adr fccb ecb.ppt
TRANSCRIPT
-
8/10/2019 ADR FCCB ECB.ppt
1/62
1
www.rbi.org.in, retrieved on 03-11-2013
3/12/2014 RKS SOM.GBU INDIA
http://www.rbi.org.in/http://www.rbi.org.in/ -
8/10/2019 ADR FCCB ECB.ppt
2/62
2
BackdropThree Routes to Overseas Capital in India
1.Foreign Equity Participationa. Direct Investment
i. FDI
ii. GDRs/ADRsb. Indirect Investment: FIIs/Portfolio Funds2.Debt Route:
External Commercial Borrowings (ECBs)
3.Hybrid Route:Foreign Currency Convertible Bonds (FCCBs)
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
3/62
3
Financing Strategies of Indian Companies
via Foreign Markets
Domestic Market Equity Share
Preference Share
Private Placement
Syndicate Loan
Convert ib le Debentu re
Rights Issue
Bonus Share
Preferential Allotment
International Market
GDRs (Equity)
ADRs (Equity)
FDIs/FIIs
ECBs (Debt)
FCCBs (Hyb rid )
Hedge Funds Venture Capital
Private Equity
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
4/62
-
8/10/2019 ADR FCCB ECB.ppt
5/62
5
Introduct ion..
Investors demand for DRs is growing faster:During 1990 and 2001,the volume of ADRstrading inc reased exponent ia lly $75bn to$1185bn and $4,365bn in 2008 and (2.79 tri l l ion2012)
Cost-effectiveness, convenience, liquidity andoperational risks are lower than the risk ofpurchasing and safekeeping ordinary sharesoutside the country.
Demand of ADRs/GDRs, ECBs/FCCBs is driven byincreasing desire of individual and institutionalinvestors.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
6/62
6
ADR/GDRs
J.P. Morgan-the first DR program in 1927.
A negotiable certificate that represents a non-U.S. companyspublicly traded equity.
US $ denominated equity based instruments
traded freely on a major exchanges
GDRs are listed in London & Luxembourg
ADRs listed and traded in US stockexchanges.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
7/62
7
Structure of DR Programme
ISSUER COMPANY
From INDIA
DEPOSITARY BANK(Bank of New York, US)
Foreign Investors
US/UK Citizen
CUSTODIAN
(Local Bank in Mumbai)
Clearing HouseEuroclear / Cedel
Depositary Trust Co.
Foreign Stock Ex.NYSE/LSE/LxSE
Underlying
Equity Shares
DividendIn INR
DividendIn US $ Investing
Capital
ForeignCapital
Inform Depos i t ion of Underly ing
Shares to Issues ADRs
ForeignListing
Issue
ADRs
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
8/62
8
ADRs/GDRs
Issued by depositories, mostly InternationalBanks.
Companies - Depository - Intl. Investors. Each GDR/ADR entitles the owner a specific no.
of underlying shares.
Issuing Companies pays dividend in Rs.,Depository converts it to $ and distributes to Intl.Investors.
GDR/ADR holders have Rights to Dividend, to
Subscribe new shares, to Bonus, Voting Rights Under the depositarysagreemen t, a Depositary would, Not to vote
the shares at all , or /and Vote the shares w ith the major i ty of the rest
of the sharehold ers.
