Capital markets:

Meaning:
Capital markets are markets where people, companies, and
governments with more funds than they need (because they save
some of their income) transfer those funds to people, companies, or
governments who have a shortage of funds (because they spend
more than their income). Stock and bond markets are two major
capital markets. Capital markets promote economic efficiency by
channelling money from those who do not have an immediate
productive use for it to those who do.
Capital markets carry out the desirable economic function of
directing capital to productive uses. The savers (governments,
businesses, and people who save some portion of their income)
invest their money in capital markets like stocks and bonds. The
borrowers (governments, businesses, and people who spend more
than their income) borrow the savers' investments that have been
entrusted to the capital markets.
For example, suppose A and B make Rs. 50,000 in one year, but
they only spend Rs.40,000 that year. They can invest the 10,000 their savings - in a mutual fund investing in stocks and bonds all
over the world. They know that making such an investment is
riskier than keeping the 10,000 at home or in a savings account.
But they hope that over the long-term the investment will yield
greater returns than cash holdings or interest on a savings account.
The borrowers in this example are the companies that issued the
stocks or bonds that are part of the mutual fund portfolio. Because
the companies have spending needs that exceeds their income, they
finance their spending needs by issuing securities in the capital
markets.

The Structure of Capital Markets

Primary markets:
The primary market is where new securities (stocks and bonds are
the most common) are issued. The corporation or government
agency that needs funds (the borrower) issues securities to
purchasers in the primary market. Big investment banks assist in
this issuing process. The banks underwrite the securities. That is,
they guarantee a minimum price for a business's securities and sell
them to the public. Since the primary market is limited to issuing
new securities only, it is of lesser importance than the secondary
market.
Secondary market:
The vast majority of capital transactions, take place in the
secondary market. The secondary market includes stock exchanges
(like the New York Stock Exchange and the Tokyo Nikkei), bond
markets, and futures and options markets, among others. All of
these secondary markets deal in the trade of securities.
Securities:
The term "securities" encompasses a broad range of investment
instruments. Investors have essentially two broad categories of
securities available to them:
1. Equity securities (which represent ownership of a part of a
company)
2. Debt securities (which represent a loan from the investor to a
company or government entity).

Equity securities:
Stock is the type of equity security with which most people are
familiar. When investors (savers) buy stock, they become owners
of a "share" of a company's assets and earnings. If a company is
successful, the price that investors are willing to pay for its stock
will often rise and shareholders who bought stock at a lower price
then stand to make a profit. If a company does not do well,
however, its stock may decrease in value and shareholders can lose
money. Stock prices are also subject to both general economic and
industry-specific market factors. In our example, if Carlos and
Anna put their money in stocks, they are buying equity in the
company that issued the stock. Conversely, the company can issue
stock to obtain extra funds. It must then share its cash flows with
the stock purchasers, known as stockholders.
Debt securities:
Savers who purchase debt instruments are creditors. Creditors, or
debt holders, receive future income or assets in return for their
investment. The most common example of a debt instrument is a
bond. When investors buy bonds, they are lending the issuers of
the bonds their money. In return, they will receive interest
payments (usually at a fixed rate) for the life of the bond and
receive the principal when the bond expires. National
governments, local governments, water districts, global, national,
and local companies, and many other types of institutions sell
bonds.

Importance of capital market:

1. The capital market serves as an important source for the
productive use of economys savings. It mobilizes the saving
of the people for further investment and thus avoids their
wastage in unproductive uses.
2. It provides incentives to saving and facilitates capital formation
by offering suitable rates of interest as the price of capital.
3. It provides an avenue for investors, particularly the household
sector to invest in financial assets which are more productive
than physical assets.
4. It facilitates increase in production and productivity in the
economy and thus, enhances the economic welfare of the
society. Thus it facilitates the movement of stream of command
over capital to the point of highest yield towards those who can
apply them productively and profitably to enhance the national
income in the aggregate.
5. The operations of different institutions in the capital market
induce economic growth. They give quantitative and qualitative
directions to the flow of funds and bring about rational
allocation of scarce resources.
6. A healthy capital market consisting of expert intermediaries
promotes stability in values of securities representing capital
funds.
7. Moreover, it serves as an important source for technological up
gradation in the industrial sector by utilizing the funds invested
by the public.
Thus, a capital market serves as an important link between those
who save and those who aspire to invest their savings.

DRAWBACKS OF FOREIGN CAPITAL

1) Foreign capital usually does not produce an efficient because
of the microeconomic distortions and macro economics
instability it generates. In fact it has been found that the
increasing volume of international financial flows has been
associated with a decline in the trade volume due to higher
costs.
2) Another harmful impact of these flows has been to increase
the instability of volatility in the exchange rates, assets
prices, interest rates and the whole economical system of the
recipient countries.
3) The global capital flows reduce the effectiveness of monetary
policy they are associated with the loss of monetary control
at home. The current surge in these flows has created a major
worry for the regulatory authorities about the global money.
4) The cost of foreign is rather difficult to measure and it is
subject to a great variability. Foreign currency borrowings
imply a series of uncertainties due to floating interest and
vary margins. This is an important reason for exercising
utmost restraint while seeking to raise funds abroad.
5) The non economical costs of the foreign capital are also
unaffordable. It is well known but conveniently forgotten that
the foreign capital creates a larger number of very serious
problems of foreign ownership and control dumping of
technology loss of autonomy of domestic policies
dependence hegemony and neo-colonialism.
6) The existence of a contrary belief notwithstanding the foreign
capital is not nor free the costs and harmful effects discussed

above.
CAPITAL MARKET IN INDIA: Coming to Indian context, the term capital market refers to only
stock markets as per the common man's ideology, but the capital
markets have a much broader sense. Where as in global scenario, it
consists of various markets such as:
1. Government securities market
2. Municipal bond market
3. Corporate debt market
4. Stock market
5. Depository receipts market
6. Mortgage and asset-backed securities market
7. Financial derivates market
8. Foreign exchange market
Indias presence in International Markets:
India has made its presence felt in the IFMs only after 1991-92. At
present there are over 50 companies in India, which have accessed
the GDR route for raising finance. The change in situation has
been due to the following factors:
1. Improved perception of Indias economic reforms.
2. Improved export performance.
3. Healthy economic indicator.
4. Inflation at single digit.
5. Improved forex reserves.
6. Improved performance of Indian companies.
7. Improved confidence of FIIs.
Reliance was the first Indian company to issue GDR in 1992. Since
1993, number of Indian companies successfully tapped the global

capital markets & raised capital through GDR or foreign currency

bond issues. Though there was a temporary setback due to Asian
crisis in 1997. Since 1999 even IT majors have stepped the
bandwagon of international markets & raised capital. The average
size of the issue was around 75USD. And the total amount raised
was around USD 6.5billion. India has the distinction of having the
largest number of GDR/ADR issues by any country.
INTERMEDIARIES INVOLVED
CAPITAL MARKET:

IN

INTERNATIONAL

Lead & co-lead managers:

The responsibilities of a lead manager include undertaking due
diligence & preparing the offered document , marketing the issues ,
arrangement & conducting road shows. Mandate is given by the
issuer to the lead manager.
Underwriters:
The lead manager & co managers act as underwriters to the issue ,
taking on the risk of interest rates /markets moving against them
before they have placed bonds/DRs. Lead Managers may also
invite additional investment banks to act as sub-underwriters , thus
forming a larger underwriting group. The underwriters undertake
to subscribe to the unsubscribed portion of the issue .
Agents & Trustees:
These intermediaries are involved in the issue of
bonds/convertibles. The issuer of bonds convertible in association
with the lead manager must appoint paying agents in different
fifnacial centers, who will arrange for the payment of interest &
principal due to investor under the terms of the issue. These paying
agents will be banks.
Lawyers & Auditors:

The lead manager will appoint a prominenet firm of solicitors to

draw up documentation evidencing the bond/DRs issue. The
various draft documents will vetted by the solicictors acting for the
issuer. Many of these documents are prepared in standard forms
with a careful review to the satisfaction of the parties. The legal
advisors will advise the issuer pertaining to the local & foreign
laws.
Similarly, Auditors are required for preparation of the financial
statements, cash flows, and audit reports. The Auditors provide a
comfort letter to the lead manager on the financial health of the
company. They also prepare the financial statement as per GAAP
requirements wherever necessary.
Listing Agents & Stock Exchanges:
The listing Agent helps facilitate the documentation & listing
process for listing on stock exchange & keep file information
regarding the issuer such as Annual reports, depository agreements,
articles of association,etc. The stock exchange reviews the issuers
application for listing of bonds/GDRs & provides comments on
offering circular prior to accepting the security for listing.
Depository Bank:
It is involved only in the issue of GDRs. It is responsible for
issuing the actual GDRs ,disseminating information from the issuer
to the DR holders, paying any dividends or other distributions &
facilitating the exchange of GDRs into underlying shares when
presented for redemption.
Custodian:
The Custodian holds the shares underlying the GDRs on behalf of
the depository &is responsible for collecting rupee dividends on
the underlying shares & repatriation of the same to the depository
in US dollars/foreign currency.

