'Foreign Currency Convertible Bond - FCCB' A type of convertible bond issued in a currency different than the issuer's domestic

currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. (Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs. A newcomer to the business and finance sector can get numbed with the plethora of stocks, bonds, funds etc. along with its associated terms. An average individual has to understand a mountain of information to make sound financial decisions. In a bid to make things simpler, let's take a look at a bond which we most probably would run into while going through financial information - Foreign Currency Convertible Bond (FCCB). What is a Foreign Currency Convertible Bond (FCCB)? A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. It gives two options.One is, to get the regular interest and principal and the other is to convert the bond in to equities. It is a hybrid between bond and stock. How does FCCB help companies? Some companies, banks, governments, and other sovereign entities may decide to issue bonds in foreign currencies because:

It may appear to be more stable and predictable than their domestic currency. It gives issuers the ability to access investment capital available in foreign markets. Companies can use the process to break into foreign markets. The bond acts like both a debt and equity instrument. Like bonds it makes regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. It is a 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. Conversion of bonds into stocks takes place at a premium price to market price. Conversion price is fixed when the bond is issued. So, lower dilution of the company stocks.

How does it benefit an investor?

It's not just companies who are benefited with FCCB. Investors too enjoy its benefits. Here are some: Safety of guaranteed payments on the bond Can take advantage of any large price appreciation in the company's stock Redeemable at maturity if not converted Easily marketable as investors enjoys option of conversion in to equity if resulting to capital appreciation

Are there any disadvantages to the investors and companies? Yes, like any financial instrument, FCCBs also have disadvantages. Some of these are:

The exchange risk is more in FCCBs as interest on bond would be payable in foreign currency. Thus companies with low debt equity ratios, large forex earnings potential only opted for FCCBs. FCCBs means creation of more debt and a forex outgo in terms of interest which is in foreign exchange. In case of convertible bond the interest rate is low (around 3 to 4 per cent) but there is exchange risk on interest as well as principal if the bonds are not converted in to equity. If the stock price plummets, investors will not go for conversion but redemption. So, companies have to refinance to fulfill the redemption promise which can hit earnings. It will remain as debt in the balance sheet until conversion. FCCBs turned out to be very expensive when the share prices of companies starts declining, which made the conversion price of FCCBs much higher than the current market price, as usually evident in market crash and bearish phase. The problem got further compounded when the exchange rate turned unfavorable as seen by rupee fall. When the FCCBs were taken, the rupee was in the range of Rs 40-44 and now it is Rs 54 to a dollar. Thus, companies need to pay almost 22-23% more if they have to buy the same number of dollars. Further, FCCB issue (on conversion) will result in dilution of equity shares, which will bring down the EPS and consequently the valuations for the company.

How is taxation done on FCCBs? Taxation is computed in the following way:

Until the conversion option is exercised, all the interest payments on the bonds, is subject to deduction of tax at source at the rate of 10 per cent. Tax exercised on dividend on the converted portion of the bond is subject to deduction of tax at source at the rate of 10 per cent.

If Foreign Currency Convertible Bonds (FCCB ) is converted into shares it will not give rise to any capital gains liable to income-tax in India [ Images ]. If Foreign Currency Convertible Bonds (FCCB) is transferred by a non-resident investor to another non-resident investor it shall not give rise to any capital gains liable to tax in India.

What are FCCBs An FCCB is basically like this:

You give me dollars I give you bonds that have a coupon interest rate, which I dont pay you, it accumulates over the period. At the end or anywhere in between you can convert some or all of your bonds, with accrued interest, into equity shares at a predefined conversion price. If you dont convert, I pay you bank the principal plus interest, in dollars.

Most offerings had conversion prices at a premium to the then market price, assuming, as investors do, that stocks only go up in the long term. Interest rates, or coupons, were at zero percent or extremely low figures of 1-2% . The typical term of an FCCB was five to seven years. Whats the problem? India went gung-ho on FCCBs in the 2004-07 timeframe, when stocks went nuts. This is now reaching redemption zone, and hurting. More than 50,000 cr. worth FCCBs are nearing maturity soon, and of this the next two years will see between 35,000 and 40,000 cr. worth of bonds maturing. Conversion prices are far above current market prices, so the companies have to pay investors back. What can companies do? Their choices are:

Borrow in dollars, through more FCCBs, to pay back current investors: That will probably take a leap of faith because investors have been burnt badly. Conversion prices will be required to be much lower, meaning more dilution for existing shareholders. Coupon rates will also need to be higher after all, if Italy is paying 7% for its bonds, you cant expect an Indian midcap corporate to pay much lesser. Change the conversion price of the bonds to near market prices. Considering that some issues have conversion prices 90% below conversion prices, a drop to market price will mean 10x the dilution of the share. Take Subex it has to pay $131 million or convert at a price of 646 in one tranche and Rs. 80 in another; the stock price is at Rs. 34.45 today. (Additionally lowering conversion prices may need RBI approval, or breach FDI limits)

Repay through cash or selling assets. ET says some can like JP Associates, FT, L&T or Moser Baer. Raise cash through equity offers: Companies can use rights issues, an FPO or a private placement. Given the situation in the market, these options look bleak. Default. This is the least preferred option but its what companies will have to do if they cant do any of the above steps. Zenith Infotech defaulted recently. If a default occurs, the lenders will take the company to court, and most likely require it to be wound up and assets sold to recover their money. Importantly, this will hurt all other lenders even domestic banks that have lent money as such an action will prompt them to have to restructure or write-off their loans as well.

The problem is compounded by The Rupee Fall When the FCCBs were taken, the rupee was at values of Rs. 40-44. Today, the rupee is at Rs. 52 to a dollar. That means to buy the same number of dollars and pay back, companies need to pay 20% more! This is apart from the coupon interest; and given that if they try to pay back the FCCBs, they will end up flooding the market with buy orders, the rupee will fall even more. This rupee fall hurts conversion as well. Consider an FCCB issue with the dollar at 44, and a conversion price of Rs. 440. That means one share = $10 worth. Today, even if the stock stays at Rs. 440, it will be worth just $8.46 a loss of 15%. To break even, the stock needs to be at least Rs. 520. This hurts more when companies borrowed to deploy money in India if they used the funds abroad, the return on those funds would also be in dollars so the impact is lesser. What has happened? Zenith Infotech defaulted on $33 million worth of FCCB repayments in October. But it sold a part of the company, Zenith RMM, to a fund called Summit Partners at an undisclosed amount, and the remaining shareholders have gone to court saying dudes, if you got that money, you gotta pay us. Summit has said theywill share transaction details if they are kept out of reach of other bondholders. Tata Steel offered to increase coupon rate from 1% to 4.5% if bondholders increased the tenure from 2012 to 2014, which it could do because of its size. Wockhardt attempted a default, and after investors went to court, will pay back the 473 cr. it owes, over five tranches till Oct 2012. Interestingly, secured local lenders like SBI and ICICI have claimed a higher seniority on their loans compared to the unsecured FCCB holders, which means they want to get paid first. Lets see how that develops. In Conclusion It will be important to keep FCCB redemptions in mind as the months go by, and to track them. Im building an excel sheet to see if prices move suddenly on the FCCB repayment due stocks, and will in general avoid going long on them unless they are actually able to pay their dues properly. But a lot of things will be impacted, as Rs. 50,000 cr. is not a small amount; the dollarrupee rate, and thus the price at which we buy oil, and thus inflation.

If there are many defaults, the banking system might be hit as well. This is more of a beware post than an action post; more on individual companies and an FCCB List later.

ECB- External Commercial Borrowings External commercial borrowing also known as Overseas Corporate borrowings is an additional source of funds to Indian Corporates as well as Public Sector Undertakings. This is specifically for expansion of existing capacity and also to expand the resources available domestically. In India, the ECB are permitted by the Govt of India and further the access of Indian firms to foreign capital markets are monitored and regulated by the Ministry of Finance and the Reserve Bank.The ECB can be used for any purpose OTHERTHAN for investment in the stock market and real estate sector. Commercial bank loans,buyer's credit,supplier's credit,floating rate notes,fixed rate bonds etc etc all constitute External commercial Borrowings. Norms eased by RBI for ECBs in March2013 The RBI has relaxed rules for corporate to access ECB (external commercial borrowings) route to raise funds. The apex bank has now permitted companies which are under investigation by assorted law-enforcing authorities to raise funds through the ECB window under the automatic route. Till now, such companies are not allowed to access ECB under the automatic route. Any request by such corporates for ECB was usually examined by the RBI under the approval route. AUTOMATIC ROUTE On a review, it has been decided to permit all entities to avail of ECBs under the automatic route as per the current norms, notwithstanding the pending investigations /adjudications / appeals by the law enforcing agencies, without prejudice to the outcome of such investigations / adjudications / appeals, the RBI said. If the borrowing company indicates about the pending investigations / adjudications / appeals, an authorised dealer while approving the proposal shall intimate the agencies concerned by endorsing the copy of the approval letter, the RBI said. The same procedure would be followed by the apex bank while approving such proposals. The relaxation to the ECB guidelines comes into force with immediate effect. All other aspects of the ECB policy, under the automatic route such as amount of ECB, eligible borrower,

