Custodian agreement Subscription agreement Trust deed Paying and conversion agency agreement Underwriting agreement Listing agreement
The LaunchEuro-Equity Syndication - intermediariesSegmented Syndication - geographically
targeted Marketing
Lead manager & advertising agenciesBack-up material Road shows - future profitability, growth
prospectsFace-to-face presentations - financial
centres
Pricing and Closing Underwriters response Book-runner keeps the book open - 1to2
weeks Fix a particular price
Costs Lead-manager Marketing cost
Recent trends in capital raising show continued growth in use of GDR
360° Perspective of ADR/GDR/IDR
Investor Perspective
Company Perspective
Economy Perspective
Investor Perspective
Opportunities
Investor Perspective
Global portfolio Benefits of higher risk; higher return
equities Quoted and traded in U.S. Dollars Easy access to markets Transparency Lower transactions costs Tax efficient Prompt dividend payments
Company Perspective
Raise capital from international market Enlarged investor base Greater exposure & Share’s liquidity Boosting the company's prestige Extend its research base to foreign
countries International shareholder base Stock-swap acquisition Costs of Cross Listing
Company Perspective
Arbitrage opportunities
Economy’s Perspective
Coupling of global economies
Risks Political Risk Exchange Rate Risk Inflationary Risk
Impact on Company’s Valuation – Forex exposure
Economic Perspective
BOP’s Position of the country
Case Study – Infosys ADR
Name Ticker CusipUnderlying Sedol Ratio Exchange Depositary Region
Country Sector
DR REDDYS LABORATORIES LTD RDY 256135203 6410959 1 : 1 NYSE JPM Emrg. Asia India Pharmaceuticals
HDFC BANK LTD HDB 40415F101 6100131 1 : 3 NYSE JPM Emrg. Asia India Banks
ICICI BANK LTD IBN 45104G104 6100368 1 : 2 NYSE DB Emrg. Asia India Banks
INFOSYS TECHNOLOGIES LTD INFY 456788108 6205122 1 : 1 NASDAQ DB Emrg. Asia India Software
MAHANAGAR TELEPHONE NIGAM MTE 559778402 6117807 1 : 2 NYSE BNY Emrg. Asia India
Telecommunications
PATNI COMPUTER SYSTEMS LIMITED PTI 703248203 6734745 1 : 2 NYSE BNY Emrg. Asia India SemiconductorsREDIFF.COM INDIA LTD REDF 757479100 1 : 0.5 NASDAQ CIT Emrg. Asia India InternetSATYAM COMPUTER SERVICES LTD SAY 804098101 6241858 1 : 2 NYSE CIT Emrg. Asia India Software
SIFY LTD SIFY 82655M107 B05DZX1 1 : 1 NASDAQ CIT Emrg. Asia India InternetSTERLITE INDUSTRIES INDIA LTD SLT 859737207 B13TC37 1 : 1 NYSE CIT Emrg. Asia India
Metal Fabricate/Hardware
TATA COMMUNICATIONS LTD TCL 876564105 6114745 1 : 2 NYSE BNY Emrg. Asia India
Telecommunications
TATA MOTORS LTD TTM 876568502 6101509 1 : 1 NYSE CIT Emrg. Asia IndiaAuto Manufacturers
WIPRO LTD WIT 97651M109 6206051 1 : 1 NYSE JPM Emrg. Asia India Software
WNS HOLDINGS LTD WNS 92932M101 1 : 1 NYSE DB Emrg. Asia IndiaCommercial Services
Infosys
Incorporated – 1981
53 Global Development Centers
47 Sales Offices around the world
ADR issue
IPO @ Rs. 95/share – Feb 1993 Listed @Rs. 145/share – June 1993 Private placement (FII,FI) – Oct 1994 ADR issue 20,70,000 ADS @ $34 – March
1999 Secondary ADR issue
o US $294m – July 2003o US $1.07b – June 2005o US $1.605b - Nov 2006
Details of ADR issue
Stock market data ADS Listed @ NASDAQ Ratio of ADS to equity shares (A:O)=
1:0.5 ADS symbol -- INFY Date of ADS issue: March 11, 1999. Amt raised US$ 70,380,000 (Rs 296.86
crore)
Details of ADR issue
Depository Bank: Deutsche Bank Trust Company Americas
Custodian Bank: ICICI Bank Limited Investment Banks:
Lead Bank: NationsBanc Montgomery Securities
Co-Lead Banks:1. BankAmerica Robertson Stephens of San
Francisco2. Brown of New York
Details of ADR issue
ADR issue expenses:
Rs.Legal and accounting fees 1,28,26,437Printing charges 77,03,653TOTAL 2,05,30,090
Details of ADR issue
Forms related to the issue:
Form 20F Form F-1
Strategic Perspective
Objectives - ADR Issue
Increase Visibility and Comfort for clients Position as a US based Technology comp Diversify Shareholder base Unlock Share Value Become part of Global Index Issue Stock Options – Overseas
employees Obtain Hot Money for M&A
Objectives - Secondary ADR issue
Issue FloatPrimary Issue – 11 Mar 1999 3%Secondary Issue – July 2003 9%Secondary Issue – June 2005 14%Secondary Issue – Nov 2006 19%
Research on ADR Premium
Data : NSE: nseindia.com: INFYTECH
Yahoo Finance: finance.yahoo.com- INFY ADR
Research Outcome
Analysis – ADR Premium
Demand – Supply Regulatory
Foreign Exchange Management Act Two-way fungibility – Feb 2002
Regulations: Issue of ADRs/GDRs by Indian Companies Issue ADRs/GDRs if eligible in terms of the Scheme for
Issue of FCCB and OS (Through DR) Scheme, 1993 and guidelines issued by MoF, GoI
Co. should not be ineligible to issue shares to non-resident persons in terms of the Foreign Exchange Management Act (FEMA)
Foreign investment - GDRs, ADRs - treated as FDI
