Chapter 09

International Finance
INTERNATIONAL EQUITY
MARKET
Learning Objectives
After completing this chapter, you should be able to understand:
What do you mean by Foreign Capital

International Equity Capital
Global Depository Receipt
American Depository Receipt
Indian Depository Receipt
Foreign Direct Investment
Foreign Portfolio Investment
Hot Money
Participatory Notes
International Equity Market
Structure
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9
9.10
9.11
9.12
Introduction to Foreign Capital

Need for Foreign Capital
Concept of Depository Receipt
Global Depository Receipt (GDR)
American Depository Receipt (ADR)
Comparison Between Different Levels of ADR
Advantages of ADRs and GDRs
Distinction Between GDR & ADR
Indian Depository Receipt
Foreign Currency Convertible Bonds (FCCB)
Foreign Currency Exchangeable Bonds (FCEB)
Structure
9.13
9.14
9.15
9.16
9.17
9.18
9.19
9.20
9.21
9.22
9.23
Distinction Between FCCB and FCEB

Distinction Between FDI & FPI
Hot Money
Participatory Notes
Fungibility
Foreign Direct investment in India
Factors Contributing to the Slow Flow of FDI into
India
Foreign Investment Promotion Board (FIPB)
Foreign Investment Promotion Council (FIPC)
Summary
Self Assessment Questions
9.1 Introduction to Foreign Capital

Foreign capital refers to the investment of capital by a
foreign government, institution, private individual and
international organization in a country.
Foreign capital includes foreign aid, commercial
borrowing and foreign investment. Foreign aid
includes foreign grants, concessional loans etc.
Foreign capital is invested in the form of foreign
currency, foreign machines, and foreign technical
know-how.
Foreign Collaborations
Loan in Foreign Currency
Foreign capital
Investment in Equity Capital
9.2 Need for Foreign Capital

Increase in resources:
Foreign capital not only provides an addition to the
domestic savings and resources, but also an addition
to the productive assets of the country. The country
gets foreign exchange through FDI. It helps to increase
the investment level and thereby income and
employment in the recipient country.
Risk taking:
Foreign capital undertakes the initial risk of
developing new lines of production. It has with it
experience, initiative, resources to explore new lines. If
a concern fails, losses are borne by the foreign
investor.

Technical Know How:
Foreign investor brings with him the technical and
managerial know how. This helps the recipient country
to organize its resources in most efficient ways i.e. the
least costs of production methods are adopted. They
provide training facilities to the local personnel they
employ.
High Standards:
Foreign capital brings with it the tradition of high
quality, higher real wages to labour and sound
business practices. This serves the interest of the
investor and brings up quality / efficiency of local
enterprises.

Marketing facilities:
Foreign investor provides new marketing outlets, starts
imports and exports among units located elsewhere.
Reduces trade deficits:
Foreign capital helps host country to increase exports
by raising quality and lowering costs and thereby,
reduce trade deficit.
Increases competition:
Foreign capital may help to increase competition and
break domestic monopoly. Foreign capital is a good
barometer of worlds perception of a countrys
potential.
9.3 International Equity Market

Until the end of 1970s, international capital market
mainly focused on debt financing, but equity financing
was raised only by corporates in the domestic markets
as there were restrictions on cross border equity
investments.
Early
1980s
witnessed
Liberalization
and
Globalization of many domestic economies. This gave
a boost to the developing countries where issue of
dollar or foreign currency denominated equity shares
were not permitted. Now they are able to access
international equity markets through Depository
Receipts.
9.4 Concept of Depository Receipt

1. A Depository Receipt is a negotiable certificate
issued by a depository bank that represents the
beneficial interest in shares issued by a company.
2. These shares are deposited with a local custodian
appointed by the depository, which issues receipts
against the deposit of shares. Each of these
depository receipts represents a specified number
of shares in the domestic market.
3. According to the placement planned, depository
receipts are classified into three categories, as
follows.
American Depository Receipt (ADR)

which are issued only to
investors in America

4. The main objectives of a company going for an
international capital market are:
1.
the size of the fund that can be raised.
2.
currency choice.
3.
large shareholder base
4.
international brand image ; and
5.
presence that emerges out of the issue.