Sources of Capital
There are two sources of capital:
1. Private sources
2. Public sources
Both sources are very important to the economies of the world.
Capital flows result when funds are transferred across borders; the
flows are recorded in the balance of payments account. Read on for
definitions, examples, and trends in capital flows.

1. Private Sources of Capital.

Important sources of private capital are
a. Foreign direct investment
b. Portfolio investment (both debt and equity flows)
Each is defined below.
a. Foreign Direct Investment (FDI):
Foreign direct investment is capital invested by corporations in
countries other than their places of domicile (their home countries).
Direct investment is not nearly as liquid as portfolio investment
and is therefore less volatile. The normal requirement to qualify as
foreign direct investment is for the foreign firm to own at least ten
percent of voting stock.
An example of foreign direct investment is a Japanese company
that starts a joint venture (50-50) in Mexico with a Mexican
company. The Japanese company has a long-term investment in the
assets of the joint venture and not merely a passive investment like

portfolio investors, who can remove their money from a country

almost instantaneously.
FDI or Foreign Direct Investment is any form of investment that
earns interest in enterprises which function outside of the domestic
territory of the investor. FDIs require a business relationship
between a parent company and its foreign subsidiary. Foreign
direct business relationships give rise to multinational
corporations. For an investment to be regarded as an FDI, the
parent firm needs to have at least 10% of the ordinary shares of its
foreign affiliates. The investing firm may also qualify for an FDI if
it owns voting power in a business enterprise operating in a foreign
country.
Types of Foreign Direct Investment: An Overview
FDIs can be broadly classified into two types:
1. Outward FDIs
2. Inward FDIs.
This classification is based on the types of restrictions imposed,
and the various prerequisites required for these investments.
An outward-bound FDI is backed by the government against all
types of associated risks. This form of FDI is subject to tax
incentives as well as disincentives of various forms. Risk coverage
provided to the domestic industries and subsidies granted to the
local firms stand in the way of outward FDIs, which are also
known as direct investments abroad.
Different economic factors encourage inward FDIs. These include
interest loans, tax breaks, grants, subsidies, and the removal of
restrictions and limitations. Factors detrimental to the growth of
FDIs include necessities of differential performance and limitations
related with ownership patterns.

Other categorizations of FDI exist as well. Vertical Foreign Direct

Investment takes place when a multinational corporation owns
some shares of a foreign enterprise, which supplies input for it or
uses the output produced by the MNC.
Horizontal foreign direct investments happen when a
multinational company carries out a similar business operation in
different
nations.
Foreign Direct Investment is guided by different motives. FDIs
that are undertaken to strengthen the existing market structure or
explore the opportunities of new markets can be called marketseeking FDIs.
Resource-seeking FDIs are aimed at factors of production
which have more operational efficiency than those available in the
home country of the investor.
Some foreign direct investments involve the transfer of strategic
assets. FDI activities may also be carried out to ensure
optimization of available opportunities and economies of scale. In
this case, the foreign direct investment is termed as efficiencyseeking.

Benefits of FDIs:
One of the advantages of foreign direct investment is that it
helps in the economic development of the particular country
where the investment is being made.
This is especially applicable for the economically developing
countries. During the decade of the 90s foreign direct
investment was one of the major external sources of financing
for most of the countries that were growing from an economic
perspective.
It was observed during the financial problems of 1997-98 that
the amount of foreign direct investment made in these countries
was pretty steady. The other forms of cash inflows in a country
like debt flows and portfolio equity had suffered major setbacks.
Foreign direct investment also permits the transfer of
technologies. This is done basically in the way of provision of
capital inputs. It also assists in the promotion of the competition
within the local input market of a country.
The countries that get foreign direct investment from another
country can also develop the human capital resources by getting
their employees to receive training on the operations of a
particular business.
Foreign direct investment helps in the creation of new jobs in a
particular country. It also helps in increasing the salaries of the
workers. This enables them to get access to a better lifestyle and
more facilities in life.
Foreign direct investment assists in increasing the income that is
generated through revenues realized through taxation. It also
plays a crucial role in the context of rise in the productivity of
the host countries.

 It also opens up the export window that allows these countries

the opportunity to cash in on their superior technological
resources. It has been possible for the recipient countries to keep
their rates of interest at a lower level.
It becomes easier for the business entities to borrow finance at
lesser rates of interest. The biggest beneficiaries of these
facilities are the small and medium-sized business enterprises.

Disadvantages of Foreign Direct Investment

The disadvantages of foreign direct investment occur mostly in
case of matters related to operation, distribution of the profits
made on the investment and the personnel. The situations in
countries like Ireland, Singapore, Chile and China corroborate
such an opinion.
It is normally the responsibility of the host country to limit the
extent of impact that may be made by the foreign direct
investment. They should be making sure that the entities that
are making the foreign direct investment in their country
adhere to the environmental, governance and social regulations
that have been laid down in the country.
The various disadvantages of foreign direct investment are
understood where the host country has some sort of national
secret something that is not meant to be disclosed to the rest
of the world like defense.
At times it has been observed that certain foreign policies are
adopted that are not appreciated by the workers of the recipient
country.
Foreign direct investment may entail high travel and
communications expenses. The differences of language and
culture could also pose problems in case of foreign direct
investment.
Yet another major disadvantage of foreign direct investment is
that there is a chance that a company may lose out on its
ownership to an overseas company.
At times it has been observed that the governments of the host
country are facing problems with foreign direct investment. It
has less control over the functioning of the company that is

functioning as the wholly owned subsidiary of an overseas

company.
This leads to serious issues. The investor does not have to be
completely obedient to the economic policies of the country
where they have invested the money. At times there have been
adverse effects of foreign direct investment on the balance of
payments of a country.

 Foreign Institutional Investors (FII) :

FII means an entity established or incorporated outside India which
proposes to make investment in India.
An investor or investment fund that is from or registered in a
country outside of the one in which it is currently investing.
Institutional investors include hedge funds, insurance companies,
pension funds and mutual funds.
In countries like India, statutory agencies like SEBI have
prescribed norms to register FIIs and also to regulate such
investments flowing in through FIIs. FEMA norms includes
maintenance of highly rated bonds (collateral) with security
exchange.

Following entities / funds are eligible to get registered as FII:

1. Pension Funds
2. Mutual Funds
3. Insurance Companies
4. Investment Trusts
5. Banks
6. University Funds
7. Endowments
8. Foundations
9. Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad

based funds, are also eligible to be registered as FIIs:
1. Asset Management Companies
2. Institutional Portfolio Managers
3. Trustees
4. Power of Attorney Holders

Parameters on which SEBI decides FII applicants eligibility

a. Applicants track record, professional competence,
financial soundness, experience, general reputation of
fairness and integrity. (The applicant should have been
in existence for at least one year)
b. whether the applicant is registered with and regulated
by an appropriate Foreign Regulatory Authority in the
same capacity in which the application is filed with
SEBI
c. Whether the applicant is a fit & proper person.

b. Portfolio investment: debt flows and equity flows.

Portfolio debt flows result from foreign investors buying domestic
debt securities. A German investor buying bonds in Canada is an
example. Commercial bank lending (loans from private financial
institutions) is also portfolio debt. Portfolio equity flows occur,
similarly, when foreign investors purchase equity securities
domestically. A Japanese investor who purchases stock in the
Brazilian stock market is creating an equity capital flow into
Brazil. ADRs and GDRs also fit into this category.

