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Friday 7 March 2014

if- UNIT III CRR

International financial markets function as a principal source of equity and debts for the majority of the foreign and domestic subsidiary operations. The international financial markets influence the international trade to a considerable degree because of the unpredictability that is present in the international capital markets. Another factor working behind this is the minimum effort taken by a large number of countries for complete capital account convertibility.
}  It’s the Market in which currencies are traded
}  It is the domain of Government Central banks and Commercial and Investment banks, not to mention hedge funds and massive international corporations
}  The forex offers trading 24-hours a day five days a week
}  The daily dollar volume of currencies traded in the currency market exceeds $5 trillion, making it the largest and most liquid market in the world
Participants
}  Primary Price  Makers or Professional Dealers eg. Commercial Banks and Investment dealers
}  Secondary Price Makers eg. Tourists Hotels
}  Foreign Currency Brokers who are middle men between two market-makers

}  Price Takers are those who take the prices quoted by the primary price makers eg. Individuals and Corporate 


        Foreign exchange dealing room operations comprise functions of a service branch to meet the needs of other branches/divisions to buy/sell foreign currency.
        Acts as a profit centre for the bank/financial institution
        A dealer has to maintain two positions- funds position and currency position
        The funds position reflects inflows and outflows of funds i.e. receivables and payables
        A mismatch in funds position will throw open interest rate risks in the form of overdraft interest in the Nostro a/c, loss of interest income on credit balances, etc.

    The European Monetary System and the Euro

        In 1979 a formalized structure was put in place among many of the major members of the European Community.
        The European Monetary System (EMS) officially began operation in March 1979 and once again established a grid of fixed parity rates among member currencies
        The EMS consisted of three elements:
o   First, all countries that were committing their currencies and their efforts to the preservation of fixed exchange rates entered the Exchange Rate Mechanism (ERM)
o   Second, was the actual grid of bilateral exchange rates with their specialized band limits
o   Third, was the creation of the European Currency Unit (ECU)
        On December 31, 1998, the final fixed rates between the 11 currencies and the euro were put into place
        On January 1, 1999,the euro was officially launched as a single currency for the European Union
        The monetary policy for the EMU will be conducted by the European Central Bank (ECB) and has a single responsibility of safeguarding the stability of the euro
        On January 4, 1999, the euro began trading on world currency markets
        International money markets, often termed the Eurocurrency markets, constitute an enormous financial market that is in many ways outside the jurisdiction and supervision of world financial and governmental authorities
        Euro as currency of EU. (April 2005)International Capital Markets have come into existence to cater to the need of international financing by economies in the form of short, medium or long-term securities or credits. These markets also called Euro markets, are the markets on which Euro currencies, Euro bonds, Euro shares and Euro bills are traded/exchanged. Over the years, there has been a phenomenal growth both in volume and types of financial instruments transacted in these markets. Euro currency deposits are the deposits made in a bank, situated outside the territory of the origin of currency. For example, Euro dollar is a deposit made in US dollars in a bank located outside the USA; likewise, Euro banks are the banks in which Euro currencies are deposited. They have term deposits in Euro currencies and offer credits in a currency other than that of the country in which they are located. A distinctive feature of the financial strategy of multinational companies is the wide range of external services of funds that they use on an ongoing basis. British Telecommunication offers stock in London, New York and Tokyo, while Swiss Bank Corporation-, aided by Italian, Belgian, Canadian and German banks- helps corporations sell Swiss franc bonds in Europe and then swap the proceeds back into US dollars.