9.5 Global Depository Receipt

(GDR)
GDR is a negotiable instrument in
the form of depository receipts or
certificate created by the overseas
depository bank outside India and
issued to non-resident investor
against the issue of ordinary shares
of Foreign Currency Convertible
Bonds (FCCB) of the issuing
company.
9.5 Global Depository Receipt (GDR)

A. The Characteristic Features
GDRs are issued to investors in more than one
country and may be denominated in any acceptable
freely convertible currency.
The equity share holder may deposit the specified
number of shares and obtain the GDR and vice versa.
A typical GDR is denominated in any foreign currency
whereas the underlying shares would be denominated
in the local currency of the issuer. The holder is
entitled to the dividend, bonus on the value of shares
underlying the GDR.

A. The Characteristic Features- contd.
GDR may be, at the request of the investor, converted
into equity shares by cancellation of GDRs through
the intermediation of the depository and the sale of
underlying shares in the domestic market through the
local custodian. This provision can be used after a
cooling off period of 45 days from the date of issue.
GDRs are considered as common equity of the issuing
company. The company effectively transacts with only
one entity; i.e. the overseas depository for all its
transactions.

A. The Characteristic Features- contd.
The foreign currency funds acquired by the company
through a GDR issue are permitted to be used for any
normal business activity, but cannot be used for
trading in international securities or real estate.
Indian companies with good financial track record of
three years are readily allowed access to international
markets through such issues. Clearances are required
from the Foreign Investment Promotion Board (FIPB)
and the Ministry of Finance.

B. Advantages of a GDR issue:
GDR holders do not acquire voting rights and,
therefore, the promoters are not in the danger of
losing management control.
Companies having international operations are able to
build brand image which helps in their marketing
efforts.
Investors have the benefit of having access to good
quality companies in other countries without political
risk, operational risk and excessive regulatory control.
9.5 Global Depository Receipt

(GDR)
B. Advantages of a GDR issue:
contd.
Through a GDR issue the company is
able to create a potential demand
for its shares at the international
level which results
in higher
valuation for its shares in the
domestic market. This increases
companys P/E ratio which in turn
reduces the cost of capital.

#
9
Its a nine step

process.
C. Mechanism of Issue:
Listing on
Stock
Exchange
#
6 Custodian
Bank
#
8
#
4
Depository Bank
#
2
Investor /
Deposit Receipt
Holder
Lead Manager
#
1
Issuing Company
#
3
Book Runners

C. Mechanism of Issue: contd.
Step 01: The domestic company wishing to issue
equity shares favoring international investors is called
The Issuing Company
Step 02: The issuing company appoints an
international merchant bank to act as a lead manager
required to market the issue to international investors
by conducting Road Shows with respect to
background, financial status and future prospects of
the issuing company.

Step 03: After the road shows the lead manager
arranges book runners who are specialized agencies
for establishing and analyzing investor response to the
issue, the purpose being to help the issuing company
to price the issue at an appropriate level.
Step 04: After issue price is decided, the lead
manager collects subscription money from potential
investors and after deducting their fees transfers the
collected amount to the depository bank.

Step 05: The issuing company now issues physical
shares in favour of the depository bank.
Step 06: These shares issued in favour of the
depository bank are submitted with the domestic bank
of the issuing company which is also called custodian
bank.
Step 07: The custodian bank then confirms the
receipt of underlying shares issued by issuing
company in favour of depository bank.

Step 08: As soon as depository bank receives the
confirmation from the custodian bank, it issues GDRs
to the investors /deposit receipt holders.
Step 09: The issuing company helps the depository
bank to arrange listing of the GDRs. Most Indian
companies list the GDRs on the international stock
exchanges in London, and Luxemburg.
This helps investors to freely trade on GDRs.

