GDR_s-Global Depository Receipts

8/2/2019 GDR_s-Global Depository Receipts

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GDRs and FCCBs


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GDRs-Global

depository receipts


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The Concept

Negotiable certificates issued by depositary banks

Represent ownership of a given number of a companys shares

which can be listed and traded independently from theunderlying shares

Emerged from the concept of American Depository Receipts(ADR)

GDRs are usually listed in the Frankfurt StockExchange, Luxembourg Stock Exchange and in the London StockExchange.


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The Mechanism

GDRs also function in the same manner, the difference being the fact that they cantrade in different countries denominated in the respective countrys currency


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Types of DRs

The company (RIL in our case) has got no agreementwith the custodian or depository bank for the issuanceof DRs

These are traded on the over-the-counter (OTC) marketand are issued according to the market demand forces

Can be issued by a no. of depository bank

Each depository services only the DRs issued by it

UnsponsoredDRs

Sponsored by the company itself

The foreign company itself wants to issue DRs and itdoes so by designating a depository bank that will issueDRs in the foreign market on its behalf

SponsoredDRs


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Types of Sponsored DRs

Level 1 DRs

OTC Facility

Level 2 DRs Listing Facility

Level 3 DRs

Fresh Issue Facility


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Rationale behind buying GDRs

Easy to purchase and hold.

Investor doesnt need to go through the hassles of govt.

regulations and currency conversion to buy stocks of foreigncompanies.

Trades and settles in the same manner as any other security

available in the investors home countrys stock markets.

Facilitates portfolio diversification by inclusion of foreign stocks.

Better comparison between stocks of various companies.

Since GDRs are denominated in the investors home currency (likeADR in US Dollars), they tend to reduce foreign exchange risks


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Rationale behind issuing GDRs

Broadens investor base.

Increases global presence.

More avenues to raise funds.

Price parity with global competitors.

Facilitates mergers and acquisitions.


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The GDR Scam

SEBI detected the scam involving GDR and barred seven companies Asahi Infrastructure, IKF Technologies, Avon Corp, K Sera Sera, CATTech, Maars Software and Cals Refineries from issuing any shares.most of these companies had issued GDRs in 2009

The regulator received a complaint, in which it was alleged that a fewIndian companies and investment bankers located overseas misused theGDR route for issuance of shares overseas

These companies issued large sized GDR issues in overseas market andthen gradually sell it in a structured manner to Indian clients

already known to the FIIs

SEBIs Integrated Market Surveillance System (IMSS) helped track thisanomaly


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FCCBs-Foreign currency

convertible Bonds


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Regulation 2(g) of Foreign ExchangeManagement Regulations defines FCCBs as

Foreign Currency Convertible Bond (FCCB)means a bond issued by an Indian company

expressed in foreign currency, and the

principal and interest in respect of which ispayable in foreign currency


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Rationale behind

buying FCCBs

Receipt of fixed payments on these bonds i.e. theprincipal and the interest accruing on these bondswhich are payable in foreign currency

Investors can avail the benefit of converting theirbonds into equity during the value appreciation ofthe issuer companys shares


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Features of FCCBsFCCB can be secured as well as unsecured. Mostly the FCCB issued

by the Indian Companies are unsecured.

Credit rating of Bonds is not mandatory, since corporations havingexcellent track record mostly issue such Bonds

Indian Companies, eligible to issue shares to persons residentsoutside India under the Foreign Direct Investment.

The bond to equity convertible option attached to the FCCBs is

subject to the Reserve bank of India guidelines.

FCCBs are generally listed on the national and regional stockexchanges to improve liquidity.

FCCB Issue related expenses shall not exceed 4% of issue size andin case of private placement, shall not exceed 2% of the issue size.


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Raising of fundsthrough FCCBs

Automatic route

Automatic route


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This route does not require anyapproval from government orRBI

Available to real sector i.e.Industrial sector, especiallyinfrastructure sector-in India.

Automatic

Route


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Financial institutions dealing exclusivelywith infrastructure or export finance

Banks and financial institutions which had

participated in the textile or steel sectorrestructuring package as approved by theGovernment.

FCCBs with minimum average maturity of 5years issued by Non-Banking Financialcompanies (NBFCs) to finance import ofinfrastructure equipment for leasing to

infrastructure projects.

Approvalroute


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Pricing Norms

The minimum price will be the average weekly high andlow prices for the 2 weeks prior to the relevant date,instead of the previous price determined as the higher

of the average for 6 months and 2 weeks.

The relevant date for price determination will the date

on which the board decides to issue to securities, andnot 30 days prior to the shareholders resolution as itearlier stood.


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RBI regulations-recent changes

RBI has raised the annual limit of Foreign

Currency Convertible Bonds (FCCBs) for

companies to USD 750 million under theautomatic route, up from USD 500 million in a

fiscal year.


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Risks involved in FCCBs

Exchange risk is more in FCCBs as interest on bondwould be payable in foreign currency. Thus companieswith low debt equity ratios, large FOREX earningspotential only opted for FCCBs.

The risk for the investor is that the stock of the issuerdoes not perform over the life of the bond and theinvestor returns the bonds back to the issuer atmaturity above par depending on the coupon

structure. FCCBs means creation of more debt and a FOREX outgo

in terms of interest which is in foreign exchange.


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Current Scenario Indian corporate houses have raised debt of US$13.6 bn through the

FCCB route since January 2006

70+ FCCBs valuing close to US$12.2 billion are expected to mature by2013.

Threats: Trailing stock prices, high debt on books and low promoter shareholding

will pose problems for conversion and redemption

Only 13 out of the 119 securities trading above their conversion priceand RBI regulatory prohibitions against reduction of conversion price.

INRs depreciation against the USD coinciding with FCCB yields rising 5-7% since August

Profitability of many of these companies is already under pressurebecause of rising inflation and interest rates.

FCCBs will either get refinanced or their conversion prices will haveto be revised downward, leading to equity dilution for currentshareholders. These options will adversely affect their financials.


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Opportunities While high yields and INRs depreciation reflect the plausible threat

of defaults and restructuring for weaker issuers, attention should bedrawn to some mispricing opportunities within the FCCB spacewhich are offering high yields along with lower risk due to relativelysound financials.

FCCBs for some of the prominent companies are yielding 20-25%after diverging almost 10-15% from their year-to-date average

Using certain convertible bond valuation method, we can identifythe magnitude of mispricing as well as the implied credit riskpremium for some of the issuers.

Example: RCOM, JPA and Suzlon are yielding more thanapproximately 20%.

Although highly leveraged, the debt-servicing capability for RCOMand JPA remains reasonable considering their EBITDA-to-Interestpaid ratio.

Rolta India, First Source Solutions and Videocon Industries are someother companies with high yields and a relatively stronger ability topay their liabilities.


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THANK YOU!

GDR_s-Global Depository Receipts

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