Assignment # 2 1.

American Depository Receipt (ADR)

An American Depository Receipt, or ADR, is a security issued by a U.S. depository bank to domestic buyers as a substitute for direct ownership of stock in foreign companies. An ADR can represent one or more shares, or a fraction of a share, of a non-U.S. company. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADSs). The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges. An ADR is a convenient way for companies whose stock is listed on a foreign exchange to crosslist their stock in the United States and make their stock available for purchase by U.S. investors, as these receipts can be traded on U.S. exchanges. Some ADRs are traded on major stock exchanges such as the Nasdaq Stock Market (NDAQ) and the New York Stock Exchange, which require these foreign companies to conform to many of the same reporting and accounting standards as U.S. companies. Other ADRs are traded on overthe-counter exchanges that impose fewer listing requirements. Stock dividends and similar adjustments to the underlying shares are paid in cash or ADR dividends by the bank. For example, let's assume the ADRs of XYZ Company, a French company, pay an annual cash dividend of 3 euros per share. Let's also assume that the exchange rate between the two currencies is even -- meaning one Euro has an equivalent value to one dollar. XYZ Company's dividend payment would therefore equal $3 from the perspective of a U.S. investor. However, if the euro were to suddenly decline in value to an exchange rate of one euro per $0.75, then the dividend payment for ADR investors would effectively fall to $2.25. The reverse is also true. If the euro were to strengthen to $1.50, then XYZ Company's annual dividend payment would be worth $4.50.
Different type of ADR Issues

Level 1 - These are found on Over the counter market and have the loosest requirements from Securities and Exchange Commission. Level 2 - These are listed on an exchange or Nasdaq. They have slightly more requirements from the SEC, but they have greater visibility and trading volume. Level 3 - The issuer floats a public offering of ADRs on a U.S. exchange

Why It Matters: ADRs give U.S. investors the ability to easily purchase shares in foreign firms, and they are typically much more convenient and cost effective for domestic investors (versus purchasing stocks in overseas markets). And because many foreign firms are involved in industries and geographical markets where U.S. multinationals don't have a presence, investors can use ADRs to help diversify their portfolios on a much more global scale.

Implication of ADR on funding Indian Companies Depository receipts permit investors to trade in foreign securities and at the same time giving the issuing companies an access to major international markets. American Depository Receipts are an offshoot of DR's and are US dollar denominated negotiable instruments issued in the US by a depository bank, representing ownership in non-US securities. ADR's provide non-US companies with access to the US capital markets which has the world's largest domestic investor base. India's most popular ADRs include: Tata Motors Limited (NYSE: TTM) ICICI Bank Limited (NYSE:IBN) Dr Reddy's Laboratories Limited (NYSE: RDY) Infosys Ltd. (NASDAQ: INFY) Rediff.com India Limited (NASDAQ: REDF) India's positive demographics and booming economy make it a great investment opportunity for international investors. India faces fewer risks than many emerging markets, with its longstanding democracy and liberal economic policies, but geopolitical risks should be considered. .International investors looking to invest in India should take a look at the country's many U.S. traded ETFs and ADRs to avoid possible legal and tax issues.

2. Global Depositary Receipt (GDR)

A Global Depositary Receipt (GDR) is a negotiable instrument issued by a depositary bank in international markets typically in Europe and generally made available to institutional investors both outside and within the U.S. that evidences ownership of shares in a non-U.S. company, enabling the company (issuer) to access investors in capital markets outside its home country. Each GDR represents a specific number of underlying ordinary shares in the international company, on deposit with a custodian in the applicable home market. GDRs are quoted and traded in U.S. dollars, pay dividends in U.S. dollars, and are subject to the trading and settlement procedures of the market in which they are transacted. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. GDRs are often listed in the Frankfurt Stock Exchange, 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.