        Euro currency market: While opening up of the domestic markets began only around the end of seventies, a truly international financial market had already been born in the mid-fifties and gradually grown in size and scope during sixties and seventies. This refers to the well-known ‘Eurocurrencies Market’. It is the largest offshore market.  Prior to 1980, Eurocurrencies market was the only truly international financial market of any significance. It is mainly an inter-bank market trading in time deposits and various debt instruments. What matters is the location of the bank neither the ownership of the bank nor ownership of the deposit. The prefix "Euro" is now outdated since such deposits and loans are regularly traded outside Europe.  Over the years, these markets have evolved a variety of instruments other than time deposits and short-term loans, e.g. certificates of deposit (CDs), euro commercial paper (ECP), medium- to long- term floating rate loans, eurobonds, floating rate notes and euro medium-term notes (EMTNs). The main factors behind the emergence and strong growth of the Eurodollar markets were the regulations on borrowers and lenders imposed by the US authorities which motivated both banks and borrowers to evolve Eurodollar deposits and loans. Added to this are the considerations mentioned above, viz. the ability of euro banks to offer better rates both to the depositors and the borrowers and convenience of dealing with a bank that is closer to home, who is familiar with business culture and practices in Europe.  
        Euro Bond Market : This market caters to the long term financial needs of the international players. The Euro Bond Market facilitates the transfer of long-term funds from surplus units to deficit units around the world. Unlike the domestic bond marke, the Euro Bond market is not subject to the stringent rules and regulations.  International Bond is classified as either foreign bonds or Euro Bonds.
o   Foreign Bonds: a foreign bond is issued by a borrower foreign to the country where it is placed, but in the currency of the country of sale. For example: Reliance issues a bond in USA, denominated in the US $
o   Euro Bonds: Euro bonds are sold in countries other than the country represented by the currency denominating them. For example Infosys issues bonds denominated in US $ in Japan.
        Eurobond is to be distinguished from a foreign bond in that it is denominated in a currency other than the currency of the country in which it is issued. Eurobonds are sold for international borrowers in several markets simultaneously by international group of banks. The same causes, which led to the growth of Eurocurrency market, have also contributed to the development of Eurobond market. But the size and growth rate of this market are modest compared to Euromarket. Yet, it has established itself as a major source of financing for multinational corporations. Besides MNCs, private enterprises, financial institutions, government and central banks and international financial institutions like the World Bank are the principal borrowers. They issue these bonds.
        Distinction between Euro Credit and Euro Bond Market:  Both Euro bonds and Euro credit (Euro currency) financing have their advantages and disadvantages. For a given company, under specific circumstances, one method of financing may be preferred to the other. The major differences are:
1.      Cost of borrowing: Euro bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds are an attractive exposure management tool since the known long-term currency inflows can be offset by the known long-term outflows in the same currency. In contrast, Euro currency loans carry variable rates.               
2.      Maturity: Euro bonds have longer maturities while the period of borrowing in the Euro currency market has tended to lengthen over time.
3.      Size of the issue: Earlier, the funds available for lending at any time have been much more in the inter-bank market than in the bond market. But of late, this situation does not hold true. Moreover, although in the past the flotation costs of a Euro currency loan have been much lower than a Euro bond (about 0.5 % of the total loan amount versus about 2.25 % of the face value of a Euro bond issue), compensation has worked to lower Euro bond flotation costs.
4.      Flexibility: In a Euro bond issue, the funds must be drawn in one sum on a fixed date and repaid according to a fixed schedule, unless the borrower pays a substantial prepayment penalty. By contrast, the drawdown in a floating rate loan can be staggered to suit the borrower’s needs and can be repaid in whole or in part at any time, often without penalty. Moreover, a Euro currency loan with a multi-currency clause enables the borrower to switch currencies on any roll-over date, whereas switching the denomination of a Euro bond from currency A to currency B would require a costly, combined, refunding and reissuing operation.
        Speed: Funds can be raised by a known borrower very quickly in the Euro currency market. Often, a period of two to three weeks should suffice. A Euro bond financing generally takes more time, though the difference is becoming less significant. 

Offshore banking refers to the international banking business involving nonresident foreign currency‐denominated assets and liabilities. It refers to the banking operations that cover only non‐residents and do not mix with the domestic banking. The origin of offshore banking units can be traced to the growth of financial activity in tax havens. A “tax haven” is a place where non-residents can receive income or own assets without paying high taxes. Some such places are Bahamas, Bermuda, Hong Kong, the Netherlands, Panama and Switzerland.  Offshore banking centres are an integral part of the foreign currency markets. Therefore, the operations of banking units set up at these centers comprise foreign currency transactions, in the form of accepting and placing of funds in foreign currency outside the country of issue. The functional offshore centers engage in the issue and placement of foreign currency certificates of deposits, loan/credits and bonds. These centers contribute to the economic development of the host country in the following ways.
1.The offshore banking units can raise foreign currency loans and bonds for the host country at reasonable interest rates, due to their connections with well known international banks These foreign currency funds can be lent to the host countries or invested in onshore projects or even projects in a third country. Indirectly, the host country gains better access to international capital markets.
2.The functional offshore centers contributes to the foreign exchange income of the host country through local operating expenditures, such as rent paid on leased property, salary paid to local staff, and license fees/taxes recovered from the offshore units.
3.The presence of functional units speeds up the communication and transport network in the host country, which helps to upgrade local skills and technology and constitutes productive assets to the host country.
4.The onshore banking industry in the host country is compelled to improve its efficiency and skills in order to retain its competitive edge.
5.The local staff employed at the centre develops sophisticated international banking skills and this pool of highly trained personnel can be brought in to the host country to attain a faster growth level.
Once an offshore centre consistently offers an attractive package of incentives, the above benefits will accrue to the host county, which will be able to induce more and more reputed foreign banks to set up banking units in its territory.
Presence of OBU worldwide: Offshore banking is carried out in about 20 centres throughout the world which offer the following benefits:
1. Exemption from minimum reserve requirements i.e CRR, SLR..
2. Freedom from control on interest rates
3. Low or non‐existent taxes and levies
4. Entry is relatively easy
5. Licence fees are generally low

