MODULE –III

INTERNATIONAL FINANCIAL SYSTEM

Introduction to International Financial system

A financial system consists of systematically important financial institutions, their customers stake
holders and other financial regulators. The importance of financial institutions that operate by
design at an international or multinational level. The International financial system is the
worldwide framework of legal requirements, institutions and both formal and informal economic
actors that together facilitate international flow of financial capital for purposes of investment and
trade facing. The system has evolved substantially since its emergence in the late 19 th century
during the first modern wave of economic globalization , marked by the establishment of the
central banks, multilateral treaties and of intergovernmental organizations aimed at improving the
transparency , regulations, effectiveness of international markets.
Evolution of international
Emergence of financial globalization (1870-1914) : The world experienced substantial changes
prior to 1914 which created an environment favourable to an increase in and development of
international financial centres. Principle among such changes were unprecedented growth in capital
flows, rapid financial centre integration resulting from these capital flows and faster
communication. Before 1870, London and Paris existed as the world’s only prominent financial
centres. Berlin and New York soon were rose to eminence on par with London & Paris. An array of
smaller financial centres became important as they found market niches, such as Amsterdam,
Brussels, Zurich & Geneva. London remained the leading international financial center in the four
decades leading up to World War I
Birth of the US Federal Reserve System : the United States congress passed the Federal Reserve
Act in 1913, giving rise o the Federal Reserve System.
Interwar period (1915-1944) : economist have referred to the onset of World War I as the end of
an age of innocence for foreign exchange markets, as it was the first geopolitical conflict to have a
destabilizing and paralyzing impact. The United Kingdom declared war on Germany on August 4,
1914 following Germany’s invasion of France and Belgium. In the weeks leading up to the UK’s
declaration of war, the foreign exchange market in London was the first to exhibit signs of distress.
European tensions & increasing political uncertainty motivated investors to chase liquidity,
prompting commercial banks to begin borrowing heavily from London’s discount market.
Rise of the Bretton Woods financial order1945 : as the inception of the United Nations as an
intergovernmental entity slowly began formalizing in 1944,delegates from 44 of its early member
states met at a hotel in Bretton Woods, New Hampshire for the United Nations Monetary and
Financial conference, now commonly referred to as the Bretton Woods conference.
General Agreement on Tariffs and Trade 1947 : in 1947 , 23 countries concluded the General
Agreement on Tariffs and Trade (GATT) at a UN conference in Geneva. Delegates intended for the

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agreement to suffice in the interim while member states would negotiate and ratify the creation of a
UN body to be known as the International Trade Organization(ITO)
Birth of the European Monetary Union : in February 1992, the European Union countries signed
the Maastricht Treaty which outlined a three stage plan to accelerate progress toward an Economic
and Monetary Union(EMU).
Birth of the World Trade Organization : the Uruguay Round of GATT multilateral trade
negotiations took place from 986 to 994, with 123 nations becoming party to the series of
agreements achieved throughout the negotiations. Among the achievements were trade
liberalization in agricultural goods & textiles , the General Agreement on Trade in Services and
agreements on intellectual property rights issues. One of the key manifestations of this round of
negotiation was the Marrakech Agreement signed in April 1994, which established the World
Trade Organization(WTO).
International Financial Institutions: The international financial institutions are financial
institutions that have been established by more than one country and hence are subjects of
international law. Their owners or shareholders are generally national governments , although other
international institutions & organizations occasionally figure as shareholders .The most prominent
IFIs are creations of multiple nations , although some bilateral financial institutions exist and are
technically IFIs.
Meaning of International Financial System
The global financial system is the world wide frame work of legal agreements , institutions and
both formal & informal economic actors that together facilitate international flows of financial
capital for purpose of investment and trade financing .
Difference between International Monetary System and International Financial System

International monetary system International financial system

It constitutes an integrated set of money flows &It constitutes the full range of interest and return
& related governance institutions that establishbearing assets , bank & nonbank financial
the quantities of money, the means forinstitutions, financial markets that trade and
supporting currency requirements & the basisdetermine the prices of these assets , and the
for exchange among currencies in order to meetnonmarket activities through which the
payments obligations within &across countries. exchange of financial assets take place.

Central banks, international financial institutionsPrivate equity transactions, private equity

,commercial banks& various types of money/hedge fund joint ventures, leverage buyouts
market funds along with open markets forwhether bank financed or not etc are the best
currency and depending on institutionalexample for the international financial system.
structure, government bonds are all part of the
international monetary system.

Money is used as unit of account or a mediumThe IFS lies at the heart of the global credit
of exchange to support and foster the exchangecreation and allocation process.
of goods & services and capital flows within
and across countries.

