This presentation focuses on the study of multiple overseas sources of finance for Indian Corporate.

1. REVIEW OF OVERSEAS SOURCES OF FINANCE
FOR INDIAN CORPORATE
BY NIKITA TILOOMALANI
MBA (BANKING & FINANCE)
AMITY UNIVERSITY, MUMBAI

2. There are multiple overseas sources of finance for
Indian Corporate:-
AMERICAN DEPOSITORY RECEIPTS (ADRs)
American Depository Receipts (ADRs) are a way of trading non-U.S. stocks on the U.S. exchange. Through ADRs,
Indian companies who are willing to raise funds from the U.S. can do so by issuing shares on American Stock
exchange. However, the issuance of ADR is governed by the rules and regulations as laid down by the regulator SEC
(Securities and Exchange Commission). The Indian Companies will have to maintain accounts as per the American
Standards. The Indian companies cannot directly list their equity shares on the international stock exchange. So in
order to overcome this problem; the companies give shares to an American bank. These American banks in return for
those shares provide receipts to the Indian companies. The companies raise funds by providing those ADR receipts
in American share market.
How American Depositary Receipts Work
Investors willing to invest in American Depositary Receipts can purchase them from brokers or dealers. The brokers
and dealers obtain ADRs by buying already-issued ADR in the US financial markets or by creating a new ADR.
Already-issued ADR can be obtained from the NASDAQ or NYSE. Creating a new ADR involves buying the stocks
of the foreign company in the issuer’s home market and depositing the acquired shares in a depository bank in the
overseas market. The bank then issues ADRs that are equal to the value of the shares deposited with the bank, and the
dealer/broker takes the ADR to US financial markets to sell them. The decision to create an ADR depends on the
pricing, availability, and demand. Investors who purchase the ADRs are paid dividends in US dollars. The foreign
bank pays dividends in the native currency, and the dealer/broker distributes the dividends in US dollars after
factoring in currency conversion costs and foreign taxes. This makes it easy for US investors to invest in a foreign
company without worrying about currency exchange rates. The US banks that deal with ADRs require the foreign
companies to furnish them with their financial information, which investors use to determine the company’s financial
health.

3. Trading Mechanism of ADRs
One ADR comprises of a certain number of shares in an Indian company and these ADRs are quoted in US
dollars. The investors of a foreign country can buy and sell shares directly and the investor is free to convert
the ADR to receive the equivalent number of shares. For example, an American citizen willing to invest in
Infosys limited in U.S. can do so by purchasing ADR from the listed entity. As an investor, they will receive
all the dividends and capital gains in US dollars, no matter where the original company is from.
Different types of ADR Programs
When a company establishes an ADR program, there are 3 different types of programs, or facilities, from
which it can choose. Levels differ in terms of their listing exposure and reporting requirements.
Level 1 - Is the lowest level of an ADR program. Under a Level 1 program, shares can only be traded on the
OTC market and the issuing company has minimal reporting requirements with the US Securities and
Exchange Commission (SEC). The company is not required to issue quarterly or annual reports; however, it
must publish in English on its website its annual report in the form required by the laws of the country of
incorporation.
Level 2 - ADRs can be listed on a US stock exchange. But shares must be registered with the SEC, and the
company is required to file an annual report (on Form 20-F, not Form 10-K) that conforms to US generally
accepted accounting principles (GAAP) standards. It must also meet the exchange's listing requirements.
Level 3 - Is the highest level of an ADR program and requires the issuing company to meet even stricter
reporting rules that are similar to those followed by US companies. With a Level 3 program, companies can
issue shares to raise capital rather than just list existing shares on a US exchange. Many of the largest
companies with ADR programs are Level 3.

4. Trading Mechanism of ADRs
One ADR comprises of a certain number of shares in an Indian company and these ADRs are quoted in US dollars.
The investors of a foreign country can buy and sell shares directly and the investor is free to convert the ADR to
receive the equivalent number of shares. For example, an American citizen willing to invest in Infosys limited in U.S.
can do so by purchasing ADR from the listed entity. As an investor, they will receive all the dividends and capital
gains in US dollars, no matter where the original company is from.
Termination or Cancellation
ADRs are subject to cancellation at the discretion of either the foreign issuer or the depositary bank that created
them. The termination results in the cancellation of all ADRs issued and delisting from the US exchange markets
where the foreign stock was trading. Before the termination, the company must write to the owners of ADRs, giving
them the option to swap their ADR for foreign securities represented by the receipts. If the owners take possession of
the foreign securities, they can look for brokers who trade in that specific foreign market. If the owner decides to
hold onto their ADR certificates after the termination, the depositary bank will continue holding onto the foreign
securities and collect dividends, but will not sell more ADR securities.
Therefore, American Depository Receipts (ADRs) provide the US investors with ability to trade in foreign companies
shares. ADR makes it easier and convenient for the domestic investors in US to trade in foreign companies shares.
ADR provides the investors an opportunity to diversify their portfolio by investing in companies which are not
located in America. This eventually leads to investors investing in companies located in emerging markets, thereby
leading to profit maximization for investors.

