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
No comments:
Post a Comment