The benefits of Offshore Banking:
1. Exporters would benefit in terms of finer margins on loans and better foreign exchange rates available via an offshore banking unit.
2. The benefits of multi‐currency operations which, to an extent, minimise currency fluctuation risk, will be an added advantage.
3. Salaries paid by offshore banks and local expenditure incurred by them contribute to the economy's
welfare. For smaller countries, the benefit would be greater. For a larger country such as India, however, this may not form a significant portion of the total income.
4. India may earn revenue in the form of licence fees, profit taxes imposed on the banks operating in the area. It may also get the benefit of banks' funds in the form of capital and liquidity requirements.
5. The country can gain improved access to the international capital markets.
6. The domestic financial system may become more efficient through increased competition and exposure of the domestic banks to the practices of offshore banks.
7. The offshore banking centres will provide opportunities to train the local staff which will, in turn,
contribute to faster economic growth.
8. The offshore banking units would help channelise non‐resident Indian investments.
9. Setting up offshore banking centres would trigger enforced development of more advanced
communication facilities — a must for their functioning.
But establishing offshore centres also comes with a price/ Disadvantages
1. The supervision and regulation of offshore banks may involve substantial costs.
2. Encouraging offshore banking may result in the diminution in autonomy of domestic monetary policy, since it is difficult to draw a line always between the offshore and onshore operations, particularly in the absence of exchange control.
3. Offshore banking provides scope for tax evasion by residents. For instance, in Hong Kong, it was found that residents place deposits with offshore banks and take loans of the same amount. The interest on loan would be a deductible expenditure for taxation, while the income from interest on deposits is not taxed.
4. Offshore banks may prove to be harmful competitors to the local banks and may inhibit their growth.
In India Offshore banking units are permitted to be set up in SEZs. These branches would be virtually foreign branches of Indian banks but located in India. These OBUs are exempt from CRR , SLR and they provide international finance to SEZ units and SEZ developers.

A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all.[1] Individuals and/or corporate entities can find it attractive to establish shell subsidiaries or move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. following characteristics as indicative of it:
a)      nil or nominal taxes;
b)      lack of effective exchange of tax information with foreign tax authorities;
c)      lack of transparency in the operation of legislative, legal or administrative provisions;
d)      no requirement for a substantive local presence; and
e)      self-promotion as an offshore financial center.
Some features of these tax havens are:
•Low rate or complete absence of income tax on foreign investment and income.
•High degree of economical and political stability and a political system, which directly or indirectly encourages and fosters business activity at the center.
•Strict and well enforced rules of banking secrecy.
•Absence of exchange control
•Availability of supporting infrastructure such as an efficient communications and transportation network.
•Presence of well developed legal system and professional accounting expertise.
•Investor’s confidence due to past credential.
•No incidence of violence or criminal activities.