3/12/2014 RKS SOM.GBU INDIA
T bl R i i C it l ith ADR /GDR
-
8/10/2019 ADR FCCB ECB.ppt
9/62
9
Table - Raising Capital with ADRs/GDRs:Types of Depositary Receipt Programmes
Particulars Unsponsored Sponsored
Level-I Level-II Level-III Rule 144A DRs GDRs
Description Not sponsoredby the issuer
Unlistedprogrammein the US
Listed on theUSexchanges
Sharesoffered andlisted on theUSexchanges
Privateplacement toqualifiedinstitutionalinvestors (QIB)in the US market
Global offering ofsecurities outsideissuers home
country
Purpose Broaden theshare-holderbase with theexisting shares
Broaden theshareholderbase with theexistingshares
Broaden theshareholderbase with theexistingshares
Raising thecapital withfresh issueof shares
Raising thecapital withfresh issue ofshares
Raising thecapital with freshissue of shares
Trading OTC US OTCmarket
AMEX, NYSE,NASDAQ
AMEX,NYSE,NASDAQ
US privateplacementmarket -PORTAL
US exchangesand non USexchanges
SECregistration
Register underForm F-6
Registerunder Form
F-6
Registerunder Form
F-6
Registerunder
Forms F-1and F-6
None Varies dependingon structure of
US offering
US reportingrequirements
Exempt underRule 12g3-2(b)
Exemptunder Rule12g3-2(b)
Form 20-F* Form 20-F* Exempt underRule 12g3-2(b)
Varies dependingon structure ofUS offering
Source: 2004/www.adr.com by J.P.Morgan/10.12.2003 , *Financial statements must be partially reconciled to US GAAPRule 12g3-2(b) SEC Information Supplying Exemption
PORTALPrivate Offerings Retail Trading Automated Likage, 144A allowed immediate resale, no holding pd.3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
10/62
10
Entry A lternat ives
There are five alternative ways to enter US
Securities Market: -a) Public listings of shares on the NYSE, AMEX or
NASDAQ, i.e., listing shares without raising new
funds, through Sponsored ADRs;
b) Private placements;
c) Rule 144A offerings, with re-sale exemption for sale
to and among QIBs;
d) Public offerings where a company goes to the US
public markets to raise funds; and
e) Level I ADRs, trading on the pink sheets without
registration with the SEC.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
11/62
11
GDR/ADR rou te op ted :Foreign Currency, Low cost, Large volume of capital.
Brand Visib i l i ty at global LevelSustainable Prof i t sharing with strategic foreign
inv esto rs , i.e. Long-term equi ty partnership,
Inorganic Growth through acquiring companies abroad currency
for M&Atransforming themselves into global multinationals
Dividend is paid in INR. i.e., companies are not exposed
to foreign exchange risk.
Bu i lding an Internat ional Prof i le
Diversi f ied Investor/shareho lder base/revenue base
Gateway to l iquid internat ional capital Market and
Corpo rate governance.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
12/62
12
GDR/ADR rou te op ted..
Creat ing Stock Option for US employees-
Attract ing & retaining Quali ty talent to US/Europe
ESOP thru ADRs has helped reducing the attr i t ion rate in IT
companies (Infos ys)
Info sys has pion eered the grant of ESOPs to its emp loyees t ime-to-
t ime. First , the com pany had com e out w ith ESOP plan in 1998 and
1999
Investors gets intl. portfolio diversification, that too in US$
and enjoy all right at par with domestic investors
While faces Costly currency conversion of dividends,
Unreliable custodial services and Poor information flow
Arbitrage Opportunity: encash Premium over the foreign market
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
13/62
3/12/2014 RKS SOM.GBU INDIA 13
Type Stock Exchange of
Listing
2006 2013
GDR LuxSE 52 59
GDR LSE 26 24
GDR PORTAL 75 73 Euro MTF
ADR NYSE 11 09ADR NASDAQ 03 02
ADR/ GDR OTC 03 04
GDR DFIE 02 --
SDR Singapore -- 07None SE 130
Total 172 308
Frequency Distr ibu t ion of List ing s of Indian Firms on
Foreign Exchanges
-
8/10/2019 ADR FCCB ECB.ppt
14/62
14
Reasons for so few ADRs. As; SEC of USrequires a stringent reporting norms Reportingaccording to US GAAP and Higher Listing fees
Rule 144 a private placement, and Regulation S offeringto non US person, a non-US tranche of a Rule 144A,
traded outside the US, not registered under US SECTraded on 16 designated offshore Securities Market(DSOM) SEC treats it as an Offshore transaction.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
15/62
3/12/2014 RKS SOM.GBU INDIA 15
Issue from India, China, UK, Japan and
Austral ia respect ively represents top 5
coun tr ies w i th DRs prog rams.
Asia Pacific - 1799 W & E Europe -1346
Middle East242 Latin America - 288
India DRs value traded US $69.8 bn, 2nd to
China, where as volume traded 2.43 bn, 4th
behind China, Taiwan and Japan in Asia
region.
Info sy s and ICICI Bank stands among top 5
DRs by value traded and market capi ta lizat ion
respectively.