recognised lender, end-use, all-in-cost ceiling, average maturity period, pre-payment, refinancing of existing ECB, and reporting arrangements, however will remain unchanged. Advantage As long as the company's return on invested capital is higher than the cost of borrowing, it is advantageous for the company to borrow. the advantages include the tax shield, as muncie birder mentioned, and more importantly, the effect of financial leverage. remember the definition of the word leverage. it's like having a multiplier effect. a borrower who's return on capital is higher than the interest rate on the debt is basically using other people's money to produce returns for themselves. It does not dilute the value of shareholders' equity by adding to the number of shares outstanding.

Disadvantages The increase in default risk, bankruptcy risk, and a plethora of interest rate and market risks related to having more debt on a company's balance sheet. having more debt may increase your actual cost of borrowing, ie. the intrest rate paid on the debt. with public companies, the ratings agencies will see the additional debt burden and possibly lower the company's rating, which automatically boosts borrowing costs. this could have a downward spiraling effect on the company as its borrowing costs go up, but suddenly less capital is available to draw from due to the lower credit rating. in the case of a liquidity crunch, this can dramatically increase the risk of bankruptcy. The effect on earnings due to interest expense payments: public companies are run to maximize earnings. private companies are run to minimize taxes, so the debt tax shield is less important to public companies b/c earnings still go down. It is a way of rasing capital without giving away any control, as debt holders don't have voting rights, etc. debt may also be a more easily hedged form of raising capital, as swaps and futures can be used to manage interest rate risk.

ECB GUIDELINES: The important aspect of ECB policy is to provide flexibility in borrowings by Indian corporate, at the same time maintaining prudent limits for total external borrowings. The guiding principles for ECB Policy are to keep maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. The ECB policy focuses on three aspects: Eligibility criteria for accessing external markets The total volume of borrowings to be raised and their maturity structure End use of the funds raised

ECB POLICY: External Commercial Borrowings (ECBs) are defined to include commercial bank loans, buyers' credit, suppliers' credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs are being permitted by the Government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment. The policy seeks to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Applicants will be free to raise ECB from any internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equityholders, international capital markets etc. offers from unrecognized sources will not be entertained.

Debt syndication is an arrangement made between two or more banks/financial institutions to provide the borrower a credit facility using common debt documents. Debt syndication is the process of distributing the money advanced in, generally a large loan, to a number of companies or investors. It's commonly used when the loan required, in order funding a company or save a company from bankruptcy, is several million US dollars (USD). By employing debt syndication, several banks, investment firms or other companies share both the profits and the risk of making a large loan. A decline in the number of available lenders has complicated the syndication process. While banks are often the primary lenders, they can be involved in deals with less outlay, thus reducing their risk. Banks are likely to syndicate debt, because they are more careful about taking on more risky investments. In fact banks may advance little money but act more as the principals in arranging a deal between several investors. Banks frequently do not underwrite the entire loan, since this would mean they would be advancing all initial risk for a large deal. Some underwriting of debt syndication is still done by banks, which means that initially, they write the check. The bank then takes the loan to additional investors in an effort to sell part of the loan and thus reduce its outlay of funds. Sometimes underwritten syndication is only final, if the underwriter is able to secure additional financing for the loan required. Thus, choosing an underwriter with a record of being able to put together details and attract other financing companies is helpful in achieving the necessary funds. When debt is syndicated, other firms that may help share the cost of an investment might be investment firms. However, securities firms, insurance companies, credit unions, or single investors might all share a portion of the risk and advance money for a loan.

Some of the largest banks that offer debt syndication in the US are Wells Fargo, Bank of America and J.P. Morgan. Choosing a bank with exceptional experience in this process may be of assistance in obtaining a large loan.