        “Global Depositary Receipts mean any instrument in the form of a depositary receipt or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.”      They are negotiable certificates that usually represent a company’s publicly traded equities and can be denominated in any freely convertible foreign currency. They are listed on a European stock exchange, often Luxembourg or London. Each DR represents a multiple number or fraction of underlying shares or alternatively the shares correspond to a fixed ratio, for example, 1 GDR = 10 Shares.
        A Global Depository Receipt is a dollar denominated instrument traded  on a stock exchange in Europe or the US or Both. Each GDR represents a certain number of underlying equity shares. Though GDRs are quoted and traded in dollar terms the underlying equity shares are denominated in rupees.
Salient Features of a GDR
·         These are special instruments which are created from ordinary shares to generate funds abroad
·         The shares of a company are deposited with a bank which will issue GDRs and ADRs of equivalent value in a foreign currency (normally dollars)
·         The holder of a GDR does not have voting rights
·         The proceeds are collected in foreign currency thus enabling the issuer to utilize the same for meeting the foreign exchange component of project cost, repayment of foreign currency loans, meeting overseas commitments and for similar other purposes.
·         Dividends are paid in Indian rupees due to which the foreign exchange risk or currency risk is placed totally on the investor
·         It has less exchange risk as compared to foreign currency borrowings or foreign currency bonds.
·         The GDRs are usually listed at the Luxembourg Stock Exchange as also traded at two other places besides the place of listing e.g. on the OTC market in London and on the private placement market in USA.
·         An investor who wants to cancel his GDR may do so by advising the depositary to request the custodian to release his underlying shares and relinquishing his GDRs in lieu of shares held by the Custodian. The GDR can be canceled only after a cooling-period of 45 days. The depositary will instruct the custodian about cancellation of the GDR and to release the corresponding shares, collect the sales proceeds and remit the same abroad.
·         Marketing of the GDR issue is done by the investment banks that manage the road shows, which are presentations made to potential investors.  During the road shows, an indication of the investor response is obtained. The issuer fixes the range of the issue price and finally decides on the issue price after assessing the investor response at the road shows.
        Cost of floating an ADR or GDR issue is quite high and is only justifiable if the amount of finance to be raised is quite large
        Advantages: to issuer, to investor,


        American depository receipt is a negotiable certificate that represents a company's publicly traded equity or debt. They are created when a broker purchases the company's shares on the home stock market and delivers those to the depository's local custodian bank, which then instructs the depository bank, to issue Depository Receipts. Depository receipts could be traded freely just like any other security, either by exchange or in the over-the-counter market and could be used to raise capital.
        These are the certificates denominated in dollars issued by a US. Bank on the basis of a foreign equity it holds in custody in one of the branches abroad, usually in the home country of the issuer. This system was developed abroad, usually in the home country of the issuer. This system was developed by Morgan Guaranty Trust Company of New York on 1981 to facilitate the trading of foreign securities in the U.S. The ADR represents a convenient way for a US investor to buy foreign equity shares that were not listed in US Exchanges. The investor can receive dividends in dollars without bearing foreign taxes or being subject to exchange regulations. The system also permits transfer of ownership of this receipt in the US without the physical transfer of ownership of this receipt in the US without the physical transfer of the underlying shares. Because the underlying shares are not subject to US Securities and Exchange Commission (SEC) registration procedure, they have become more attractive. Issues traded outside the US were called International Depositary eceipt (IDR) issues.
        There are many advantages of ADRs.   For individuals, ADRs are an easy and cost effective way to buy shares of a foreign company.    The individuals are able to  save considerable money and energy by trading in ADRs, as it reduces administrative costs and avoids foreign taxes on each transaction.   Foreign entities prefer ADRs, because they get more U.S. exposure and it allows them to tap  the  American equity markets.  The shares represented by ADRs are  without voting rights.   However, any foreigner can purchase these securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs.     The purchaser has a theoretical right to exchange the receipt without voting rights for the shares with voting rights (RBI permission required) but in practice, no one appears to be interested in exercising this right.
        In case of American Depositary Receipts, non-US shares are converted into domestic US securities which are also denominated in US dollars. ADRs enable US investors to acquire and trade non-US securities denominated in US dollars without any concerns the differing settlement timetable and other problems associated with overseas markets. They also provide non-US companies with easy access to the US capital markets which has the largest investor base in the world. ADRs are created when a broker, acting on behalf of a potential ADR investor, buys domestic shares in a non-US company and places them in custody with a depository bank. The depository bank then issues US dollardenominated receipts conveying beneficial ownership of those shares. These depository receipts are deemed by the Unites States Securities and Exchange Commission (SEC) to be domestic US securities and their trading and settlement is done in United States.