FDI V/S FII

Motive

Source

Duration

Form
Purpose

FDI
Motive behind FDI is
to acquire controlling
interest in a foreign
entity or set up an
entity with controlling
interest.
FDI investment
comes from MNCs
and corporate so as to
derive benefit of new
market, cheaper
resources (labor),
efficiency and skills,
strategic asset seeking
(oil fields) and time
geography (BPO
Transcriptions)
FDI investment is
more enduring and
has longer time
stability.
FDI generally comes
as subsidiary or a
joint venture.
FDI is made with core
thought of business
philosophy of
diversification,
integration,
consolidation, and
expansion and/or core

FII
Motive behind FII
is to make (capital)
gains from
investments. There
is no intention to
control the entity.
FII investment
come from
investors, mutual
funds, portfolio
management
companies and
corporate with pure
motive of
investment gains.
FII is highly
volatile.
FII comes mainly
through stock
markets.
FIIs sole criteria
and motive is gains
on investments.

business formation.
Calculation of gains is
always prime criteria
but never the sole
criteria.

2. Public Sources of Capital.

Public sources of capital include
a. Official non-concessional loans of both multilateral and bilateral
aid b. Official development assistance (ODA).
Each is discussed in turn below.

a. Official non-concessional loans: multilateral & bilateral aid.

Official non-concessional multilateral aid consists of loans from
the World Bank, regional development banks, and other
intergovernmental agencies such as multilateral organizations. The
term "non-concessional" refers to the fact that these loans are
based on market rates, must be repaid, and are not partly grants. By
contrast, official non-concessional bilateral aid is loans from
governments and their central banks or other agencies. Export
credit agency loans are also included here. "Bilateral" refers to the
fact that the entities providing the funding provide aid only in their
home country.

b. ODA: official grants and concessional loans.

ODA refers in part to official public grants that are legally binding
commitments and provide a specific amount of capital available to
disburse (give out) for which no repayment is required.
Concessional bilateral aid refers to aid from governments, central
banks, and export credit agencies that contains a partial grant
element (25% or more), or partially forgives the loan.

Similarly, concessional multilateral aid contains a partial grant, or

forgiveness of the loan. Multilateral aid comes from the World
Bank, regional development banks and intergovernmental
agencies.

Instruments in capital markets

Instruments in
International Capital
Markets:

International Bond
Market

International Equity
Markets

FOREIGN BOND

GDRs

EURO BOND

ADRs

FCCB

ECB

International Equity Markets:

Funds can be raised in the primary market from the domestic
market as well as from international markets. After the reforms
were initiated in 1991, one of the major policy changes was
allowing Indian companies to raise resources by way of equity
issues in the international markets. Earlier, only debt was allowed
to be raised from international markets. In the early 1990s foreign
exchange reserves had depleted and the countrys rating had been
downgraded. This resulted in a foreign exchange crunch and the
government was unable to meet the import requirement of Indian
companies. Hence allowing companies to tap the equity and bond
market In Europe seemed a more sensible option. This permission
encourages Indian companies to become global.
India companies have raised resources from international capital
markets through
1. Global depository receipts (GDRs) /
2. American Depository Receipts (ADRs)
3. Foreign Currency Convertible Bonds (FCCBs)
4. External Commercial Borrowings (ECBs).
Depository Receipts (GDRs and ADRs)
Global Depositary Receipts mean any instrument in the form of a
depositary receipt or certificate (by whatever name it is called)
created by the Overseas Depositary Bank outside India and issued
to non-resident investors against the issue of ordinary shares or
Foreign Currency Convertible Bonds of issuing company. A GDR
issued in America is an American Depositary Receipt (ADR). Issue
of equity in the form of GDR/ADR is possible only for the few top
notch corporates of the country.

Among the Indian companies, Reliance Industries Limited was the

first company to raise funds through a GDR issue.
Introduction:
ADR stands for American Depository Receipt. Similarly, GDR
stands for Global Depository Receipt. Every publicly traded
company issues shares and these shares are listed and traded on
various stock exchanges. Thus, companies in India issue shares
which are traded on Indian stock exchanges like BSE (The Stock
Exchange, Mumbai), NSE (National Stock Exchange), etc. These
shares are sometimes also listed and traded on foreign stock
exchanges like NYSE (New York Stock Exchange) or NASDAQ
(National Association of Securities Dealers Automated
Quotation).But to list on a foreign stock exchange, the company
has to comply with the policies of those stock exchanges.
Many times, the policies of these exchanges in US or Europe are
much more stringent than the policies of the exchanges in India.
This deters these companies from listing on foreign stock
exchanges directly. But many good companies get listed on these
stock exchanges indirectly using ADRs and GDRs.
Process of issue of ADR/GDR:
1. The company deposits a large number of its shares with a bank
located in the country where it wants to list indirectly. The bank
issues receipts against these shares, each receipt having a fixed
number of shares as an underlying (Usually 2 or 4).
2. These receipts are then sold to the people of this foreign country
(and anyone who are allowed to buy shares in that country).
These receipts are listed on the stock exchanges.

3. They behave exactly like regular stocks their prices fluctuate

depending on their demand and supply, and depending on the
fundamentals of the underlying company.
4. These receipts, which are traded like ordinary stocks, are called
Depository Receipts. Each receipt amounts to a claim on the
predefined number of shares of that company. The issuing bank
acts as a depository for these shares that is, it stores the shares
on behalf of the receipt holders.

1. ADR - American Depositary Receipt

Definitions:
It is a receipt for shares bought in the US of a foreign-based
corporation in an overseas market. The receipt is held by a US
bank, but shareholders are entitled to any dividends and capital
gains.
Security representing the ownership interest in a foreign
company's common stock. ADRs allow foreign shares to be
traded in the United States
Certificates issued by a US depository bank, representing
foreign shares held by the bank, usually by a branch or
correspondent in the country of issue. One ADR may represent a
portion of a foreign share, one share or a bundle of shares of a
foreign corporation.

Meaning:
American Depository Receipts (ADRs) are certificates that
represent shares of a foreign stock owned and issued by a U.S.
bank. The foreign shares are usually held in custody overseas, but
the certificates trade in the U.S. Through this system, a large
number of foreign-based companies are actively traded on one of
the three major U.S. equity markets (the NYSE, AMEX or
Nasdaq).
An American Depositary Receipt (ADR) is how the stock of most
foreign companies trades in United States stock markets. Each
ADR is issued by a U.S. depositary bank and represents one or
more shares of a foreign stock or a fraction of a share. If investors
own an ADR they have the right to obtain the foreign stock it
represents, but U.S. investors usually find it more convenient to

own the ADR. The price of an ADR is often close to the price of
the foreign stock in its home market, adjusted for the ratio of
ADRs to foreign company shares.

Depository banks have numerous responsibilities to the holders of

ADRs and to the non-U.S. company the ADRs represent. The
largest depositary bank is The Bank of New York. Individual
shares of a foreign corporation represented by an ADR are called
American Depositary Shares (ADS).
Pricing of ADR:
The prices of ADRs in the secondary market are, of course,
determined by supply and demand, but the price will not deviate
too much from the price of the underlying stock. If the ADR is
trading at a higher price than the equivalent foreign shares of the
company, then more shares of the company will be bought and
held in the custodian bank, and more ADRs will be created. If the
ADR trades below the equivalent price, then some ADRs will be
canceled, and the corresponding shares of the company will be
released by the custodian bank. This maintains parity between the
price of the ADR and the foreign shares, after accounting for the
currency exchange rate.
Dividend payments:
When dividends are paid, the custodian bank receives it and
withholds any foreign taxes, exchanges it for U.S. dollars, then
sends it to the depositary bank, which then sends it to the investors.
The depositary bank, being a U.S. bank, handles most of the
interaction with the U.S. investors, such as rights offerings, stock
splits, and stock dividends, but sponsored ADR investors may
receive communications, such as financial statements, directly
from the company.