What are the reasons why financial institutions go into loan syndication? A syndicated loan is the opposite of a bilateral loan, which only involves one borrower and one lender (often a bank or financial institution.) A syndicated loan is a much larger and more complicated version of a participation loan. There are typically more than two banks involved in syndication. Currency Carry Trade A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used. Here's an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%. The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.

CAPS FLOORS COLLARS

An interest rate cap is a contract where if interest rates exceed a certain strike rate, for an agreed upon notional amount, the buyer will receive interest for the interest differential over the strike rate for the given conversion period. Consider it insurance protection against rising interest rates. Caps are mainly used by borrowers to protect them from raising interest rates. The critical elements of an interest rate cap are listed below: Strike Rate The trigger rate where payment is to the purchaser if market rates exceed it. The rate can be a set percentage, or an underlying reference index rate (usually LIBOR) or a reference rate plus a spread. Its the ceiling exposure if rates increase. Notional Amount The underlying principle amount. The notional amount can also have an amortization schedule attached. Start Date The commencement date Settlement Date - Payment date Interest Calculation There are various acceptable interest calculations, such as the actual number of days / 360 or 365. Example: Lenders often rely on interest rates caps to protect their margins from unexpected interest rate increases. These companies originate many fixed rate term loans or leases. Their new business volume is usually initially funded by floating rate revolving debt, and then securitized at a later date. They always have a certain amount of volume debt sitting in their revolver. Management, however, often chooses not to absorb the full cost of swaps, but is willing to pay the insurance premiums for caps, to protect its portfolio from a spike in short term funding rates. The caps set the upper limits that the companies are exposed to if interest rates increase. Their P&Ls are exposed to interest rate hikes, up to the strike rate. An interest rate floor is the opposite of a cap. Its a contract that is written with a specified notional amount and a predetermined strike rate. The buyer gets paid if the market interest rate drops below the strike rate. It protects the purchaser (usually the borrower) from falling interest rates. Floors are particularly useful for lenders with adjustable rate assets and fix rate debt. Lets assume you have a lender issuing floating rate (adjustable) loans and capitalized with fixed rate debt, usually bonds. The lender would buy a floor to protect him if interest rates dropped. If the interest rate decreases below the strike rate, the company would be paid for the interest differential. In effect, as the loans were re-priced downward, the floor would somewhat protect the margins. Caps and floors wont completely lock in your profits, but they do reduce risk. An interest rate collar is a combination play of purchasing a cap (or floor) and selling a floor (or cap). The strike prices are set within a band. The structure is used because the proceeds received by selling the floor (or cap) offset the cost of the cap (or floor).

As with all derivatives, if you dont control the offsetting notional amounts, you are exposed to a great deal of risk. Companies play the rate game all the time, and they make their bets by not being 100% hedged. These option products can be used to establish maximum (cap) or minimum (floor) rates or a combination of the two which is referred to as a collar structure. These products are used by investors and borrowers alike to hedge against adverse interest rate movements. A Cap provides variable rate borrowers with protection against rising interest rates while also retaining the advantages of lower or falling interest rates.

Interest Rate Caps - FAQs

Who uses Interest Rate Caps?
Variable rate borrowers are the typical users of Interest Rate Caps. They use Caps to obtain certainty for their business and budgeting process by setting the maximum interest rate they will pay on their borrowings. By implementing this type of financial management, variable rate borrowers obtain peace of mind from rising interest rates but retain the ability to benefit from any favourable interest rate movements.

How does an Interest Rate Cap work?

An Interest Rate Cap ensures that you will not pay any more than a pre-determined level of interest on your loan. St.George will reimburse you the extra interest incurred should interest rates rise above the level of the Cap. An Interest Rate Cap enables variable rate borrowers to retain the advantages of their variable rate facility while obtaining the additional benefits of a maximum interest rate.

How much does an Interest Rate Cap cost?

The cost of the Cap is referred to as the premium. The premium for an Interest Rate Cap depends on the Cap rate you want to achieve when compared to current market interest rates. For example, if current market rates are 6%, you would pay more for a Cap at 7% than a Cap at 8.5%. The premium for an Interest Rate Cap also depends on the rollover frequency and how you make your premium payments. We will endeavour to structure the payments to suit your cash flows. Your St.George Financial Markets representative will be happy to provide an indication of costs when you discuss your requirements with them.