A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuer’s domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. It gives two options. One is, to get the regular interest and principal and the other is to convert the bond in to equities. It is a hybrid between bond and stock. Some companies, banks, governments, and other sovereign entities may decide to issue bonds in foreign currencies because:
a)      It may appear to be more stable and predictable than their domestic currency
b)      Gives issuers the ability to access investment capital available in foreign markets
c)      Companies can use the process to break into foreign markets
d)      The bond acts like both a debt and equity instrument. Like bonds it makes regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock
e)      It is a low cost debt as the interest rates given to FCC Bonds are normally 30-50 percent lower than the market rate because of its equity component
f)       Conversion of bonds into stocks takes place at a premium price to market price. Conversion price is fixed when the bond is issued. So, lower dilution of the company stocks
How does it benefit an investor?
It’s not just companies who are benefited with FCCB. Investors too enjoy its benefits. Here are some:
·         Safety of guaranteed payments on the bond
·         Can take advantage of any large price appreciation in the company’s stock
·         Redeemable at maturity if not converted
·         Easily marketable as investors enjoys option of conversion in to equity if resulting to capital appreciation
Are there any disadvantages to the investors and companies?
Yes. Like any financial instruments, FCCBs also have there disadvantages. Some of these are:
Exchange risk is more in FCCBs as interest on bond would be payable in foreign currency. Thus companies with low debt equity ratios, large forex earnings potential only opted for FCCBs
FCCBs means creation of more debt and a FOREX outgo in terms of interest which is in foreign exchange
In case of convertible bond the interest rate is low (around 3 to 4%) but there is exchange risk on interest as well as principal if the bonds are not converted in to equity
If the stock price plummets, investors will not go for conversion but redemption. So, companies have to refinance to fulfil the redemption promise which can hit earnings
It will remain as debt in the balance sheet until conversion
How is taxation done on FCCBs?
Taxation is computed in the following way:
·         Until the conversion option is exercised, all the interest payments on the bonds, is subject to deduction of tax at source at the rate of 10%
·         Tax exercised on dividend on the converted portion of the bond is subject to deduction of tax at source at the rate of 10%
“Foreign Currency Exchangeable Bond” means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible foreign currency.
If Foreign Currency Convertible Bonds ( FCCB ) is converted into shares it will not give rise to any capital gains liable to income-tax in India
If Foreign Currency Convertible Bonds (FCCB) is transferred by a non-resident investor to another non-resident investor it shall not give rise to any capital gains liable to tax in India
In order to encourage the flow of foreign exchange to India, the Government, in 1992, had allowed established Indian companies to issue foreign currency convertible bonds (FCCB), with special tax scheme for non-resident investors. The Government has now allowed established Indian companies to issue foreign currency exchangeable bond (FCEB). These are bonds expressed in foreign currency and the principal and interest in respect of such bonds is payable in foreign currency. The Central Government, has vide Notification No.G.S.R.89(E) dated 15.2.2008, introduced the “Issue of Foreign Currency Exchangeable Bonds Scheme, 2008” for facilitating the issue of FCEBs by Indian companies.
(ii) The difference between FCCB and FCEB is that while FCCBs can only be converted into shares of the issuing company, FCEBs can also be converted into or exchanged for the shares of a group company. Therefore, in order to provide an equitable treatment to FCEBs, clause (xa) has been inserted in section 47 to provide that the conversion of FCEBs into shares or debentures of any company shall not be treated as a ‘transfer’.
When it came to borrowings in foreign currency, Indian companies hitherto had two options, namely (i) external commercial borrowings (ECBs) where they borrow monies in foreign currency, or (ii) foreign currency convertible bonds (FCCBs) where they issue bonds denominated in foreign currency that are convertible into shares of the issuer company.
Foreign Currency Convertible Bonds (FCCBs) are issued by a company to non-residents giving them the option to convert them into shares of the same company at a predetermined price. On the other hand, Foreign Currency Exchangeable Bonds (FCEBs) are issued by the investment or holding company of a group to non-residents which are exchangeable for the shares of the specified group company at a predetermined price.
The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies — the bonds are usually of the parent company while the shares are of the operating company which must be a listed company.
The conversion or exchange option, as the case may be, would be exercised obviously only when the share market gives higher quotations for the shares on offer than the price at which the shares are offered either on exchange or on conversion.


