Financing International Operations

7/31/2019 Financing International Operations

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Financing International OperationsPresented by:-

Vikash Shaw


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IntroductionPost liberalization India has seen tremendous boom in Industrialization

hence after the opening up of the gates of the country for foreigninvestments the concept of funding up of projects becomes extremelyimportant.

The concept of funding through sources likeEurocurrency Markets , ADRs , GDRs etc. provide financial managers

with alternatives which are viable , to financing from domestic marketsas well as a supplementary sources of financing when domesticmarkets cannot provide adequate financing. It gives MNCs largerflexibility to raise funds from International Markets whileimplementing Projects or setting up their own subsidiaries in foreigncountries.


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Eurocurrency Markets A Eurocurrency is any freely convertible currency deposited in a bank

outside its country of origin.

Any convertible currency can exist in Euro e.g. we can have

Eurosterling, Euroyen ,Eurodollars. The Eurocurrency markets consists of those banks which accept

deposits and make loans in foreign currencies. Banks in whichEurocurrencies are deposited are called EuroBanks.

The Eurocurrency Markets serves two purpose

1) It is a convenient and efficient money market device for holdingexcess corporate liquidity

2) It is a major source of short term bank loans to finance corporateworking capital.


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Characteristics of Eurocurrency Markets It is a large International money market relatively free from govt.

regulations and interference

The deposits made in Eurocurrency market are primarily for shortterm. This sometimes leads to problem in managing risk, since mostEurocurrency loans are for longer period of time.

Transactions in this market is generally very large with government ,

public sector organizations , corporates borrow most of the fund. Thismakes the market a whole sale market rather than a retail market.


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International Bond Market Foreign Bonds

These are the bonds floated in a particular domestic capital market (andin the domestic currency of that market) by non resident entities. The

bonds are generally named on the basis of the capital markets in whichthey are floated. for example

Dollar denominated bonds issued in the US domestic markets by non UScompanies are called Yankee bonds, similarly Yen denominated bondsissued in Japanese domestic market by non japanese companies are

called Samurai bonds. Pounds denominated bonds offered in the UK iscalled Bulldogs bonds.


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The Euro bond Market Euro bonds are unsecured debt securities issued and sold in markets

outside the home country of the issuer and denominated in a currencydifferent from that of the home country of the issuer. Euro bonds areunderwritten and sold in more than one market simultaneously usuallythrough international syndicates and are purchased by an internationalinvesting public that extends far beyond the confines of the country ofissue.

Occasionally, Euro bonds issues may provide currencyoptions, which enable the creditor to demand repayment in one ofseveral currencies and therby reduce reduce the exchange risk inherentin single currency foreign bonds.


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American Depository Receipt(ADRs) An ADR is a dollar denominated negotiable certificate that represents a

non- US companys publicly traded equity. It falls within the regulatoryframework of the USA and requires registration of the ADRs and theunderlying shares with the Securities Exchange Commission (SEC).

The main hurdle in raising money in the USmarket is that most of the Indian companies find it difficult to meetthe US GAAP. An ADR will require complete recasting of the accountsand corporates will have to disclose far more information then areused to.


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Benefits to the Issuing Company An ADR programme can stimulate the investors interest, enhance a

companys visibility, broaden its shareholders base and increaseliquidity.

By enabling a company to tap US equity markets, the ADR offers a newavenues for raising capital often at highly competitive cost. Forcompanies with a desire to build a stronger presence in the UnitedStates , an ADR programme can help finance US initiatives or facilitateUS acquisitions

ADRs can provide enhanced communications with shareholders inthe US.

ADRs provide an easy way for US employees of non US companies toinvest in their companies employee stock purchase plan.


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Global Depository Receipts (GDRs) It is a global finance vehicle that allows an issuer to raise capital

simultaneously in two or more markets through a global offering.

GDRs may be used in either the public or private markets inside or

outside the US. They are marketed internationally, mainly to financialinstitutions .

thus a GDR is a negotiable instrument denominated indollars or some other freely convertible currency. It is used as a funding

vehicle for raising capital simultaneously in two or more markets.


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Benefits to the Issuing Company Access to capital markets outside the home markets to provide a

mechanism for raising capital or as a vehicle for an acquisition.

Enhancement of company visibility by enhancement of image of the

companys products, services or financial instrument in a marketplaceoutside its home country

Expanded shareholders base which may increase or stabilise the shareprice

May increase local share price as a result of global demand/ trading

through a broadened and a more diversified investor exposure. Increase potential liquidity by enlarging the markets for the companys

share.


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External Commercial Borrowing(ECBs) ECBs can be raised from any internationally recognized source such as banks,

export credit agencies, suppliers of equipments, foreign collaborators, foreignequity holders, international capital markets.

Purpose of ECBs

The scarcity of domestic capital resources hinders a high rate of capitalformation.

The rate of savings is low because the income levels are at low level andwhatever small savings are possible, they are very difficult to mobilise.

Generally the countrys export are not sufficient to cover the large imports of

machinery, components, spare parts, materials and related services Funding of infrastructure sector by the government alone cannot go on forever

on borrowed money because the monetary needs of the infrastructure sector ina developing economy are massive and if the govt. were to even attempt toborrow it all then the interest and deficits would rocket with the usual dizzyingsymptoms on the economy.


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Specifications

Usage Specifications:

Raised only for Investment (Capital Goods, Capacity augmentation)

Permitted for Overseas Acquisitions (JVs or Subsidiaries)

Permitted for acquisition of shares in PSUs (Disinvestment)

Restrictions:

Investment in Capital Markets

Investment in Real Estate Sector

On Lending of funds

Domestic Companies Takeover


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Foreign Currency Convertible Bonds (FCCBs) FCCBs are debt instruments

issued in a currency differentthan the issuers domesticcurrency with an option toconvert them in common sharesof the issuer company. Its aquasi debt instrument to raiseforeign currency funds atattractive rate. FCCB acts like a

bond by making regular couponand principal payments; andalso gives the bond holder anoption to convert the bond intostocks.


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AdvantagesAdvantages to the issuer company1. Low cost debt as the interest rates given to FCC Bonds are normally 30-50

percent lower than the market rate because of its equity component.

2. Conversion of bonds into stocks takes place at a premium price to marketprice. Conversion price is fixed when the bond is issued. So, lower dilution ofthe company stocks.

3. Simple regulatory process

4. Mostly FCCBs are issued to suit the company needs

Advantages to the investors1 Capital protection by guaranteed payments to the bond.

2 Greater return potential if the stock price appreciates more than thepreviously fixed conversion price.

3 Redeemable at maturity if not converted.


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Disadvantages1 FCC Bonds are ideal for the bull market scenario as the conversion occurs at a

premium price lowering the dilution. But if the stock price plummet -investors will not go for conversion and they go for redemption at maturityvalue.

2 If the investors do not go for conversion, then companies will be forced tolower the conversion price (Previously Fixed) to entice the investors to go forconversion which will lead to higher dilution.

3 It will remain as debt in the balance sheet until conversion.

4 If the exchange rate goes up, then the issuer has to pay more to the investors.

So, foreign exchange plays a role too.5 If the stock price goes below the conversion price, then the issuer loses an

opportunity to dilute at a higher price.


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THANK YOU

Financing International Operations

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