Sourcing Equity Globally

Sourcing Equity Globally

 To implement the goal of gaining access to global

capital markets a firm must begin by designing a
strategy that will ultimately attract international
investors.
 This would mean identifying and choosing
alternative paths to access global markets.
 This would also require some restructuring of the
firm, improving the quality and level of its disclosure,
and making its accounting and reporting standards
more transparent to potential foreign investors.

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Designing a Strategy
to Source Equity Globally
 Designing a capital sourcing strategy requires
that management agree upon a long-run
financial objective and then choose among the
various alternative paths to get there.
 Often, this decision making process is aided by
an early appointment of an investment bank as
an official advisor to the firm.

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Designing a Strategy
to Source Equity Globally
 Most firms raise their initial capital in their own
domestic market.
 However, most firms that have only raised capital in
their domestic market are not well known enough to
attract foreign investors.
 Incremental steps to bridge this gap include
conducting an international bond offering and/or
cross-listing equity shares on more highly liquid
foreign stock exchanges.

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 Designing a Strategy
to Source Equity Globally
 Depositary receipts (depositary shares) are negotiable
certificates issued by a bank to represent the underlying
shares of stock, which are held in trust at a foreign
custodian bank.
 American depository receipts (ADRs) are certificates traded
in the United States and denominated in US dollars.
 ADRs are sold, registered, and transferred in the US in the
same manner as any share of stock with each ADR
representing some multiple of the underlying foreign share
(allowing for ADR pricing to resemble conventional US
share pricing between $20 and $50 per share).

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 Mechanics of American Depositary Receipts
(ADRs)
American Depositary Receipts
Shares issued by a bank representing Receipts
underlying shares held (ADRs)
by a custodial bank

Publicly traded firm Receipts for shares

outside the U.S. listed on U.S. exchange

Traded by
U.S. investors

Shares traded on local

Shares stock exchange Arbitrage
Activity

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Arbitrage with Depository Receipts

 There are some stocks which are also allowed to be

bought in India and converted into the DR forms, which
is attractive if the DR is trading at a premium to the
Indian stock price.

 The Process
1. Buy DR
2. Sell local stock in India in cash market or futures
market.
3. Convert shares from DR to local.
4. Deliver shares to stock exchange in India.
5. Deposit proceeds in Indian bank account.
6. Repatriate funds.
7. Repeat process.

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Designing a Strategy
to Source Equity Globally
 ADRs can be exchanged for the underlying foreign
shares, or vice versa, so arbitrage keeps foreign and
US prices of any given share the same after
adjusting for transfer costs.
 ADRs also convey certain technical advantages to
US shareholders.
 While ADRs are quoted only in US dollars and
traded only in the US, Global Registered Shares
(GRSs) can be traded on equity exchanges around
the globe in a variety of currencies.

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Indian Depository Receipts

 The rapid technological developments have

made it possible for speedier transfer of
money and securities.
 Sweeping technological advances and the
rapid growth of e-commerce have made
conventional, geographic, regulatory and
market barriers irrelevant.

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Indian Depository Receipts

 A number of Indian companies have accessed the

global markets by ADR/GDR route with a view to
raising the foreign exchange for their global
operations.
 With the projected growth rate of the Indian
economy at 8% and the spurt in the forex markets,
India is fast emerging as an important destination for
global companies.

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Indian Depository Receipts

 IDRs is an innovative instrument enabling overseas

corporates to raise funds through the Indian capital
markets.
 It would enable the Indian investors to invest in well
performing companies and participate in the growth
and prosperity of these companies.
 It would provide one more investment instrument to
the Indian investors and this increases the choice of
instruments available to them.

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Indian Depository Receipts

 The IDR would be an instrument

denominated in Indian Rupees and
represented by underlying securities of the
foreign company, which are listed on an
international stock exchange.
 IDRs would be listed on the Indian stock
exchanges in the similar manner in which
GDRs and ADRs issued by domestic
companies are listed overseas.

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Indian Depository Receipts

 The foreign company would raise funds from

Indian investors by floating IDRs and issue
the securities underlying the IDRs to an
overseas custodian bank, which, in turn,
authorize the domestic depository bank in
India to issue IDRs to Indian investors.

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Structure of IDR

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Depository Receipts of Indian
Companies
 Many Indian companies have accessed the
global equity market primarily for establishing
their image as global companies.
 Other relevant considerations are :
1.Visibility and post-issue considerations related
to investor relations,
2.Liquidity of the stock (or instruments based on
the stock such as depository receipts which are
listed and traded on foreign stock exchanges)
3.The price at which the issue can be placed,
costs of issue and factors related to taxation.
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 Shares of many firms are traded indirectly in
the form of depository receipts e.g. GDR and
ADR .
 After a hesitant start in 1992 following the
experience of the first ever GDR issue by an
Indian company , a fairly large number of
them have raised equity capital in
international markets.