Risks involved:
Although ADR transactions are in U.S. currency, there still is a
currency exchange risk. If the dollar falls, for instance, then the
amount of dividend in U.S. dollars will be reduced, and the market
price of the ADR will drop. There is also political risk because the
ADR still derives its value from the foreign stock, which could be
adversely affected by unfavorable changes in politics or the law of
the country.
How It Works/Example:
Investors can purchase ADRs from broker/dealers. These
broker/dealers in turn can obtain ADRs for their clients in one of
two ways: they can purchase already-issued ADRs on a U.S.
exchange, or they can create new ADRs.
To create an ADR, a U.S.-based broker/dealer purchases shares of
the issuer in question in the issuer's home market. The U.S.
broker/dealer then deposits those shares in a bank in that market.
The bank then issues ADRs representing those shares to the
broker/dealer's custodian or the broker-dealer itself, which can then
apply them to the client's account.
A broker/dealer's decision to create new ADRs is largely based on
its opinion of the availability of the shares, the pricing and market
for the ADRs, and market conditions.
Broker/dealers don't always start the ADR creation process, but
when they do, it is referred to as an unsponsored ADR program
(meaning the foreign company itself has no active role in the
creation of the ADRs). By contrast, foreign companies that wish to
make their shares available to U.S. investors can initiate what are
called sponsored ADR programs. Most ADR programs are

sponsored, as foreign firms often choose to actively create ADRs

in an effort to gain access to American markets.
ADRs are issued and pay dividends in U.S. dollars, making them a
good way for domestic investors to own shares of a foreign
company without the complications of currency conversion.
However, this does not mean ADRs are without currency risk.
Rather, the company pays dividends in its native currency and the
issuing bank distributes those dividends in dollars -- net of
conversion costs and foreign taxes -- to ADR shareholders. When
the exchange rate changes, the value of the dividend changes.
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.
Levels of ADRs
There are three levels of ADRs depending on their adherence to
Generally Accepted Accounting Principles
For a Level I ADR program the receipts issued in the US are
registered with the SEC, but the underlying shares are held in
the depositary bank are not registered with the SEC. They must
partially adhere to Generally Accepted Accounting Principles
(GAAP) used in the USA.
Level II ADRs are those in which both the ADRs and the
underlying shares (that already trade in the foreign companys

domestic market) are registered with the SEC. They must also
partially adhere to the Generally Accepted Accounting
Principles.
Level III ADRs must adhere fully to the GAAP and the
underlying shares held at the Depositary Bank are typically new
shares not those already trading in the foreign companys
domestic currency.

2. GDRs Global Depository Receipts

Definitions:
A Global Depository Receipt or Global Depositary Receipt
(GDR) is a certificate issued by a depository bank, which
purchases shares of foreign company
Global Depository Receipts (GDRs) may be defined as a global
finance vehicle that allows an issuer to raise capital
simultaneously in two or markets through a global offering.
GDRs may be used in public or private markets inside or
outside US. GDR, a negotiable certificate usually represents
companys traded equity/debt. The underlying shares
correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.
Meaning:
A Global Depository Receipt or GDR is a certificate issued by a
depository bank, which purchases shares of foreign companies and
deposits it on the account. GDRs represent ownership of an
underlying number of shares.
Global Depository Receipts facilitate trade of shares, and are
commonly used to invest in companies from developing or
emerging markets - especially RUSSIA.
Prices of GDRs are often close to values of related shares, but they
are traded and settled independently of the underlying share.
Normally 1 GDR = 10 Shares
Several international banks issue GDRs, such as JP Morgan Chase,
Citigroup, Deutsche Bank, Bank of New York. They trade on the
International Order Book (IOB) of the London Stock Exchange.

Listing of the Global Depositary Receipts

The Global Depository Receipts issued may be listed on any of the
Overseas Stock Exchanges, or Over the Counter Exchanges or
through Book Entry Transfer Systems prevalent abroad and such
receipts may be purchased, possessed and freely transferable
Issue structure of the Global Depositary Receipts
(1) A Global Depository Receipt may be issued for one or more
underlying shares or bonds held with the Domestic Custodian
Bank.
(2) The Foreign Currency Convertible Bonds and Global
Depository Receipts may be denominated in any freely convertible
foreign currency.
(3) The ordinary shares underlying the Global Depository Receipts
and the shares issued upon conversion of the Foreign Currency
Convertible Bonds will be denominated only in Indian currency.
(4) The following issue will be decided by the issuing company
with the Lead Manager to the issue, namely:(a) Public or private placement;
(b) Number of Global Depository Receipts to be issued;
(c) The issue price;
(d) The rate of interest payable on Foreign Currency Convertible
Bonds; and
(e) The conversion price, coupon, and the pricing of the conversion
options of the Foreign Currency Convertible Bonds.

(5) There would be no lock-in-period for the Global Depository

Receipts issued under this scheme
History of GDRs in India
India entered the international arena in May 1992, with the first
GDR issue by Reliance Industries Limited, which collected US
b$150 million. This was followed by Grasim Industries offer of
US $90 million in November. Then, the GDR markets witnessed a
lull till 1993-end in the wake of the securities scam and the
consequent fall in the domestic markets, during which time the
only Indian offering came from HINDALCO in July 1993, which
raised US $72 million. The end of 1993 saw a flood of Indian
paper hit the Euro markets with Bombay Dyeing, Mahindra and
Mahindra, SPIC and Sterlite Industries raising funds. This boom
continued till mid-1995, after which a combination of factors
political instability, falling markets, reduced profitability due to a
liquidity crunch - pulled down the GDR market again, till the end
of 1996, during which time, the only notable exception was the US
$370 million offering by the State Bank of India.
Procedure for an Initial Issue of GDR
GDRs are marketed through a syndication process which is the
responsibility of lead managers. The lead manager is involved in
the issue structuring, pricing and obtaining market feedback on the
issue timing. The lead manager also prepares in-depth research and
offer documents for circulation to prospective institutional
investors. He/she also assists in the selection of the foreign
depository, foreign legal advisors and compliance with the listing
requirements of the stock exchanges. The steps in Euro issue
management in chronological order are as follows:
Pre-issue: Discuss strategy, obtain approvals, obtain legal advice.

Prepare tentative plan and size of the issue.

Week 0-4: Nominate lead manager.
Discuss plan and other roles with lead manager/ co-manager.
Depository/bankers/auditors to the issue provide information to the
lead manager for drafting of offer documents and agreements.
Week 5-7: Meetings between lead managers, legal advisors and
auditors and the issuers executives. Preparation of offer circular
completed.
Week 8: Lead manager completes and sends preliminary offer
documents to co-managers and other - underwriters.
Week 9: Road shows, investor meets abroad. Lead managers and is
seller decide to-send different teams to focus on geographical
locations.
Agreement documentation finalized after final discussions between
concerned parties.
Week 10 Launch and syndication by the lead managers and. comanagers. Foreign listing and trading approvals received.
Benefits and Uses of a GDR
Benefits to an Issuing Company
Currently, there are over 1600 Depository Receipt programmes for
companies from over 60 countries. Companies have round that the
establishment of a depository receipt programme offers numerous
advantages. The primary reasons why a company would establish a
depository receipt programme can be divided into. the following
considerations:
Access to capital markets outside the home market to provide a
mechanism for raising capital or as a vehicle for an acquisition.
Enhancement of company visibility by. enhancement of image
of the companys products, services or financial instruments in a
marketplace outside its home country.

 Expanded shareholder base which may increase or stabilize the

share price
May increase local share, price as a result of global demand/
trading through a broadened and a more diversified investor
exposure.
Increase potential liquidity by enlarging the market for the
companys shares.
Adjust share price to trading market comparables through Ratio
Enhance shareholder communications and enable employees to
invest easily in the parent company.

Benefits to an Investor
They facilitate diversification into foreign securities.Trade, clear
and settle in accordance with requirements of the market in
which they trade.
Eliminate custody charges. Can be easily compared to securities
of similar companies.
Permit prompt dividend payments and corporate action
notifications.
If GDRs are exchange listed, investors also benefit from
accessibility of price and trading information and research.
In addition to the benefits GDRs have to offer to the issuing
company and the investor, they are also increasingly being used
by governments to facilitate the process of privatization. They
have also been used to raise capital in the process of acquisition
of other companies by the issuer.
What is the difference between ADR and GDR?
Both ADR and GDR are depository receipts, and represent a
claim on the underlying shares. The only difference is the
location where they are traded.If the depository receipt is traded
in the United States of America (USA), it is called an American
Depository Receipt, or an ADR. If the depository receipt is
traded in a country other than USA, it is called a Global
Depository Receipt, or a GDR. While ADRs are listed on the
US stock exchanges, the GDRs are usually listed on a European
stock exchange.

How can you use an ADR / GDR?

ADRs and GDRs are not for investors in India they can invest
directly in the shares of various Indian companies. But the
ADRs and GDRs are an excellent means of investment for NRIs
and foreign nationals wanting to invest in India. By buying
these, they can invest directly in Indian companies without
going through the hassle of understanding the rules and working
of the Indian financial market since ADRs and GDRs are
traded like any other stock, NRIs and foreigners can buy these
using their regular equity trading accounts!

Which Indian companies have ADRs and / or GDRs?