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IMS events are often about the availability ofThe IFS depends on the effective functioning &
liquidity prudent management of the IMS and the ready
availability of currencies to support the payment
system.

IMS events can be resolved primarily throughIFS encompasses the IMS but extends in
central banks action and common agreement. function and complexity well beyond the IMS

IMS calibrate values and advance the exchangeIFS crises are more complex & far reaching .
of financial assets and to foster the developmentthey can involve regulatory & reporting
of financial markets. changes, they have significant economic effects.

Elements/components of financial system

A FINANCIAL INSTITUTION :
Financial institutions are the intermediaries that mobilise savings & facilitate the allocation of
funds in an efficient manner. Financial institutions can be classified as banking and non banking
financial institutions. Banking institutions are creators and purveyors of credit while non
banking financial institutions are purveyors of credit.
B FINANCIAL INSTRUMENTS :
A financial instrument is a tradable asset of any kind either cash , evidence of an ownership
interest in an entity or a contractual right to receive or deliver cash or another financial
instrument.
C FINANCIAL SERVICES :
Financial services are the economic services provided by the finance industry which
encompasses a broad range of organizations that manage money, including credit unions, banks,
credit and companies , insurance companies ,accountancy companies , consumer finance
companies ,stock brokerages , investment funds and some government sponsored enterprises.
D FINANCIAL MARKETS :
Financial markets are those which deals in financial assets and credit instruments like currency,
cheques, bills, bonds, bank deposits, hundies etc. The markets also provides a facility in which
their demands & requirements interact to set a price for such claims.
Functions of financial markets
 Growth in the income : financial markets allow lenders earn dividend on their surplus
investable funds, thus contributing to the growth in their income.
 Transfer of resources : financial markets facilitate the transfer of resources form one
person to another.
 Productive usage : financial markets allows for the productive use of the funds used
in financial system thus enhancing the income and the gross national production.
 Capital formation : financial markets provides a channel through which new savings
flow to aid capital formation of a country.

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  Price discovery : financial markets allow for the determination of the price of the
financial asset through the interaction of different set pf participants.
 Sale mechanism : financial markets provide a mechanism for selling of a financial
asset by an investor so as to offer the benefits of marketability and liquidity of such
assets.
 Information availability : the information generated in financial markets is useful to
various parties taking part in the financial market.
KINDS OF FINANCIAL MARKETS
A CAPITAL MARKET :
Capital market is a place where the medium and long term financial needs of business and other
undertakings are met by financial institutions which supply medium and long term resources to
borrowers. These are financial markets for the buying and selling of long term debt or equity
backed securities.
Features of the capital market
1 it deals in long & medium term funds.
2 it consists of primary market, secondary market and special financial institutions.
3 it covers both individual and institutional investors.
4 it makes funds available to industrial and commercial undertakings.
Functions of capital market
 Mobilization of savings : it is an important source for mobilizing the idle savings from
the economy. It mobilizes funds from people for further investments in the productive
channels of an economy. In that sense it activate the ideal monetary resources and puts
them in proper investments.
 Capital formation : capital market helps in capital formation. Capital for addition is net
addition to the existing stock of capital in the economy. Through mobilization of ideal
resources it generates savings, the mobilized savings are made available to various
segments such as agriculture, industry etc . this helps in increasing capital formation.
 Provision of investment avenue : it raises resources for longer periods of time. Thus it
provides an investment avenue for people who wish to invest resources for a long period
of time. It provides suitable interest rate returns also to investors. Instruments such as
bonds, equities, units of mutual funds , insurance policies etc definitely provides diverse
investment avenue for the public.
 Speed up economic growth and development : it enhances the production & productivity
in the national economy. As it makes funds available for long period of time the
financial development. This helps in increasing production & productivity in economy
by generation of employment and development of infrastructure.
 Proper regulation of funds : capital markets not only helps in fund mobilization , but
also helps in proper allocation of these resources. It can have regulation over the
resources so that it can direct funds in a qualitative manner.