Foreign bonds are referred to as traditional international bonds because they existed long before eurobonds.  These are bonds issued by borrowers outside their domestic capital market underwritten by a firm that is situated in the foreign market. These bonds are denominated in the currency of the market in which they are issued. At times they may be denominated in another currency. Thus a foreign bond is issued by foreign borrowers and is denominated in the currency of the country in which it is issued. U.S.A., Japan, Switzerland, Germany and U.K. allow foreign borrowers to raise money from their residents through the issue of foreign bonds. Yankee bonds are foreign bonds issued in the United States. Foreign bonds issued in U.K. re called Bulldog bonds. Those issued in Japan are called Samurai bonds.
        Yankee Bonds: These are dollar denominated bonds issued by foreign borrowers. It is the largest and most active market in the world but potential borrowers must meet very stringent disclosure, dual rating and other listing requirements, options like call and put can be incorporated and there are no restrictions on size of the issue, maturity and so forth. Yankee bonds can be offered under rule 144a of Sec. These issues are exempt from elaborate registration and disclosure requirements but rating, while not mandatory is helpful. Finally low rated or unrated borrowers can make private placements. Higher yields have to be offered and the secondary market is very limited.
        Samurai Bond. (April 2003): They are publicly issued yen denominated bonds. They are issued by non-Japanese entities. The Japanese Ministry of Finance lays down the eligibility guidelines for potential foreign borrowers. These specify the minimum rating, size of issue, maturity and so forth. Floatation costs tend to be high. Pricing is done with respect to Long-term Prime Rate. Foreign bonds are referred to as traditional international bonds because they existed long before eurobonds. Yankee bonds are foreign bonds issued in the United States. Foreign bonds issued in U.K. re called Bulldog bonds. Those issued in Japan are called Samurai bonds.
        Shibosai Bonds: They are private placement bonds with distribution limited to banks and institutions. The eligibility criteria are less stringent but the MOF still maintains control.
        Shogun / Geisha Bonds: They are publicly floated bonds in a foreign currency while Geisha are their private counterparts.
         Petro Dollar: During the oil crises of 1973, the Capital markets have played a very important role. They accepted the dollar deposits from oil exporters and channeled the funds to the borrowers in other countries. This is called ‘recycling the petrodollars’.
        Junk Bonds: A junk bond is issued by a corporation or municipality with a bad credit rating. In exchange for the risk of lending money to a bond issuer with bad credit, the issuer pays the investor a higher interest rate. "High-yield bond" is a nicer name for junk bond The credit rating of a high yield bond is considered "speculative" grade or below "investment grade". This means that the chance of default with high yield bonds is higher than for other bonds. Their higher credit risk means that "junk" bond yields are higher than bonds of better credit quality. Studies have demonstrated that portfolios of high yield bonds have higher returns than other bond portfolios, suggesting that the higher yields more than compensate for their additional default risk.  Junk bonds became a common means for raising business capital in the 1980s, when they were used to help finance the purchase of companies, especially by leveraged buyouts, the sale of junk bonds continued to be used in the 1990s to generate capital
Foreign investment is bifurcated into Foreign Direct Investment (FDI) and portfolio investment. Direct investment is the act of purchasing an asset and at the same time acquiring control on it. The FDI in India could be in the form of inflow of investment (credit) and outflow in the form of disinvestments (debit) or abroad in the reverse manner. Portfolio investment is the acquisition of an asset, without control over it. Portfolio investment comes in the form of Foreign Institutional Investors (FIIs), offshore funds and Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). Acquisition of shares (acquisition of shares of Indian companies by nonresidents under section 5 of FEMA, 1999) has been included as part of foreign direct investment since January 1996.
Investors in many countries have been exhibiting interest in acquiring  equity investments outside their countries. Investment in foreign equity is of two types- direct investment (DI) and portfolio investment. Individuals and multinational corporations make investment in listed equities of foreign firms. While individual investors acquire shares as investment, multinational corporations invest in shares of a company of a foreign country so as to acquire a controlling interest over management. They may even start subsidiaries in foreign countries with 100 percent equity ownership. These are all called direct foreign investments.
A company can raise equity capital in international market in two ways: 1. By issuing shares in Euro market which are listed on the foreign stock exchange. 2. Through the issue of America Depository Receipt (ADRs) or European Depository Receipt EDRs or Global Depository Receipts (GDRs).


Participatory Notes are commonly know as P-Notes or PNs instruments. These are used by foreign investors who wish to invest in the Indian stock market, but without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI). PNs are offshore investment derivative instrument which means these instruments are used outside India for making investment in the Indian stock market. P-Notes are popular among Foreign Institutional Investors as the features of p-notes ate restricted to them. However, SEBI has often in the past shown its dissatisfaction towards P-Notes as the investors remain anonymous. Registered FIIs take care of all the transaction of a p-note investor and it is therefore not mandatory to disclose client details, unless asked 

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