Monday, June 29, 2009

Euro Bond Market

The Eurobond marlet is larger than the U.S Corporate bond market. The Euro Dollar center is in London, where most of the trading is. This bond market is either denominated in U.S dollars or in foreign currencies like the Euro.

Many Eurobonds are Eurodollar bonds.

Some foreign investors prefer Eurodollar issues because the maturities range from 5-10 years which is shorter and they have better bond call protection than many US bonds.

Euro bonds are also not subject to witholding tax on interest earned.

Most Eurodollar bonds are traded in bearer form.

These securities normally pay once per year. US based corporate and agency bonds normally pay semi annually.

Euro dollar bonds do not have to register with the SEC, where corporate securities are not exempt.

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Euro Issue With the rapidly rising index and foreign funds investing heavily in the Indian market, the corporate sector has seen a massive surge of profits in the recent past. India is now the largest recipient of non-resident transfers in the world. The Indian government has introduced an alternative means for the Indian entities to raise funds from the international markets by way of the Bonds Issue. The most common facet of this bonds issue is the foreign currency convertible bonds, which are open to the foreign markets by making regular coupon and principal payments and also giving the foreign bondholder an option to convert the bond into stock when the market fluctuations favour them.

In addition there has also been a significant liberalization of Indian investment abroad and relaxation of policies regulating foreign investments in India, increased access to external commercial borrowings by Indian companies and major participation by the foreign institutional investors in the domestic stock markets. India is the 7th largest and 2nd most populous country in the world. It is also the 4th largest economy in the world. A number of monetary reforms stimulating foreign investment has moved India firmly into the front-runners of the rapidly emerging markets at the international scenario. Meaning of Euro Issue Euro Issue is an issue of securities to raise funds outside the domestic market. Euro issues by Indian companies have been by way of GDRS or EUROCONVERTIBLE BONDS.

The advantages associated with Euro issues are:
1. Low cost of capital owing to lower interest rates and floatation costs. 2.pricing that maximizes mobilization. 3. No change in control. 4. Greater visibility due to international exposure. 5. Inflow of foreign funds.

Euro issues must conform to the guidelines issued by the Central Government. Among other thing, prior permission for an issue must be obtained from the Ministry of Finance. Indian companies are permitted to raise foreign currency resources through issue of Foreign Currency Convertible Bonds (FCCBs) and/or issue of ordinary equity shares through Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) to foreign investors i.e. institutional investors or individuals (including NRIs) residing abroad. A scheme had been initiated during 1992 to allow the Indian Corporate Sector to have access to the Global capital markets through issue of Foreign Currency Convertible Bonds (FCCBs)/ Equity Shares under the Global Depository Mechanism (GDR) and American Depository Mechanism (ADR).Under this scheme, companies with consistent track record of good performance (financial or otherwise) for minimum period of three years were allowed to access international capital market. The three year track record requirement had been relaxed for companies making Euro issues for financing projects in infrastructure sectors like power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

Foreign Currency Convertible Bonds (FCCB)