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  Service provision : as an important financial set up capital market provides various types
of services. It includes long term & medium term loans to industry, underwriting
services, consultancy services, export finance etc. These services helps the
manufacturing sector in a large spectrum.
 Continuous availability of funds : capital market is place where the investment avenue is
continuously available for long term investment. This is a liquid market as it makes fund
available on continuous basis. Both buyers & sellers can easily buy & sell securities as
they are continuously available. Basically capital market transactions are related to the
stock exchanges. Thus marketability in the capital market becomes easy.
I PRIMARY MARKET :
Primary market is the market where the funds are raised by industrial & commercial enterprises
from investors through the issue of shares, debentures & bonds. Primary markets are known as
New Issue markets. It also called as market for public issue.
Primary market issues can be classified into four types
 Initial public offer (IPO): when an unlisted company makes either a fresh issue of
securities to the public or an offer for sale of its existing securities or both for the first
time to the public , the issue is called as an Initial Public Offer.
 Follow on public offer (FPO) : when an already listed company makes an either a fresh
issue of securities to the public or an offer for sale of existing shares to the public ,
through an offer document , it is referred to as Follow offer.
 Right issue : when a listed company proposes to issue fresh securities to its existing
shareholders as on a record a date, it is called as a Right issue.
 Preferential issue : a preferential issue is an issue of shares or of convertible securities
by listed companies to a select group of persons under section 81 of the Companies
Act,1956, that is neither a rights issue nor a public issue. This is a faster way for a
company to raise equity capital.
II SECONDARY MARKET :
Secondary market is a market for all those securities and stock which are already issue to the
public. It deals with sale/purchase of already issued equity/debts by corporate and others. It is
also known as stock market.
Significance of the secondary market are as follows
 To facilitate liquidity & marketability of the outstanding equity and debt instruments.
 To contribute to economic growth allocation of funds to the most efficient channel
through the process of disinvestment to reinvestment.
 To provide instant valuation of securities caused by changes in the internal
environment. Such valuation facilitates the measurement of the cost of capital and the
rate of return of the economic entities at the micro level.
 To ensure a measure of safety and fair dealing to protect investors interest

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B MONEY MARKET :
Money market refers to the market where money and highly liquid marketable securities are
bought and sold having a maturity period of one or less than one year. The money market
constitutes a very important segment of the Indian financial system.
DEFINITIONS OF MONEY MARKET:
According to Crowther ,” the money market is a name given to the various firms and institutions
that deal in the various grades of near money.
Features of Money Market :
 It is a market purely for the short term funds or financial assets called near money.
 It deals with financial assets having a maturity period up to one year only .
 It deals with only those assets which can be converted to cash readily without loss and
with minimum transaction cost.
 Generally transactions take place through phone or oral communication. Relevant
documents and written communications can be exchanged subsequently. There is no
formal place like stock exchange as in case of a capital market.
 Transaction have to be performed without the help of brokers.
 The components of a money market are the central bank, commercial banks, non –
banking financial companies, discount houses and acceptance house. Commercial banks
generally play a dominant role in this market.
Functions of Money Market :
 To maintain monetary equilibrium. It means to keep a balance b/w the demand for and
supply of money for short term monetary transactions.
 To promote economic growth. Money market can do this by making funds available to
various units in the economy such as agriculture ,small scale industries
 To provide help to trade and industry. Money market provides adequate finance to
trade and industry. Similarly it also provides facility of discounting bills of exchange
for trade and industry.
 To help in implementing monetary policy. It provides a mechanism for an effective
implementation of the monetary policy.
 To help in capital formation. Money market makes available investment avenues for
short term period. It helps in generating savings and investments in the economy.
 Money market provides non- inflationary sources of finance to government. It is
possible by issuing treasury bills in order to raise short loans. However this does not
leads to increase in the prices.
 Transfer of large sums of money.
 Transfer from parties with surplus finds to parties with a deficit.
 Allow government to raise funds.
 Helps to implement monetary policy.

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Common Money Market Instruments :
 Certificate of deposit : time deposit, commonly offered to consumers by banks , thrift
institutions and credit unions.
 Repurchase agreements : short term loans normally for less than two weeks and
frequently for one day arranged by selling securities to an investor with an agreement to
repurchase them at a fixed price on a fixed date.
 Commercial paper : short term use promissory notes issued by company at discount to
face value and redeemed at face value.
 Euro dollar deposit : deposits made in US dollars at a bank or bank branch located
outside the united states.
 Federal agency short term securities in the US . short term securities are issued by
government sponsored enterprises such as the Farm Credit System, the Federal Home
Loan Banks and the Federal National Mortgage Association.
 Federal funds in the US : interest bearing deposits held by banks and other depositary
institutions at the Federal Reserve. These are immediately available funds that
institutions borrow or lend usually on an overnight basis. They are lent for the Federal
funds rate.
 Municipal notes : in the US short term notes issued by the municipalities in anticipation
of tax receipts or other revenues.
 Treasury bills : short term debt obligations of a national government that are issued to
mature in three to twelve months.
Major participants in the Financial Markets
 The Individuals : these are not savers and purchase the securities issued by corporate.
Individuals provide funds by subscribing to these security or by making other
investments.
 The firms or corporate : the corporate are net borrow. They require funds for different
projects from time to time. They offer different types of securities to suit the risk
preferences of investors.
 Governments : government may borrow funds to take care of the budget deficit or as a
measure of controlling the liquidity, government may require funds for long terms or
short terms in the money market.
 Regulators : financial system is regulated by different government agencies. The
relationship among other participants, the trading mechanism and the overall flow of
funds are managed, supervised and controlled by these statutory agencies.
 Market intermediaries : there are a number of market intermediaries known as
financial intermediaries or merchant bankers, operating in financial system. There are
also known as investment managers or investment bankers. The objective of these
intermediaries is to smoothen the process of investment and to establish a link b/w the
investors and the users of funds.