No restriction on the number of GDRs/ADRs/FCCBs floated by a co. or a group of cos. in a financial year
No end‐use restrictions on GDR/ADR issue proceeds – except ban on investment in real estate and stock markets
Swap or exchange of shares of an Indian CompanyIndian co. permitted to acquire shares of foreign
co. engaged in same core activity, in exchange for ADRs/GDRs provided:
Investment don't exceed USD 100 million or 10 times the export earnings of Indian party in preceding FY, whichever is higher
Indian co. already floated ADR/GDR listed on any bourse outside India
ADR/GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian party
Total foreign holding should be within the prescribed sectoral cap limits
Govt. Policies: Amendments in ADR/GDR NormsAmendments in May 1998 Three Year Track Record required for ADR/GDR
issue Unlisted co. with 3yr’s track record can float
ADR/GDR Euro Issue proceeds to be treated as FDI No restrictions on the no. of Euro - issues in a
financial year NBFCs registered with RBI allowed to raise GDR Liberal end - use specifications Repatriation of proceeds – Cos. may retain
proceeds abroad or may remit funds into India
ADR, GDR norms further relaxed - February 2003 Conversion and reconversion ( fungibility) of shares of
Indian co. into DR listed in foreign bourses
Cos. allowed to invest 100% of proceeds of ADR/GDR issues (earlier 50%) for acquisitions of foreign cos. and direct investments in JV and wholly-owned subsidiaries overseas
FII investment limit in a co.through portfolio investment increased to 49%
Two way fungibility in ADR/GDR issues of Indian cos. introduced subject to sectoral caps wherever applicable
Two-way Fungibility Scheme of ADR/GDR Registered broker in India can purchase
shares of Indian co. on behalf of a person resident outside India to convert the shares so purchased into ADRs/GDRs
Purchase and re-conversion of shares which is equal to or less than the number of shares emerging on surrender of ADRs/GDRs which have been actually sold in the market
Benefits of Fungibility Improvement in liquidity and Elimination of arbitrage
Proposed changes in Pricing Rules - August 2008 Higher of the two months' average price or
the last 15 days average price as against last six months' average price or last 15 days' average price
New pricing rules will reflect accurate and more up to date - prices of the ADR/GDR issues
Move is significant when funds for companies are not easily forthcoming from the domestic equity market
Indian Depository Receipts - Rules and RegulationsIssuers Eligibility Criteria – “MUST” Average turn over of US$ 500 million in previous 3 fin.
yrs Capital and free reserves aggregating to at least
US$100 million Making profit for the prev. 5 years and must have
declared a dividend of 10% in each such year Pre issue debt-equity ratio must be not more than 2:1 Listed in its home country Not been prohibited by any regulatory body to issue
securities Good track record with compliance with securities
market regulations Comply with any additional criteria set by SEBI
Procedure for making IDR Issue Cannot raise funds in India by issuing IDR
without permission from the SEBI Application seeking permission made to the
SEBI at least 90 days prior to the opening date of the issue with a non-refundable fee of US $10,000
Issuing co. shall obtain necessary approvals/exemption from the appropriate authorities from the country of its incorporation under the relevant laws relating to issue of capital
Issuing co. shall appoint an overseas custodian bank, a domestic depository and a merchant banker for the purpose of issue of IDRs
Who can Invest in IDRs??? Indian Companies Qualified Institutional Buyers NRI’s and FII’s with permission of RBI
The Issue The minimum issue size is Rs. 50 crores 90% of the issue must be subscribed Automatic fungibility is not permitted
Conditions to be applied for IDR Issue Market cap (in any fin. Yr) cannot exceed 15 % of
the paid up capital and free reserves of the issuer
Redemption into underlying shares prohibited for 1 year, beginning the issue date
Repatriation of proceeds: Subject to Indian foreign exchange laws, prevailing at time of repatriation
Issue must be in rupees
Issuer is subject to Clause 49 of the listing agreement
International Bond Market
Bonds can be defined as negotiable debt instruments with original maturity in excess of one year
It has an estimated size of US $47 trillion Size of US bond market is largest, equal
to US $ 25 trillion Eurobond is the largest international
bond market(1963)
Foreign Bonds Euro Bonds
Yankee Bonds
Dollar-denominated bonds issued in the United States by foreign corporations, banks, and governments. Free from currency risks Interest rates Registered Pay Interest semi-annually Major issuers Interest equalization tax (1963-1974)
Largest and most active market in the world but potential borrowers must meet stringent disclosure.
