The International Banking & Money Market

PART II

The International Euro-Equity Market

Mobilizing Equity Flows

For mobilising equity investments, the companies can approach: 1. Domestic markets

2. Foreign stock exchanges

MAJOR STOCK EXCHANGES ( 31.12.2010)

Rank Economy Stock Exchange Location Market Capitalisation (USD Billions) 1 2 3 4 5 6 7 8 9 USA/ Europe USA/ Europe Japan United Kingdom China Hong Kong Canada India India NYSE Euronext NASDAQ OMX Tokyo Stock Exchange London Stock Exchange Shanghai Stock Exchange Hong Kong Stock Exchange Toronto Stock Exchange Bombay Stock Exchange National Stock Exchange of India New York New York Tokyo London Shanghai Hong Kong Toronto Mumbai Mumbai 15970 4931 3,827 3,613 2,717 2,711 2,170 1,631 1,596 Trade Value (USD Billions) 19813 13439 3,787 2,741 4,496 1,496 1,368 258 801

10
11 12 13 14 15 16 17 18

Brazil
Australia Germany China Switzerland Spain South Korea Russia South Africa

BM&F Bovespa
Australian Securities Exchange Deutsche Borse Shenzen Stock Exchange SIX Swiss Exchange BME Spanish Exchanges Korea Exchange MICEX JSE Limited

Sao Paulo
Sydney Frankfurt Shenzen Zurich Madrid Seoul Moscow Johannesburg

1,545
1,454 1,429 1,311 1,229 1,171 1,091 949 925

868
1,062 1,628 3,572 788 1,360 1,607 408 340

Mobilizing Equity Flows Cross Listing

Cross-listing refers to a firm having its equity
shares listed on one or more foreign exchanges, in addition to the home country stock exchange

MNCs often cross-list their shares, but nonMNCs also cross-list

Foreign Investors
Foreign investors enter an equity market with
basic risk return trade off in their minds

While entering a nation, the FIIs undertake a

country study in which various economic indicators are tracked and analysed..

Foreign Investors
1. 2. 3. 4. 5. 6. The growth rate of the economy Debt/ GDP ratio Foreign reserve position Debt service ratio Transparency of institutional practices Political risk

Mobilizing Equity Flows

In developed equity markets, accounting
standards and disclosure norms are stringent

Therefore, it is usually difficult to list equity

on these exchanges

To avoid this, depository receipts can be

issued and funds mobilised

ADRs & GDRs

In American markets, there are two important instruments with the help of which the funds can be mobilised:
1. 2. American Depository Receipts (ADRs) Global Depository Receipts (GDRs)

ADRs have less stricter norms than GDRs

GDRs
GDR represents a certain number of
underlying equity shares ( e.g. Reliance 1 GDR = 2 equity shares) The shares are issued by the company to the intermediary called the depository, in whose name the shares are registered It is the depository which subsequently issues the GDRs

GDRs
The physical possession of the equity shares is
with custodian

GDRs do not figure in the books of accounts of

the company

Though the GDRs are quoted in dollars, the

underlying is in rupees

GDRs
The dividend outflow is in rupees. The
depository converts it in US dollars and pays to the investors after deducting tax

GDRs can be cancelled and exchanged against

share certificates

Uses of GDR for Corporate Financing

To raise debt or equity capital To diversify shareholder base To increase demand for their securities To create dollar denominated securities for tax efficient acquisitions To enhance global image The company does not assume any foreign exchange risk

Benefits to the Investors

GDRs are quoted in dollars, dividend and
interest are also in dollars GDRs overcome foreign investment restrictions GDRs overcome obstacles that institutional investors have in purchasing and holding securities outside the domestic markets

GDRs
Prices of GDRs are often close to values of

related shares, but they are traded & settled independently of the underlying share

Several international banks issue GDRs, such as

JP Morgan Chase, Citigroup, Deutsche Bank, Bank of New York

GDRs
GDRs are often listed in the Luxembourg Stock
Exchange and in the London Stock Exchange, where they are traded on the International Order Book (IOB)