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INTERNATIONAL FINANCIAL MARKETS
Meaning of International Financial Markets : International Financial Markets provide links
connecting the financial markets of each country and independent market external to the
authority of any one country. The heart of the international financial market is being governed
by the market of currency where the foreign currency is denominated by the international trade
and investment. Hence the purchase of goods & services is preceded by the purchase of
currency.
The purpose of the foreign currency markets , international money markets international capital
market and international securities market are as follows.
 The foreign currency market : the foreign currency market is an international market
that is familiar in structure. This means that there exist no central place where the
trading can take place. The market is actually the telecommunications like among
financial institutions around the globe and opens for business at any time.
 International money market : this is also termed as Euro currency market. The euro
currency market is a money market for depositing and borrowing a money located
outside the country where that money is officially permitted tender,
 International capital market : the international capital provides links among the
capital markets of individual countries. It also comprises a separate market of their own
, the capital that flows into the euro markets. The firms enjoy the freedom to raise
capital ,debit, fixed or floating interest rates and maturities varies from one month to
thirty years in an international capital markets.
 International security markets : the bank have experienced the greatest growth in the
past decade because of the continuity in providing large portion of the international
financial needs of the government and business. The private placements, bonds and
equities are included in the international security market.
FOREX/FOREIGN EXCHANGE MARKET :
The foreign exchange market is a global decentralized market for the trading of currencies. The
main participants in this market are the larger international banks. The foreign exchange market
is the market in which different currencies are bought and sold for one another.
The functions of foreign exchange market are as follows
 transfer of purchasing power
 provision of credit
 provision for heading facilities
 transfer funds through one country to another
 provide short term credit to finance trade b/w countries to credit instruments
 to facilitate of foreign exchange risks of speculation
Methods of foreign payments :
 Demand draft
 Telegraphic transfer
 Mail transfer

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  Banker cheque
 Bills of exchange
 Travellers cheque
 International credit card
Euro currency market :
The money market in which Eurocurrency , currency held in banks outside of the country where
it is legal tender, is borrowed and lent by banks in Europe. It is utilized by large firms and
extremely wealthy individuals who wish to circumvent regularly requirements, tax laws and
interest rate caps that are often present in domestic banking.
The following are the functions
It is an international market and it is under no national control
It is a short term money market
It is a whole sale market
It is highly competitive and sensible market
BOP deficit
Relation of exchange control
Euro bond market :
A market in which bonds are issued in the capital market of the one country to a non-resident
borrower from another country. A bond which is issued in a currency other than the currency of
the country or market in which it is issued..
International bond market :
The international bond market facilitates flow of funds b/w borrowers who need long term funds
and investors who are willing to supply long term funds. The governments and many
corporations in these countries can easily obtain long term funds by issuing bonds and yield that
they pay on the bonds is relatively low.
The international bond market can categorized into two parts
A Foreign bonds : these are simply bonds issued in a bond market by foreign company. For
example , a Japanese firm issuing a US dollar denominated bond in the US is issuing a foreign
bonds.
B Euro bonds : these are bonds denominated in one currency but issued in a country that is not
the home of that currency. For example , a bond denominated in dollar can but issued in London
is a Euro bond.
DEPOSITORY RECEIPTS :
A Depository Receipt is a negotiable certificate issued by a bank representing shares in a foreign
company traded on a local stock exchange. The depository receipt gives investors the
opportunity to hold shares in the equity of foreign countries and gives them an alternative to
trading on an international market.