Why GDR? Benefits of GDRs to a company The establishment of a Depositary Receipt programme, through which GDRs can be issued, offers several advantages to foreign companies. These may include: Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity for the underlying shares, which may increase or stabilise the share price. Enhanced visibility and image for the companys products, services and financial instruments in a marketplace outside its home country and also greater prestige in its home market a flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions Ability to encourage investment from abroad without having to worry about barriers to entry that a foreign investor might face. Opportunity for employees of domestic subsidiaries of foreign companies to invest more easily in the parent company. Encouragement and promotion of an international shareholder base. Benefits of GDRs to an Investor Investors are increasingly aiming to diversify their portfolios on an international scale. However, the various hurdles associated with international securities trading may discourage institutions and private investors from venturing outside their local market by purchasing ordinary shares in the foreign companys home market. With that in mind, the advantages of purchasing GDRs instead may, from the investors perspective, include: quotation in the GDR currency and payment of dividends or interest in the GDR currency, which is usually US dollars, pounds sterling or euros. diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market. the ability to reap the benefits of these usually higher-risk, higher-return equities in emerging markets, without having to endure the added risks of going directly into such foreign markets, which may pose a lack of transparency or instability resulting from changing regulatory procedures. familiar and certain trade, clearance and settlement procedures competitive GDR currency/foreign exchange rate conversions (as against most foreign currencies) for dividends and other cash distributions. the ability to acquire the underlying securities directly upon cancellation.

Implication of GDR on funding of Indian Companies The advantage in GDR issue is that company does not assume any exchange risk. The dividend outflow from the company is in Rupees only but depository converts these rupee payments and pays the dividend in US dollar to the ultimate investors after deducting a withholding tax of 10 per cent on deposit. Once a GDR has been issued, it can be freely traded among international investors. GDR plays a crucial role in international corporate finance. GDR's are used to:

raise debt or equity capital; diversify shareholder base; increase demand for securities; enhance global image; and create dollar-denominated securities.

3. Foreign Currency Convertible Bonds (FCCBs)

Foreign Currency Convertible Bonds commonly referred to as FCCB's are a special category of bonds. FCCB's are issued in currencies different from the issuing company's domestic currency. Corporates issue FCCB's to raise money in foreign currencies. These bonds retain all features of a convertible bond making them very attractive to both the investors and the issuers. 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 bonds assume great importance for multi-nationals and in the current business scenario of globalization where companies are constantly dealing in foreign currencies. FCCB's are quasi-debt instruments and tradable on the stock exchange. Investors are hedge-fund arbitrators or foreign nationals. FCCB's appear on the liabilities side of the issuing company's balance-sheet Under IFRS provisions, a company must mark-to-market the amount of its outstanding bonds. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies. FCCB are also referred as FCCN (Foreign Currency Convertible Notes) by some issuers. Bonds of foreign countries are called by various names in International markets. For example in US, overseas bond listed with SEC are called Yankee Bonds, while they are referred to as Bulldog Bonds (in U.K.) and Samurai Bonds (in Japan).

4. External Commercial Borrowings (ECB)

Source of funds for corporates from abroad with advantage of lower rates of interest prevailing in the international financial markets. longer maturity period, for financing expansion of existing capacity as well as for fresh investment.

Defined as to include commercial loans [in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years. Modes of raising ECB Foreign currency loan raised by residents from recognized lenders. Basically ECB suggests any kind of funding other than Equity (considered foreign direct investment) be it Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature, satisfying the norms of the ECB regulations. Commercial Bank Loans : in the form of term loans from banks outside India Buyer's Credit Supplier's Credit Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate Bonds (FRBs), Syndicated Loans etc. Syndicated Loan Credit from official export credit agencies Commercial borrowings from the private sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognized credit rating agency Lines of Credit from foreign banks and financial institutions Financial Leases Import Loans Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds External assistance, NRI deposits, short-term credit and Rupee debt Foreign Currency Convertible Bonds Non convertible or optionally convertible or partially convertible debentures Redeemable preference shares are considered as part of ECBs Bonds, Credit notes, Asset Backed Securities, Mortgage Backed securities

Why ECB is attractive Investor ECB is for specific period, which can be as short as three years. Fixed Return, usually the rates of interest are fixed. The interest and the borrowed amount are repatriable. No owners risk as in case of Equity Investment.

Borrower No dilution in ownership. Considerably large funds can be raised as per requirements of borrower. Usually only a fixed rate of interest is to be paid. Easy Availability of funds because ECB is more appealing to Investors.

Reference Links:

http://www.wikinvest.com/wiki/American_Depositary_Receipt_(ADR) https://wwss.citissb.com/adr/common/file.aspx?idf=1525 http://www.tcii.co.uk/images/upload/guest_article_pdfs/Global_depositary_receipts_inve sting_in_emerging_markets_pdf_5788.pdf http://www.icai.org/resource_file/10351703-708.pdf http://www.stockanalysisonline.com/2009/05/foreign-currency-convertible-bondsfccb.html http://www.assocham.org/arb/afp/2009/ECBs_Study.pdf http://india-financing.com/Presentation_on_External_Commercial_Borrowings.pdf