D. Participants Involved in GDR Issue:
Investment
Bankers
Brokers
Depository
Custodian
Issuing
Company
Lawyers
Accountants

D. Participants Involved in GDR Issue: contd.
1. Issuing Company1. Determine financial objective.
2. Appoint depository bank, lawyer, investment
bank and accountants.
2. Lawyers1. Advise on applicable securities laws and related
matters.
2. Advise on GDR program (legal) structure.
3. Investment Bankers
1. Lead underwriting process.
2. Establish syndicate of participating bankers.

4. Depository Bank1. Advise on GDR program structure.
2. Appoint local custodian.
5. Custodian Bank1. Act as a local market agent for the depository.
2. Receive and hold deposits of underlying
ordinary shares for GDR issuances.

6. Accountants
1. Prepare financial statements in accordance
with
relevant
international
accounting
standards, review and audit offer circular of
financial disclosure.
7. Brokers
1. Make GDRs available to qualifying investors
9.6 American Depository Receipt (ADR)

Till 1990s the companies had to issue separate
depository receipts for markets in each country, ADR
for US and EDR for European market.
There was no cross border trading possible, as ADRs
and EDRs could be traded, settled and cleared in US
and European markets respectively.
However, since 1990, non-US companies could raise
capital in the US market with registration with SEC
(Securities Exchange Commission).
ADR is a dollar denominated negotiable certificate that
represents a non-US company in US the market. They allow
US citizens to invest in overseas securities.

ADRs can be diagrammatically represented as follows:
Types of ADR
A
B
1
UnSponsored
Level 1
Sponsored
B
2
Level 2
B
3
Level 3
B
4
Restricted
B4a
Section 144A
B4b
Regulation
S

A
Unsponsored ADR:
Unsponsored ADRs are issued by one or more
depository banks based on market demand.
Unsponsored ADRs are issued without the cooperation
of the foreign company, but it has to be reporting
company as per US Exchange Act of 1934.
Sponsored ADR:
B
Sponsored Level 1 ADR Program:
1
This is the first step for an issuer. In this instrument
only minimum disclosure is required by the SEC. The
issuer is not allowed to raise fresh capital or list itself
on any of the National Stock Exchanges.
B

B
Sponsored ADR:
B
2 Sponsored Level 2 ADR Program:
The Company is allowed to enlarge the investor base

for existing shares to greater extent. But significant
disclosure has to be arranged. The Company now can
test itself on American or New York Stock Exchange.
B
3
Sponsored Level 3 ADR Program
This level is to raise fresh capital through public

offering in the US capital market.

B
Sponsored ADR:
B
4
Restricted ADR
In addition to the sponsored ADR issues a company

can also access the US and other capital markets
through ADR program falling under rule 144 or
regulation S of the SEC.
These issues have certain limitations in terms of
target investors etc.

B
Restricted ADR
4
B4
Rule 144:
a
This rule provides for raising capital through private
placement of ADRs with large institutional investors
called qualified institutional bodies (QIBs). Such
issues operate at Level 1 status and do not require
fulfillment of GAAP standards.
B4
Regulation S:
b
Regulation S provides for raising capital through the
placement of ADRs to offshore non-US investors.
Section S of the SEC regulation permits ADRs to be
issued to individuals and corporate entities without
any restrictions outside the US
9.7 Comparison Between Different Levels of ADR

PARTICULARS
Level 1
Level 2
Level 3
Trading Pattern
Only on OTC market
Listing allowed
on stock
exchanges in
the US
Listing allowed
on stock
exchanges in
the US
Registration with
SEC
ADRs are registered Both ADRs and

but underlying shares underlying
are not registered.
shares
registered
Both ADRs and

underlying
shares
registered
9.7 Comparison Between Different Levels of ADR

- contd.
PARTICULARS
Level 1
Level 2
Level 3
Adherence to
GAAP norms
Only nominal
fulfillment
Partial
Full
compliances compliance
Disclosure
norms
Limited
Stringent
Capital raising
No public issue.
Only private
placement
Public issue Public issue

without fresh with fresh
capital.
capital.
Very
stringent
9.8

ADVANTAGES TO THE ISSUING COMPANIES
i. Provides access to the more liquid markets.