Over what period can I obtain a Cap?

An Interest Rate Cap can be purchased for a minimum term of 90 days and a maximum term of five years. When the Actual Interest Rate rises above the Cap Strike Rate the Bank will reimburse the extra interest to the customer.

Is there a minimum amount for an Interest Rate Cap?

We will be pleased to quote on Interest Rate Caps of $1,000,000 or more.

What happens if I repay my loan early? Can I cancel the Cap?

Interest Rate Caps are totally separate to your loan facility (you may have even borrowed from another bank and entered into an Interest Rate Cap with St.George). If at any time you repay these borrowings you can either let the Cap run to maturity or you may terminate it. Depending on interest rate movements there may be some remaining value of the Cap. The Bank will pay this remaining value to you on termination.

Are there any risks associated with an Interest Rate Cap?

There are no risks associated with an Interest Rate Cap. It is important to understand that if interest rates do not rise above the Cap rate, you have not obtained any benefit from the purchase of the Cap.

What other information is required?

If you decide you can benefit from an Interest Rate Cap you will be required to sign the Bank's standard terms and conditions. These documents are easy to read as they have been written in plain English. They summarise the terms and conditions under which you agree to deal with the Bank.

How do I arrange a Cap?

Please phone your St.George Financial Markets representative to discuss your needs.

Interest Rate Collars - Borrowers - FAQs

Who uses Interest Rate Collars?
Variable rate borrowers are typical users of Interest Rate Collars. They use Collars to obtain certainty for their borrowings by setting the minimum and maximum interest rate they will pay on their borrowings. By implementing this type of financial management, variable rate borrowers obtain peace of mind from the knowledge that interest rate changes will not impact greatly on the borrowing costs, with the resultant freedom to concentrate on other aspects of their business. An Interest Rate Collar is simply a combination of an Interest Rate Cap and an Interest Rate Floor. You receive payment of a premium from St.George to purchase the Interest Rate Floor which offsets the premium that you pay for the Interest Rate Cap. As such the premiums payable for an Interest Rate Collar are less than the premium payable for an Interest Rate Cap.

How does an Interest Rate Collar work?

An Interest Rate Collar ensures that you will not pay any more than a pre-determined level of interest on your borrowings. St.George will reimburse you the extra interest should interest rates rise above the level of the Cap. An Interest Rate Collar however, will not allow you to take advantage of interest rates below a pre-determined level. You will be required to reimburse St.George the extra interest should interest rates fall below the level of the Floor. An Interest Rate Collar enables variable rate borrowers to retain the advantages of their variable rate facility while obtaining the additional benefits of a maximum interest rate, at a reduced cost to an Interest Rate Cap.

How much does an Interest Rate Collar cost?

The cost of the Collar is referred to as the premium. The premium for an Interest Rate Collar depends on the rate parameters you want to achieve when compared to current market interest rates. For example, as a borrower with current market rates at 6%, you would pay more for an Interest Rate Collar with a 4% Floor and a 7% Cap than a Collar with a 5% Floor and a 8.5% Cap. The premium for an Interest Rate Collar also depends on the rollover frequency and how you make your premium payments. We will endeavour to structure the payments to suit your cash flows. It is possible to achieve a net zero premium. Your St.George Financial Markets representative will be happy to provide an indication of costs when you discuss your requirements with them.

Over what period can I obtain a Collar?

An Interest Rate Collar can be purchased for a minimum term of 90 days and a maximum term of five years. For borrowers, should the actual interest rate rise above the Cap Strike Rate, St.George will reimburse you the extra interest. If the actual interest rate fall below the Floor Strike Rate, you will reimburse the extra interest to St.George.

Is there a minimum amount for an Interest Rate Collar?

We will be pleased to quote on Interest Rate Collars of $1,000,000 or more.

What happens if I need to repay my loan early? Can I cancel the Collar?
Interest Rate Collars are totally separate to your borrowings (you may have even borrowed from another bank and entered into an Interest Rate Collar with St.George). If at any time you need to retire your borrowings, you can either let the Collar run to maturity or you may terminate it. Depending on interest rate movements there may be some remaining value of the Collar. The Bank will pay this remaining value to you on termination.

Are there any risks associated with an Interest Rate Collar?