Normally 1 GDR = 10 Shares, but not always

GDR Prices as on 03.09.2010

1 USD = Rs. 46.6700
Security Name GDR Price (US $) L and T (GDR) M and M (GDR) 39.85 13.67 Equiv Value (Rs.) 929.90 31/03/1996 637.98 30/11/1993 Issue Date Issue Size (USD millions) 150.00 74.75 Issue Price (USD) 15.35 4.46 Prem / Discount to Issue Price (%) 159.60 206.50

Ranbaxy (GDR)
RIL (GDR) SBI (GDR)

10.98
40.00 118.63

512.44 30/06/1994
933.40 28/02/1994 2,768.23 31/10/1996

100.00
300.00 369.95

19.38
11.75 14.15

-43.34
240.42 738.37

American Depositary Receipts (ADRs)

ADR represents ownership in the shares of a
non-U.S. company and trades in U.S. financial markets

The stock of many non-US companies trade on

US stock exchanges through the use of ADRs

American Depositary Receipt (ADRs)

ADRs enable U.S. investors to buy shares in
foreign companies without the hazards or inconveniences of cross-border & crosscurrency transactions

ADRs carry prices in US dollars, pay dividends

in US dollars, and can be traded like the shares of US-based companies

ADR Prices as on 03.09.2010

1 USD = Rs. 46.6700
Security Name Dr.Reddy (ADR) HDFCBank (ADR) ICICIBk. (ADR) INFY(ADR) MTNL(ADR) ADR Price (US $) 30.56 169.58 43.31 60.66 2.74 ADR Price Date 3/9/2010 3/9/2010 3/9/2010 3/9/2010 3/9/2010 Equiv Value (Rs.) 1,426.24 7,914.30 2,021.28 2,831.00 127.88

Patni (ADR)
Rediff (ADR) Satyam (ADR) SIFY (ADR)

19.60
2.95 5.04 1.57

3/9/2010
3/9/2010 3/9/2010 3/9/2010

914.73
137.68 235.22 73.27

Sterlite (ADR)

13.88

3/9/2010

647.78

Indian Equity & Foreign Equity Market

In Sept. 1992, the Indian government
announced the opening of Indian stock markets for approved foreign institutional investors (FIIs) FIIs were allowed to buy 24% of equity in Indian companies The eligible foreign investors include pension funds, mutual funds etc.

Indian Depository Receipts (IDRs)

A foreign company can access Indian securities
market for raising funds through issue of IDRs

An IDR is an instrument denominated in Indian

Rupees in the form of a depository receipt created by a Domestic Depository against the underlying equity of issuing company

Indian Depository Receipts (IDRs)

Just like overseas investors in the US-listed

American Depository Receipts (ADRs) of Infosys and Wipro get receipts against ownership of shares held by an Indian custodian, an IDR is proof of ownership of foreign companys shares

The IDRs are denominated in Indian currency

Indian Depository Receipts (IDRs)

IDRs will be issued to Indian residents in the
same way as domestic shares are issued Investors eligible to participate in an IDR issue are institutional investors, including FIIs but excluding insurance companies and venture capital funds retail investors and nonInstitutional Investors NRIs can also participate in the Issue

Indian Depository Receipts (IDRs)

Indian individual investors have restrictions on
holding shares in foreign companies, but IDR gives Indian residents a chance to invest in a listed foreign entity No resident individual can hold more than $200,000 worth of foreign securities, including shares, as per foreign exchange regulations. However, this will not be applicable for IDR

Indian Depository Receipts (IDRs)

Standard Chartered PLC, a UK based
multinational bank has become the first global company to file for an issue of Indian Depository Receipts in India The companys issue for 24 crore IDRs opened on may 25, 2010 and sought to raise between Rs. 2400 to Rs. 2700 Crore. The issue was subscribed 2.20 times on an overall basis

Indian Depository Receipts (IDRs)

10 IDRs represent one share of US $ 0.50 nominal value Standard Chartered Bank, Mumbai is the domestic depository, and it appointed Bank of New York, Mellon as its overseas depository

Thank you