Reasons for Issuing Yankee Bonds
Attractive opportunities Somewhat shielded form the
expensive regulation Dollar income stream US interest rates Currency strengths (Value of dollar)
Eurodollar Bonds
A US dollar denominated bond issued by a overseas company and held in a foreign institution outside both US and the issuer’s home nation• Issuer’s• Major trading center• Constitute most of the Eurobond market• Fewer regulatory restrictions• Pay Interest annually without deduction of tax
Unavailability of suitable database of Eurobond returns and related information
Bulldog BondsA bulldog bond is a sterling bond whose issuer is not
British• Usually issued to acquire a revenue stream or assets
in sterling
Samurai BondsA Yen-denominated bond issued in Tokyo by a non-
Japanese Co.• Not subjected to Japanese withholding taxes• Minimum maturities of 5 years or longer• No secondary market restrictions• Minimum rating, size of issue, maturity etc
ECB-External Commercial Borrowing Meaning
Regulator
Considered Aspects: Eligibility volume & maturity End-use funds
Accessibility
Automatic Route Eligible Borrowers Recognized Lenders
Approval Route Eligible Borrowers
ECB - Guidelines
Amount & Maturity
All-in-Cost Ceilings
End-use
Refinance of existing ECB
FCCB - Foreign Exchange Convertible Bonds
Meaning
Pricing
Significance
FCEB – Foreign Currency Exchangeable Bonds
Meaning
Pricing
Significance
TATA MOTORS LTD
First issue of Fccbs: 2003
Amount:$100 million of $1000 each
Fccb issue expenses: Rs. 11.89 crores
Maturity:5 years Coupon Rate: 1%
Purpose: Retire expensive foreign currency debt amt. $40 mio approx Capital expenditure plan of $150 mio
Conversion Price: Rs.250 per share
Second Issue: 2004
Amount: $400 million of $100 mio
Multi Tranche Offer Tranche I: $ 100 mio for 5 years maturity , 0 coupon Tranche II: $ 300 mio for 7 years maturity, 1%
Purpose: Capex plan of Rs.6000 Refinancing loan taken for Daewoo commercial plant
Listed on: Singapore Stock Exchange
Conversion Price: Tranche I: Rs.573.106 per share i.e. 17.5% premium Tranche II: Rs. 780.40 per share i.e. 60 % premium
Max equity dilution: 6.4% (2.1% in I and 4.3% in II tranche)
Simultaneous ADR Issue:FY-05 and fccb issue in 06 Giving Fccb holders robust platform to trade in
shares
Latest Development: June 2008 Completed acquisition of Jaguar and &Land Rover-
Deal worth $2.3 billion Received shareholders approval to raise $1 billion
Raised Company’s overall borrowing limit to $ 5 billion (Rs. 20k cr.)
EPS diluted: Rs. 52.64 to Rs. 46.48
Current Issues For Borrower
Investors not exercising conversion from bond to equity
Borrowers burden of debt servicing
Have to redeem the FCCB on maturity
Inadequate provision for FCCB redemption as its not pure debt
May have to raise new debt, increasing debt to equity ratio
Illustration: ABC SPORTS LTD FCCB issue: $ 10 mio
10,000 convertible bonds Face value : $ 1000 each Yield: 5% Conversion Premium: 25% Stock price: $ 40 at issue
Conversion Price: $40 * 1.25= $50
Conversion Ratio: 20:1 ($ 1000/ $ 50= 20)1 bond= 20 shares
Current Stock price: $ 25
Impact of tumbling stock price Investor A: Has 1 bond Face value $ 1000
He will not exercise the put option
As on maturity: on redemption of bond he will get $ 1000 he can buy 40 shares of the co. ($1000/$ 25)
On exercising put option: He will get 20 shares of the company. ($1000/
$50)
Example: Aurobindo Pharma
FCCB issue: $ 200 mio
Redemption maturity: May 2011
Conversion price: Rs.1483.4 per share
Current share price: Rs. 347.20 per share
Difference of 327.25%*
Net Debt including FCCB: $615 mio
Existing Debt : EBITDA ratio= 5.86
Depreciation of Rupee
In a months time -depreciated by more than 8.5%
Debt value increases as it is denominated in dollar.
Company must show mark to market losses, reducing its PAT.
Possible Solution
Making Put option attractive
Attractive swap price/ conversion price
Example: Spice Jet
Prev. conversion price: Rs.57 per share
Current conversion price: Rs. 25 per share
Have to issue 3.5 times more equity than originally planned
Leads to higher equity dilution
New Problem: Equity Dilution Larger equity base to service
EPS reduces as No of shares increases
Other way out: Extend Maturity Date Bad impact on the credibility of the
company
Longer period to service debt
Conclusion
Thank You