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

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 shares

Level I

Level II (listed)

Level 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 LaunchEuro-Equity Syndication - intermediariesSegmented Syndication - geographically

targeted Marketing

Lead manager & advertising agenciesBack-up material Road shows - future profitability, growth

prospectsFace-to-face presentations - financial

centres

Pricing and Closing Underwriters response Book-runner keeps the book open - 1to2

weeks Fix 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 & Share’s 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

Economy’s Perspective

Coupling of global economies

Risks Political Risk  Exchange Rate Risk Inflationary Risk 

Impact on Company’s Valuation – Forex exposure

Economic Perspective

BOP’s Position of the country

Case Study – Infosys ADR

Name Ticker CusipUnderlying Sedol Ratio Exchange Depositary Region

Country Sector

DR REDDYS LABORATORIES LTD RDY 256135203 6410959 1 : 1 NYSE JPM Emrg. Asia India Pharmaceuticals

HDFC BANK LTD HDB 40415F101 6100131 1 : 3 NYSE JPM Emrg. Asia India Banks

ICICI BANK LTD IBN 45104G104 6100368 1 : 2 NYSE DB Emrg. Asia India Banks

INFOSYS TECHNOLOGIES LTD INFY 456788108 6205122 1 : 1 NASDAQ DB Emrg. Asia India Software

MAHANAGAR TELEPHONE NIGAM MTE 559778402 6117807 1 : 2 NYSE BNY Emrg. Asia India

Telecommunications

PATNI COMPUTER SYSTEMS LIMITED PTI 703248203 6734745 1 : 2 NYSE BNY Emrg. Asia India SemiconductorsREDIFF.COM INDIA LTD REDF 757479100 1 : 0.5 NASDAQ CIT Emrg. Asia India InternetSATYAM COMPUTER SERVICES LTD SAY 804098101 6241858 1 : 2 NYSE CIT Emrg. Asia India Software

SIFY LTD SIFY 82655M107 B05DZX1 1 : 1 NASDAQ CIT Emrg. Asia India InternetSTERLITE INDUSTRIES INDIA LTD SLT 859737207 B13TC37 1 : 1 NYSE CIT Emrg. Asia India

Metal Fabricate/Hardware

TATA COMMUNICATIONS LTD TCL 876564105 6114745 1 : 2 NYSE BNY Emrg. Asia India

Telecommunications

TATA MOTORS LTD TTM 876568502 6101509 1 : 1 NYSE CIT Emrg. Asia IndiaAuto Manufacturers

WIPRO LTD WIT 97651M109 6206051 1 : 1 NYSE JPM Emrg. Asia India Software

WNS HOLDINGS LTD WNS 92932M101 1 : 1 NYSE DB Emrg. Asia IndiaCommercial Services

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 US $294m – July 2003o US $1.07b – June 2005o 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. BankAmerica Robertson Stephens of San

Francisco2. Brown of New York

Details of ADR issue

ADR issue expenses:

Rs.Legal and accounting fees 1,28,26,437Printing charges 77,03,653TOTAL 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 FloatPrimary Issue – 11 Mar 1999 3%Secondary Issue – July 2003 9%Secondary Issue – June 2005 14%Secondary Issue – Nov 2006 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 end‐use restrictions on GDR/ADR issue proceeds – except ban on investment in real estate and stock markets

Swap or exchange of shares of an Indian CompanyIndian 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 NormsAmendments in May 1998 Three Year Track Record required for ADR/GDR

issue Unlisted co. with 3yr’s 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 RegulationsIssuers 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 NRI’s and FII’s 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 issuer’s home nation• Issuer’s• 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 BondsA bulldog bond is a sterling bond whose issuer is not

British• Usually issued to acquire a revenue stream or assets

in sterling

Samurai BondsA Yen-denominated bond issued in Tokyo by a non-

Japanese 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%

Purpose: Capex plan of Rs.6000 Refinancing loan taken for Daewoo commercial plant

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 Company’s 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