-
8/10/2019 ADR FCCB ECB.ppt
16/62
3/12/2014 RKS SOM.GBU INDIA 16
1460
1527
1681
1729
1791
1819
1847
1817
1858
1912
1984
206
0
2130
2
287
458
501
520
570
563
537
504
498
485
478
428
404
396
0
500
1000
1500
2000
2500
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2013
Num
ber
Year
Total Sponsored Vs US L isted DRs
Total Sponsored DRs US L is ted DRs
-
8/10/2019 ADR FCCB ECB.ppt
17/62
17
FactorsInternational investors look for companies, which
have the strength on following forms: Internationally significant capacities and
technology;
Strong fundaments for several years; A consistent record of profitability;
International presence/involvement and aglobal investor appeal, and
Operations in industries with goodprospects.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
18/62
18
Factors.. ADR returns are affected by respective home market
factors rather than by US market movements. ADR return responds negatively, on the
strengthening of home currency, against US $.US investors are exposed to incremental risk
from foreign equity market. Price of an ADR fluctuates based on the variation ofprice of underlying shares, dividend payouts, andstock-splits. Usually, the two, track each other, one-for-one.
If, one deviates from the other, provides, anopportunity for international arbitrage.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
19/62
19
Sponsored ADRs
A sponsored American Depositary Share
(ADS) is a mechanism to convert theexisting equity shares listed in India, intoADS for trading in US market, and realize
the proceeds net of issue expenses. Companies do not issue new shares.
December 2002, RBI allow ed Indian com panies
to o f fer their domest ic investors , an opt ion of
conver t ing their domest ic sh are into ADRs that
is l is ted on the LSE, LxSE, and NYSE etc.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
20/62
20
Sponso red ADRs..
Infosys was the first Indian company to take
advantage of the changed procedure and wentto offer more shares to its overseas investorswithout actually issuing fresh shares.
On February 18, 2005, Infosys ADR wastrading on NASDAQ at $72.8. Simultaneously,in India, available at Rs 2,174. Given an
exchange rate of Rs. 43.8 per dollar, the ADRshould have quoted $50 approximately toeliminate arbitrage.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
21/62
21
Fungibi l i ty
Interchangeability of any security with in a class pre-specified with.
one-way fungibility, investors in ADRs/GDRs couldconvert their DRs into underlying domestic shares,without the freedom to reconvert it back into
ADRs/GDRs. Once the ADRs/GDRs are converted into domestic
shares, the depository redeems DRs. Only on afresh issue, ADRs/GDRs could be reinstateted. Thatleads to loss of liquidity in the overseas market, i.e. agradual reduction in the availability of ADRs/GDRs inthe overseas market.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
22/62
22
Fungibi l i ty
In two-way Fungibility, investors (foreign
institutional or domestic) in any company thathad issued ADRs/GDRs can freely convert the
ADRs/GDRs into underlying domestic shares
and reconvert the domestic shares further intoADRs/GDRs, depending on the market
movement and the direction of price change.
Reverse fungibility - allowing re-conversion of the cancelled ADRs/GDRs
back into depository receipts.
3/12/2014 RKS SOM.GBU INDIA
C I f T h l i Li it d
http://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Fungibilityhttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Fungibility -
8/10/2019 ADR FCCB ECB.ppt
23/62
23
Case: Infosys Technologies Limited
1. $70.38million
at 22% prem iumover BSE price 3201/-March1999-Listed in NASDAQ.
Offered at 27.88 per ADS, sold @ $ 34 perADSNet Proceeds $66.90
Issued 20,70,000 ADSs underlying 10,35,000Equity share @10/
ADRs traded at a premium of 193% to the domestic shares in year 2000
2. $294 million Sponso red secondary of fering-Offered 5.22 mnADS/2.61 mn equity share. Sold at $49 per ADS, 26% premium over Rs3593.30 in BSE- July 2003
3. $ 1.1 billion Converted 16 million share or 6% of its locally listed
shares. At $ 67 per ADS, 34% premium over 2171.2in NSE- June 2005.