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In December 1990 , Citibank introduced the first global depository receipt. Samsung corporation
, a Korean trading company, wanted to raise equity capital in the United States through a private
placement, but also had a strong European investor base that it wanted to include in the offering.
American Depository Receipt (ADR)
Meaning of American Depository Receipt : American Depository Receipt is a certified
negotiable instrument issued by an American bank suggesting the number of shares of a foreign
company that can be traded in U.S financial markets.
 For example : Volkswagen a German company trades on New York Stock Exchange.
The investor in America can easily invest into the German company , through the stock
exchange. Volkswagen is listed on the American Stock Exchange after complying the
required laws. On the other hand if the shares of the Volkswagen are listed in stock
markets of countries other than US then it is termed as GDR.
History of American Depository Receipt :
ADR have been introduce to the financial markets as early as April 19 th 1927, when the
investment bank J.P Morgan launched the first ever ADR program for the UK’s Selfridges
Provisional Stores Limited (now known as Selfridges plc.), a famous British retailer.
American Depository Receipt process
 The domestic company already listed in its local stock exchange , sells it shares in
bulk to a US . bank to get itself listed on U.S exchange.
 The U.S banks accepts the share of the issuing company . the bank keeps the shares in
its security and issues certificates to the interested investors through the exchange.
 Investor set the price of the ADRs through bidding process in U.S dollars. The buying
and selling in ADR shares by the investors is possible only after the major U.S stock
exchange lists the bank certificates for trading.
 The U.S stock exchange is regulated by Securities Exchange Commission , which
keeps a check on necessary compliances that need to be complied by the foreign
company.
Advantages of ADR
 The American investor can invest in foreign companies which can fetch him higher
returns.
 The companies located in foreign countries can get registered on American Stock
Exchange and have its shares trades in two different countries
 The benefit of currency fluctuation can be availed.
 It is an easier way to invest in foreign companies as there are no restrictions to invest in
ADR.
 ADR simplifies tax calculations . trading in shares of foreign company in ADR would
lead to tax under US jurisdiction and not in the home country of company.
 The pricing of shares of foreign companies in ADR is generally cheaper. Hence it
provides additional benefit to investors.

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 Disadvantages of ADR
 Even though the transactions in ADR take place in US dollars, still they are exposed to
the risk associated with foreign exchange fluctuation.
 The number of options to invest in foreign companies is limited. Only a few companies
feel the necessity to register themselves through ADR. This limits the choice available to
US investors to invest.
 The investment on companies opting for ADR often becomes illiquid as an investor
needs to hold the shares of the long term to generate good returns.
 The charges for the entire process of ADR are mostly transferred on investors by foreign
companies.
 Any violation of companies can lead to strict action by the Securities Exchange
Commission.
GLOBAL DEPOSITORY RECEIPT (GDR)
Meaning of Global Depository Receipt : Global Depository Receipt is an instrument in which
a company located in domestic country issues one or more of its shares or convertible bonds
outside the domestic country. In GDR , an overseas depository bank i.e bank outside the
domestic territory of a company , issues shares of the company to residents outside the domestic
territory. Such shares are in the form of depository receipt or certificate created by overseas the
depository bank.
Issue of Global Depository Receipt is one of the most popular ways to tap the global equity
markets. A company can raise foreign currency funds by issuing equity shares in a foreign
country.
For example : A company based in USA , willing to get its stock listed on German stock
exchange can do so with the help of GDR. The US based company shall enter into a an
agreement with the German depository bank , who shall issue shares to residents based in
Germany after getting instructions from the domestic custodian of the company. The shares are
issued after compliance of law in both the countries.
Global Depository Receipt Mechanism :
 Domestic company enters into an agreement with the overseas depository bank for the
purpose of issue of GDR.
 The overseas depository bank then enters into a custodian agreement with the domestic
custodian of such company.
 The domestic custodian holds the equity shares of the company.
 On the instruction of the domestic custodian , the overseas depository bank issues shares
to foreign investors.
 The whole process is carried out under strict guidelines.
 GDRs are usually denominated in U.S dollars.

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Advantages of GDR
 GDR provides access to foreign capital markets.
 A company can get itself registered on an overseas stock exchange or over the counter
and its shares can be traded in more than one currency.
 GDR expands the global presence of the company which helps in getting international
attention and coverage.
 GDR are liquid in nature as they are based on demand and supply which can be
regulated.
 The valuation of shares in the domestic market increase ,on listing in the international
market.
 With GDR, the non-residents can invest in shares of the foreign company.
 Foreign institutional investors can buy the shares of the company issuing GDR in their
country even if they are restricted to buy shares of foreign company.
 GDR increases the shareholders base of the company.
 GDR saves the taxes of the an investor. An investor would need to pay tax if he
purchases shares in the foreign company whereas in GDR same in not the case.
Disadvantages
 Violating any regulation can lead to serious consequences against the company.
 Dividends are paid in domestic country’s currency which is subject to volatility in the
forex market.
 It is mostly beneficial to high net worth individual (HNI) investors due to their capacity
to invest high amount in GDR.
 GDR is one of the expensive sources of finance.
Indian Depository Receipt(IDR)
Indian Depository Receipt are based on American Depository Receipts introduced in 1927.
Securities and Exchange Board of India first operationalised the rules of IDRs. The RBI issued
operations under the foreign Exchange Management Act.
Meaning of Indian Depository Receipt :
As per the definition given in the companies (issue of IDR) Rules ,2004,IDR is an instrument in
the form of a depository receipt created by the Indian depository in India against the underlying
equity shares of the issuing company.
In an IDR , foreign company would issue shares to an Indian depository (say National Securities
Depository Limited-NSDL) which would in turn issue depository receipts to investors in India.
The actual shares underlying the IDRs would be held by an overseas custodian ,which shall
authorize the Indian depository to issue the IDRs.
Features of the IDR
 Overseas custodian : foreign bank with branches in India requires approval from
Finance Ministry and has to be registered with SEBI.