5. GLOBAL DEPOSITORY RECEIPTS (GDRs)
Global Depository Receipts or GDRs are certificates that are nowadays becoming popular among the investors to
access the global stock market. The companies have also accepted it as one of the ways to list its securities in foreign
markets. The concept of GDRs is based on American Depository Receipts (ADRs) which were the first depository
receipts issued in 1927. It allowed the companies outside the USA to have access to capital markets of the USA.
A global depositary receipt (GDR) is similar to an ADR, but is a depositary receipt sold outside the United States and
outside the home country of the issuing company. These are widely used nowadays by almost all the companies in
the world to gain accessibility to the capital markets of the world. India is no exception. Many companies in India
have expanded their market to foreign platforms with the help of GDRs and gained access to investment capital
overseas.
PROCEDURE INVOLVED
A GDR is issued in the same manner as a financial instrument. It is administered by a depository bank to the
corporate issuer. The bank is generally located in the countries in which the GDR is traded. A GDR is often
considered as a Deposit Agreement between the bank issuing it and the holder of GDR. The agreement specifies the
rights and duties of each party. There is a separate Custodian bank which holds the shares of the company that
underlie the GDR. The depository bank then buys the shares and deposits the shares in the custodian bank. These
shares are then issued in the form of GDRs representing ownership in these shares. The custodian bank which is
situated in the country of the issuer has a duty for safe keeping the shares of the GDR. It is generally the depository
bank which selects the custodian bank which then collects the dividend and forwards any notice of the issuer to the
depositary bank, which then sends them to the GDR holder. Global depository receipts (GDRs) as tradable
instruments are becoming increasingly popular in the hands of institutional investors worldwide and an accepted
option for companies to access global equity markets. India is no exception, and a number of Indian companies have
spread their presence to foreign bourses through GDRs and gained access to investment capital overseas.

6.  Further, the holder of GDR has an option to convert his GDRs to a proportionate number of shares. The
underlying feature of GDRs is that it has many features of shares such as the right of the holder to receive
dividends and also voting rights in a company if provided in GDRs Agreements. Apart from this, another
advantage of GDR is that is capable of being traded as a security in a more investor-friendly currency thus
leading to more liquidity. Thus, any outsider investor who wishes to invest in the stock of any Indian company
would prefer GDRs as their natural choice since GDRs are exempted from tax in India unless they are converted
into shares.
 The procedure of issuing GDRs by an Indian company involves issuing of its equity shares (in Rupees) to the
depository bank situated in a foreign country and then the issue of GDRs by the depository bank against the said
equity shares to the foreign investors in foreign currency. The physical possession of the equity shares is
entrusted to a domestic custodian bank, which is an agent of the depository bank. The depository bank is
recognized as the registered owner of the equity shares of the company in its books since these shares are issued
to the depository bank. The holders of GDRs have an option to exchange their GDRs for the equity shares of the
company and such holders then become the owner of the equity shares of the company. Since at the beginning it
is the depository bank holding the equity shares, hence it has all the voting rights given to any equity
shareholder.
 Before 2005, all companies were permitted to issue GDRs, however, post 2005, certain amendments were made
as a result of which now only listed companies can make issuance of GDRs in foreign markets. It depends on the
company whether they want to offer GDR as a public issue or as a private placement to selected group of
individuals. Similarly, GDR holders have certain benefits over preferential shareholders. Also certain types of
GDRs issuances enjoy an exemption from the open offer requirements under the Securities and Exchange Board
of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as long as they are not converted
into equity shares. Looking to the benefits associated with the issuance of GDRs, there are many companies in
India such as Tata Steel Ltd, Reliance Industries, Sterlite Industries India Ltd., that have realised the importance
of GDRs as a means for raising foreign direct investment and this number is likely to increase in future.