ii. Provides funds at lower costs and better terms.
iii. It expands the investor base for the issuing
company.
iv. Establishes name recognition for the company in
new capital markets.
v. Provides marketing advantages due to improved
brand image.
vi. Source for foreign currency resources for overseas
acquisitions, joint ventures, import financing,
project funding, etc.
9.8

ADVANTAGES TO THE INVESTORS
i.
ii.
iii.
iv.
v.
Access to the best investment possibilities across

the world.
It is an easy and cost effective way for individuals
to hold and own shares in a foreign company.
The mechanism helps investors to avoid foreign
procedural hurdles and clearances.
Means of wealth protection and investment
diversification.
Hedge against adverse development in domestic
economy.
9.9 Distinction Between GDR & ADR

No
1
Global Depository Receipts American Depository Receipts

Can be denominated in
any freely convertible
currency.
Can be issued to investors
in one or more markets
simultaneously.
Can be denominated only in

US dollars.
Depository bank can be

any international
investment bank
Depository bank needs to be

located in the US
Can be issued only to

investors resident in the US.
9.9 Distinction Between GDR & ADR

No
4
Global Depository Receipts American Depository Receipts

Issue does not require
foreign regulatory
clearances
There is no subclassification in this
instrument.
GDRs are normally corelated to equity shares of
the issuing company
expressed in whole
numbers.
Issues require approval from

the Securities and Exchange
Commission(SEC) of the US
They are sub-classified in
terms of the level of clearance
of the SEC
In many cases ADRs are corelated to equity shares of the
company expressed as a
fraction.
9.10 Indian Depository Receipt (IDR)

IDRs are financial instruments that allow foreign
companies to mobilize funds from Indian markets by
offering entitlement to foreign equity and getting listed
on Indian Stock Exchange.
This instrument is similar to the GDR and ADR. IDRs
need to be registered with SEBI.
The Government opened this avenue for the foreign
companies to raise funds from the country, as a step
towards globalizing the Indian capital market and to
provide local investors exposure in global companies.
9.11 Foreign Currency Convertible Bonds (FCCB)

FCCB is a type of Eurobond which can be exchanged
for equity shares at some later date after the issue of
the Bond.
i.
Features:
It is a type of convertible bond issued in currency
different than the issuers domestic currency.
ii. A convertible bond is a mix between a debt and

equity instrument as these bonds provide the
bondholder the option to convert the bond into
stock.

iii. Investors have option to convert them into GDRs or
underlying shares. If investors prefer to hold the
bonds till the maturity date, the corporate has to
redeem them on that date.
iv. The coupon rate on the FCCB would be nominal.
v. FCCBs are denominated typically at thousand USD
each.
vi. FCCBs can be converted at predetermined
conversion price, at any time by the investor into
GDRs or underlying shares.
vii. In India, FCCBs with up to three year tenure cost
150 bps over six months LIBOR and 250 bps for 3
5 years tenure.

i.
Advantages:
The company gains higher leverage, as debt is
reduced and equity capital enhanced upon
conversion.
ii. FCCB does not dilute ownership immediately as

holders of ADR / GDR do not have voting rights.
iii. Conversion premium adds to the capital reserves.
iv. FCCB carries fewer covenants as compared to
syndicated loan or debenture, hence more
convenient to raise funds for Mergers and
Acquisitions.

i.
Disadvantages:
In a falling stock market there is no demand for
FCCB.
ii. FCCB, when converted into equity brings down

earnings per share, and eventually dilutes
ownership.
iii. In the long run, equity is costlier than debt, and
hence, when interest rates are falling, FCCBs are
not preferred.
iv. Book value of converted shares depends on the
prevailing exchange rates.
9.12 Foreign Currency Exchangeable Bonds (FCEB)

FCEB is a type of Eurobond (issued by issuing
company) which can be exchanged for equity shares of
another company (called the offered company) at
some later date after the issue of the bond.
Features:
i.
FCEB is a bond expressed in foreign currency, the

principal and interest in respect of which are
payable in foreign currency.
ii. It is issued by an issuing Company and subscribed

by a person who is resident outside India in foreign
currency.