4. $ 1.6 billion 3rdSpons ored secondary offer ing - con verted 30mn s hares at $ 53.50 per ADS, at 6% prem ium - Nov
2006
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
24/62
24
Case: Infosys Technologies LimitedObject ive:
Become under NASDAQ 100 ( require at least 10% float)-19.13 %; Increases LiquidityEncash arbitrage opportunity & Premium in NASDAQEnhance Brand equity & Create stock OptionAccelerate sales and Marketing initiatives
Make Strategic Investors through ADR issue- investor getsgood price and company gets a strategic partner withoutdiluting equityAcquisition currency to expand in German Market ( Largest
economy and IT spender in Europe), tapped only 2%- ProvideBroad base Revenue.Struck a deal of $ 300 million with ABN Amro, substantiatingtheir core-competency.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
25/62
25
Infosys Technologies Limited Share Holding Pattern: (in Percent)
ADSs held in the name of Bankers Trust Company, Depositary to the Companys Sponsored ADR offering.Source: Infosys Report, 2005-06, 2012-13
Category 2002 2003 2004 2005 2006 2007 2013
Promoters 28.72 28.42 26.50 21.76 19.50 16.54 16.04
Non-promoters 71.28 71.58 73.48 78.24 80.50 73.35 73.96
Institutional
Investors
FIs/Bank
FIIs
9.41
36.599.26
39.186.77
41.824.75
42.876.44
37.916.27
32.5517.51
40.52
Others
Indian Public
ADSsRest
12.51
3.209.57
10.59
3.269.29
9.02
7.947.95
19.00
8.041.95
15.49
13.956.71
21.83
19.11
3.70
11.17
12.34
2.42
Total 100.0
0 100.00 100.00 100.00 100.00 100.00 100.00
Total Foreign
Share holding 40.44 43.45 50.46 52.54 56.35 55.36 55.28
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
26/62
26
Infosys' ADS Premium Compared to Price Quoted on NSE
0
5000
10000
15000
20000
Months 2000-01
Price(INR)
0
20
40
60
80
100
120
140
%P
remiu
ADS Price 1771 1367 1582 1192 1427 1214 1283 1123 8614 1121 8582 6099
NSE Share P rice 8122 6999 8310 6761 8327 7361 7133 7184 5694 6793 6242 4084
% Premium 118 95.4 90.4 76.4 71.4 65 79.9 56.3 51.3 65.1 37.5 49.4
28/0
4
31/0
5
30/0
6
31/0
7
31/0
8
29/0
9
31/1
0
30/1
1
29/1
2
31/0
1
28/0
2
30/0
3
3/12/2014 RKS SOM.GBU INDIA
I f ' ADS P i C d t P i Q t d NSE
-
8/10/2019 ADR FCCB ECB.ppt
27/62
27
Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13
ADR 3,028 2670 2506 2563 2423 2575 2672 2424 2422 2822 2968 2989
Equity 2855 2484 2520 2501 2472 2633 2609 2469 2436 2815 2960 3005
Premium 6.41% 7.49% -0.56% 2.48% -1.98% -2.20% 2.41% -1.82% -0.57% 0.25% 0.27% -0.53%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Premium
in%
PriceinINR
2012-13
Infosys' ADS Premium Compared to Price Quoted on NSE
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
28/62
Infosys
During 2012-13, Infosys Ltd ( Infosys
Tech. Ltd.) shifted from NASDAQ toNYSE, LSE and Paris Stock Exchange.
The delisting and listing is made toleverage the NYSE Euro Nextpartnership which are closer to Infosyss
investors, clients and employees.
3/12/2014 RKS SOM.GBU INDIA 28
-
8/10/2019 ADR FCCB ECB.ppt
29/62
29
Outcome Foreign listing of Indian companies on one way have
opened them to follow international capital market
practices and brought frame for efficiency of Indianmarket.
The quality of DR programmes in Indian context has
improved to align with the SEC, requirements and the
return to the expectation of US investors.
Adherence of the AS, depict profitability and credit
worthiness of an issuer company across.
Market segmentations on cross-border listing tend toevaporate on faster inflow of information and on lifting of
information asymmetry
Brought parity in price behaviors in two markets.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
30/62
30
FCCBsA hybrid bond, quasi -debt instrument with an
attached call option, issued to foreign investorsin foreign currency at a spread-over Libor,convertible into equity shares, either in whole/
part, at the option of the investor, at thespecified strike rate, either on maturity or froma date.
LondonInter-Bank Offered Rate(LIBOR) is a rate at wh ich afel low London bank can borrow money from o ther banks. Ratecalculat ions incorporate var iables such as t ime, matur i ty andcu rrency rates. There are hundreds of LIBOR rates reported eachmonth in num erous currencies. 6 Month LIBOR is the LIBOR for asix month depos it in U.S. Dol lars.
-
8/10/2019 ADR FCCB ECB.ppt
31/62
31
Features:
FCCBs provide low cost funds,
As an alternative to straight ECB to sweetendebt by adding a conversion privilege thatlowers the coupon rate, even issued at Zerocoupon.
paying YTM of around -1.0 to 4.5% onfive-year convertible bonds, if notconverted into shares.