There are risks associated with an Interest Rate Collar. It is important to understand that if interest rates fall below the Floor rate, you will have missed out on the potential reduction to your cost of funds. The cost advantages over an Interest Rate Floor may or may not compensate for this potential loss. Only you can decide if the premium savings outweigh the potential of reduced cost in a falling interest rate environment.

What other information is required?

If you decide you can benefit from an Interest Rate Collar you will be required to sign the Bank's standard terms and conditions. These documents are easy to read as they have been written in plain English. They summarise the terms and conditions under which you agree to deal with the Bank.

How do I arrange a Collar?

Please phone your St.George Financial Markets representative to discuss your needs.

Interest Rate Floors - FAQs

Who uses Interest Rate Floors?
Variable rate investors are the typical users of Interest Rate Floors. They use Floors to obtain certainty for their investments and budgeting process by setting the minimum interest rate they will receive on their investments. By implementing this type of financial management, variable rate investors obtain peace of mind from falling interest rates and the freedom to concentrate on other aspects of their business/investments.

Q. How does an Interest Rate Floor work?

An Interest Rate Floor ensures that you will not receive any less than a pre-determined level of interest on your investment. The Bank will reimburse you the extra interest incurred should interest rates fall below the level of the Floor. An Interest Rate Floor enables variable rate investors to retain the upside advantages of their variable rate investment while obtaining the comfort of a known minimum interest rate.

How much does an Interest Rate Floor cost?

The cost of the Floor is referred to as the premium. The premium for an Interest Rate Floor depends on the Floor rate you want to achieve when compared to current market interest rates. For example, if current markets rates are 6%, you would pay more for a Floor at 5% than a Floor at 4.5%. The premium for an Interest Rate Floor also depends on the rollover frequency and how you make your premium payments. We will endeavour to structure the payments to suit your cash flows. Your St.George Financial Markets representative will be happy to provide an indication of costs when you discuss your requirements with them.

Q. Over what period can I obtain a Floor?

An Interest Rate Floor can be purchased for a minimum term of 90 days and a maximum term of five years. When the actual Interest Rate falls below the Floor Strike Rate the Bank will reimburse the extra interest to the customer.

Is there a minimum amount for an Interest Rate Floor?

We will be pleased to quote on Interest Rate Floor of $1,000,000 or more.

Q. What happens if I require my funds early? Can I cancel the Floor?

Interest Rate Floors are totally separate to your investment (you may have even invested with another institution and entered into an Interest Rate Floor with St.George). If at any time you recall your investment, you can either let the Floor run to maturity or you may terminate it. Depending on interest rate movements there may be some remaining value of the Floor. The Bank will pay this remaining value to you on termination.

Are there any risks associated with an Interest Rate Floor?

There are no risks associated with an Interest Rate Floor. It is important to understand that if interest rates do not fall below the Floor rate, you have not obtained any benefit from the purchase of the Floor.

What other information is required?

If you decide you can benefit from an Interest Rate Floor you will be required to sign the Bank's standard terms and conditions. These documents are easy to read as they have been written in plain English. They summarise the terms and conditions under which you agree to deal with the Bank.

Wholly Owned Subsidiary- WOS Overseas

JOINT VENTURE AND WHOLLY OWNED SUBSIDIARY IN FOREIGN COUNTRY BY INDIAN PARTY

The success of Indian companies in software exports as also in other businesses have opened up the possibilities of Indian companies entering into joint venture (J/V) and also open wholly owned subsidiary (WOS) in foreign countries. For J/V and WOS the Indian companies have to make investment in foreign currency. As the foreign exchange goes out of India the Reserve Bank of India comes into picture. The provisions related to J/V and WOS are governed by the Foreign Exchange Management Act (FEMA) and The Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2000. (Said regulations). Before we discuss in detail we see how some of the important terms are defined. "American Depository Receipt" (ADR) means a security issued by a bank or a depository in United States of America (USA) against underlying rupee shares of a company incorporated in India; `Core Activity means activity carried on by an Indian entity which constitutes at least 50% of its average turnover in the previous accounting year; "Global Depository Receipt"(GDR) means a security issued by a bank or a depository outside India against underlying rupee shares of a company incorporated in India; "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, but does not include portfolio investment or investment through stock exchange or by private placement in that entity; "Indian party" means a company incorporated in India or body created under an Act of Parliament, making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by Reserve Bank "Joint Venture (JV)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment; "Wholly Owned Subsidiary (WOS) " means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party; "Real estate business means buying and selling of real estate or trading in transferable development rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges;

SOME IMPORTANT POINTS Only (a) Public Ltd. Company, (b) Private Limited Company are allowed to invest for J/V and WOS called Indian party. Individual, partnership firms etc are not allowed to invest. Investment in banking business and real estate business are not allowed. Investment can be by way of equity, debentures, loans, and guarantees. Remittance can be by way of cash, or export of goods and services. Dividends, royalties, etc. due to Indian investor should be repatriated to India .