Features: contd.
iii. The issuing company has to be a part of the
promoter group.
iv. Prior approval of Foreign Investment Promotion
Board, wherever required under the Foreign Direct
Investment policy, should be obtained.
Advantages:
i.
It provides an additional avenue for Indian

companies raising funds from overseas.

Advantages: contd.
ii. It helps companies unlock the value of their
holdings in other companies.
iii. It helps companies raise financing without further
dilution of ownership.
Disadvantages:
i. It is permissible only in certain areas and to the
extent that FCEBs and FCCBs are permitted.
ii. Proceeds of FCEBs cannot be used for investment
in real estate sector / in capital markets.
9.13 Distinction Between FCCB and FCEB

Particulars
Conversion
Issuing
Company
FCCB
FCCBs are issued by a
company to nonresidents providing
them the option to
convert them into
shares of the same
company at a predetermined price.
A proper Indian firm
issues FCCBs .
FCEB
FCEBs are issued by a
company which are
exchangeable for the
shares of the specified
group company at a
pre-determined price.
FCEBs are issued by

investment or holding
company of group to
non-residents
9.13 Distinction Between FCCB and FCEB

Particulars
FCCB
FCEB
Issue of fresh
shares /
existing
shares
In an FCCB, when the

holder exercises the
option to convert, the
issuer company will
issue fresh shares to
the holder in exchange
for the bonds.
FCCB possesses low risk
In case of FCEB, when

the option is exercised,
there is no issuance of
fresh shares.
Default risk
FCEB possesses high

risk
9.14 Distinction Between FDI & FPI

Foreign Direct Investment (FDI)
FDI can be defined as
investment made by NonResident investors in the
equity shares of a domestic
company with the intention of
participating
in
the
management of the company.
Foreign Portfolio Investment (FPI)

FPI can be defined as investment
by Non-Resident investors in the
equity of a domestic company
with the intention of getting quick
capital gains.
FDI normally involves a long FPI normally involves a short

term association between the term investment in the target
investors and the target company
company.

Foreign Direct Investment (FDI)
FDI normally takes place
through a direct transaction
between existing promoters
and the investors by private
placements.
Foreign Portfolio Investment (FPI)

FPI does not involve any
interaction between the investor
and the target company and such
investments are made through
the stock exchange.
FDI is usually a primary market

transaction
FDI has an impact on the
balance sheet of the company
through introduction of fresh
capital, technology etc.
FPI is usually a secondary market

transaction
FPI has no such direct impact
since
secondary
market
transaction involves exchange
among investors.

Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI)
FDI
normally
involves
introduction of new technology,
financing arrangement, etc. as
the new investor actively
participates in management
process.
FPI does not involve any direct

linkage between the new investor
and the management. Investors
do not wish to take part in
management.
FDI leads to economic growth FPI does not

since it increases employment. economic growth.
create
any

Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI)
FDI is normally desired by all Due to the problem of HOT
Governments as a catalyst for MONEY associated with FPI, most
economic growth.
Governments impose restrictions
on such investments.
FDI involves investment in FPI involves investment
physical assets.
financial assets.
in
9.15 Hot Money

FDI provides the host country with foreign currency
resources which are in most cases permanent
whereas FPI provides short term foreign currency
resources helping to reduce the use of existing
reserves for meeting BOP deficits.
FPI contributors include a diversified set of investors
with different risk profiles and investment horizons.
Macroeconomic fundamentals do not play a critical
role in such investments. The intention is to make
quick profits out of opportunities provided by emerging
markets.
9.15 Hot Money

Movements of such funds distort the exchange rates
and disrupt the capital market both when entering and
exiting a market
These monetary flows are called Hot Money.
Operations of domestic entities gets adversely
affected, therefore, to safeguard against the ill effect
of such fund movements, most governments introduce
exchange control regulations.
9.16 Participatory Notes