FCCBs have the call and put options,
FCCBs leads to Price discovery, as analternative to common stock when the marketundervalues equity.
-
8/10/2019 ADR FCCB ECB.ppt
32/62
32
Advan tage to Issuers.. FCCBs facilitate debt swap. Tata Motors, Interest costs
declined by 47% Prospect of getting a higher conversion premium in
rising market
No interest outgo rather earn interest income till the
FCCBs Proceeds is spent. (US Fed rate moved up from1.0% during Jan-June 2004, to 2.50% in 2005.)
Upside investment in equity, and debt element protectsthe downside.
A investment destination for global investors todiversify portfolio, in rising stock market.
Market index is on slope, FCCBs a choice and on slidenon- conversion a choice.
-
8/10/2019 ADR FCCB ECB.ppt
33/62
33
Star t ups & Trends..
Early 1990s, euro issues were skewedtowards GDRs.
During May 1992 to December 1994:GDRs - 48 issues- US $ 3950 million
FCCBs-10 issues- US $ 1016 million
Rise in FCCBs issue from $190million in year2003, to $2.25 billion in 2004 ,continued till2007 end.
High performance of the stock market during
2003 to 2007, and stronger INR helped toreduce the cost of borrowing for Indiancompanies.
-
8/10/2019 ADR FCCB ECB.ppt
34/62
34
Year Amount in US $ Million Number of Issue
1992 -- 0
1993 550 6
1994 533.75 6
1995 -- 0
1996 337.31 5
1997 175 1
1998 -- 0
1999 26.5 1
2000 -- 0
2001 -- 0
2002 126.6 1
2003 212 4
2004 2362.88 23
2005 3731.57 54
-
8/10/2019 ADR FCCB ECB.ppt
35/62
35
Sensex - Monthly Price Trend (2006)
9919.8
9
10370.2
4
11279.9
6
11851.9
3
10398.6
1
10609.2
5
10743.8
8
11699.0
5
12454.42
12961.9
13696
.31
13786
.91
0
2000
4000
6000
8000
10000
12000
14000
16000
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Months
P
rice
-
8/10/2019 ADR FCCB ECB.ppt
36/62
36
Sensex - Monthly Price Trend (2007)
14090.9
2
1
2938.0
9
13072.1
13872.3
7
14544.4
6
14650.5
1
15550.9
9
15318.6
17291.1
19837.99
19363.1
9
20286.9
9
0
5000
10000
15000
20000
25000
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Months
P
rice
-
8/10/2019 ADR FCCB ECB.ppt
37/62
37
Sensex -Monthly Price Trend (Jan 2008 - Aug 09)
17648.71
17578.72
1564
4.44
1
7287.31
16415.57
13461.6
14355.75
14564.53
12860.43
9788.06
9
092.72
9647.31
9424.24
8
891.61
9708.5
11403.25
14625.25
14493.84
15670.31
15240.83
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Months
Price
-
8/10/2019 ADR FCCB ECB.ppt
38/62
38
Macro Econom ic Factors:Growing use of converts by Ind ian companies
was in l ine w ith the internat ional trend s. Global ly,579 companies issued more than $150 bi l l ionworth of converts in 2003.
Low interest rate (LIBOR/Federal rate)
Buoyant equity markets, Liberalised norms,
Uncertainty in the global capital markets,
Issuer creditability,
Rupee Appreciation against US $,
Attractive YTM.
http://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Libralised%20norms.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Libralised%20norms.doc -
8/10/2019 ADR FCCB ECB.ppt
39/62
39
Macro Econom ic Facto rs..
Exchange Rate Variat ion and Interest rate
differentialaffects market prices of FCCBs.
Foreign investors perception about the
company,equ i ty market and convers ion p r ice
offered is another issue.
-
8/10/2019 ADR FCCB ECB.ppt
40/62
40
Tata Moto rs FCCB issued , YTM on seven-yearper iod 3.75% and equ i ty convers ion premiumas high as 60% over the market rate on the dayof the issue.
In November 2004, holders of Tata Motors haveconverted more than 22% of the $100 million bonds into
equity shares.At the time of issue (July 2003) conversion price was
of Rs 250.75.