Some of the best Indian companies have issued ADRs and / or

GDRs. Below is a partial list.
Company

ADR

GDR

Bajaj Auto

No

Yes

Dr. Reddys

Yes

Yes

HDFC Bank

Yes

Yes

Hindalco

No

Yes

ICICI Bank

Yes

Yes

Infosys Technologies

Yes

Yes

ITC

No

Yes

L&T

No

Yes

MTNL

Yes

Yes

Patni Computers

Yes

No

Ranbaxy Laboratories

No

Yes

Tata Motors

Yes

No

State Bank of India

No

Yes

VSNL

Yes

Yes

WIPRO

Yes

Yes

3. FCCB (Foreign Currency Convertible Bonds):

FCCBs are quasi-debt instruments issued by a company to the
investors of some other country denominated in a currency
different from that of domestic country. Principal and interest both
are payable in the foreign currency. They carry an option for the
investor to convert them into ordinary equity shares of the
company at a later stage in accordance with the terms of the issue.
In India FCCB are issued in accordance with guidelines and
regulations framed under FEMA Act by the RBI and schemes
notified by the Ministry of Finance, Government of India. An
FCCB issue by a company is governed by FEM (Transfer or Issue
of any Foreign Security) Regulations, 2004 (hereinafter
Regulations) and Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (through Depository Receipt Mechanism)
Scheme, 1993 (hereinafter the Scheme). The comprehensive
guidelines issued on External Commercial Borrowings (ECB) vide
A.P. (DIR Series) Circular No. 5 dated August 1, 2005 (hereinafter
ECB Guidelines) are also applicable to FCCB issue. In other
words the FCCB are required to be issued in accordance with the
Scheme. They will also have to adhere to the Regulations. Further
they must be meeting the requirements of the ECB guidelines.

4. External Commercial Borrowings (ECBs):

Indian corporate companies are allowed to raise foreign loans for
financing infrastructure projects. The last are used as a residual
source after exhausting external equity as a main source of finance
for large value projects.

International Bond Markets:

What is a bond?
Bonds are debt. They are debt because when an investor buys a
bond they are effectively loaning the bonds issuer a sum of money
and that issuer is incurring a debt. So the issuer or seller of the
bond - is a borrower and the investor - or buyer of the bond - is a
lender.

The price paid for the bond is the money the investor is loaning the
issuer. And, like most other loans, when you buy a bond the
borrower pays you interest for as long as the loan is outstanding
and then at the end of the agreed period of the loan pays you
the loan back.

The Bond Market

The bond market (also known as the debt, credit, or fixed
income market) is a financial market where participants buy and
sell debt securities, usually in the form of bonds. As of 2006, the
size of the international bond market is an estimated $45 trillion, of

which the size of the outstanding U.S. bond market debt was $25.2
trillion. Average daily trading volume in the U.S. bond market
takes place between broker-dealers and large institutions in a
decentralized, over-the-counter (OTC) market. However, a small
number of bonds, primarily corporate, are listed on exchanges.

Market structure:
Bond markets in most countries remain decentralized and lack
common exchanges like stock, future and commodity markets.
This has occurred, in part, because no two bond issues are exactly
alike, and the number of different securities outstanding is far
larger.
However, the New York Stock Exchange (NYSE) is the largest
centralized bond market, representing mostly corporate bonds. The
NYSE migrated from the Automated Bond System (ABS) to the
NYSE Bonds trading system in April 2007 and expects the number
of traded issues to increase from 1000 to 6000.
The bonds can be broadly classified as:
1. Foreign bonds:
These bonds are issued within a particular country and
denominated in the currency of that country, but the issuer is a
non-resident.
Dollar denominated bonds issued in US domestic markets by non
US companies are known as Yankee bonds
Yen denominated bonds issued in Japanese domestic markets by
non Japanese companies are known as Samurai bonds
Pound denominated bonds issued in UK domestic markets by non
UK companies are known as Bulldog bonds
2. Eurobonds:
These are bonds issued outside the country of the currency in
which such bonds are denominated. For instance US dollars

denominated bonds issued in Europe, called as Eurodollar

Bonds.
What is the difference between Eurobonds and foreign bonds?
Eurobonds are bonds which are underwritten by a multinational
syndicate of banks and sold simultaneously in many countries
other than the country of the issuing entity. Foreign bonds are
bonds which are sold in a particular country by a foreign borrower,
and underwritten by a syndicate of members from that country;
foreign bonds are denominated in the currency of that country.
Evolution of euro currency
During 1950s, Russians were earning dollars from the sell of gold
and other commodities and wanted to use them to buy grains and
other products from the west, mainly from the US. However, they
didnt want to keep these dollars on deposits with the banks in
New York, as they were apprehensive that the US government
might freeze the deposits if the cold war intensified. They
approached the banks in Britain and France who accepted these
dollar deposits. These deposits were in Europe, so euro and were
dollar deposits so, EuroDollar deposits. Later on till 1980s, such
deposits were by and large in Europe only. Since 1990, the markets
have expanded geographically and also in volume, but the prefix
Euro has still remained. It strictly and really means offshore and
not necessarily always referred to Europe.
Eurodollar or Eurocurrency refers to bank time deposits in a
currency other than that of the country in which the bank or bank
branch is located. Euro currency market is the market for such
deposits.
Euronotes are notes issued outside the country in whose currency
they are denominated. Euronotes consist of Euro-commercial paper
(ECPs) and Euro-Medium-term notes (EMTNs). Commercial

papers are unsecured short-term promissory notes issued by

finance companies and some industrial companies. EMTNS are
medium-term funds guaranteed by financial institutions with the
short-term commitment by investors. Global bonds are bonds sold
inside as well as outside the country in whose currency they are
denominated. For example, dollar-denominated bonds sold in New
York and Tokyo are called dollar global bonds.
EUROCURRENCY MARKETS:
A Eurocurrency is a dollar or other freely convertible currency
deposited in a bank outside the country of its origin. Thus US
dollars on deposit in London become Eurodollars. The
Eurocurrency market consists of those banks called Euro banksthat accept deposits and make loans in foreign currencies.
The Eurocurrency markets enables investors to hold short-term
claims on commercial banks, which then act as intermediaries to
these deposits into long term claims on final borrowers.
The dominant euro currency is US dollars with dollar weakness
other currency particularly the Deutcshe mark and Swiss Frankincreased in importance. In Eurodollar markets, banks accept
deposits from depositors, mainly corporate depositors. They also
place these Eurodollars to other banks.
For instance, Citibank may accept deposit from a company Alcoa.
Citibank would place this as a deposit to Barclays bank. Barclays
to Chase bank. Chase may ultimately lend it to Unilever group, a
corporate house. Eurocurrency transactions may be classified as
corporate to bank on one hand and bank to another bank on the
other hand.

Short term debt instrument

1.Bankers acceptance BA
This instrument is used to finance domestic as well as international
trade. On completing the transaction, the exporter hands over the
shipping documents and letter of credit LC issued by the
importers bank to its own bank. At the same time, the exporter
draws a draft (or bill) on the importers bank and gets paid the
discounted value of the draft. A bankers acceptance (BA) is
created when the exporters bank presents the draft to the importers
bank which accepts it. This BA may be sold (or discounted) as a
money market instrument or the exporter may keep it as an asset
with himself. Bas are highly standardized negotiable instruments
and are available in varying amounts. They permit importers and
other users to obtain credit on better terms than simple borrowing.
2. Euro commercial paper
Euro commercial paper is a short term Euro note issued by
corporates on a discountto-yield basis. Investor in ECP may be
money market funds, insurances companies, pension funds and
other corporate bodies having short-term cash surpluses. For
investor s, it represents an attractive short-term investment
opportunity, unlike a time deposit with financial institution. For
borrowers, it is a cheap and flexible source of funds, cheaper than
bank loans. As mentioned above, a CP or ECP is a discount
redeemed at face value on maturity. For example, an ECP issued at
$952.4 with a maturity of 180 days will have a face value of
$1,000, if the discount rate is 10 % pa.
3. EURO CERTIFICATE OF DEPOSIT (ECD)
A certificate of deposit is an evidence of a deposit with a bank. CD
is a negotiable or marketable instrument. Unlike a bank term

deposit, a CD can be sold in the secondary market whenever cash

is needed. Who ever is holding it at the time of maturity receives
its face value in addition to the interest due. Euro CDs are issued
by London banks. The interest on floating rate CDs is indexed to
LIBOR and Treasury Bill rate, etc. These instruments may be
issued in sum like $1, 00,000 or more. For fixed rate CDs, usually
there is a single period maturity when principal and interest are
paid.
4. REPURCHASE OBLIGATION ( REPO)
This is a form of short-term borrowing in which the borrower sells
securities to the lender with an agreement to buy them back at a
later date. That is why it is called REPO. The repurchase price and
selling price are the same. But the original seller has to pay interest
while repurchasing the securities. The amount of interest depends
on demandsupply conditions. Repos may be overnight repos or of
longer maturity.