7. Trading of Global Depositary Receipt Shares
To draw interest from foreign investors, GDRs are issued by companies. It is a low-cost method which allows
investors to invest in these foreign shares. The trade of these shares is just like that of domestic shares but they are
purchased in an international marketplace. The purchase and the sale of GDRs is managed by the representative
broker. Usually, the brokers belong to the home country, and they act as sellers in the foreign market. The purchasing
of a GDR is a multistep process. It involves a local broker for the investor, a broker in the marketplace where the
company issued its shares, a bank that represents buyers and the custodian bank. During the transaction, a custodian
bank (escrow agent) holds possession of the shares. This ensures that both the parties are protected during the
transaction. A broker can also sell GDRs on the investor’s behalf. They can be sold as-is on the exchange or they can
be converted into regular stock of the company. In addition, they can also be cancelled and sent back to the issuing
company.
Therefore, Global Depository Receipts (GDR) has emerged as the most efficient and widely known method of raising
capital from foreign markets. It provides benefits both ways: giving domestic companies access to the foreign capital
markets, and allowing foreign investors to invest in domestic companies. Investors like to buy GDRs holding shares
of companies of developing and emerging markets to take advantage of high growth rates in those countries as
compared to the developed countries. A GDR can be issued in any freely convertible foreign currency. GDR are the
best way of raising finance from USA and other European countries' investors. No Indian company has right to sell
their shares in foreign capital market without GDRs. So, it is very necessary to know the procedure of issue GDRs.
Only GDRs connects foreign investors with Indian Companies.

8. MASALA BONDS
Masala Bonds are debt securities denominated in INR issued by Indian entities to overseas investors but settled in
foreign currency. In other words, they are rupee denominated bonds issued to overseas buyers. While masala bonds
are issued to overseas investors, still the same is denominated in Indian rupees. Accordingly, the term masala is used
to give Indian flavour to the said bonds. These are Indian rupee denominated bonds issued in offshore capital
markets. The issuance of rupee denominated bond is an attempt to shield issuers from currency risk and instead
transfer the risk to investors buying these bonds. Interestingly, currency risk is borne by the investor and hence,
during repayment of bond coupon and maturity amount, if rupee depreciates, RBI will realize marginal saving.
Issue of Masala Bonds
The International Finance Corporation (IFC), an arm of the World Bank, issued the first masala bonds in October
2013 as part of its $2 billion dollar offshore rupee programme. However, no Indian corporate has yet issued any
masala bond. Two prospective issuers, India’s largest mortgage lender Housing Development Finance Corp. Ltd
(HDFC) and the nation’s largest power producer NTPC Ltd, have been on the road to secure investors for such bonds
since last month but are yet to launch their respective issues. HDFC began talking to investors early November while
NTPC concluded it’s marketing a week ago. HDFC initially wanted to raise USD 750 million. However, following
its meeting with the investors, HDFC has decided to raise about USD 300 million in the first tranche with a maturity
of five years. NTPC has not yet announced the date and size of its issue.

9. Trends and Outlook for Masala Bonds
Masala Bonds have been adopted by a variety of issuers. The types of issuers who have accessed funding via
Masala Bonds from the international debt capital markets include corporates, quasi-sovereign entities such as
the National Highways Authority of India and state level entities such as the Kerala Infrastructure Investment
Fund Board. Factors such as a shortfall in supply of credit onshore and a trend towards diversification of
funding sources by borrowers in India are expected to encourage more issuers to access the international
fixed income markets in this manner. Issuances would also be encouraged by increased investor appetite for
better yields from the emerging markets. At the time of writing this article, more than 50 issuances of Masala
Bonds have taken place raising more than USD5 billion1 (INR equivalent) from the international debt capital
markets. With the Government of India acting to ease the liquidity shortage in India, it is expected that the
requirements for ECBs would be further liberalised. It is expected that Masala Bonds will remain attractive
for investors seeking an opportunity to participate in one of the fastest growing economies.