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  Approvals for the issue: IDR issue will require approval from SEBI and application
can be made for this purpose 90 days before the issue opening date.
 Listing : these IDRs would be listed on stock exchanges in India and would be freely
transferable.
 Extent of issue : the issue during a particular year should not exceed 15% of the paid
up capital plus free reserves.
 Redemption : IDRs would not be redeemable into underlying equity shares before one
year from date of issue.
 Denomination : IDRs would be denominated in Indian rupees, irrespective of the
denomination of underlying shares.
Issue mechanism of IDR
IDRs will be issued to Indian residents in the same way domestic shares are issued.
NRIs can also participate in the issue.
The issuer company will make a public offer in India and residents can bid the same way
as they do for Indian shares
Investors eligible to participate in an IDR issue are institutional investors , including
FIIs –but excluding insurance companies and venture capital funds-retail investors and
non-institutional investors
Commercial banks may participate subject to approval from the RBI.
Parties involves and their roles.
 Issuer company : intends to raise capital in India must be listed in the its home country.
 Domestic depository : Indian entity appointed by the issuer company and registered as a
custodian of securities with SEBI. Issues IDRs and serve as the trustee on behalf of the
shareholders.
 Overseas custodian : holder of equity shares on behalf of the domestic depository.
Appointed by the domestic depository.
 Registrar and transfer(R&T) agent : provides services to the issuer company, the
domestic depositary and the IDR holders services –keeping records of the IDR holders
coordinating corporate actions and handling investor grievances.
Benefits of IDR
 Indian individual investors have restrictions on holding shares in foreign companies
,but IDR gives Indian residents a chance to invest in a listed foreign entity.
 No resident individual can hold more than US dollar 200000 worth of foreign securities
,including shares as per foreign exchange regulation. However this will not be
applicable for IDR.
 Additional key requisites such as demat a/c outside India to hold foreign securities
,KYC with foreign broker , foreign bank account to hold funds are too cumbersome for
most investors . these troubles are completely avoided in holding IDRs.
 It gives access to the large Indian capital pool and creates opportunities for future fund
raising.
 It provides enhanced local branding and target business opportunities in India.

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Bond market :
The bond market is a financial market where participants can issue new debt, known as the
primary market or buy and sell debt securities known as the secondary market. This is usually in
the form of bonds it may include notes, bills and so for public and private expenditure.
Masala Bond
Masala bonds were introduced in India in 2014 by International Financial corporation(IFC). The
IFC issued the first masala bonds in India to fund infrastructure project. Indian entities or
companies issue masala bonds outside India to raise money. The issue of these bonds is in
Indian currency rather than local currency. Thus if the rupee rate falls the investors will bear the
loss.
Meaning of Masala bond :
Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the
local currency . Masala is an Indian word and it means spices. The term used by the
International Finance Corporation to evoke the culture and cuisine of India.
Characteristics of Masala bonds
 Masala bonds are rupee denominated bonds issued outside in India by Indian entity.
 They are debt instruments which help to raise money in local currency from foreign
investors. Both the government and private entities can issue these bonds.
 Investors outside India who would like to invest in assets in India can subscribe to these
bonds.
 Any resident of that country can subscribe to these bonds which are members of the
financial action task force. The investors who subscribe should be whose securities
market regulator is a member of the international organization of securities commission.
 Multilateral and regional financial institutions which India is a member country can also
subscribe to these bonds.
 According to RBI the maturity period is three years for the bonds raised to the rupee
equivalent of 50million dollars in a financial year. The maturity period is five years for
the bonds raised above the rupee equivalent of 50 million dollars in a financial year.
 The conversion of these bonds happens at marker rate on the date of settlement of
transactions undertaken for issue and serving of interest of the bonds.
Procedure
The proceeds raised from these bonds ca be used
 In refinancing of rupee loan and non-convertible debentures.
 For the development of the integrated townships and affordable housing projects.
 Working capital to corporate.
RBI mandates the proceeds raised from these bonds cannot be used

