Trends of Financing Obtained by Indian Companies from International Financial Markets

International Banking Project (Under guidance of Dr. Sankersan Sarkar)

Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

funds from abroad Traditional source: Corporate profits and loans from domestic FI & banks Trend change: Increase in fund raise from overseas, due to lower cost, greater flexibility, speed and depth in International financial markets offer Instruments broadly classified as :
Capital Funding : FDI, FII & ADR/GDR Borrowing : ECB, FCCB/FCEB

Introduction demand for Huge need for investment, drives

Methodology
The study is based on the following methodology:
Data collection and analysis for 10 years Trends of changes in regulatory parameters Shift in associated international financing risks for Indian companies Opportunities and forecasting

Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

Foreign Direct Investment or company in (FDI) It is an investment made by a foreign individual

productive capacity of another country. It is the movement of capital across national frontiers in a way that grants the investor control over the acquired asset. Why India adopted an FDI-friendly regime

To bring down the chronic current account deficit by obtaining stable long term FDI To facilitate non-debt creating foreign capital inflows To develop the stock market Providing Indian enterprises an option of having capital at lower cost To improve the corporate governance structure of Indian enterprises

 How FDI benefited Indian Companies.. Technology and knowledge transfer Enhanced production capabilities Introduction of modern managerial techniques Access to marketing networks Offers competition

Benefits

How India succeeded in attracting FDI.. FDI friendly policy Foreign investment can now take advantage of the automatic approval route without seeking government approval Concomitant steps to remove hurdles in the path of foreign investors both at the stage of entry and later in the process of establishing the venture.

 Trend of FDI Inflows to India for Financial Years 2000 2012

FDI Inflows to India (Amount US$ million)
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

Trend : Volume

FDI Inflows to India (Amount US$ million)

FDI is considered as the safest type of external finance by developing countries FDI gained momentum in India in the last two decade FDI in India has increased manifold since 2001. From US$ 4,029 million in 2001, it increased to US$ 32,901 in year 2011

Trend :(2000 to 2011) - Sector wise Sector wise FDI Inflow

OTHERS 32% SERVICES SECTOR 20% TELECOMMUNICA TIONS 8%

PETROLEUM & NATURAL GAS 2% METALLURGICAL INDUSTRIES 4% AUTOMOBILE

INDUSTRY 4%

DRUGS & HOUSING & PHARMACEUTICAL CONSTRUCTION REAL ESTATE S ACTIVITIES POWER 7% 6% 6% 4%

COMPUTER SOFTWARE & HARDWARE 7%

Among sectors, Service sector tops the chart of FDI inflows accounting 20% of the total inflows, followed Telecommunications (8%), Computer Software & Hardware (7%) and Housing and Real Estate sector (7%)

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Sector wise comparison in inflows for 2009-10 & 2010-11

25,000 200.0 150.0 100.0 15,000 50.0 10,000 0.0 5,000 -50.0 -100.0 20,000

USD million

TELE SERVI COM CES MUNI SECT CATIO OR NS 2009-10(USD Million) 19,945 12,270 2010-11(USD Million) 15,053 7,542 % Change to total Inflows -24.5 -38.5

COMP UTER SOFT WARE & HARD WARE 4,127 3,551 -14.0

HOUS CONS ING & TRUC REAL TION ESTA ACTIV TE ITIES

DRUG PETR AUTO META S& OLEU MOBI LLUR PHAR POWE M& LE GICAL MACE NATU R INDUS INDUS UTICA RAL TRY TRIES LS GAS 6,138 5,796 -5.6 5,893 5,864 -0.5 1,999 5,023 151.3 1,297 2,543 96.1

14,027 13,469 1,006 5,600 4,979 961 -60.1 -63.0 -4.5

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 FDIs from countries Mauritius, Singapore, Japan, USA & UK accounts 60% of the total inflows into the country.

Observation

Overall FDI into almost all the sectors had declined in the year 2010-11, a reason for which could be the global situation, inflation, increasing fiscal burden etc The main determinants of FDI in developing countries are inflation, infrastructural facilities, debts, burden, exchange rate, FDI spillovers, stable political environment etc

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Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

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Trend of FII investment in India

2,000,000 1,500,000

1,000,000

500,000

-500,000

-1,000,000
FIIs Net Investment in Equity ($ mn) FIIs Net Investment in Debt ($ mn)

FIIs Total Investment ($ Mn)

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 FDI is considered as the safest type of external finance by developing countries FDIs from countries Mauritius, Singapore, Japan, USA & UK accounts 60% of the total inflows into the country The main determinants of FDI in developing countries are inflation, infrastructural facilities, debts, burden, exchange rate, FDI spillovers, stable political environment etc FII Flows supplement and augment domestic savings and domestic investments

Key Observations FDIscompared to FDI & FIIs Entry and Exit is relatively very easy for an FII as

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Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

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 Covers commercial loans Bank loans, buyers credit, suppliers credit, securitized instruments availed from non-resident lenders with minimum average maturity of 3 years. Routes for ECB access
Eligible borrowers Amount and Maturity

External Commercial Borrowings (ECBs)

Recognized Lenders and All-in-cost ceilings Parking of ECB proceeds Prepayment and Refinancing an existing

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ECBs (Outstanding & Disbursement)

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Forms of ECB - Trends

19

Purpose wise distribution FY2011

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 Domestic loan refinancing by ECBs is not available for companies in sectors like retail, construction, services etc Use of ECBs for on-lending is not allowed Absence of full capital account convertibility

Key issues & Future Outlook

Reasons for expected increase in ECB demand Huge spending plans on Infrastructure
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Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

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 FCCBs are bonds with a fixed maturity period issued by Indian companies to foreign investors. The bond holders are given the option to convert the bonds into shares of the issuer company at the time of maturity at a pre-decided price. Until they are converted to shares, FCCBs constitute debt of the company. FCCBs are quasi debt Instrument with features of both Equity & Debt. It is a Debt instrument issued in a currency different
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Foreign Currency Convertible Bonds (FCCBs)

Salient minimum 3 years consistent track features Issuer Company to have a

record of good performance Forex Services. Maximum amount: US$ 500 Million in a Financial Year Call and Put option The interest on FCCBs is generally 30 - 40 % less The redemption of FCCBs can be made at a premium or at par or even at a discount Credit rating of Bonds is not mandatory The issuance of FCCBs invariably requires the approval of existing consortium of lenders

Credit rating of Bonds is not mandatory

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Total FCCB Outstanding Debt

16,000.00 14,000.00 12,000.00 11,391.95 10,000.00 14,240.91 13,282.46 12,392.66 13,993.09

Million
USD

8,000.00 6,000.00 4,000.00 2,785.24 2,000.00 0.00 210.00 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 6,464.35

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FCCB Inflows
7000.00 6000.00
5152.59 4791.84 5810.93

5000.00

USD Million

4000.00

3000.00
2726.32

2776.65

2000.00
1325.00

1000.00

0.00 2004-05 2005-06 2006-07 2007-08

26.56

2008-09

2009-10

2010-11

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 Investors are worried about the FCCB exposure of Indian companies Volatility of the stock market and the depreciation of the rupee against the dollar have changed the equation for FCCB-issuing companies Indian companies are now burdened with huge foreign debt overruns A number of FCCBs will mature before June 2012 60% raised at less than rate of Rs 42 Cumulative MTM loss of approximately
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Current Scenario

Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

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 A way of raising capital from the international money market. Negotiable (transferable) financial security, traded on a local stock exchange, representing equity/debt issued by a foreign publicly listed company. Need of DR regulatory issue in foreign listing Can be traded publicly or over-the-counter Types of DRs
Capital raising and Non-capital raising
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Depository receipts

Issuer Issue proceeds in foreign currency Huge amount raised in the global market at cheaper rates Dividend payable is in Rupees Certainty of raising new capital and the issue terms Control is not affected immediately Can float more than one foreign equity issue in a year Investor Facilitating diversification Eliminating cross boarder custody Easy comparison Quick settlement Salient features Underlying shares, Denomination, Dividend, Listing, Voting, Transfer, Redemption, Sale, Listing of underlying shares

Benefits

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Issuance and Regulation

Regulating body - Foreign Investment Promotion Board (FIPB), Ministry of Finance Automatic Route of Foreign Investment- for company within specified Sectorial cap Exception: Company control/ ownership will be transferred to a non-resident entity due to amalgamation, merger, acquisition Company established with foreign investment & owned/controlled by a non-resident entity
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There are 15 ADRs, all are sponsored, out of which 12 are for capital raising purpose. There are 178 GDRs, all are sponsored, in which 120 are for capital raising purpose. ADR/GDR Yearly Trend
7000 6000 US $ million 5000

Observation and Trend

4000
3000 2000 1000 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Policies towards ADRs and GDRs have been liberalised over the past few years and unsurprisingly are much less restrictive than those towards ECBs and FCCBs During global meltdown, volume has decreases but again it is picking up as 32

# of Industry (with significant ADRs/ no. of companies) GDRs Banks 7 Electron.& Electric Eq. Food Producers General Retailers Oil & Gas Producers Support Services General Industrials Industrial Engineer. Construct. & Materials Indust. Metals & Mining Pharma. & Biotech. S/w & Computer Svc. 7 7 7 7 7 8 8 13 14 15 30

Industry and Exchange wise break up

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Agenda Introduction and Methodology

Foreign Direct Investment (FDI) Foreign Institutional Investors (FII)

External Commercial Borrowings (ECBs)

Foreign Currency Convertible Bonds (FCCBs) Depository Receipts (ADR/GDR)

Conclusion and Reference

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Conclusion Capital Inflows

FDI is a better, long lasting and reliable source as compared to FIIs because unlike FII, FDI has a comparatively stable nature. As observed in the current study, during recession period of FY2008 and FY2009, FIIs pulled out most of the money which created pressure on the markets as well as on the economy. Due to hassles faced by Indian corporates in listing their shares in foreign stock exchanges ADRs / GDRs are not a very attractive fund raising instrument.

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 Borrowings

Conclusion

Post recession the market prices of almost all the Indian companies who had availed FCCBs went down sharply and the stocks could not meet the strike price. This resulted into increased debt obligation on the companies which are still reeling due to the double hit due to increased debt obligation and depreciating rupee. Due to relaxed norms raising ECB has become easier for corporates and thus they have started availing ECB for meeting their funding requirements on cheaper rates. However depreciating rupee has adversely affected them as well which if properly hedged, can protect the corporates.

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www.bseindia.com www.sebi.gov.in www.rbi.org.in http://www.adrbnymellon.com https://www.adr.com (J P Morgan DR Repository) http://en.wikipedia.org/wiki/American_Depositary_ Receipt (ADR) http://www.gopubliceu.com/globaldepositoryrecei pt.html (GDR)

Reference

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Thank you

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