While on November 28, 2004, the scrip closed at Rs
409/-, i.e. the conversion was at a 63% discount.
Macro Econom ic Facto rs..
I d i C T t M t
-
8/10/2019 ADR FCCB ECB.ppt
41/62
41
Ind ian Case: Tata Moto rs
Accessed international market in July 2003 and April2004, by two issues of FCC Notes, US $500 mn.
Had outlined a capex program of Rs 6000 crore for theperiod 2003-08, via out of several financing optionsalong with of FCCB.
Its $ 100 million offering in July 2003 was the firstconvertible bond offering out side India in over fiveyears, had received subscription to the tune of$1billion within two hours of opening, reflected highconfidence of investors in Tata Motors future equity
return. This issue had opened up the market for otherissuer of FCCBs.
Purpose:Proceeds of the bond was to retire companysexpensiveborrowings and meeting other capital expenditure.
T t M t
-
8/10/2019 ADR FCCB ECB.ppt
42/62
Tata Motors
2nd issue of $400 million, 2004, over-subscribed tentimes and received investor interest to the extent of $ 4
billion. The offer was innovative and had dual-tranchebull-bear structure.
First ever multi-tranche convertible offering by anIndian company; with the first tranche being ever
negative yield structure (an aggressive yield structure)and the second tranche achieving longest tenure ofseven years with the highest conversion premium of60%.
TML
42
T t M t
http://localhost/var/www/apps/conversion/tmp/scratch_1/TML.docxhttp://localhost/var/www/apps/conversion/tmp/scratch_1/TML.docx -
8/10/2019 ADR FCCB ECB.ppt
43/62
Tata Motors
1. Outcome: with large cash accrual of Rs 8,747 millionin 2003-04 had helped to pre-pay a substantial part of
its outstanding debt.
2. TMLs earlier US $100 million FCCB issue wasconverted well, helped the company, to improve itscapital structure. (equity had di luted from 319.9 m il l ion
sh ares in financial year 2003 to 371.1 mn in 2004). TataMotors share had gained more than 210% during 2003-04.
3. Capital cost declined by 47% largely due to swapping
(to retire high cost debt) its high costs debt with freshfunds from FCCB issues. Profit after Tax (PAT)increases, largely due to higher savings in interestcosts, more than expectation.
43
T t M t E C i
-
8/10/2019 ADR FCCB ECB.ppt
44/62
Tata Motors Easy Conversion
Helped, to further restructure its debt portfolio.
By March 31, 2004, US $ 75.913 million ofthese Notes were converted into the ordinaryshares or GDSs and only US $ 24.09 millionwere outstanding.
As on March 31, 2004, the Foreign CurrencyLoan of the company stood at US $ 161 million.
The companys borrowing as on March 31,2004 stood at Rs. 1259.77 crores as comparedto Rs. 1458.31 crores on March 31, 2003.
44
-
8/10/2019 ADR FCCB ECB.ppt
45/62
45
FCCBs and ECBs
All-in-cost for FCCBs is better than the
corresponding debt instruments (ECBs). Thecoupon on ECBs is a spread over the rulingbenchmark of Libor, which is a floating rate.FCCBs, in contrast, carry a fixed coupon.
Instrument has equity conversion built into it,the coupon on the bonds works out muchcheaper than ECBs and has to be paid at theend of the tenure.
Well-capitalized, moderate growing companywith no option to dilute equity prefers ECBs,like public sector corporates.
Rapidly growing companies for wider investorbase prefer FCCBsroute.
-
8/10/2019 ADR FCCB ECB.ppt
46/62
46
RBI In tervent ion 2008 -09
RBIsCircular dated December 8, 2008 allowed
buyback of FCCBs upto December 2008extended further upto December, 2009. Issuer can buyback FCCBs under automatic
route upto any limit out of existing foreignresources or by raising fresh ECBsif effectedat minimum discount of 15% on the bookvalue.
FCCBs up to $ 50 million can be bought backwith prior RBI approval out of Rupee
resources representing internal accrual, ifeffected at a minimum discount of 25% on thebook value.
-
8/10/2019 ADR FCCB ECB.ppt
47/62
47
RBI In tervent ion 2008 -09
RBI had ear lier allowed FCCB buyback March
2003 to Sept . 2003, under the automatic rou teup to a l im it of $100 m il l ion,
i f the buy back w as made of local resources andw ithou t any l imi t , or
i f the buyback was out of Exchange EarnersForeignCurrency Funds or inward remit tances toward theequi ty
subject to inter-a lia one cond i t ion- buy back shouldbe effected at face value, and not b ook value.