We shall now look at the various ways of investments by Indian party in detail. CATEGORY AMONT OF OF INVESTMENT INVESMENT NOT TO EXCEED Investment US $ 50 in J/V or millionor its WOS equivalent in a outside block of three India except financial years Nepal & Bhutan CRITERIA FOR PERMISSION MODE OF INVESTMENT HOW TOAPPLY

The direct investment is made in a foreign entity engaged in the same core activity carried on by the Indian party; The Indian Party has earned net profit during the preceding three accounting years; .

Investment Rs. 120 in J/V or croresin a WOS in block of three Nepal & financial years Bhutan Investment 50% of out of amount raised ADR/GDR by ADR / GDR issues issue

Same as above

Investment can be made by To submit way of equity or loan or by form ODA, way of giving guarantee. duly completed, to Investment can be made out the designated of EEFC account funds or by branch of an drawing Foreign Exchange authorised from the Authorised Dealer. dealer (Bank) for onward transmission Investment by way of to Reserve capitalisation of exports of goods and services towards Bank. equity contribution and any other dues can be also be made as prescribed under the regulations. Same as above Same as above

The ADR/GDR issue has Same as above been made in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993 and the guidelines issued thereunder

To file with Reserve Bank, in form ODAfull details of the investment made, within 30 days of such investment.

Investment in Financial Service Sector

US $ 50 million or its equivalent in a block of three financial years

Only Indian party engaged Same as above in financial service activities can make investment in entity engaged in financial services activities If

Investor company has earned net profit in 3 preceding financial years and has minimum net worth of Rs. 15 Cr. as on last audited Balance Sheet Investment US$ 100 Only those Indian party in foreign million or 10 engaged in, Information security by times of export Technology and way of earning of entertainment Software, Swap or Indian party in Pharmaceutical sector, exchange of preceding biotech [Specified activity] shares. financial year may acquire shares of including all foreign company in investment in exchange of ADR / GDR same financial year

To submit form ODA, duly completed, to the designated branch of an authorised dealer (Bank) for onward transmission to Reserve Bank. To submit a report in form ODG to the Reserve Bank

ADR / GDR issue of Indian party is listed outside India 80% of average turnover of Indian party in 3 previous financial year - is from activity included in schedule or Indian party has annual average export earning of at least Rs. 100 Cr. in previous 3 financial year from its activities.

Acquisition of a foreign Company through bidding or tender Investment proposal, not falling under General Permission Category

Same as first category

Same as first category

ADR / GDR issue is backed by fresh equity shares by Indian party. Acquisition of the foreign To fill formODA and company ODI as prescribed to Reserve Bank File form ODI File form ODB

As per the Prima facie viability of Direct investment permission of J/V or WOS Exchange of shares Reserve Bank Contribution to external trade by proposed investment Financial position & business track record of Indian party & foreign entity. Experience & expertise of Indian party in related line of activity

Obligations of the Indian Party An Indian Party which has acquired foreign security as above shall (i) receive share certificates or any other document as an evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months (ii) repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 60 days of its falling due, or such further period as the Reserve Bank may permit; (iii) submit to the Reserve Bank every year an annual performance report in form APR in respect of J/V or WOS outside India set up or acquired by the Indian Party and other reports or documents as may be stipulated by the Reserve Bank. Transfer by way of sale of shares of a JV/WOS not allowed without the permission of Reserve Bank or as provided in the Act or rules or regulations made or directions issued there under. Pledge of Shares of J/V and WOS as a security for availing of fund based or non-fund based facilities for itself or for the J/V WOS from an authorised dealer (Bank) or a public financial institution in India is allowed.

Foreign Institutional Investor FII

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. Read more: http://www.investopedia.com/terms/f/fii.asp#ixzz2NnFXiSaU