In India, generally stated, investments by nonresidents under the Portfolio Investment Scheme are
permitted only as foreign institutional investments.
For purpose of eligibility for investment under this
route, a non-resident has to register with the SEBI as a
Foreign Institutional Investor (FII) or as a sub-account
of an existing FII.
Registration as an FII requires fulfillment of various
conditions as prescribed by SEBI.
BSE
FII registered in India

FIIs buy shares
on behalf of such
Investors.
Investors
abroad
give
money to
FII.
Investors
not
registere
d in India
FIIs issue them a contract paper called as

Participatory Note

Further, SEBI requires that any sub-account can be
registered under an FII only if that FII is the investment
manager for such sub-account.
Indian stocks, like those of other emerging market
economies, are in great demand by overseas
investors.
Some of these investors do not want to register
themselves with SEBI or due to conditions prescribed
for FII registration, are unable to register themselves.
It is in this context that the practice of FIIs issuing
Participatory Notes, equity Linked Notes etc. to such
overseas investors has become prevalent recently.

Thus Participatory Notes (PN or P-Notes) are
instruments used by foreign funds, not registered in
the country, for trading in domestic market.
Participatory notes are like contract notes and are
issued by foreign institutional investors, registered in
the country, to their overseas clients who may not be
eligible to invest in the Indian stock markets.
FIIs invest funds on behalf of such investors, who
prefer to avoid making various disclosures required by
the regulators.
9.17 Fungibility
Fungibility means an asset can be interchanged into
another asset of the same class. Such transactions
provide for equalization of prices in different markets.
In the case of Depository Receipts, Fungibility provides
for their conversion into underlying shares.
It provides investors with two exit options as they can:i) sell DRs on the international stock exchanges or
ii) cancel DR and sell underlying shares on the
domestic stock exchanges depending on price
benefit.
9.17 Fungibility
On February 13, 2002 the Reserve Bank of India
issued guidelines permitting Dual Fungibility
This means Depository Receipts converted into
local shares could be re-issued by repurchasing the
underlying shares in the local market.
Thus, the underlying shares representing the reissuable
Depository
Receipts
are
called
Headroom.
Dual or Two-way Fungibility, therefore, represents a
form of capital account convertibility.
9.18 Foreign Direct Investment in India

FDI is a matter of special interest in developing
countries because such countries are continuously in
competition to attract foreign capital for enhancing
availability of investible funds in their economies as
also to acquire new technology and managerial skills.
This competitive environment results in developing
countries providing several financial incentives such
as tax concessions, liberal regulations and
concessions for repatriation of profits.
9.18 Foreign Direct Investment in India

However, FDI also has adverse side effects due to which
governments of developing countries need to control the
quantity of such inflows, their end utilization and the
investment agreements between the contracting parties.
Despite very liberal and transparent FDI mechanism and
sound macroeconomic fundamentals, India has not
been able to achieve the expected level of FDI inflows.
This is due to the slow process of policy and regulatory
changes. Economic reforms were introduced in India in
1991 with Liberalization, Privatization and Globalization
(LPG) model.
9.19 Factors Contributing to the Slow Flow of FDI into

India
Despite attractiveness of the Indian market in terms of
size, demographics of the population, the liberalized
terms for inward FDI etc., the record of the country in
this regard has been poor. The factors that contributed
to this poor performance are:1. India has a highly regulated business environment
in terms of controls and procedures.
2. The government enjoys a monopoly in several key
sectors of the economy.
3. There are limitations on acquisition of real estate.
9.19 Factors Contributing to the Slow Flow of FDI into

India
4.
The labor laws require reframing in an environment

of market economies.
5. The
infrastructure,
especially
in
terms
of
transportation is inadequate.
6. The modern communication systems available in
urban India need to percolate to rural areas.
7. The fiscal deficit arising out of government
borrowing is too large resulting in very high debt.
9.20 Foreign Investment Promotion Board (FIPB)

