A presentation - PowerPoint Presentation

Slide1

A

presentation

on

Foreign Currency InstrumentsSlide2

Group Members

Roll No.: Name

5002

Neha

Agarwal

5052

Aakash

Shah

5096

Vidhi

Gandhi

5144

Yash

Shah

5212

Saurabh

Shah

KSSBM

MBA

5

th

year Finance

Seminar on contemporary issues in

FinanceSlide3

INTRODUCTION

A 

depositary receipt

 is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange.

Types of DR:

American Depositary Receipt

European Depositary Receipt

Luxembourg Depositary Receipt

Global Depositary Receipt

Indian Depository ReceiptSlide4

GDR

Global Depositary ReceiptSlide5

A GDR is a negotiable instrument, basically a bearer instrument which is traded freely in the international market either through the stock exchange or over the counter or among Qualified International(Institutional) Buyers (QIB).

It is denominated in US Dollars and represents shares issued in the local currency.

Indian Companies using ADR/GDR 

                                                                                                                                                                                     Slide6

GDR operates in the following way:

1. An Indian company issues ordinary equity shares.

2. These shares are deposited with a custodian bank (mostly domestic bank)

3. The custodian bank establishes a link with a depository bank overseas.

4. The depository bank, in turn issues depository receipts in dollars. 5. Funds are raised when the foreign entities purchase those depository receipts at an agreed price. 6. The dividends on such issues are paid by the issuing company to the depository bank in local currency. 7. The depository bank converts the dividends into US Dollars at the ruling exchange rate and distributes it among the GDR holders. Slide7

Advantages of GDR

GDRs allow investors to invest in foreign companies without worrying about foreign trading practices & laws

GDRs are liquid because they are based on demand and supply which is regulated by creating or cancelling shares

GDR issuance provides the company with visibility, more larger and diverse shareholder base and the ability to raise more capital in international markets

The shares underlying the GDR do not carry voting rights.

The instruments are freely traded in the international market.

The investors earn fixed income by way of dividend.

GDRs can be converted into underlying shares, depository/ custodian banks reducing the issue.Slide8

ADR

American Depositary ReceiptSlide9

American Depository Receipt is a depository receipt which is negotiable securities issued by a U.S. bank representing one or more shares of a foreign company that is traded publicly in U.S. markets.

 American depositary receipts (ADRs) were the 1st depositary receipts issued—JP Morgan issued the 1st ADR in 1927. 

The operation of ADR - similar to that of GDRSlide10

EXAMPLE:

Say

you're interested in investing in France. One option is to open a brokerage account in Paris, wire some money over there, convert your dollars into Euros, and then go shopping for French stocks. To say the least, this would be a difficult and time-consuming process. And your accountant would hate you at tax time.

ADRs are designed to eliminate these hassles. An ADR is a security that represents ownership of shares of a foreign company. When you buy an ADR, you technically don't own the foreign stock directly. Instead, you own a piece of paper that entitles you to one or more shares of a foreign stock being held on your behalf at a depositary bank

.Today there are more than 2,200 ADRs available, representing shares of companies located in more than 70 countries.Slide11

Types of ADR

(

i

) Sponsored ADR – This is ADR which involve direct involvement of foreign company

Sponsored Level 1 ADRs - These are found on Over the counter market Sponsored Level 2 ADRs - These are listed on an exchange

Sponsored Level 3 ADRs - The issuer floats a public offering of ADRs on a U.S. exchange.

(ii) Unsponsored ADR – This is ADR which involve no direct involvement of the foreign company (whose shares are involved).Slide12

Advantages Of ADR

ADRs help investors to invest in big foreign companies and are good instruments for portfolio diversification.

They help the investors to profit from many emerging market companies (high risk high return instruments).

ADRs offer more transparency and stability than trading the stock directly in a foreign market.ADRs helps to reduce administrative and duty costs that owould

be levied on each transaction.