“Debt-Instrument” means an instrument which creates or acknowledges indebtedness, and includes debenture, stock, bonds and such other securities of a body corporate, whether constituting a charge on the assets of the body corporate or not. These corporate bonds are sometime issued as ‘convertible bonds’ with the option of being converted to equity. Bonds carrying such optional element attract the investors making debt investment in the bonds issuing entity. A bond that can be converted into a fixed amount of the company's equity is usually done at the discretion of the bondholder. Keeping in pace with the latest economic-financial trends, Indian Corporate have started issuing these ‘convertible bonds’ in international markets commonly known as ‘Foreign Currency Convertible Bonds’. “Foreign Currency Convertible Bond” (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency” When these bonds are issued in a currency different than the issuer’s domestic currency with an option to convert them in the equity of the issuer company, such quasi- debt instruments are called foreign currency convertible bonds (FCCB). The law governing is "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993”. The FCCBs are exceedingly popular with the Corporate India for raising funds that are usually utilized for debt restructuring, infrastructure development and expansion plan of the Company. Generally, the investors on account of two main reasons favour such types of bonds: Firstly, receipt of fixed payments on these bonds i.e. the principal and the interest accruing on these bonds which are payable in foreign currency and secondly that these investors can avail the benefit of converting their bonds into equity during the value appreciation of the issuer company’s shares. Features: Following are some common features of the Foreign Currency Convertible Bonds: • FCCB can be secured as well as unsecured. Mostly the FCCB issued by the Indian Companies are unsecured. • Credit rating of Bonds is not mandatory, since corporations having excellent track record mostly issue such Bonds. However, rating done by the Credit Rating Agency certainly adds value to the bonds issued. • Indian Companies, eligible to issue shares to persons residents outside India under the Foreign Direct Investment Scheme (including Sectoral Cap and Sectors where FDI is permissible) can raise foreign currency resources aboard through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). • The ‘bond to equity’ convertible option attached to the FCCBs is subject to the Reserve bank of India guidelines. Such FCCBs can be converted by exercising the ‘Call option’ and ‘Put option’ to suit the structure of the Bond. • FCCBs are generally listed on the national and regional stock exchanges to improve liquidity. • Public issue of FCCBs shall be only through reputed lead managers in international capital market. In case of private placement, the placement shall be with banks, or with multilateral and bilateral financial institutions, or foreign collaborators, or foreign equity holder having a minimum holding of 5% of the paid up equity capital of the issuing company. Private placement with unrecognized sources is prohibited • FCCB Issue related expenses shall not exceed 4% of issue size and in case of private placement, shall not exceed 2% of the issue size. FCCB issue by the Indian Companies need to conform with various regulatory requirements: 1) Requirements as prescribed by the provisions of the Company Law: FCCBs are the bonds issued by an Indian company or any body corporate expressed in foreign currency to Non-resident investors. Such bonds fall within purview of the definition of Debentures, and therefore the process for issue of debentures shall be applicable to the issue of FCCBs. A. Prior intimation to be given to the Stock Exchange by the issuer company listed at the Stock Exchange, at least 7 days before the date of Board meeting in which the FCCB issue is to be considered. B. Power to issue FCCBs vests with the Board of Directors of the issuer Company who are obligated to pass a Board resolution pertaining to the issue of FCCBs. C. Convening a General Shareholders Meeting for procuring the shareholders consent with regard to the enhancement of borrowing powers of the Board, acquiring authorisation for creating mortgage in case of issue of secured FCCBs or obtaining shareholders approval on the further issue of the capital by way of FCCB issue, without making an offer to the existing shareholders of the company by a Special resolution. 2) Role of SEBI – Pre-issue and Post-issue requirements & Conditions to be fulfilled by the Issuer Company: • An application for listing of the Bonds has to be made to the stock exchange of the country where the FCCBs are to be issued and traded i.e. international stock exchange. • ‘In-principal’ approval has to be obtained from the Indian Stock exchange to list the shares issued upon conversion of bonds, when the bondholder exercises the convertibility option • Filing the Offer Document respectively as the Company issues these Bonds to the foreign investors in accordance with the provisions of the Trust Deed with Securities Exchange Board of India, Reserve Bank of India and stock exchanges prior to FCCB issue. 3) RBI’s Regulatory Framework:

The Government of India considers the funds raised through the FCCB issue as Foreign Direct Investment (FDI). The latest comprehensive RBI guidelines on FCCB are contained in the July 1st, 2008 Master Circular on External Commercial Borrowings and Trade Credits that provides the Scheme and Policy to be followed by the issuers of FCCB’s as the circular itself very distinctly provides that the Policy laid down for the External Commercial Borrowings are likewise applicable to the issue of FCCBs. Law Governing the FCCB issue through the ADR/GDR Mechanism:

In the recent past, some Corporate have raised funds through issue American Depository Receipts and/or Global Depository Receipts. Under such a mechanism, the companies issue shares to the depositories who in turn issue these ADRs/GDRs to the ultimate investors functioning in the international markets. For this purpose the entities issuing the ADRs/GDRs enter into an agreement with the depository to the effect that the depository would not exercise voting rights in respect of shares held by them or they would exercise voting rights as directed by the managerial authorities of the issuer companies. It may be further noted that the Indian Companies are permitted to issue Foreign Currency Convertible Bonds and Ordinary Shares through Global Depository Mechanism. The aforesaid circular further lays down that these foreign currency convertible bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993”.