Book value is the face value of FCCB p lus theinterest accru ed on the bond t i l l the date ofbuyback.
ECB E t l C i l B i
-
8/10/2019 ADR FCCB ECB.ppt
48/62
48
ECBs :External Commercial Borrowings
ECBs route helped to accelerate forex inflowat a lower cost debt fund infusedcompetitiveness.
Warded off threat emerging out of debt crisisin 1991, converging into an opportunity in
rejuvenating Indian industries. ECBs includes commercial Loan
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
49/62
49
ECBsserves six major objectives at Macro/Micro level
1. Raising debt capital and its inflow;2. Borrowing in Forex, meeting import obligation;
3. Bearing low interest rate and enhancingproduct competitiveness globally;
4. Long-term fund without issuing equity sharesand with no future fall of EPS;
5. Adding value to the firm, and for shareholders;and
6. Inflow of FOREX helps RBI to stabilize INRconversion value & maintaining adequateimport and investment cover for.
Objectives-
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
50/62
50
El igib le Borrowers arecorporates registeredunder the Indian Companies Act, except
financial intermediaries. (such as banks,financial institutions, housing finance companiesand NBFCs)
ECB investments in real sector, industrial sector,
especially the infrastructure are allowed onautomatic route.
Recogn ized Lenders areInternational Banks,International Capital Markets, Multilateral
Financial Institutions e.g. IFC, ADB, CDC;Export Credit Agencies, Suppliers of Equipment,
Foreign Collaborators.
3/12/2014 RKS SOM.GBU INDIA
ECB P li
-
8/10/2019 ADR FCCB ECB.ppt
51/62
51
ECBs Policy
Relied upon, on two major factors;
i. To Keep maturity for redemption longer andii. To Borrow at relatively lower cost.
Provide flexibility in borrowing by Indiancorporates, maintaining a prudent limit forefficient debt management for infrastructuredevelopment and export financing.
Previous guidelines, 2004 issued by the Ministry
of Finance, Government of India has beenreplaced in July 2008 by RBI, towards regulatinginflow of debt from across the boundaries, in apost sub-prime era.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
52/62
52
Amoun t and Matur ity :
Maximum amount of ECB that can be raised by aIndian corporate is US $ 500 million during afinancial year.
Minimum Average Maturity:
3 yrs. For loan < US $ 20mn.5 yrs. For loan > US $ 20mn.
Corporates could avail an additional amount of US
$ 250 million with average maturity of more than 10years under the approval route, over and above theexisting limit of US $ 500 million under theautomatic route.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
53/62
53
A ll-in-cost cei l ing
-Interest Rate Ceilings: All-in-cost ceiling over 6-month LIBOR
1. 6 month LIBOR+ 200 bps for 3-5 yrs.
2. 6 month LIBOR+ 350 bps for > 5 yrs.
(LIBOR+ bps+ Forward cover i.e. Hedgingcost + Arranger Fees + Guarantee fee +Commission)
Price Ceiling on ECBs
3/12/2014 RKS SOM.GBU INDIA
ECB fund is permitted towards :-
http://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/Price%20Ceiling%20on%20ECBs.doc -
8/10/2019 ADR FCCB ECB.ppt
54/62
54
C u d s pe tted to a ds
Investment w i th in the Country:
Longer Matur i t ies fo r Capital Intens ive Projects Import of Capital goods, as classified by DGFTin the Foreign Trade Policy, by new or existingproduction units,
Real sector, Industrial sector, including small and medium
enterprises (SME) and Infrastructure includes power,
telecommunication, railways, road including
bridges, sea port and airport, industrial parks,and urban infrastructure (water supply,sanitation and sewage projects).
End-Use Pattern of ECBs3/12/2014 RKS SOM.GBU INDIA
ECB f d i itt d t d
http://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.dochttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/End-Use%20Pattern%20of%20ECBs.doc -
8/10/2019 ADR FCCB ECB.ppt
55/62
55
ECB fund is permitted towards
Overseas Investment: Overseas direct investment in JV / Wholly
Owned Subsidiaries, subject to the existingguidelines on Indian Direct Investment in
JV/WOS abroad.