The purchaser has a theoretical right to exchange shares (non-voting right shares for voting rights)

The ADRs once sold can be re- issued.Slide13

Difference between ADRs & GDRs

ADR

GDR

ADRs are listed on an American stock exchange.

GDRs are listed in a stock exchange other than American stock exchanges, say Luxembourg or London.

ADR is compulsory for non U.S. companies to trade in stock market of U.S.A.

GDR is compulsory for foreign company to access in any other country’s share market for dealing in stock.

ADR is only negotiable in USA .

GDR is negotiable instrument all over the worldSlide14

FCCB

Foreign Currency Convertible Bonds Slide15

FCCBs are special type of convertible bonds issued in a currency different from the issuer’s domestic currency, usually with tenure of 3-7 years. A convertible bond is a mix of debt and equity instrument.

The FCCBs are unsecured, carry a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company.

FCCB's appear on the liabilities side of the issuing company's balance-sheet.

A FCCB holder has the option of redeeming their investment or converting the bonds into equity at/before maturity at a market-linked pre-determined price.

If the equity shares of the company do not reach the previously decided price and the bond reaches its maturity, then the principal is repaid to the bond holder just like a regular bond. Thus, the bondholders get the advantage of fixed coupon rate payments by owning bond as well as the additional option of converting the bond into equity. Slide16

How FCCB Works

Suppose a company ‘A’ issues bonds with following terms –

Issue Price of the Bond Rs. 1000,

Coupon rate 2%,Maturity 2 years,

Convertible into equity shares @ Rs. 800 per shareNow suppose an investor subscribes to 4 of these bonds. Thus the total investment is Rs. 4000. On this investment, he is entitled to get an interest @ 2% for 2 years. On the maturity date, i.e. after 2 years, the investor will have an option – to either claim full redemption of the amount from the company or get the bonds converted into fully paid equity shares @ Rs. 800 per share.

Thus if he goes for the conversion he will be entitled to 5 (4000/800) equity shares. The choice he makes will depend on the market price of the share on the date of conversion.Slide17

If the shares of the company ‘A’ is trading at lower than Rs. 800, let’s say Rs. 500, the investor will be better off by claiming full redemption of his bonds and buying the shares from the market.

In this case, he will get 8 (4000/500) equity shares as against 5 which he was getting on conversion.

Similarly if the market price of the share is higher than Rs. 800, the investor will benefit by getting its shares converted.

Thus, on the day of maturity, an investor will seek full redemption if the conversion price is higher than the current market price, and will go for conversion if the conversion price is less than the current market price.Slide18

ECB

External

Commercial Borrowings Slide19

Foreign currency borrowings raised by the Indian companies from sources outside India are called External Commercial Borrowings (ECBs).

These are commercial loans with minimum average maturity of 3 years. The ECBs include-

Bank Loans

Buyer’s Credit

Supplier’s Credit

Securitized instruments (e.g. floating rate notes and fixed rate bonds)

Credit from official export credit agenciesSlide20

Commercial borrowings from the private sector window of multilateral financial institutions

International Finance Corporation (Washington)

Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

FCCBs

Foreign Currency Exchange Bonds In a country like India, where the interest on the domestic bank loan is distinctly higher than the overseas loan, there is a natural inclination by the business houses to explore the possibility of mobilizing the fund through the external commercial borrowing (ECB) route to leverage the interest burden.Slide21

The Department of Economic Affairs, Ministry of Finance along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.

Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent should be used for new projects. A borrower can not refinance its existing rupee loan through ECB.

For infrastructure and telecom sector up to 50% funding through ECBs is allowedSlide22

Advantages of ECB

To Investor

ECB is for specific period, which can be as short as three years

Fixed Return, usually the rates of interest are fixed

The interest and the borrowed amount are repatriable No owners risk as in case of Equity InvestmentTo Borrower No dilution in ownership

Considerably large funds can be raised as per requirements of borrower

Usually only a fixed rate of interest is to be paid

Easy Availability of funds because ECB is more appealing to InvestorsSlide23

Thank You