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 Launch
 Euro-EquitySyndication - intermediaries
 Segmented Syndication - geographically targeted

 Marketing
 Lead manager & advertising agencies
 Back-up material
 Road shows - future profitability, growth prospects
 Face-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
 Underlying Coun
Name Ticker Cusip Sedol Ratio Exchange Depositary Region try 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 Telecommunicati
TELEPHONE NIGAM MTE 559778402 6117807 1:2 NYSE BNY Emrg. Asia India ons
PATNI COMPUTER
SYSTEMS LIMITED PTI 703248203 6734745 1:2 NYSE BNY Emrg. Asia India Semiconductors
REDIFF.COM INDIA
LTD REDF 757479100 1 : 0.5 NASDAQ CIT Emrg. Asia India Internet
SATYAM
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 Internet
STERLITE Metal
INDUSTRIES INDIA Fabricate/Hardwa
LTD SLT 859737207 B13TC37 1:1 NYSE CIT Emrg. Asia India re
TATA
COMMUNICATIONS Telecommunicati
LTD TCL 876564105 6114745 1:2 NYSE BNY Emrg. Asia India ons
Auto
TATA MOTORS LTD TTM 876568502 6101509 1:1 NYSE CIT Emrg. Asia India Manufacturers
WIPRO LTD WIT 97651M109 6206051 1:1 NYSE JPM Emrg. Asia India Software
Commercial
WNS HOLDINGS LTD WNS 92932M101 1:1 NYSE DB Emrg. Asia India 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 2003
o US $1.07b – June 2005
o 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 Francisco
2. Brown of New York
Details of ADR issue
ADR issue expenses:

Rs.
Legal and accounting fees 1,28,26,437
Printing charges 77,03,653
TOTAL 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 Float
Primary 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 Company
Indian 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 Norms
Amendments 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 Regulations
Issuers 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 Bonds
A bulldog bond is a sterling bond whose issuer is not British
• Usually issued to acquire a revenue stream or assets in sterling

Samurai Bonds
A 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