The Scheme further provides the eligibility conditions for issue of Convertible Bonds or Ordinary Shares of Issuing Company: a) Obtain prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India. b) Issue ADRs/GDRs, if company is eligible to issue shares to persons resident outside India under the FDI Scheme. c) Indian listed company not eligible to raise funds from the Indian Capital Market including a company restrained from accessing the securities market by (SEBI) will not be eligible to issue ADRs/GDRs. d) Unlisted companies would require prior or simultaneous listing in the domestic market, on issuance of ADR/GDRs. e) Unlisted companies already issued ADRs/GDRs have to list in the domestic market on making profit or within three years of such issue whichever is earlier. As announced in Annual Policy Statement 2009-10 and keeping in view the benefits accruing to the Indian companies, the current policy has been reviewed and it has been decided to increase the total amount of permissible buyback of FCCBs, out of internal accruals, from USD 50 million of the redemption value per company to USD 100 million, under the approval route by linking the higher amount of buyback to larger discounts. Accordingly, Indian companies may henceforth be permitted to buyback FCCBs up to USD 100 million of the redemption value per company, out of internal accruals, with the prior approval of the Reserve Bank, subject to a: i) minimum discount of 25 per cent of book value for redemption value up to USD 50 million; ii) minimum discount of 35 per cent of book value for the redemption value over USD 50 million and up to USD 75 million; and iii) minimum discount of 50 per cent of book value for the redemption value of USD 75 million and up to USD 100 million. ADRs & GDRs

ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt..Every publicly traded company issues shares – and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation). But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. So the companies get listed on these stock exchanges indirectly – using ADRs and GDRs. Depository receipts Depository receipts are instruments issued by international depositories, and they represent an interest in the underlying shares held by them in the issuer company. The shares are usually held by a domestic custodian on behalf of the depositories and the depositories in turn issue the depository receipts, which entitle the holder of the receipts to get the underlying shares on demand. The depository receipts themselves, which represent an interest in the underlying securities, are in turn securities that are capable of being listed on international stock exchanges. Procedure Of Issuing Depository Receipts: ? The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or4). ? These receipts are then sold to the people of this foreign country (and anyone who are allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks – their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. ? These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of the receipt holders. Difference between ADR and GDR Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded. 1. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. 2. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR. Users of an ADR / GDR The ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market – since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts! ADRs and GDRs are not for investors in India – they can invest directly in the shares of various Indian companies. Some of the best Indian companies have issued ADRs and / or GDRs.

Below is a partial list. VSNL , WIPRO ,Bajaj Auto Government Guidelines for Issue of Global Depository Receipt (GDRs) / American Depository Receipts (ADRs) Companies in India which have the eligibility to issue shares to person resident outside India, under the Foreign Direct Investment scheme, are generally allowed to raise equity capital in the international market by issuing rupee denominated shares to a non-resident depository for the purpose of issuing of GDRs/ADRs. This is possible with the approval of the Ministry of Finance and with reference to the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Deposit Receipt Mechanism) Scheme and in accordance with the guidelines(2009) issued by the Central Government in this regard. ? A listed Indian company, which does not posses the eligibility to raise funds in the Indian market including a company held by the SEBI, becomes ineligible to issue GDRs/ADRs. ? Unlisted companies, which have not tried the GDR/ADR route for raising its capital, would compulsorily be required to possess prior or simultaneous listing in the domestic market. Unlisted companies which have already tried GDRs/ADRs need to list in the domestic market on making profit or within 3 years of such issue of GDRs/ADRs, whichever is earlier. As per the guidelines, the GDRs/ADRs are valued and in consultation with the Lead Manager, are issued on basis of the ratio worked out by the Indian company. The proceeds from the issue are required to be kept abroad till the time it is utilised. Till such time, the proceeds may be invested as per guidelines prescribed. Indian companies do not have any restriction on the number or monetary limit of GDR / ADR / FCCB that can be floated in a financial year. Before seeking the final approval from the Ministry of Finance, a company which is engaged in the manufacture of items covered under the Automatic route would need to obtain prior government clearance through the Foreign Investment Promotion Board, if the FDI after a proposed issue of GDR / ADR / FCCB is likely to exceed the sectoral caps. Except for the express ban on investment in real estate and the stock markets, there are no end-use restrictions on the proceeds of GDR / ADR issue. Under the two way fungibility scheme, an Indian stock broker registered with SEBI can purchase shares of an Indian company from the market for conversion to GDRs/ADRs based on instructions from overseas investors. Reissue of GDR / ADR are permitted to the extent of GDR / ADR which have been redeemed into underlying shares and sold in the Indian capital market. An Indian company also has the permission of sponsoring an issue of GDRs / ADRs by offering its domestic shareholders a choice to submit their shares back to the company so that consequently, GDR / ADR may be issued abroad. Within thirty days of closing the GDR / ADR, an Indian company is required to furnish full details of such issue to the Reserve Bank of India.

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