Ways to raise finance from 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. The converse is also true – downturns may

cause prices to fall past levels of intrinsic value, based on low levels of demand or other

macroeconomic forces like tax rates, national production or employment levels.

With rapid growth in globalization and foreign trade, need has arisen to procure finance

from the international markets as well. There could be various reasons to raise finance

from the international market. These could be reasons such as inadequate domestic

finance, technology gap, development of basic infrastructure etc.

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. Funds are provided

at concessional terms in respect of cost (interest), maturity, and repayment

schedule.

3) World Bank: An MNC Financial institution provides long term capital for

reconstruction and development of member countries. It comprises of three

related financial institutions:-

a) International Bank for reconstruction and redevelopment (IBRD): 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. Its emphasis is on providing risk capital to

manufacturing firms that have reasonable chance of earning the investors

required rate of return and that which will provide economic benefits to the

nation.

c) 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

4) 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. Funds are

provided at concessional terms in respect of cost (interest), maturity, and

repayment schedule.

5) 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. It includes that portion of the domestic bond market that represents

issues floated by foreign companies or Governments. They are subject to local

laws and must be denominated in local currency. E.g.: Dollar denominated

foreign bonds sold in US markets is Yankee bond; Yen Bonds sold in Japanese

banks are called Samurai bonds, in U.K. market it is Bulldog bond.

Some of its characteristics:-

Regulatory authorities in the country where the bond is issued impose

rules governing the issuance of foreign bonds.

They can be denominated in any currency.

They can be publicly issued or privately placed.

6) 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. In case of foreign capital, since foreign

exchange is involved, it is controlled and regulated by the RBI and the govt. In

November1993, the govt. announced the scheme of issue of securities by Indian

companies in capital markets abroad. This scheme is known as “issue of foreign

currency convertible bonds and ordinary shares scheme 1993”. The scheme has

been reviewed and several amendments have been made in the scheme from

time to time.

The scheme has 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. A company seeking to issue FCCBs should

have consistent track record of good performance for a period of three years. The

FCCBs are unsecured; carry a fixed rate of interest and an option for conversion into

affixed number of equity shares of the issuer company. Interest on redemption price

(if conversion option is no exercised) is payable in dollars. Interest rates are very low

by Indian domestic standards. FCCBs are denominated in any freely convertible

foreign currency, generally in US $.

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 denominated in U.S. $. DRs are commonly used by the

company which sells their securities in international market and expanding their

share holdings abroad. These securities are listed and traded in international stock

exchanges. These can be either American depository receipt (ADR) or global

depositary receipt (GDR). ADRs are issued in case the funds are raised through

retail market in United States. In case of GDR issue, the invitation to participate in

the issue cannot be extended to retail US investors. While DR is denominated in any

freely convertible foreign currency, 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 a

non-U.S. company that trades in U.S. financial markets. The stock of many

non-US companies trade on US stock exchanges through the use of ADRs.

ADRs enable U.S. investors to buy shares in foreign companies without the

hazards or inconveniences of cross-border & cross-currency transactions.

ADRs carry prices in US dollars, pay dividends in US dollars, and can be

traded like the shares of US-based companies.

Each ADR is issued by a U.S. depositary bank and can represent a fraction

of a share, a single share, or multiple shares of the foreign stock. An owner

of an ADR has the right to obtain the foreign stock it represents, but US

investors usually find it more convenient simply to own the ADR. The price of

an ADR often tracks the price of the foreign stock in its home market,

adjusted for the ratio of ADRs to foreign company shares.

Types of ADR program

When a company establishes an American Depositary Receipt program, it

must decide what exactly it wants out of the program, and how much time,

effort and resources they are willing to commit. For this reason, there are

different types of programs that a company can choose.

Unsponsored shares

Unsponsored shares are a form of Level I ADRs that trade on the over-the-

counter (OTC) market. These shares are issued in accordance with market

demand, and the foreign company has no formal agreement with a

depositary bank. Unsponsored ADRs are often issued by more than one

depositary bank. Each depositary services only the ADRs it has issued.

Due to a recent SEC rule change making it easier to issue Level I depositary

receipts, both sponsored and unsponsored, hundreds of new ADRs have

been issued since the rule came into effect in October 2008. The majority of

these were unsponsored Level I ADRs and now approximately half of all

ADR programs in existence are unsponsored.

Level I (OTC)

Level 1 depositary receipts are the lowest level of sponsored ADRs that can

be issued. When a company issues sponsored ADRs, it has one designated

depositary who also acts as its transfer agent.

A majority of American depositary receipt programs currently trading are

issued through a Level 1 program. This is the most convenient way for a

foreign company to have its equity traded in the United States.

Level 1 share can only be traded on the OTC market and the company has

minimal reporting requirements with the U.S. Securities and Exchange

Commission (SEC). The company is not required to issue quarterly or annual

reports in compliance with U.S. GAAP. However, the company must have a

security listed on one or more stock exchange in a foreign jurisdiction and

must publish in English on its website its annual report in the form required

by the laws of the country of incorporation, organization or domicile.

Companies with shares trading under a Level 1 program may decide to

upgrade their program to a Level 2 or Level 3 program for better exposure in

the United States markets.

Level II (listed)

Level 2 depositary receipt programs are more complicated for a foreign

company. When a foreign company wants to set up a Level 2 program, it

must file a registration statement with the US SEC and is under SEC

regulation. In addition, the company is required to file a Form 20-F annually.

Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S.

company. In their filings, the company is required to follow U.S. GAAP

standards.

The advantage that the company has by upgrading their program to Level 2

is that the shares can be listed on a U.S. stock exchange. These exchanges

include the New York Stock Exchange (NYSE), NASDAQ, and the American

Stock Exchange (AMEX).

While listed on these exchanges, the company must meet the

exchange’s listing requirements. If it fails to do so, it may be delisted and

forced to downgrade its ADR program.

Level III (offering)

A Level 3 American Depositary Receipt program is the highest level a foreign

company can sponsor. Because of this distinction, the company is required to

adhere to stricter rules that are similar to those followed by U.S. companies.

Setting up a Level 3 program means that the foreign company is not only

taking steps to permit shares from its home market to be deposited into an

ADR program and traded in the U.S.; it is actually issuing shares to raise

capital. In accordance with this offering, the company is required to file

a Form F-1, which is the format for an Offering Prospectus for the shares.

They also must file a Form 20-F annually and must adhere to U.S. GAAP

standards. In addition, any material information given to shareholders in the

home market, must be filed with the SEC through Form 8K.

Foreign companies with Level 3 programs will often issue materials that are

more informative and are more accommodating to their U.S. shareholders

because they rely on them for capital. Overall, foreign companies with a

Level 3 program set up are the easiest on which to find information.

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.

Prices of GDR are often close to values of related shares, but they are traded

and settled independently of the underlying share.