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
Instruments in International Market

Equity

Debt

Hybrid

ADR

GDR

IDR

Bonds

FCCB

FCEB

Yankee

Samurai

Bulldog

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
Level

shares

Level
Level

II (listed)
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-Equity

Syndication - 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 Book-runner Fix

response keeps the book open - 1to2 weeks

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 & Shares 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
Repatriate funds Buy DR

Deposit proceeds in Indian bank account

Sell local stock in India

Deliver shares to stock exchange in India

Convert shares from DR to local

Economys Perspective

Coupling of global economies Risks

Political

Risk Exchange Rate Risk Inflationary Risk

Impact on Companys Valuation Forex exposure

Economic Perspective

BOPs Position of the country

Case Study Infosys ADR

Name

Ticker

Cusip

Underlying Sedol Ratio

Exchange Depositary Region

Coun try Sector

DR REDDYS LABORATORIES LTD RDY HDFC BANK LTD ICICI BANK LTD HDB IBN

256135203
40415F101

6410959
6100131

1:1
1:3 1:2 1:1 1:2 1:2

NYSE
NYSE NYSE

JPM
JPM DB

Emrg. Asia
Emrg. Asia Emrg. Asia Emrg. Asia Emrg. Asia Emrg. Asia Emrg. Asia Emrg. Asia Emrg. Asia

India Pharmaceuticals
India Banks India Banks India Software Telecommunicati India ons India Semiconductors India Internet India Software India Internet Metal Fabricate/Hardwa India re Telecommunicati India ons Auto India Manufacturers India Software Commercial India Services

45104G104 6100368 456788108 559778402 703248203 757479100 804098101 6241858 6205122 6117807 6734745

INFOSYS TECHNOLOGIES LTD INFY MAHANAGAR TELEPHONE NIGAM PATNI COMPUTER SYSTEMS LIMITED REDIFF.COM INDIA LTD MTE PTI REDF

NASDAQ DB NYSE NYSE BNY BNY

1 : 0.5 NASDAQ CIT 1:2 1:1 NYSE CIT

SATYAM COMPUTER SERVICES LTD SAY SIFY LTD STERLITE INDUSTRIES INDIA LTD TATA COMMUNICATIONS LTD TATA MOTORS LTD WIPRO LTD SIFY

82655M107 B05DZX1

NASDAQ CIT

SLT

859737207

B13TC37

1:1

NYSE

CIT

Emrg. Asia

TCL TTM WIT

876564105 876568502

6114745 6101509

1:2 1:1 1:1 1:1

NYSE NYSE NYSE NYSE

BNY CIT JPM DB

Emrg. Asia Emrg. Asia Emrg. Asia Emrg. Asia

97651M109 6206051 92932M101

WNS HOLDINGS LTD WNS

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 o o

US $294m July 2003 US $1.07b June 2005 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.

2.

BankAmerica Robertson Stephens of San Francisco Brown of New York

Details of ADR issue

ADR issue expenses:
Rs. Legal and accounting fees Printing charges TOTAL 1,28,26,437 77,03,653 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 Primary Issue 11 Mar 1999 Secondary Issue July 2003 Secondary Issue June 2005 Secondary Issue Nov 2006 Float 3% 9% 14% 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 enduse 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 3yrs 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 NRIs and FIIs 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 issuers home nation

Issuers 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 nonJapanese 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% Capex plan of Rs.6000 Refinancing loan taken for Daewoo commercial plant

Purpose:

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 Companys 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