DOCUMENTATION:
The following are the documents generally needed for an euro
issue:
1. Prospectus:
The prospectus is a major document containing all the relevant
information concerning the issues viz investment consideration,
terms & conditions, use of proceeds, capitalization details,
information about the promoters, directors, industry review, share
information etc.. Generally the terms are grouped into financial &
non-financial information, issue particulars & others viz statement
of accounting showing the significant differences between Indian
accounting &
US/UK GAAP. The non financial part includes
the background of the company, promoters, directors, activity, etc..
The issue particulars talks about the issue size, the domestic ruling
price, the number of shares for each GDR etc..
2. Depository Agreement:
This is the agreement between the issuing company & the
overseas depository providing a set of rules for withdrawal of
depositors & for their conversion into shares. Voting rights are also
defined.
3. Underwriting agreement:
The underwriters play the role of assurers as they undertake to
pick up the GDRs at a predetermined price depending on the
market response.
4. Subscription Agreement:
The Lead manager & the syndicated members form a part of the
investors who subscribe to GDRs or bonds as per this agreement.

5. Custodian Agreement:
It is an agreement between the depository & the custodian. The
depository & the custodian determine the process of conversion of
underlying shares into DRs & vice versa.
6. Trust Deed & Paying & Conversion Agreement:
While the trust deed is a standard document which provides for
duties & responsibilities of trustees, this agreement enables the
paying & conversion agency ( performing banking function)
undertaking to service the bonds till conversion.

7. Listing Agreement:
Most of the companies prefer Luxemburg stock exchange for
listing purposes, as the modalities are simplest. The listing agents
have the responsibility of fulfilling the listing requirement of a
chosen stock exchange.
What are some reasons for a company to cross list its shares?
A company hopes to: (1) allow foreign investors to buy their shares
in their home market; (2) increase the share price by taking
advantage of the home countrys rules and regulations; (3) provide
another market to support a new issuance in the foreign market; (4)
establish a presence in that country in the instance that it wishes to
conduct business in that country; (5) increase its visibility to its
customers, creditors, suppliers, and host government; and (6)
compensate local management and employees in the foreign
affiliates.

Types of bond markets:

The Securities Industry and Financial Markets Association

classifies the broader bond market into five specific bond markets.

Corporate
Government & Agency
Municipal
Mortgage Backed, Asset Backed, and Collateralized debt
obligation
Funding

Bond market participants

Bond market participants are similar to participants in most
financial markets and are essentially either buyers (debt issuer) of
funds or sellers (institution) of funds and often both.
Participants include:

Institutional investors;
Governments;
Traders; and
Individuals

Because of the specificity of individual bond issues, and the lack of

liquidity in many smaller issues, the majority of outstanding bonds
are held by institutions like pension funds, banks and mutual funds.
In the United States, approximately 10% of the market is currently
held by private individuals.

Bond market volatility:

For market participants who own a bond, collect the coupon and
hold it to maturity, market volatility is irrelevant; principal and
interest are received according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are
exposed to many risks, most importantly changes in interest rates.
When interest rates increase, the value of existing bonds falls,
since new issues pay a higher yield. Likewise when interest rates
decrease, the value of existing bonds rise since new issues pay a
lower yield. This is the fundamental concept of bond market
volatility: changes in bond prices are inverse to changes in interest
rates. Fluctuating interest rates are part of a country's monetary
policy and bond market volatility is a response to expected
monetary policy and economic changes.

Bond indices:
A number of bond indices exist for the purposes of managing
portfolios and measuring performance, similar to the S&P 500
or Russell Indexes for stocks. The most common American
benchmarks are the Lehman Aggregate, Citigroup BIG and
Merrill Lynch Domestic Master. Most indices are parts of
families of broader indices that can be used to measure global

bond portfolios, or may be further subdivided by maturity

and/or sector for managing specialized portfolio Issuing
bonds

Bonds are issued by public authorities, credit institutions,

companies and supranational institutions in the primary markets.
The most common process of issuing bonds is through
underwriting. In underwriting, one or more securities firms or
banks, forming a syndicate, buy an entire issue of bonds from an
issuer and re-sell them to investors. Government bonds are
typically auctioned.

Features of bonds:
The most important features of a bond are:
1. Nominal, principal or face amount:
The amount on which the issuer pays interest and which has to be
repaid at the end.
2. Issue price
The price at which investors buy the bonds when they are first
issued, typically $1,000.00. The net proceeds that the issuer
receives are calculated as the issue price, less issuance fees, times
the nominal amount.
3. Maturity date
The date on which the issuer has to repay the nominal amount. As
long as all payments have been made, the issuer has no more
obligations to the bond holders after the maturity date.

4. Tenure
The length of time until the maturity date is often referred to as the
term or tenure or maturity of a bond. The maturity can be any
length of time, although debt securities with a term of less than one
year are generally designated money market instruments rather
than bonds. Most bonds have a term of up to thirty years. Some
bonds have been issued with maturities of up to one hundred years,
and some even do not mature at all. In early 2005, a market
developed in euros for bonds with a maturity of fifty years. In the
market for U.S. Treasury securities, there are three groups of bond
maturities:

 short term (bills): maturities up to one year;

medium term (notes): maturities between one and ten years;
Long term (bonds): maturities greater than ten years.

5. coupon
The interest rate that the issuer pays to the bond holders. Usually
this rate is fixed throughout the life of the bond. It can also vary
with a money market index, such as LIBOR,(London Inter Bank
Offered Rate) or it can be even more exotic. The name coupon
originates from the fact that in the past, physical bonds were issued
had coupons attached to them. On coupon dates the bond holder
would give the coupon to a bank in exchange for the interest
payment.
6. coupon dates
The dates on which the issuer pays the coupon to the bond holders.
In the U.S., most bonds are semi-annual, which means that they
pay a coupon every six months. In Europe, most bonds are annual
and pay only one coupon a year.
7. Indentures and Covenants
An indenture is a formal debt agreement that establishes the terms
of a bond issue, while covenants are the clauses of such an
agreement. Covenants specify the rights of bondholders and the
duties of issuers, such as actions that the issuer is obligated to
perform or is prohibited from performing. In the U.S., federal and
state securities and commercial laws apply to the enforcement of
these agreements, which are construed by courts as contracts
between issuers and bondholders. The terms may be changed only
with great difficulty while the bonds are outstanding, with
amendments to the governing document generally requiring
approval by a majority (or super-majority) vote of the bondholders.

8. Optionality:
A bond may contain an embedded option; that is, it grants optionlike features to the holder or the issuer:
9. Callability:
Some bonds give the issuer the right to repay the bond before the
maturity date on the call dates; see call option. These bonds are
referred to as callable bonds. Most callable bonds allow the issuer
to repay the bond at par. With some bonds, the issuer has to pay a
premium, the so called call premium. This is mainly the case for
high-yield bonds. These have very strict covenants, restricting the
issuer in its operations. To be free from these covenants, the issuer
can repay the bonds early, but only at a high cost.
10. Puttability
Some bonds give the holder the right to force the issuer to repay
the bond before the maturity date on the put dates;
("Puttable" denotes an embedded put option; "Puttable" denotes
that it may be putted.)
11. Call dates and put dates
The dates on which callable and Puttable bonds can be redeemed
early. There are four main categories.
A Bermudan callable has several call dates, usually coinciding
with coupon dates.
A European callable has only one call date. This is a special
case of a Bermudan callable.
An American callable can be called at any time until the
maturity date.