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  The real estate activities , not including the development of integrated townships and
affordable housing projects.
 Activities prohibited according to foreign direct investment guidelines.
 Investing in capital markets and usage of the proceeds for equity investment
domestically.
 Purchase of land
 On –lending to other entities for any of the above purposes.
Benefits of Masala bonds
 It offers higher interest rates and thus benefits the investor.
 It helps in building up foreign investors confidence in the Indian economy.
 It helps strengthen the foreign investment in the country as it facilities foreign investors
confidence in Indian currency.
 The capital gains arising from rupee denomination are exempted from tax.
 If the rupee appreciates at the time of maturity , it benefits the investor.
 It benefits the borrower as there is no currency risk. It saves the borrower from currency
fluctuation.
 Borrowers need not worry about rupee depreciation as the issuance of these bonds in
Indian currency rather than foreign currency.
 It helps the Indian entity issuing these bonds to diversify their portfolio
Yankee bonds
Meaning of Yankee bond
A yankee bond is a bond issued by a foreign entity such as bank or company but is issues and
traded in the United States and denominated in US dollars. Yankee bonds are administered by
the Securities Act of 1933 .
Advantages of Yankee bonds
 It helps in portfolio diversification for investors to have investment in different emerging
economies as bond issues are different entities outside the US investing in US bond
markets by issuing Yankee bonds
 Bondholders are protected from currency risk as bonds are issued in home currency USD
and repayments are also in USD hence there will be negligible currency risk
 These bonds are actively traded in US debts markets, hence yankee bonds offer the
highest liquidity to bond investors
 It has a lesser impact due to political economic factors prevailing in the US bond prices
will not change drastically
 The issuer get access to the US market after fulfilling the complicated requirements of
the SEC
 The issuer has a fund available for a longer duration due to the longer tenure of bonds
the market can frequently provide funds at a lower cost than those available in any other
market.
 It also act as a natural hedge if the bond issuer has longer tenure receivable in US
markets

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  It offers a higher yield than the lower yield on other American investment portfolios

Disadvantages of Yankee bonds

 The basic principle of financial markets –the higher the risk the higher the reward.
Lower the risk lower the reward. Hence investor should have the huge risk appetite to
bear losses.
 Some Yankee bonds may turn into junk bonds if the financial performance of the
company is not satisfactory. Also foreign companies are governed by the laws of heir
nation, any unfavourable changes in the country’s economy would have an impact on
the performance of the company.
 Currency mismatch may be happen in foreign companies. Companies have borrowed in
US dollars, but the majority of the earnings may not be in US dollars, it will be in the
company’s home currency and if the home currency depreciates against dollars then the
company has to manage its open risk position effectively in order to pay bondholders
and minimize currency losses.
 A bond issuer must go through the complicated procedure of the registration with SEC
and other legal formalities because of which issuing yankee bonds become a time
consuming procedure.
 After the subprime crisis, yankee bonds have become popular in American markets due
to better yield offerings than domestic bonds. So these bonds are sold well when interest
rates in the US are lower.

Samurai bonds
A samurai bond is a corporate bond issued by foreign companies in the Japanese market and is
required to abide by the Japanese regulations. It is a yen denominated bond that attracts
investors from Japan, providing capital to a non Japanese issuer. It provide issuers access to the
financial market. In 1972 the first non-Japanese 10 billion yen bond was issued by Australia.
Meaning of Samurai bonds
A samurai bond is a yen denominated bond issued in Tokyo by non-Japanese companies and is
subject to Japanese regulations. These bonds provide the issuer with an access to Japanese
capital which can be used for local investments or for financing operations outside Japan.
Benefits of Samurai bonds
 The US and European markets are more volatile than the Japanese market. Since the
issuers of Samurai bonds are mostly from Europe & US they seek the stability from the
Japanese market as an alternative financial source.
 Investing in multinational companies attractive as conservative institutional investors in
Japan prefer to invest in larger international companies.
 The issuers benefit from the lower coupon rates than other bonds.
 Eligible small and private companies also issue samurai bonds.