1. The FIPB mechanism was specially designed to
permit FDI proposals not falling under the
automatic route.
2. There are no specific pre-established parameters
for deciding on such proposals.
3. Each proposal is considered on merit, based on
potential for economic benefit to the country.
9.20 Foreign Investment Promotion Board (FIPB)

4. Each proposal is considered in totality and the
outcome is advised within 30 days of submission.
5. The recipient company , however, needs to intimate
to the concerned regional Office of RBI regarding
the receipt of investment amount within 30 days of
receipt and file the necessary documents 30 days
of issuing equity to foreign entity
9.21 Foreign Investment Promotion Council (FIPC)

1. Despite efforts and progressive liberalization of
investment norms in terms of quantitative ceilings
for various sectors and the conditions / terms of
investment, the country has failed to attract the
expected level of FDI.
2. The Government, therefore, constituted the Foreign
Investment Promotion Council to promote and
market India as an investment destination.
9.21 Foreign Investment Promotion Council (FIPC)

3. The FIPC is expected to play a proactive role in
identifying both domestic entities which can
benefit from FDI and the foreign counterparts and
countries which can be tapped for such
partnerships.
4. While the FIPB only comes into the picture when
there is an actual proposal for evaluation, the FIPC
would actively pursue generation of such proposal.
5. The FIPC is set up under the Industry Ministry to
ensure greater co-ordination of efforts towards
desired objective.
9.22 Summary
The international financing decision has several
dimensions which must be weighed against each other
before choosing a particular mode of funding. The all-in
cost of funding and the various risks remain the guiding
principles but regulatory issue and accessibility often
takes precedence over cost and risk considerations. Since
the start of 1990s, equity financing on global markets
became accessible to firms in developing countries.
Portfolio investments by foreign investors in the stock
markets of developing countries and the depository
receipts mechanism have been the dominant form of
equity financing by firms in emerging markets.
9.22 Self Assessment Questions

1. Explain the mechanism of a GDR issue.
2. What is ADR and explain different types.
3. Distinguish between FDI and FPI.
4. Bring out the concept of Petrodollars and Hot
Money.
5. Discuss the concept of participatory Notes in the
Indian context.
WITH THIS WE COMPLETE THE

CHAPTER 09
NEXT LET US MOVE OVER TO

CHAPTER 10
RISK MANAGEMENT &
DERIVATIVES

Chapter 09

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Chapter 09

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International Finance

What do you mean by Foreign Capital

Introduction to Foreign Capital

Distinction Between FCCB and FCEB

9.1 Introduction to Foreign Capital

9.2 Need for Foreign Capital

9.2 Need for Foreign Capital

9.2 Need for Foreign Capital

9.3 International Equity Market

9.4 Concept of Depository Receipt

9.4 Concept of Depository Receipt

American Depository Receipt (ADR)

International Equity Market

9.4 Concept of Depository Receipt

the size of the fund that can be raised.

large shareholder base

international brand image ; and

presence that emerges out of the issue.

9.5 Global Depository Receipt

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt

9.5 Global Depository Receipt (GDR)

Its a nine step

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.5 Global Depository Receipt (GDR)

9.6 American Depository Receipt (ADR)

9.6 American Depository Receipt (ADR)

9.6 American Depository Receipt (ADR)

International Equity Market

9.6 American Depository Receipt (ADR)

The Company is allowed to enlarge the investor base

Sponsored Level 3 ADR Program

This level is to raise fresh capital through public

9.6 American Depository Receipt (ADR)

In addition to the sponsored ADR issues a company

9.6 American Depository Receipt (ADR)

9.7 Comparison Between Different Levels of ADR

Only on OTC market

ADRs are registered Both ADRs and

Both ADRs and

International Equity Market

9.7 Comparison Between Different Levels of ADR

Public issue Public issue

International Equity Market

Advantages of ADRs and GDRs

i. Provides access to the more liquid markets.

Advantages of ADRs and GDRs

Access to the best investment possibilities across

9.9 Distinction Between GDR & ADR

Global Depository Receipts American Depository Receipts

Can be denominated only in

Depository bank can be

Depository bank needs to be

Can be issued only to

International Equity Market