 A death put is an optional redemption feature on a debt

instrument allowing the beneficiary of the estate of the deceased
to put (sell) the bond (back to the issuer) in the event of the
beneficiary's death or legal incapacitation. Also known as a
"survivor's option".
Sinking fund provision of the corporate bond indenture requires
a certain portion of the issue to be retired periodically. The
entire bond issue can be liquidated by the maturity date. If that
is not the case, then the remainder is called balloon maturity.
Issuers may either pay to trustees, which in turn call randomly
selected bonds in the issue, or, alternatively, purchase bonds in
open market, then return them to trustees.
Types of bonds:
1. Fixed rate bonds have a coupon that remains constant
throughout the life of the bond.
2. Floating rate notes (FRN's) have a coupon that is linked to an
Index. Common Indices include: money market indices, such as
LIBOR or Euribor, or CPI (the Consumer Price Index). Coupon
examples: three month USD LIBOR + 0.20%, or twelve month
CPI + 1.50%. FRN coupons reset periodically, typically every one
or three months. In theory, any Index could be used as the basis for
the coupon of an FRN, so long as the issuer and the buyer can
agree to terms.
3. High yield bonds are bonds that are rated below investment
grade by the credit rating agencies. As these bonds are more risky
than investment grade bonds, investors expect to earn a higher
yield. These bonds are also called junk bonds.
4. Zero coupon bonds do not pay any interest. They are issued at a
substantial discount from par value. The bond holder receives the
full principal amount on the redemption date.

An example of zero coupon bonds are Series E savings bonds

issued by the U.S. government. Zero coupon bonds may be created
from fixed rate bonds by a financial institutions separating
"stripping off" the coupons from the principal. In other words, the
separated coupons and the final principal payment of the bond are
allowed to trade independently.
5. Inflation linked bonds: in which the principal amount is indexed
to inflation. The interest rate is lower than for fixed rate bonds with
a comparable maturity. However, as the principal amount grows,
the payments increase with inflation. The government of the
United Kingdom was the first to issue inflation linked Gilts in the
1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds
are examples of inflation linked bonds issued by the U.S.
government.
Other indexed bonds, for example equity linked notes and bonds
indexed on a business indicator (income, added value) or on a
country's GDP.
6. Asset-backed securities are bonds whose interest and principal
payments are backed by underlying cash flows from other assets.
Examples of asset-backed securities are mortgage-backed
securities (MBS's), collateralized mortgage obligations (CMOs)
and collateralized debt obligations (CDOs).
7. Subordinated bonds are those that have a lower priority than
other bonds of the issuer in case of liquidation. In case of
bankruptcy, there is a hierarchy of creditors. First the liquidator is
paid, then government taxes, etc. The first bond holders in line to
be paid are those holding what is called senior bonds. After they
have been paid, the subordinated bond holders are paid. As a result,
the risk is higher. Therefore, subordinated bonds usually have a
lower credit rating than senior bonds. The main examples of
subordinated bonds can be found in bonds issued by banks, and
asset-backed securities.

8. Perpetual bonds are also often called perpetuities. They have no

maturity date. The most famous of these are the UK Consol, which
are also known as Treasury Annuities or Undated Treasuries. Some
of these were issued back in 1888 and still trade today. Some ultra
long-term bonds (sometimes a bond can last centuries: West Shore
Railroad issued a bond which matures in 2361 (i.e. 24th century))
are sometimes viewed as perpetuities from a financial point of
view, with the current value of principal near zero.
9. Bearer bond is an official certificate issued without a named
holder. In other words, the person who has the paper certificate can
claim the value of the bond. Often they are registered by a number
to prevent counterfeiting, but may be traded like cash. Bearer
bonds are very risky because they can be lost or stolen. Especially
after federal income tax began in the United States, bearer bonds
were seen as an opportunity to conceal income or assets. U.S.
corporations stopped issuing bearer bonds in the 1960s, the U.S.
Treasury stopped in 1982, and state and local tax-exempt bearer
bonds were prohibited in 1983.
10. Bear bond, often confused with Bearer bond, is a bond issued
in Russian roubles by a Russian entity in the Russian market.
11. Registered bond is a bond whose ownership (and any
subsequent purchaser) is recorded by the issuer, or by a transfer
agent. It is the alternative to a Bearer bond. Interest payments,
and the principal upon maturity, are sent to the registered
owner.
12. Municipal bond is a bond issued by a state, U.S. Territory, city,
local government, or their agencies. Interest income received by
holders of municipal bonds is often exempt from the federal
income tax and from the income tax of the state in which they are
issued, although municipal bonds issued for certain purposes may
not be tax exempt.

13. Book-entry bond is a bond that does not have a paper

certificate. As physically processing paper bonds and interest
coupons became more expensive, issuers (and banks that used to
collect coupon interest for depositors) have tried to discourage
their use. Some book-entry bond issues do not offer the option of a
paper certificate, even to investors who prefer them.
14. Lottery bond is a bond issued by a state, usually a European
state. Interest is paid like a traditional fixed rate bond, but the
issuer will redeem randomly selected individual bonds within
the issue according to a schedule. Some of these redemptions
will be for a higher value than the face value of the bond.
15. War bond is a bond issued by a country to fund a war.
16. Convertible bond lets a bondholder exchange a bond to a
number of shares of the issuer's common stock.
17. Exchangeable bond allows for exchange to shares of a
corporation other than the issuer.

Eligibility for issue of Convertible bonds or ordinary shares of

issuing company
a. An issuing company desirous of raising foreign funds by
issuing Foreign Currency Convertible Bonds or ordinary
shares for equity issues through Global Depositary Receipt is
required to obtain prior permission of the Department of
Economic Affairs, Ministry of Finance, Government of India.
b. An issuing company seeking permission under subparagraph (1) shall have a consistent track record of good
performance (financial or otherwise) for a minimum period
of three years, on the basis of which an approval for
finalising the issue structure would be issued to the company
by the Department of Economic Affairs, Ministry of Finance.
c. On the completion of finalisation of issue structure in
consultation with the Lead Manager to the issue, the issuing
company shall obtain the final approval for proceeding ahead
with the issue from the Department of Economic Affairs.

Government Bonds
In general, fixed-income securities are classified according to the
length of time before maturity. These are the three main categories:
Bills - debt securities maturing in less than one year.
Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 years.

Corporate Bonds

A company can issue bonds just as it can issue stock. Large

corporations have a lot of flexibility as to how much debt they can
issue: the limit is whatever the market will bear. Generally, a shortterm corporate bond is less than five years; intermediate is five to
12 years, and long term is over 12 years. Corporate bonds are
characterized by higher yields because there is a higher risk of a
company defaulting than a government. The company's credit
quality is very important: the higher the quality, the lower the
interest rate the investor receives.
Other variations on corporate bonds include convertible bonds,
which the holder can convert into stock, and callable bonds, which
allow the company to redeem an issue prior to maturity.

SYNDICATED LENDING:
Syndicated lending is a form of lending in which a group of
lenders collectively extend a loan to a single borrower. The group
of lenders is called a syndicate. The loan is called a syndicated
loan, in contrast to a bilateral loan, which is a loan made by a
single lender to a single borrower. Syndicated loans are routinely
made to corporations, sovereigns or other government bodies.
They are also used in project finance and to fund leveraged
buyouts.
Syndicated loans are primarily originated by banks, but a variety of
institutional investors participate in syndications. These include
mutual funds, collateralized loan obligations, insurance companies,
finance companies, pension plans, and hedge funds.
Syndicate members play different roles. Some just lend money.
Others also facilitate the process. It is common to speak of an
arranger, lead bank or lead lender that originates the loan, forms
the syndicate and processes payments.
Most syndicated loans are floaters, paying a spread over Libor, but
other structures abound. Fixed-rate term loans, revolving lines of
credit and even letters of credit are syndicated. Loans may be
structured specifically to appeal to institutional investors.
Players in the syndication process:
1. Arranger / lead manager
The bank that:
Is awarded the mandate by the prospective borrower, and
Is responsible for placing the syndicated loan with other
banks and ensuring that the syndication is fully subscribed.

 arrangement fee
reputation risk
2. Underwriting bank
The bank that
Commits to supplying the funds to the borrwoer -if necessary
from its own resources if the loan is not fully subscribed.
May be the arranging bank or another bank.
Not all syndicated loans are fully underwritten.
Risk: the loan may not be fully subscribed.

3. Participating bank
The bank that participates in the syndication by lending a
portion of the total amount required.
Interest and participation fee.
Risks: Borrower credit risk (as normal loans).
A participating bank may be led into passive approval and
complacency
4. Facility manager / agent
The one that takes care of the administrative arrangements
over the term of the loan (e.g. disbursements, repayments,
compliance).
Acts for the banks.
May be the arranging/underwriting bank.
In larger syndications co-arranger and co-manager may be
used.

Benefits to the borrower

Deals with a single bank.
Quicker and simpler than other ways of raising capital (e.g.
issue of bonds or equity).

Benefits to the lead banks

Good arrangement and other fees can be earned without
committing capital.
Enhancement of banks reputation.
Enhancement of banks relationship with the client.

