INTERNATIONAL CAPITAL

MARKETS
• IT CONSISTS OF INTERNATIONAL
BOND MARKETS – FIXED INCOME
SECURITIES MARKET
• AS WELL AS EQUITY MARKET-
SHARES&STOCKS
• IT PROVIDES FOR PRIVATE
PLACEMENT ALSO FOR RAISING
CAPITAL BY MANY COMPANIES
 ADVANTAGES
• MECHANISM FOR ALLOCATING GLOBAL
RESOURCES TO CORPORATES
• EFFICIENCY,SAFETY,INTEGRITY&
• TRANSPARENCY OF TRANSACTIONS
• REDUCTION IN TRANSACTION COST DUE TO
AUTOMATED TRADING,
• COMPRESSION OF SETTLEMENT
CYCLE,DEMATTING ETC
• MINIMAL COST-BROKERAGE,REGULATOR’S
FEES,SAFE KEEPING &CLEARING COST ABOUT
0.3%OF VALUE OF TRADE-
• LIQUIDITY
• VOLATILITY
• TRANSACTION COST EFFICIENCY OF
CAPITAL MARKETS
• INFORMATION EFFICIENCY
• ALLOCATION EFFICIENCY-60-80%OF
STOCKS MOVE IN THE SAME DIRECTION
IN EMERGING MARKETS-CHINA
• INDIA IS 70%-BRAZIL&INDONESIA
 FEATURES
• INTEGARATION OF MONEY,FOREX AND
CAPITAL MARKETS-FUNDS FLOW FROM
ONE MARKET TO THE OTHER
• HIGHLY SOPHITICATED HEDGING
INSTRUMENTS ARE AVAILABLE-
• OPTIONS,FUTURES,FORWARD RATE
AGREEMENTS/INTEREST RATE SWAPSETC
• RISK MANAGEMENT TECHNIQUES
• BOOK BUILDING PROCESS FOR
STRENTHENING PRICE
DISCOVERYPROCESS
• ELECTRONIC TRADING IN EXCHANGES-
ROLLING SETTLEMENT MECHANISM-T+3
DAYS
• TRADING MEMBERS MARGIN BASED ON
TRADING VOLUMES
• MARK TO MARKET MARGINS BASEDBON
VALUE AT RISK TO CAPTURE RISK
PROFILE OF TRADING MEMBERS
 DISCLOSURE NORMS
• CORE DISCLOSURE
• ADDITIONAL DISCLOSURE
• ACCOUNTING PRACTICES
• US GAAP
• IAS
• ICAI
 MARKET PLAYERS
• SOVEREIGN GOVTS
• WORLD BANK,ADB,CENTRAL
BANKS,MULTINATIONAL BANKS
• MUTAL FUNDS,PENSION
FUNDS,AMCS ETC
• MNES,CORPORATES,COMMERCIAL
BANKS,HIGH NETWORTH
INDIVIDUALS
 INTERNATIONAL CAPITAL
MARKETS
• VAREITY OF INSTRUMENTS AVAILABLE
IN INTERNATIONAL CAPITAL MARKET
• MARKET CAPITALISATION IS VERY HIGH--
TOTAL NUMBER OF SHARES OF STOCK
LISTED*THE MARKET PRICE PER SHARE-
IN BN OF US$
• USA-13,451 U.K-2374 GERMANY-1094
JAPAN-2496 FRANCE-991 INDIA-165
CHINA-251
 EMERGING MARKETS
• STOCK MARKETS ARE ANOTHER
SOURCE OF EQUITY CAPITAL
• GROWTH OF EMERGING STOCK
MARKETS-MKT CAPITALISATION
HAS INCREASED FROM 3.6 %IN 1986
TO 12.7 %IN 1994.
• ASIAN CRISIS DEVASTATED THE
EMERGING MARKETS
 LISTING FACILITIES
• LISTING FACILITIES FOR FOREIGN
COMPANIES-
NYSE,NASDAQ,LUXEMBURG
HONGKONG,TOKYO,SINGAPORE
• E*TRADE-ELECTRONIC TRADING OF
STOCKS IS EMERGING AS MAJOR
SOURCE OF COMPETITION TO THE
STOCK EXCHANGES
 LISTING IN NYSE
• DEVELOPS A BROAD SHARE HOLDER
CONSTITUENCY IN USA
• FACILITATES MERGERS AND
ACQUISITIONS
• INCREASES THE VISIBILTY OF THE
COMPANY
• SUPPORTS A COMPANY’S INCENTIVE
PROGRAMMES FOR U.S EMPLOYEES
 AMERICAN DEPOSITORY
RECEIPTS(ADR)
• MOST POPULAR WAY FOR EURO EQUITY
TO GET LISTING IN USA
• ADRs ARE TRADED LIKE SHARES OF
STOCK
• EACH ADR REPRESENTS SOME NUMBER
OF SHARES OF UNDERLYING STOCK
• E.G INFOSYS ISSUED 2ADRS FOR EACH
SHARE IN INDIAN STOCK MARKET
 GLOBAL DEPOSITORY
RECEIPTS(GDR/EDR)
• LESSER REPORTING REQUIREMENTS AS
COMPARED TO SECURITIES EXCHANGE
COMMISSION
• GLOBAL SHARE OFFERING- SUCH AS THE
ONE ISSUED BY DAILMER CHRYSLER-
SIMULTANEOUS OFFERING OF ACTUAL
SHARE ON DIFFERENT EXCHANGES
• DISADVANTAGE-DAILMER IS HAVING A
HARD TIME ATTRACTING BACK USA
INVESTORS
 CASH FLOWS OF A FIRM
• FOUR MAJOR AREAS
• CAPITAL STRUCTURE-DETERMINING THE
PROPER MIX OF DEBT AND EQUITY
• CAPITAL BUDGETTING-ANALYSING
INVESTMENT OPPORTUNITIES
• LONG TERM FINANCING-
SELECTION,ISSUANCE &MGT OF LONGTERM
DEBT AND EQUITY
• WORKING CAPITAL MGT-MGT OF
COMPANY’S CURRENCY ASSETS
&LIABILTIES
 DEBT MARKETS
• COMPANIES CAN USE LOCAL AS WELL AS
GLOBAL DEBT MARKETS TO RAISE FUNDS
• LEVERAGE-FUNDING GROWTH BY DEBT-
VARIES FROM COUNTRY TO COUNTRY
• LEVERAGING IS COST EFFECTIVE ROUTE
TO CAPITALISATION AS
• INTEREST ON DEBT IS TAX DEDUCTIBLE
EXPENSE WHILE DIVIDENDS ARE NOT
 CAPITAL STRUCTURE
• COUNTRY SPECIFIC FACTORS ARE A
MORE IMPORTANT DETERMINANT
OF CAPITAL STRUCTURE THAN ANY
OTHER FACTOR
• FOREX RISK,CURRENCY FLOWS
RESTRICTIONS,DIFFERENT TAX
RATES AND LAWS,REGULATION ON
ACCESS TO CAPITAL
 LEVERAGING –COUNTRY
FACTORS
• EXCESSIVE RELIANCE ON LONG
TERM DEBT INCREASES FINANCIAL
RISK AND SO REQUIRES HIGHER
RETURN FOR INVESTORS
• IN SOME COUNTRIES FOREIGN
SUBSIADIARY OF AN MNE HAVE
LIMITED ACCESS TO CAPITAL
MARKETS
 DEBT-EQUITY RATIO OF
COMPANIES
• NETHERLANDS-32/68
• BRAZIL-37/63
• USA-54/46
• AUSTRALIA-49/51
• MEXICO/CANADA-51/49-52/48
• ENGLAND-64/36
• GERMANY-69/31
• JAPAN-65/35
 ASIAN FINANCIAL CRISIS
• ASIAN COMPANIES RELIED ON TOO MUCH
DEBT TO FUND THEIR GROWTH
ESPECIALLY BANK DEBT
• LACK OF DEVELOPED BOND/EQUITY
MARKETS FORCED THEM TO DEBT
• ASIAN BANKS BORROWED DOLLARS
FROM INTERNATIONAL BANKS AND LENT
THE MONEY BY CONVERTING INTO
LOCAL CURRENCIES
 THE FALL
• WHEN ASIAN CURRENCIES FELL
AGAINST DOLLAR BANKS COULD
NOT SERVICE THEIR LOANS AND
WENT BANKRUPT.
• COMPANIES WHICH BORROWED IN
DOLLARS FROM OVERSEAS BANKS
COULD NOT PAY THE DEBT AND
CAME CLOSE TO BANKRUPTCY
 THE RESULT
• MANY COMPANIES HAVE BEEN
FORCED TO
• EXCHANGE DEBT FOR EQUITY
THEREBY LOSING SOME OF THEIR
CONTROL OR
• SELL THEMSELVES OUTRIGHT TO
FOREIGN INVESTORS WHO COULD
PAY OFF THEIR DOLLAR DEBT
 OPTIONS FOR RAISING
CAPITAL FOR MNE
• DOMESTIC DEBT MARKET-JAPAN
FOR JAPANESE COMPANIES
• JAPAN FOR JAPANESE SUBSIDIARY
OF US COMPANY-LSI LOGIC
• TOYOTO ANNUAL REPORT-YEN
BONDS OF DIFFERENT MATURITIES
• FLOAT US DOLLAR/EURO BONDS
• EURO DOLLAR BORROWINGS
 BACK TO BACK LOANS
• ITALIAN SUBSIDIARY OF A US COMPANY
ACCESSES ITALIAN LOANS IN ITALY
BANKS
• WHEN ITS US PARENT COMPANY
PROVIDED DOLLARS TO THE US BRANCH
OF THE ITALIAN BANK
• USEFUL TO SUBSIDIARIES IF INTEREST
RATES ARE HIGH OR CREDIT IS FROZEN
 EURO CURRENCIES
• EURO CURRENCY IS ANY CURRENCY
BANKED OUTSIDE OF ITS COUNTRY
OF ORIGIN
• IN ESSENCE AN OFFSHORE MARKET
• SOURCES ARE-FOREIGN
GOVTS,OPEC,MNES,COUNTRIES
WITH LARGE BOP SURPLUSES
EURO CURRENCY MARKET
• A WHOLESALE MARKET
• BOTH SHORT AND MEDIUM TERM
• LIBOR IS THE INTEREST RATE THAT
BANKS CHARGE EACH OTHER ON
EURO CURRENCY LOANS
• A EURO CREDIT IS ALOAN OF 1-5
YEARS-SYNDICATION SPREADSTHE
RISK
 INTERNATIONAL BOND
MARKET
• THREE TYPES
• FOREIGN BONDS-FRENCH COMPANY
FLOATING A SWISS BOND ISSUE IN
SWITZERLAND
• EURO BOND-A BOND ISSUE BY US
COMPANY IN DOLLARS IN LONDON
• GLOBAL BOND-INTRODUCED BY WORLD
BANK IN 1989-REGISTERED IN SEVERAL
NATIONAL MARKETS LIKE
USA,EUROPE,ASIA ETC AS PER LISTING
REQUIREMENTS
 EURO BONDS
• TYPICALLY ISSUED IN
• DENOMINATION OF $5000 OR$10000
• PAY ANNUAL INTEREST
• HELD IN BEARER FORM
• TRADED OVER THE COUNTER
• NO NATIONAL REGULATIONS TO
GOVERN
 TOP FIVE INVESTMENT
BANKS
• DEUTCHE BANK-GERMANY
• MORGAN STANLEY-US
• WARBURG DILLON READ-SWIZLAND
• ABN AMRO-NETHERLANDS
• MERRIL LYNCH-US
• PROVIDE INTEREST RATE SWAPS
CURRENCY OPTIONS AS OTC
PRODUCTS
 OFF SHORE FINANCIAL
CENTRES
• OPERATIONAL CENTRE WHERE
EXTENSIVE BANKING ACTIVITIES SHORT
TERM FINANCIAL TRANSACTIONS-
LONDON,SINGAPORE,NEWYORK ETC
• BOOKING CENTRES-TRANSACTIONS ARE
RECORDED TO TAKE ADVANTAGE OF
SECRECY AND LOW TAX RATES-CAYMAN
ISLANDS,PANAMA,ENGLISH CHANNEL
MAURITIUS,ISLE OF MANN ETC