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Indian companies in the ADR/GDR
market
 Company Industry Date of Issue Size
($m)
Arvind Mills Textiles Feb-1994 125
Ashok Leyland Auto Mar-1995 138
Century Textiles Diversified Sep-1994 100
Crompton Electrical Jul- 1996 50
Dr. Reddy’s Pharma Jul-1994 48
GE Shipping Shipping Feb-1994 100
Indian Hotels Hotels Apr-1995 86
Indo Gulf Fertilizers Jan-1994 100
ICICI Finance Sep-1999 315
Infosys IT Mar-1999 70
L&T Diversified Mar-1996 135
Mah&Mah Auto Nov-1993 75
Reliance Diversified May-1992 150
Satyam Infoway IT Oct-1999 75
VSNL Telecom Mar-1997 527
Wipro IT Sep-2000

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Foreign Equity Listing
and Issuance
 A firm must choose one or more stock
markets on which to cross-list its shares and
sell new equity.
 Just where to go depends mainly on the
firm’s specific motives and the willingness of
the host stock market to accept the firm.

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Foreign Equity Listing
and Issuance
 Cross-listing attempts to accomplish one or more of many
objectives:
 Improve the liquidity of its existing shares and support a
liquid secondary market for new equity issues in foreign
markets
 Increase its share price by overcoming mis-pricing in a
segmented and illiquid home capital market
 Increase the firms visibility
 Establish a secondary market for shares used to
acquire other firms
 Create a secondary market for shares that can be used
to compensate local management and employees in
foreign subsidiaries
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 Effect of Cross-Listing and
Equity Issuance on Share Price
 Cross-listing may have a favorable impact on share price
if the new market values the firm or its industry more
than the home market does.
 It is well known that the combined impact of a new equity
issue undertaken simultaneously with a cross-listing has
a more favorable impact on stock price than cross-listing
alone.
 Even US firms can benefit by issuing equity abroad as
increased investor recognition and participation in the
primary and secondary markets results.

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Barriers to Cross-Listing
and Selling Equity Abroad
 There are certainly barriers to cross-listing and/or selling equity
abroad.
 The most serious of these includes the future commitment to
providing full and transparent disclosure of operating results and
balance sheets as well as a continuous program of investor
relations.
 The US school of thought is that the worldwide trend toward
requiring fuller, more transparent, and more standardized
financial disclosure of operating results and balance sheet
positions may have the desirable effect of lowering the cost of
equity capital.

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Alternative Instruments to Source Equity
in Global Markets (in the USA)
 Alternative instruments to source equity in global
markets include the following:
 Sale of a directed public share issue to investors in a target
market
 Sale of a Euroequity public issue to investors in more than one
market (foreign and domestic markets)
 Private placements under SEC Rule 144A
 Sale of shares to private equity funds
 Sale of shares to a foreign firm as part of a strategic alliance

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Alternative Instruments
to Source Equity in Global Markets
 A directed public share issue is defined as one that
is targeted at investors in a single country and
underwritten in whole or in part by investment
institutions from that country.
 The issue might or might not be denominated in the
currency of the target market.
 The shares might or might not be cross-listed on a
stock exchange in the target market.

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Alternative Instruments
to Source Equity in Global Markets
 The gradual integration of the world’s capital markets
and increased international portfolio investment has
spawned the emergence of a very viable Euroequity
market.
 A firm can now issue equity underwritten and distributed
in multiple foreign equity markets, sometimes
simultaneously with distribution in the domestic market.
 The “Euro” market (a generic term for international
securities issues originating and being sold anywhere in
the world), was created by the same financial institutions
that had previously created an infrastructure for the
Euronote and Eurobond markets.

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Alternative Instruments
to Source Equity in Global Markets
 One type of directed issue with a long history as a
source of both equity and debt is the private
placement market.
 A private placement is the sale of a security to a
small set of qualified institutional buyers.
 Since the securities are not registered for sale to the
public, investors have typically followed a “buy and
hold” policy.

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Alternative Instruments
to Source Equity in Global Markets
 Private equity funds are usually limited
partnerships of institutional and wealthy
individual investors that raise their capital in the
most liquid capital markets.
 These investors then invest the private equity
fund in mature, family-owned firms located in
emerging markets.
 The investment objective is to help these firms to
restructure and modernize in order to face
increasing competition and the growth of new
technologies.
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Alternative Instruments
to Source Equity in Global Markets
 Strategic alliances are normally formed by firms that
expect to gain synergies from one or more of the
following joint efforts:
 Sharing the cost of developing technology
 Gaining economies of scale or scope
 Financial assistance (lowering of cost of capital
through attractively priced debt or equity
financing)

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