Benefits to the participating banks

Access to lending opportunities with low marketing costs.
Opportunities to participate in future syndications.
In case the borrower runs into difficulties, participant banks
have equal treatment.
Participant banks do not find themselves at a disadvantage
vis--vis a dominant bank or one with high leverage over the
client.

Stages in syndication

1. Pre-mandate phase
The prospective borrower may liaise with a single bank or it
may invite competitive bids from a number of banks.
the lead bank needs to:
Identify the needs of the borrower.
Design an appropriate loan structure.
Develop a persuasive credit proposal.
Obtain internal approval.
Milestone: award of the mandate.
2. Placing the loan
The lead bank can start to sell the loan in the marketplace.
The lead bank needs to:
Prepare an information memorandum
Prepare a term sheet
Prepare legal documentation
Approach selected banks and invite participation
Negotiations with the borrower may be needed if prospective
participants raise concerns.
Milestone: closing of the syndication, including signing.

3. Post-closure phase
The agent now handles the day-to-day running of the loan
facility.

Pricing

fees for front-end activities

Arrangement and underwriting fees.
Interest (margin over base rate).
Commitment fees for available but undrawn funds.
Agency fees -payable for administrative activity during the
term of the loan.

Examples:
Aphrodite hills -cyp30m
Arranger/agent: HSBC
Take over of the shares of Hilton hotel by Louis group
-cyp16m -arranger/agent: hsbc.
Take over of Rocl shares by Louis -usd30m
Agent/arranger: hsbc.
acquisition of the vessel emerald by Louis -usd20m
Arranger: hsbc
Agent: societe general
Construction of Elysium beach resort -arranger/agent: Cyprus
popular bank.
Syndicated loans, like most loans, pose credit risk for the lenders.
This can be extreme, as with some leveraged buyouts or loans to
some sovereigns. Credit risk is assessed as with any other bank
loan. Lenders rely on detailed financial information disclosed by
the borrower. As syndicated loans are bank loans, they have higher
seniority in insolvency than bonds.

GAAP:
"GAAP" is an acronym that stands for Generally Accepted
Accounting Principles. GAAP is a framework of accounting
standards, rules and procedures, defined by the professional
accounting industry, which has been adopted by nearly all publicly
traded U.S. companies.
GAAP principles, which are updated regularly to reflect the latest
accounting methodologies, are the definitive source of accounting
guidelines that companies rely on when preparing their financial
statements. The standards are established and administered by the
American Institute of Certified Public Accountants (AICPA) and
the Financial Accounting Standards Board (FASB).
GAAP rules and procedures are what govern corporate accountants
when they present the details of a company's financial operations.
These details can be found in such places as quarterly balance
sheets or income statements, 10-Q filings, or annual reports.
Examples of GAAP measures include net earnings, gross income,
and net cash provided by operating activities.
Why it Matters:
Investors should always review a company's GAAP financial
results, as the standardized methodology provides a reliable means
of comparing financial results from industry to industry and from
year to year. However, GAAP rules are sometimes subject to
different interpretations, and unscrupulous companies often find a
way to bend or manipulate them to their advantage. Furthermore, it
is commonplace even for accurate results where GAAP principles
were conservatively applied for financial results to be restated at
some point in the future.

Many companies, for example, often use earnings before interest,

taxes, depreciation, and amortization (EBITDA) as a core measure
of performance. However, non-GAAP financial measures exclude
operating and statistical measures such as employee counts and
ratios calculated using numbers calculated in accordance with
GAAP.
The SEC requires companies to reconcile their non-GAAP
financial measures with the closest comparable GAAP measure.
Because they can vary widely from firm to firm, non-GAAP
calculations do not always provide an apples-to-apples
comparison. For this reason, these alternative measures are not
meant to replace GAAP, but should instead be used in conjunction
with it.

FUTURE PROSPECTS FOR CAPITAL INFLOWS

It has been argued that certain factors- the large size of the Indian
market, the intrinsic strength of Indian corporate and India well
established and well functioning stock exchanges are conductive to
a substantial inflow or foreign equity buy not foreign debt. The
success of some Indian companies to float GDRs and euro
convertibles during the early 1990s is said to indicate this good
potential.
There is a need to be circumspect in respect of such sanguine
prognostications. The question really is whether the dramatic levels
of the total foreign capital will be available to India? It may not be
in the countrys interest if say more equity becomes available but
the inflow of bank loans and development. Assistance declines.
The trends described above should make it clear that the total
availability of foreign capital is likely to be strictly limited.

Conclusion
1. Foreign capital is said to fill the domestic saving gap to reduce
the foreign exchange barrier and to provide superior physical and
managerial technology.
2. The major forms of foreign are bilateral and multilateral
(official) concessional assistance and private commercial debt and
equity capital.
3. Eurodollars are deposits which are US dollar denominated and
held at banks located outside the U.S
4. The bonds floated in the domestic market and domestic currency
by a non resident entity is called foreign bonds.
5. GDRs are essentially equity instruments issued abroad b the
overseas depository Bank on behalf of the domestic companies
against the equity shares of the latter.

Key Terms and Concepts

Eurocurrency market consists of banks that accept deposits and
make loans in foreign currencies outside the country of issue.
Eurodollar could be broadly defined as dollar-denominated
deposits in banks all over the world except the United States.
Certificate of deposit (CD) is a negotiable instrument issued by a
bank.
Revolving credit is a confirmed line of credit beyond one year.
London interbank offered rate (LIBOR) is British Banker's
Association average of interbank offered rates for dollar deposits in
the London market based on quotations at 16 major banks.
Euro interbank offered rate (EURIBOR) is European Banking
Federation-sponsored rate among 57 euro-zone banks.
Euronote issue facilities (EIF) are notes issued outside the
country in whose currency they are denominated.
Euronotes are short-term debt instruments underwritten by a
group of international banks called a "facility".
Euro commercial paper (ECP) are unsecured short-term
promissory notes sold by finance companies and certain industrial
companies.
Euro-medium-term notes (EMTNs) are medium-term funds
guaranteed by financial institutions with the short-term
commitment by investors.

Contagion, as used in this chapter, is where problems at one bank

affect other banks in the market.
Bank for International Settlements is a bank in Switzerland that
facilitates transactions among central banks.
Federal funds are reserves traded among US commercial banks
for overnight use.
Universal bank is one in which the financial corporation not only
sells a full scope of financial services but also owns significant
equity stakes in institutional investors.
Keirutsu is a Japanese word that stands for a financially linked
group of companies that play a significant role in the country's
economy.
Asian Currency Units (ACUs) is a section within a bank that has
authority and separate accountability for Asian currency market
operations.
International capital market consists of the international bond
market and the international equity market.
International bonds are those bonds that are initially sold outside
the country of the borrower.
Foreign bonds are bonds sold in a particular national market by a
foreign borrower, underwritten by a syndicate of brokers from that
country, and denominated in the currency of that country.
Eurobonds are bonds underwritten by an international syndicate
of brokers and sold simultaneously in many countries other than
the country of the issuing entity.

Global bonds are bonds sold inside as well as outside the country
in whose currency they are denominated.
European Currency Unit (ECU) was a weighted value of a
basket of 12 European Community currencies and the cornerstone
of the European Monetary System; the euro replaced the ECU as a
common currency for the European Union in January 1999.
Currency-option bonds are bonds whose holders are allowed to
receive their interest income in the currency of their option from
among two or three predetermined currencies at a predetermined
exchange rate.
Currency-cocktail bonds are those bonds denominated in a
standard "currency basket" of several different currencies.
Amortization method refers to the retirement of a long-term debt
by making a set of equal periodic payments.
Warrant is an option to buy a stated number of common shares at
a stated price during a prescribed period.
Zero-coupon bonds provide all of the cash payment (interest and
principal) when they mature.
Primary market is a market where the sale of new common stock
by corporations to initial investors occurs.
Secondary market is a market where the previously issued
common stock is traded between investors.
Privatization is a situation in which government-owned assets are
sold to private individuals or groups.

BIBLOGRAPHY
INTERNATIONAL BANKING K VISWANATHAN
FINANCIAL MARKETS AND INSTRUMENTS L M BHOLE
INTERNATIONAL FINANCE APTE
FINANCIAL MARKETS AND SERVICES GORDAN
NATRAJAN
WEBLOGRAPHY:
GOOGLE.COM
IMF.COM
YAHOO.COM
ANSWERS.COM

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