ECB raised for foreign expenditure forpermissible end-uses shall be parked overseas
and not to be remitted to India. The fundsshould be invested in such a way that theinvestments can be liquidated as and whenfunds are required by the borrower in India.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
56/62
56
End -Use Restr ict ion :
Utilization of ECB proceeds is not permitted for on-lending or investment in capital market or
acquiring a company (or a part thereof) in Indiaby a corporate,
in real estates,
for working capital,
general corporate purpose and
repayment of existing Rupee loans.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
57/62
57
Pre-payment:Upto US $ 500 million may be prepaid by
an authorized dealer banks without prior approval of RBIsubject to compliance with the stipulated minimumaverage maturity period as is applicable to the loan. (if metout of inflow of foreign equity capital).
Swapping/Ref inancing: The existing ECB may berefinanced on raising a fresh ECB. But, the fresh ECBshould be raised at a lower all-in-cost, maintaining theoriginal outstanding maturity period.
Hybr id Debt:Conversion of ECB into Equity is permitted,covered under the Automatic Route for FDI, or undersectoral cap. The pricing of shares shall be as per SEBIand erstwhile CCI guidelines/regulations.
3/12/2014 RKS SOM.GBU INDIA
-
8/10/2019 ADR FCCB ECB.ppt
58/62
58
f low of funds across boundaries:
Factors are considered important1. Interest Rate Disparity
During 1993-94 PLR was 19% while LIBOR was3.391%
By 2003-04 PLR is 11% and LIBOR 1.210%2. Exchange rate fluctuation
Uncertainty of burden of future debtredemption, more cost: stable Rupee is a
boosting factor
ECBs Inflow Quarterly
3/12/2014 RKS SOM.GBU INDIA
ECB Pol icy:
http://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/ECBs%20Inflow%20Quarterly.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/ECBs%20Inflow%20Quarterly.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/ECBs%20Inflow%20Quarterly.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/ECBs%20Inflow%20Quarterly.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/ECBs%20Inflow%20Quarterly.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_1/Documents%20and%20Settings/a/My%20Documents/4.10.2009%20Thesis%20work/4.10.2009%20Thesis%20work/ECBs%20Inflow%20Quarterly.xls -
8/10/2019 ADR FCCB ECB.ppt
59/62
59
ECB Pol icy:1. Larger to Small Scale Benefits
2. Longer Maturities for Capital Intensive Projects
3. Debt Restruc tu ring4. Bear in g on Market & L iq uid ity as
i. Fuels the liquidity and inflation both
ii. Interest rate increases
iii. Domestic debt market suffered
iv. FOREX swells5. Balan ce o f Paymen t affec ted as Pressure of outflow on
i. Current account of BOP ( paying interest and otherservice charge as a cost of capital) Current account deficitdecreases Rupee conversion value
ii. Capital account ( can be offset with larger inflow ofcapital)
3/12/2014 RKS SOM.GBU INDIA
Indias External Debt Service Payments
-
8/10/2019 ADR FCCB ECB.ppt
60/62
60
Indias External Debt Service Payments
Amount that a Country ought to borrow isgoverned by two factors, how much foreign capi tal the economy can
absorb effic ient ly and
debt i t can serv ice wi thou t r isk ing externalpayment prob lem .
Each factor depend on the quality ofeconomic management.
Gross external debt is to repay principal,with or without interest, or to pay interest,with or without principal.
3/12/2014 RKS SOM.GBU INDIA
Indias External Debt Service Payments
-
8/10/2019 ADR FCCB ECB.ppt
61/62
61
Indias External Debt Service Payments..
Gross debt is the stock of liabilities, onwhich debt service is calculated.
The Government of India has beenprudently slashing its direct external debt
share from 41.6% in 2003 to 23.9% in2009. The corporates and otherinstitutions have directly bearing more inaggregate external debt enhancing from58.4% to 76.1% during the period.
3/12/2014 RKS SOM.GBU INDIA
Determining Factors influencing PEDM Policy :
-
8/10/2019 ADR FCCB ECB.ppt
62/62
Determining Factors influencing PEDM Policy :-
ECB Inflows- ECBs share in foreign capital inflows Debt / Service Ratio- In 1990-91 35.3% to 4.6% by 2008-09. Falling Libor- Lower Interest payment Rupee Stability
Short term / Total Debt Balance -of-Payment : Domestic Interest Rate: Inflationary Pressure:
Forex Cover: Payment Schedule: