INTERNATIONAL Capital Market

International capital market
S.CLEMENT
No Financial Boundaries
But
Only Geographical Boundaries
The free movement of capital across borders has created
and
will certainly Continue to create enormous economic benefits

Ben S. Bernanke
(Governor, FED Reserve, USA)
Features of the post-BW system
Gradual end on the constraints of money
creation
• Evolved from using a gold standard to $

pegs with a gold guarantee
• 1971 Nixon Shock

– Gold link broken by Nixon due to domestic
spending and costs of Vietnam war
• Fiat money system

– Money could be created without underlying asset
backing it
Features of the post-BW system
Bretton Woods-era gave way to freer flows of capital and
floating exchange rates
• Volatility drastically increased

– Contradicting expectations and orthodox economic
predictions
• Volatility created need to hedge against fluctuating

prices
– New markets in volatility-management tools: derivatives
– Created marketplace for speculative profits and amplified the
use of these tools
• Assault on transparency
– Vast majority of derivatives ‘OTC’ – over the counter and not
traded on exchanges
– Created mechanism to avoid supervision or regulatory
oversight
Capital flows – still going uphill
Net capital flows have been negative due to reserve
accumulation
2007
China $1.5 trillion
Russia $455 billion
Mid East $638 billion
Africa $145 billion
• Sterilisation of exchange pegs by purchase of US

Treasuries
• Provides Insurance
International capital market
• The group of closed interconnected markets in
which residents of different countries trade
assets such as currencies, stocks and bonds
• The risk associated with a trade of assets is
shared when assets are traded internationally.
• When people are risk averse, countries can gain through the
exchange of risky assets.
• International capital markets make these trades possible.
• Portfolio Diversification as a Motive for
International Asset Trade
– International portfolio diversification can allow
residents of all countries to reduce the variability of
their wealth.
• International capital markets make this diversification
possible.
Menu of International Assets
• The : Debt Versus Equity
– International portfolio diversification can be carried out
through the exchange of:
• Debt instruments
– Bonds and bank deposits
» They specify that the issuer of the instrument must repay a
fixed value regardless of economic circumstances.
• Equity instruments
– A share of stock
» It is a claim to a firm’s profits, rather than to a fixed
payment, and its payoff will vary according to
circumstance.
International Banking and the
International Capital Market
• The Structure of the International Capital
Market
– The main actors in the international capital
market are:
• Commercial banks
• Corporations
• Nonbank financial institutions
• Central banks and other government agencies
Borrowing in the International Capital Market
The International Capital Market
and the Gains From Trade
Figure 21-1: The Three Types of International Transaction
Home Foreign
Goods Goods
and and
Services Services
Assets Assets
To sum up
• FII to broker: Hold off on those INFY
shares, get me a bunch of Hussains &
Pynes instead
Two academics evaluate the returns of the
art markets in India, Russia and China
over the last decade, using a portfolio
theory/ CAPM framework.
Investors constantly hunt for alternative
assets that might improve the risk-
adjusted returns on
Regulators at various countries
• Australian Securities and Investments Commission, (Australia);
• Financial Supervision Commission, (Bulgaria);
• Canadian Securities Administrators, (Canada);
• Financial Supervision Authority, (Finland);
• Autorité des marchés financiers, (France);
• Bundesanstalt für Finanzdienstleistungsaufsicht, (Germany);
• Securities and Futures Commission, (Hong Kong);
• Securities and Exchange Board of India, (India);
• Financial Services Authority , (United Kingdom);
• Dubai International Financial Centre, (United Arab Emirates);
• Financial services authority (UK)
• SEC ( USA)
What is capital market ?
• Capital markets provide a mechanism for
intermediation over the long term between financial
surplus units and financial deficit units. As such
they form the artery for the flow of resources
among the various economic sectors.
• Healthy capital markets grow from the real needs of
the economy, es-pecially the need for long-term
financing, and they develop through serving
resident and non-resident sectors.
• These markets thrive within an appropriate legal
and regulatory environment and a stable
economy.
International capital Market
• The international capital markets have undergone
a boom during the past decade.
• Total capitalization of the global securities market
was estimated at $19 trillion at the end of 1988.
• A noticeable phenomenon of the 1980s was the
huge growth of foreign institutional investment
from the major industrial countries, and equity
assets held by foreign investors totalled 6.7% of
world market capitalization, and reached a total
value of $640 billion at the end of 1988.
• First, the scale of gross capital flows throughout the
world is expanding, reflecting financial innovation,
lowered barriers to capital movements, and a
decline in what economists refer to as "home bias."
• Second, increased capital mobility is making it
possible to finance ever larger current account
deficits, and, indeed, these deficits have grown in
recent years relative to the size of the global
economy.
• Finally, in the aggregate, capital has been flowing,
on net, from emerging-market economies to
industrial countries in recent years, the reverse of
the pattern in
• 1. the scale of gross capital flows throughout the
world is expanding, reflecting financial innovation,
lowered barriers to capital movements, and a
decline in what economists refer to as "home bias."
• 2. increased capital mobility is making it possible to
finance ever larger current account deficits, and,
indeed, these deficits have grown in recent years
relative to the size of the global economy.
• 3. in the aggregate, capital has been flowing, on
net, from industrial countries to emerging-market
economies in recent years, the reverse of the
pattern in the past.
Reason for growth?
• 4. trend has been a shift in the major markets toward the securiti-zation
of finance.
• The above trends have occurred in an environment marked by a high
degree of market volatility, partly fueled by interest rate and exchange
• rate uncertainties in the major industrial countries, and the resultant large
and shifting capital flows among markets and sectors.
• 5. One noticeable consequence of this environment has been the
development of new financial instruments, such as options and forward
contracts, aimed at reallocating the various types of risks, especially
exchange and interest risks.
• 6.Another consequence is that the concerned authorities in many
countries have been reviewing their regulatory and supervisory
frameworks, and adapting them to shifts in global capital markets.
• 7.There is now, for example, more emphasis on capital adequacy
requirements for international banks, and there are moves to-ward
international coordination for closer monitoring of the banks’ large
exposure limits, interest rate risks and securities dealings.
Reason for growth?
• 8.deregulation and liberalization of rules governing financial
transactions in individual markets have suddenly expanded the
scope of activities and operations for financial intermediation
and for investment.
• 9. globalization, or internationalization, of markets has
expanded the geographic scope for intermediation and in-
vestment well beyond national or regional borders. As a result,
now corporate planners and strategists, investment managers,
and official policy-makers must keep in mind the various forces
interacting in the world markets when making their decisions
• 10.Explosive development of derivative markets encouraged
investors to flock to international markets since risk can be
transferred
Reason for growth?
• 11.there has been in-tense competition to take
advantage of the economies of scale and of
specialized niches in financial intermediation
and investment.
• 12.This trend has been most noticeable in the
rush toward mergers and acquisitions that
have led to the restructuring of many
international finan-cial institutions, as various
market participants, and some concerned
authorities, have worked to position
themselves for the future. E.g. Kraft Foods &
Cadbury.
• According to estimates by the International Monetary
Fund (IMF), the developing economies as a group had
a current account surplus of $640 billion last year
(IMF, 2007).
• Because the financial counterpart to this surplus is a
deficit on the financial accounts, it represents the net
capital outflow to the industrial economies. $640
billion is a big number and stands in sharp contrast to
the situation preceding the Asia crisis.
• For example, in 1996 the combined current account
balance of the developing economies was a deficit of
$80 billion, representing a capital inflow of that amount
from the industrial world.
• Of those developing economies running current account
surpluses, a mere seventeen of them--China, four other
Asian economies, Russia, and eleven members of the
Organization of Petroleum Exporting Countries--accounted
for a combined surplus of $710 billion.
• And about half of that was generated by the major oil-
exporting countries in the Middle East and by Russia,
whose surpluses ballooned in the past several years as oil
prices soared.
• Thus, the other 131 developing economies in our data had
a combined current account deficit, or net capital inflow, of
$70 billion. This is not to say that things have not changed
for these 131 countries in the past decade: In 1996, their
combined current account deficit was twice as large as it
was last year.
• In 2005, gross capital outflows from the
developing economies totaled almost $1.2
trillion--more than a tripling of the 1996 figure.
• Thus, question , "Why has capital stopped
flowing from the industrial countries to the
developing economies?" In gross terms it has
not stopped; in fact, the flow has accelerated!
• The question instead is, "Why are the
developing economies investing so much in the
industrial countries?" E.g. CHINA
• Of the gross capital outflow from the developing
economies in 2005, fully half reflects the further
accumulation of foreign exchange reserves by the
official sector. To be sure, a large part of this
reserve accumulation was by the seventeen
economies singled out earlier as large capital
exporters (IMF, 2007).
• But the other 131 economies also recorded
substantial reserve accumulations.
• it turns out that, in 2005, private capital flowed, on
net, from the industrial economies to the developing
economies.
• Net capital is flowing from the developing to the industrial
world. Economists sometimes refer to this phenomenon as
capital flowing "uphill" because it appears to contradict
economic logic (See Prasad, Rajan, and Subramanian, 2006).
• There are two elements of that logic. First, in developing
economies, labor is generally much more available than capital;
accordingly, capital should in principle be more productive in
these economies and should thus flow there from the relatively
labor-scarce industrial countries.
• Second, the relatively rapid income growth expected by
developing economies as they catch up to industrial countries
should provide them with incentives to borrow against their
expected higher future incomes.
• These considerations lead economists to puzzle over both the
net outflow of capital from the developing economies and its
implications for the global economy.
• One approach to explaining the uphill flow of capital focuses
on divergent patterns of growth and investment. According to
one such view, the rise in U.S. productivity growth since the
mid-1990s boosted perceived rates of return on U.S. assets
and thus attracted capital; expectations of higher rates of
return and higher incomes likely boosted U.S. investment and
consumption spending as well (Erceg, Guerrieri, and Gust,
2006; Ferguson, 2005).
• A complementary explanation, labeled the "global saving glut"
by Federal Reserve Chairman Bernanke several years ago,
argues that during the past decade, declines in investment
spending outside the United States--in part because of
emerging-market crises--led to a surplus of saving over
investment abroad that was channeled toward the U.S.
economy (Bernanke, 2005; Gruber and Kamin, forthcoming).
• The global saving glut argument suggests that
developing economies have benefited from the
recent pattern of global capital flows, gaining both
demand for their products and a safe return on
their assets at a time when an investment slump
threatened to depress domestic activity and rates
of return.
• The implications of the U.S. productivity story are
a little harder to read, but developing economies,
especially in Asia, likely have benefited from the
expansion of investment and production
opportunities created by the revolution in
information technology
International Capital Market- Bonds
• In a foreign bond issue, an issuer from one country issues debt
securities in the domestic market of another country.
• The issue is denominated in the currency of the host country
and with assistance of a syndicate from that country. The
potential buyers are domestic investors.
• Market practitioners have given foreign bond odd nicknames.
The most famous one is the so-called "yankee bond"
(denominated in US dollars and issued in the US market).
Similarly, other foreign bonds are: "samurai" (Japanese
market), "bulldog" (British market), "matador" (Spanish market),
and "navigator" (Portuguese market) which are denominated in
Japanese yen, pound sterling pound, Spanish pesetas and
Portuguese escudos, respectively.
– Eurodollars
• Dollar deposits located outside the U.S.
– Eurobanks
• Banks that accept deposits denominated in
Eurocurrencies
– Eurocurrency trading has grown for three
reasons:
• Growth in world trade
• Evasion of financial regulations like reserve
requirements
• Political concerns
• The Growth of Eurocurrency Trading
– London is the leading center of Eurocurrency
trading.
– The early growth in the Eurodollar market was due
to:
• Growing volume of international trade
• Cold War
• New U.S. restrictions on capital outflows and U.S.
banking regulations
• Federal Reserve regulations on U.S. banks (e.g., the
Fed’s Regulation Q)
• Move to floating exchange rates in 1973
• Reluctance of Arab OPEC members to place surplus
funds in American banks after the first oil shock
• Eurobonds are bonds (or notes) issued in the
international market (also called "euromarket"). The
main differences usually cited is that eurobonds are
intended for international investors and syndicated
internationally while foreign bonds are for domestic
investors and syndicated domestically.
• The participants in any securities market (domestic or
international) are issuers, dealers and investors.
• The issuers are the entities that issue the securities in
order to raise money to finance their investments, or,
in the case of financial institutions, to re-lend the funds
to other borrowers.
• The dealers are financial institutions, usually large and
traditional investment banks, responsible for arranging
the operations and selling the securities to investors.
• The investors are the buyers of the securities. The
most important investors are pension funds, insurance
companies, investment funds and mutual funds
(institutional investors). The private investors around
the world also represents a significant portion of the
potential buyers in the market.
• It is important to mention that there are large amounts
of money deposited abroad (mainly in off-shore
centers) owned by private investors. These funds are
the so-called flight capital (money that ran away from
a country searching for better yields or due to
economic and/or political instability).
Euro Bond Market - Genesis
• According to Graaf, the historical origin of the eurocurrency
markets may be traced to shortly after World War II. At that
time, the Soviet Union, the Eastern European countries and
China choose to protect their dollar balances against "freezing
orders" or other US governmental interference by transferring
them from US banks to banks under their control in Western
Europe.
• During the early 1950s the US dollar supplanted sterling as the
primary reserve currency used in international financial
transactions and as the primary currency used in international
trade.
• At the same time, the United States developed very substantial
deficits in its balance of payments. Therefore, non-US
corporations, central and other banks, and financial entities
inevitably acquired large amounts of US dollars.
• According to Bell the eurobanks (including the foreign branches
of US banks) succeeded in offering competitive interest rates
vis-à-vis the domestic banks in North America and Europe.
• It happened because the eurobanks were not required to
observe US banking regulations regarding mandatory non-
interest bearing reserves and the maximum interest payable on
time deposits.
• Consequently, dollar holdings were transferred to interest-
bearing accounts with overseas branches of US banks and with
European and other banks. Those accounts were maintained in
dollars rather than in local or other currency because, due to
avoidance of regulatory costs and extra risk, the eurodollar
deposits paid higher interest rates.
• In that environment of capital movement, a significant number
of US residents also transferred deposits to banking institutions
outside the USA, providing another source of foreign dollars.
• E. g Recently IRS in US investigated secret Swiss a/cs.of
US residents and also put penalty on Swiss banks.
• Over time, the eurodollar market rapidly expanded to
become an important, low cost and easily
accessible source of funds. Other eurocurrencies
have developed next to the eurodollar and share the
same characteristics.
• The euro deposits generated inter bank euro loans
and commercial euro loans to end-users. These
transactions were not necessarily short term loans;
medium and long term loans (syndicated or not) were
available as well. These loans were generally made at
a floating rate of interest; the benchmark for pricing
the overwhelming majority of eurocurrency loans was
the six-month LIBOR (London Interbank Offer Rate).
• The activity of the euro banks through the
intermediation of funds denominated in
Eurocurrencies was called euro market
• Until the early 1960s, foreign borrowers raised money by
issuing securities in the US market (foreign bonds). However,
the American Monetary Authority, in order to reduce the flow
of funds out of the USA and, thereby, to redress the balance
of payments deficit, imposed several controls in the mid-
1960s upon both domestic and foreign borrowers.
• As a result, many US and foreign borrowers turned to the
euromarkets. This shift led to the creation of the
eurosecurities market. Some examples of fixed-income
eurosecurities are eurobonds, eurocommercial paper and
eurocertificates of deposit.
• This first eurobond issue was arranged in 1963 for an Italian
issuer, denominated in US dollars and lead-managed by a
British merchant bank.
• Since then, the eurobond market has grown rapidly. As an
indication of its present size, eurobond quarterly trading
volume well exceeds US$ 1.2 trillion according to the
Association of International Bond Dealers (AIBD).
Features of Euro Bond
• The main eurobond features are as follows:
– not issued on or into only a domestic market but marketed
internationally;
– sold to a wide range of investors through a multinational syndicate of
underwriting firms and banks;
– denominated in a currency that is not necessarily native to the
investors or the syndicate members through whom the securities are
sold. Therefore, investors in eurobonds take both credit and foreign
exchange risks;
– generally bearer instruments to facilitate negotiability (high liquidity
and, therefore, easy cash convertibility) and anonymity of the
ultimate investors;
– either issued with the benefit of a stock exchange listing, normally in
London or Luxembourg (although still placed with investors in
various countries) and, therefore, called a "public offering", or placed
with such investors without a listing (private placement).
Euro Bond market
• in the eurobond market the buyers of the bonds, in the first
instance, are exclusively financial institutions (the syndicate).
• Usually, eurobonds are not offered directly to the public, but
are offered mostly to banks and other financial institutions for
placing with central banks, insurance companies, investment
funds, multinational corporations and private investors.
• As any kind of activity (economic or not), investing in eurobonds
implies in some kind of risk for all the parts involved.
• Usually, the market measures that risk in terms of spread
(premium) over the yield paid by the comparable notes/bonds
issued by the United States Treasury (worldwide considered
the lesser risk fixed-income securities available).
• Even the eurobonds denominated in a currency other than US
dollar are compared to the US Treasury securities in a swap
(exchange) basis.
International debt crisis
• THE DEVELOPING-COUNTRY EXTERNAL DEBT
CRISIS
• World economic conditions were deeply affected by the
second international petroleum crisis between 1979 and
1980, when oil prices rose 50%.
• As inflationary pressures accumulated, the industrialized
countries raised interest rates sharply. In connection, for
example, six-month LIBOR rose from about 9% in 1978 to
more than 16% in 1981.
• The immediate impact of the anti-inflationary policies were:
– a contraction of the world trade;
– reduction in the attractiveness of investing in developing-country
assets;
• Because of their global magnitude, that events caused a
retraction in international credit, reducing capital flows to
developing countries and raising doubts about their
repayment capacity. The combination of these effects had
disastrous consequences for those countries’ balance of
payments, specially the Latin-American countries which had
a high level of indebtedness.
• According to Paula, the developing countries were
particularly vulnerable to changes in world economic
conditions in the early 1980s because most of their external
commercial bank debt carried floating interest rates basis.
Thus, the higher interest rates caused an unexpected
change in cash flow, making the previously- accumulated
debt excessively large and burdensome.
• In August of 1982, the international financial community
experienced a crisis when Mexico’s Finance Minister
announced that his country was unable to meet its foreign debt
payment on time. Thereafter, more than two dozen countries
followed Mexico’s example in the next 18 months, undermining
the world financial market’s confidence. Thus, the capital
inflows used to finance interest payments and trade deficits
dried up.
• The developing-country external debt crisis produced strong
effects for a long period. In fact, the decade was marked by a
successive restructuring of debt agreements between
commercial banks and developing countries. However,
considering the extreme fragility of the developing-country
economies, most of those agreements failed.
• Finally, creditors and debtors reached a satisfactory
agreement under the so-called Brady Plan, which
began started in March 1989. According to Neira, by
1994 eighteen agreements with indebted countries
had been signed under the Brady Plan, involving
approximately US$ 191 billion.
• Mexico completed its rescheduling agreement in
February 1990, Costa Rica May 1990, Venezuela
June 1990, and Uruguay November 1990.
• Brazil reached a preliminary understanding with its
creditors in April 1991, but, the country did not
conclude its agreement until April 1994.
• All the bonds issued by the developing countries in
exchange for debt under the Brady plan are known in
the market by the nickname Brady bonds.
• At the end of 1982, with a balance of payments deficit of US$
8.8 billion and foreign reserves of US$ 3.9 billion, Brazil
reached an agreement with the IMF, opening the doors to
negotiations with the international banking community.
• Since then, negotiations were delayed several times because
did not meet previous agreements. In fact, all the agreements
reached by the country prior to 1994 just postponed the
external debt problem.
• In 1986, due to the economic difficulties of the Cruzado Plan
and to the large capital account deficit caused by substantial
current account shortfalls, the level of reserves dropped
sharply. This decline led the government to declare, in
February 1987, a moratorium on principal and interest
payments to commercial banks.
FDI Flow
• Net FDI flow to developing countries and economies in
transition had grown rapidly in the 1990s, peaking in
2001.
• During the Asian financial crisis and subsequent
financial
• crises in emerging market countries, FDI was the most
resilient and became the consistently largest
component of net private capital flow to these
countries.
• The different modalities of FDI, Greenfield investment
and cross-border mergers and acquisitions (M&A)
have different effects on the domestic economy, in
terms of both net financial contribution and linkages
with the host economy.
EDI Flow
• Liberalization of FDI through legislative and regulatory changes
in a growing number of countries since the 1990s has
supported high levels of FDI.
• At the same time, although extensive privatization, particularly
in Latin American and Central and Eastern
• European countries, drove the surge in FDI in the second half
of the 1990s, it has largely run its course in many countries.
• Acquisitions by international investors of distressed financial
and non-financial institutions in Asia after the financial crisis
also brought direct investment flows through cross-border
acquisitions. In turn, the opportunities provided by low
production costs and its growing domestic market have been
the major sources of attraction towards China, the major
recipient of FDI in the developing world.
• The World Bank estimates that the ratio of FDI to GDP in the
top 10 recipient countries was more than twice that in low
income countries in 2003
FDI Flow
• Growth has been accompanied by significant
changes in the composition of FDI.
• The most important trend has been the rapid
growth of investment in services since the 1990s.
• This process has been associated both with the
expansion of transnational corporations into
developing countries’ service sectors, facilitated in
many cases by privatization and the opening of
domestic markets (for example, in financial
activities, telecommunications
• and, to a lesser extent, public utilities) and, more
recently, with the rapid growth of offshoring of
services by transnational corporations.
FDI Flow
• The share of services in the stock of
inward FDI in developing countries
increased from 47 per cent in 1990 to 55
per cent in 2002.
• At the same time, the share of
manufacturing in FDI stock declined from
46 to 38 per cent.
FDI Flow
• FDI in off shoring of services, involving relocation of lower value
added corporatefunctions, including computer programming,
customer service and chip design, has been increasing in a
number of developing countries.
• This type of FDI has a relatively large spillover effect
particularly through improvement of information and
communication technologies (ICT) infrastructure and capacity-
building in human capital, as in the case of the off shoring
of software development in India (United Nations Conference
on Trade and Development, 2004b, pp. 169-170).
* However, because of its relatively high-skill and ICT
infrastructure requirements, FDI in off shoring is limited to a
small number of countries.
Trade Finance by International Banks
• Trade finance, tied to international trade transactions, has
important implications for development.
• It is provided by banks, goods producers, official export
agencies, multilateral development banks, private insurers
and specialized firms, and is indirectly supported by
insurance, guarantees and lending with accounts receivable
as collateral.
• This type of financing rose sharply in the 1990s up until the
Asian crisis.
• Also, the average spread on trade finance had declined
significantly from more than 700 basis points in the mid-1980s
to 150 before the Asian crisis and on average was 28 basis
points lower than spreads on bank loans over the period
1996-2002 (World Bank, 2004)
• E.g.ADR/ECB for Indian corporate
• The creditors reacted immediately. The US Federal
Reserve Chairman Paul Volker decided to stop
negotiations with Brazil, but to go on with the other
indebted countries (Chile, Philippines, Mexico and
Venezuela).
• In 1989, again due to internal economic problems,
Brazil did not fulfill all the covenants under an
agreement reached in 1988. In July 1989, the
country declared a new principal and interest
moratorium for medium and long-term operations.
• Such actions delayed the Brazilian external debt
solution for more than two years.
• Such actions delayed the Brazilian external debt solution for more than two
years.
• The relationship problems with the international community, the lack of
credibility of its stabilization programs and the ineffective policies to stop
inflation were reflected in the prices of Brazilian debt the secondary market.
The discount rates reached more than 70%, meaning that credits were sold
for less than 30% of their face value.
• In fact, all the developing-country debts traded at high discount rates. It was
one of the factors that led the external debt problem to a voluntary market-
oriented approach implying in true debt reduction. That idea was
implemented by the Brady Plan, starting in March 1989.
• Mexico and Venezuela rescheduled their debt before the Brady Plan was
introduced and returned to the international bond market in 1988. Mexico
raised US$ 339 million and Venezuela US$ 256 million. In spite of this,
those countries joined the Brady Plan and completed their agreements in
February and June 1990, respectively, as already mentioned.
• Argentina returned to the market in 1990, raising US$ 21 million.
INTERNATIONAL MARKET CONDITIONS IN THE EARLY 1990’s
• The debt crisis virtually ended commercial banks new

lending to developing countries. In the United States, for
instance, the Inter Agency Sovereign Credit Risk Committee
(ICERC) kept setting higher provisions for new commercial
bank loans to those countries.
• Besides that, the banks were reluctant to tie-up capital by
making new loans to developing countries due to the
uncertainty about the latter repayment capacity. Therefore,
the euromarket was the only source of new money available.
It was not just a question of willingness, but one of cost.
• Thus, market re-entry by developing-country borrowers was
typically through the international securities market (equities
and fixed income instruments), and the source of funds was
dominated by nonbank investors. This pattern reflected
global trends toward both disintermediation and
securitization.
• International equity issues by companies from developing
countries totaled US$ 9.3 billion in 1992 (41% of the equity
issues in international equity market), compared with US$
5.4 billion in 1991 (35%), and US$ 1.3 billion in 1990
(15.5%).
• Some estimates suggested that secondary market
purchases amounted to some US$ 12 billion in 1991 and
US$ 14 billion in 1992, and that 28% of the total international
equity flows went to emerging markets in 1992 (up from 12%
in 1991). For instance, net foreign investment in the Brazilian
stock exchanges increased from US$ 0.6 billion in 1991 to
US$ 1.7 billion in 1992.
• Nonetheless, the international bond market was the main
avenue for market reentry by developing countries. Their
international bond issues totaled US$ 5.5 billion in 1989,
US$ 6.2 billion in 1990, US$ 12.4 billion in 1991 and US$
23.5 billion in 1992.
• Basically, the market re-entry was through sovereign borrowers
(Argentina and Chile, for instance) or high profile state-owned
companies (Brazil and Mexico).
• The modalities of developing-country market re-entry observed
in the late 1980s and early 1990s reflected, in part, the
particular international environment of that time.
• The main favorable factors were: the economic growth in
industrial countries, the level of interest rates (mainly in the
United States), the external debt agreements, and investors’
receptiveness to noninvestment grade securities.
• Beyond that, the market re-entry depended on particular
country circumstances and on market conditions.
• For instance, the existence of a large pool of flight capital
facilitated market re-entry by the main Latin American
borrowers (mainly until 1991
• According to data from the IMF, by 1992, 16 countries (accounting for about
80 percent of the bank debt of developing countries) had restructured, or
reached agreements to restructure, their bank debt under the Brady Plan. A
number of other countries were actively negotiating with bank creditors on
debt packages.
• The amounts of medium and long-term bank debt restructured were US$
80.2 billion in 1988, US$ 50.7 billion in 1989, US$ 28 billion in 1990, US$
17.8 billion in 1991 and US$ 80.5 billion in 1992.
• Given that the market-oriented negotiations concluded under the Brady Plan
implied significant debt reduction (compared with previous failed
agreements), the market was optimistic about the process providing a
definitive solution for the developing countries’ external debt.
• Another element that facilitated re-entry in the wake of debt operations was
the fact that restructurings involved securitization of old debt. This fact laid
the basis for the emergence of a liquid secondary market for high-yielding
instruments and attracted new investors not previously interested in
developing-country securities.
• The number of new issues on the international bond market
reached record levels in the early 1990s, confirming the
appetite for high-yielding sub-investment grade debt at that
time. Improvements in the economic performance of developing
countries were of key importance to this sharp turnaround in
international investor sentiment
• Reestablishing credibility with foreign investors hinged critically
on a combination of sound macroeconomic policies centered
around fiscal consolidation and market-oriented structural
reforms in the developing countries.
• The resulting trends toward more stable macroeconomic
environment and increasingly dynamic private sectors
persuaded investors that developing-country borrowers were in
an improved position to service their new debt and, in the case
of private sector debt, to obtain the foreign exchange needed
for debt service
• Investor interest in the high returns offered by developing
countries was also encouraged by the demise of other high-
yielding sectors, such as the junk bond market in the United
States and real estate markets more generally.
• Also, the implementation of extensive privatization programs
created new opportunities and helped attract large investment
flows from abroad, exposing investors to emerging market
securities. As a result, the institutional investors (mutual funds,
pension funds and insurance companies) entered the market.
• Finally, the successful experience of early re-entrants, including
Mexico, contributed to improving investor confidence levels,
facilitating re-entry by other developing countries.
• Brazil returned to the international bond market on July 10,
1991
Laws Of India – Outbound
Investments
• Key Legislations
– Companies Act
– Income Tax Act
– Stamp Duty Legislations
– SEBI Guidelines
– Takeover Code
– Exchange Control Regulations
(under FEMA & RBI rules)
Exchange Control Regulations
• Direct Investment in an Overseas
JV/WOS
– An Indian party (i.e. corporation) is permitted
to invest in a JV/WOS not exceeding 400%
of its net worth (as of the date of the last
audited balance sheet), either directly or
through a Special Purpose Vehicle (SPV).
– For a registered partnership, investment not
exceeding 200% of its net worth.
– The ceiling includes (i) contribution to the capital of
the overseas JV/WOS; (ii) loan granted to the
JV/WOS; and (iii) 100% of guarantees issued to, or
on behalf of JV/WOS.
– There are certain conditions imposed by the RBI
regulations for issuance of guarantees.
– Such as, (i) Indian entity may extend loan/guarantee
to an overseas concern only in which it has equity
participation; (ii) no “open-ended” guarantees (i.e.
the amount of the guarantee should be specified up
front); and (iii) corporate guarantees are required to
be reported to the RBI.
– The ceiling will not be applicable where, (i)
investment is made out of EEFC A/C; or (ii)
investment out of proceeds of ADR/GDR.
– Mandatory requirement of effecting
remittances towards investment in an
overseas JV/WOS through one branch of an
Authorized Dealer Bank.
Investment By Cash Or
Equivalent
• Partial/Full acquisition of an existing foreign
company, where the investment is more than
USD $5,000,000 (Five Million Dollars), a
valuation of the shares of the company is
required to be undertaken by an investment
banker/merchant banker registered with SEBI
or an investment banker/merchant banker
outside India, registered with the appropriate
regulatory authority in a target company’s
country.
Investment By Cash Or
Equivalent, cont.
• If the investment is less than USD
$5,000,000 (Five Million Dollars), valuation
by a chartered accountant or a certified
public accountant shall suffice.
Investment By Equity Swap
• Acquisition by way of swap of equity shares
of overseas company in consideration for
the shares of an Indian company would
require RBI & FIPB approval;
• Such share swap requires valuation of the
shares to be undertaken by a merchant
banker registered with SEBI; or investment
banker/merchant banker outside India
registered with the appropriate authority
(irrespective of the amount).
Investment - Partnership
• For a registered partnership firm, where
funding for such overseas investment is
done by a firm, the individual partners are
required to hold shares for, and on behalf
of, the firm in overseas JV/WOS and not in
individual capacity.
Laws of USA Inbound
Investments
• Key reporting requirements and legislation.
– Hart-Scott-Rodino Antitrust Improvement Act
– International Investment to Trade Services Survey
Act
– Agriculture Foreign Investment Disclosure Act
– National Security Review (Exxon-Florio) Act
– Foreign Assets Control Regulation (pursuant to
Trading With the Enemy Act)
– Buy American Act
– USA Patriot Act
General Restrictions – Ownership
Limits In Sensitive & Highly
Regulated Sector
• US Federal Laws restrict the percentage of
foreign ownership in certain sectors considered
particularly sensitive and highly regulated.
• Some restrictions may be avoided by
incorporating a US subsidiary. Usually the laws
will look to the nationality of the owners or the
nationality of management, or both, in order to
determine whether even a U.S. subsidiary may
be utilized for the investment.
• Some of the sensitive and highly regulated
sectors are:
– Aviation
• Aircraft may be registered by US citizens or
permanent residents, partnership in which all
partners are US citizens or companies in which
75% of stock is controlled by US citizens.
• Foreign corporations organized and doing
business under laws of the US may be able to
register the aircraft if it is based or primarily
used in the US.
– Banking
• Require US Federal Reserve Board
approval.
• All directors of a national bank must
ordinarily be US citizens.
• If operating (subject to license approval)
as a branch or agency of a foreign
affiliated bank, then subject to extensive
regulation and supervision.
– Insurance
• Some states have US citizenship and
residency requirements for directors of
insurance companies.
• Approval from State Insurance Commission.
– Power Generation & Utility Service
• Atomic Energy Act prohibits foreign
ownership or control of nuclear power
facilities.
– Communications & Broadcasting
• Review process under Telecommunication
Act of 1996, foreign corporations or
partnerships may not be denied license
under An equity and public interest
standard.
– Real Estate
JPM Study
• The recycling of petrodollars has turned into a dominant force in the
global financial system. The surge in oil prices from an average of US$25
a barrel in 2002 to US$66 last year has brought a spectacular windfall to oil-
producing economies. With export revenues growing from US$251 billion in
2002 to around US$900 billion by the end of last year, the collective current
account surplus of these countries widened from 5.4% of GDP to 25.8%
over the course of the same period.
• Put differently, oil exporters’ current account surplus soared from a mere
0.1% of global GDP in 1999 to 0.4% in 2003 and then an astonishing 1.4%
last year, dwarfing what Asian countries accumulated altogether. In our
view, this unprecedented level of income transfer from oil-consuming to oil-
producing economies — reaching US$1.8 trillion (or about 4% of global
GDP) on a cumulative basis in the past five years — has made a significant
contribution to global imbalances and influenced the direction of financial
flows around the world.
• Indeed, the recycling of petrodollars is one the crucial pieces of the puzzle of
record-low real interest rates and term premiums (see The Petrodollar
Connection, January 29, 2007).
• Therefore, what happens next to petrodollars will likely alter capital flow
patterns and global asset allocations.
Implications of Crisis
Impact
Changing of the guard, not the
system?
• New centres of financial power
• Too soon to proclaim the death of the

old centres of finance?
• Will the name-plates change and

nothing else?

INTERNATIONAL Capital Market

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INTERNATIONAL Capital Market

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International capital market

will certainly Continue to create enormous economic benefits

• Evolved from using a gold standard to $

• 1971 Nixon Shock

• Fiat money system

• Volatility drastically increased

• Volatility created need to hedge against fluctuating

• Sterilisation of exchange pegs by purchase of US

• The debt crisis virtually ended commercial banks new

• New centres of financial power

• Too soon to proclaim the death of the

• Will the name-plates change and

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