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  The bonds do not need to be left in the custody of security companies or other
institutions
Limitations of samurai bonds
 the samurai bond market comes with high tax rates and an unclear fiscal environment
 a major concern of US companies the lack of a constant policy
 lack of flexibility of issuance terms and conditions create restrictions for investors or
traders to invest in samurai bonds
 companies issuing such bonds face high administrative burdens
 the samurai bond market growth is stagnant since the bond issuing procedure is
difficult and tax rules are complicated
Panda bonds
A Panda bond is a Chinese renminbi - denominated bond from a non-Chinese issuer , sold in the
People’s Republic of China. The first two panda bonds were issued in October 2005 on the same
day by the International Finance Corporation and the Asian Development bank.
Meaning of Panda bonds
Panda bonds refers to bonds issued in the Chinese bond market by foreign institution duly
registered outside the people’s Republic of China including by those registered in Hong kong,
Macau, and Taiwan. Panda bonds are usually denominated in RMB but may be issued in other
currencies such as special drawing rights of IMF.
Benefits of Panda bonds
 additional funding channel : panda bonds are a great funding tool for companies as it
allows them to finance their mainland china operations without exposing themselves
to FX risks, which essentially acts as a natural currency hedge.
 Access to Chinese investors : panda bonds provide an ideal opportunity for main land
china investors to diversify their investment portfolios . high quality foreign issuers
are particularly attractive to mainland Chinese investors.
 Attractive cost of funding : issuers were able to achieve lower cost of funding through
panda bonds compare to other this is likely due to liquidity flush in the onshore
market.
Practical challenges of panda bonds issuance
 Approval process : currently there are no unified laws or regulations governing onshore
bond issuance by foreign issuers. Approval procedures can vary significantly depending
on the market and the type of the bond.
 Financial statements : financial statements will also need to be audited by a qualified
accounting firm in china or in case where permitted , a qualified foreign accounting firm
that meets MoF requirements including practising qualification in the country or region it
is located.
 Credit ratings : panda bonds are required to obtain at least one credit rating from
domestic credit rating agency. There are difference b/w the domestic and international
rating system in terms of rating scale, framework and methodology

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  Chinese documents : all application documents including the offering circular are
required to be prepared in Chinese. Foreign issuers will need to set aside more time to
engage appropriate professionals for translation. In addition, foreign issuers are required
to meet requirements on continuing obligations following a panda bond issuance which
would require the help of professionals with an adequate level of Chinese proficiency.
 Market liquidity : the investor base of the onshore bond market is highly concentrated
with more than half of bonds outstanding held by commercial banks . since many
commercial banks tend to hold long position. Their dominance in the onshore bond
market impacts market liquidity which could affect the pricing of panda bonds. While
efforts have been made to allow the greater participation of foreign investors , it can take
years to develop a highly liquid bond market.
Green masala bond
August ,2015-IFC issued a 5-year green masala bond on the London stock exchange, the first
green bond issued in the offshore rupee markets.
The IFC green Masala bond is issued under IFCs 3billion dollar offshore rupee masala bond
program . IFC will invest the proceeds of the bond in a green bond issued by Yes Bank one of
India’s largest commercial banks.
Meaning of green bond
A green bond is a debt instrument with which capital is being raised to fund green projects
which typically include those relating to renewable energy a clean transportation sustainable
water management.
Benefits
 It offers highest interest rates and thus benefits the investor
 It helps in building up of foreign investors confidence in the Indian economy
 It helps in strengthen the foreign investments in the country as it facilitates foreign
investors confidence in Indian currency.
 Investor demand and diversification
 Enabling projects at a lower cost of capital
 Green bonds often offers an exciting opportunity for both investors and issuers to
encourage sustainable growth while leading the investment community.
Challenges of green bonds
 cash flow concerns : the bias in favour of transport and renewable energy regarding
green bind issuance could relate to the more reliable cash flow projections from these
projects compared to land conservation
 lack of green definition : one of the most commonly cited challenge to expansion of
green bond markets at a national or global scale the lack of a strict agreed upon
definition of what green. Though voluntary principles such as the green bonds
principles and the climate bond standards have attempted to resolve this it appears that
the issue is not completely resolved.

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  Labelling and pricing : there is currently the opinion among investors that green bonds
add cost and complexity without any real benefit in pricing. Green bonds do not
currently allow borrowers to access a lower cost of capital and so many investors are
not willing to pay a premium that will incur a lower interest rate for borrowers .
 Matching scales : there is an asymmetry b/w the minimum size of green bond issuance
and project costs within biodiversity conservation . large supranational investors want
to fund large projects but finding conservation project at this scale can be challenging
owing to the complexities of land use, land tenures and land rights. Therefore market
growth may be constrained a lack of suitable projects , as investors demand may now be
outstripped by supply. Unilever stated this was the reason they were yet to come back to
the market for a second year.

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