10. Reasons for issuing and investing in Masala Bonds
Unlike other ECBs, such as ‘medium term note’ or a ‘floating rate note’ that are mostly dollar denominated,
masala bonds are rupee dominated borrowings. That means that although masala bonds are settled in dollars
overseas, the returns from it is determined by the rupee-dollar exchange rate and is repaid to the issuer
(domestic entities) in rupees. By issuing, or pricing bonds in rupees, the issuer is insulated from the volatile
exchange rate and the associated currency risk; the risk is instead, passed on to the investor. Further, masala
bond issuance allows domestic entities to access a large and diversified pool of global investors, apart from
funding via banks and the corporate bond market in India. For global investors, masala bonds are a high yield
investment opportunity that offers easy access to India’s asset market and its rapidly growing economy. If the
rupee appreciates at the time of returns, an investor is likely to benefit from his investment in masala bonds.
Besides, the government of India allows capital gains tax exemption on income accruing due to rupee
appreciation. Moreover, the withholding tax rate payable over and above the interest income of masala bonds
has been significantly reduced from 20 percent to 5 percent.

11. SAMURAI BOND
Foreign business enterprises/corporate firms issue Samurai bonds in Japan. To do so, the issuing company or
the government has to follow the rules and regulations of Japanese market. These companies issue their bond
in the Japanese market for acquiring the local currency. For investors in Japan, financial samurai bonds are an
attractive instrument as there is no risk of currency variation. The issuing company can use the proceeds from
samurai bond issuance for various purposes.
HISTORY OF SAMURAI BOND MARKET
 The Samurai Bond Market came into existence in 1970. It was the first time when the Ministry of Finance
allowed supranational entities and international government organizations to issue Samurai Bonds. However,
there were terms and conditions about the size of issue and tenor. The reason to open the Samurai bond market
was to deal with the excessive reserve of foreign currency in Japan. It was in the late 1960s when one US dollar
worth 360 Yen. To reduce the pressure on the financial and monetary market of Japan, the government opened
the gates for foreign organizations to invest in its market by issuing Yen-denominated bonds.
 The Asian Development Bank is the issuer of the first Samurai bond in the year 1970. The issue was worth 6
billion Yen and the tenor was 7 years. The Japanese market accepted the bond issue heartily. The first
government to take part in Samurai bond issue was the Australian Government, in the year 1972. Along with
government organizations and multinational companies, blue chip companies also participate in this market. This
is allowed since 1978. In 1979, for the first time, Sears Roebuck, a private enterprise, issued samurai bonds.

12.  After 1990 and the great Economic Reform of 1991, Samurai bond market came into the limelight. With
globalization hitting all the economies, Samurai bond issues grew significantly. In just 25 years, from 1990 to
2015, there have been more than 3000 samurai bond issues. However, in 2018, with the deterioration of market
sentiments, yield of the bond market across the world is increasing. The effect has also come on Samurai Bonds.
The result is the prices of these bonds are falling.
PURPOSE OF ISSUING SAMURAI BONDS
 The financial samurai bond issues are used to get an access to the market in Japan with Yen as a currency. They
can acquire capital for their business by issuing these funds. The proceeds gained from issuing these funds can
be converted to domestic currency and used for financing business operations. If the issuing company’s economy
is unstable, then it can use samurai bonds to invest and take advantage of the highly stable and systematic
Japanese market. The issuing entity can also invest the proceeds in the Japanese market (one of the prime
purpose of these bonds). The risk of foreign exchange rate is hedged by using these bonds.
 The issuer can also use the proceeds for taking the advantages of lower costs by converting the issue in a
different currency at the same time. Investor preferences change according to the market segment and thus a
difference in cost. It can also result from short-term market conditions affecting the bond and swaps markets.
 The issuer can also use the proceeds for taking the advantages of lower costs by converting the issue in a
different currency at the same time. Investor preferences change according to the market segment and thus a
difference in cost. It can also result from short-term market conditions affecting the bond and swaps markets.
 The government entity or the company issuing these bonds can explore the Japanese market without worrying
about currency risk. The bonds are denominated in the Japanese currency and the proceeds can directly be used
in the country. The investors purchasing these bonds are also protected against this risk. The Japanese financial
regulator, the FSA (Financial Services Agency) has laid down the rules and regulations for this kind of issue.

13. YANKEE BOND
Yankee bonds are bonds issued in the U.S. bond market by a foreign entity, and they are denominated in U.S. dollars.
Governments, companies, and other entities issue Yankee bonds. According to the Securities Act of 1933, these
bonds must first be registered with the Securities and Exchange Commission (SEC) before they can be sold. Yankee
bonds are often issued in tranches and each offering can be as large as $1billion. Investors like Yankee bonds because
they offer geographic and currency diversification as well as some tax advantages. Investors also get dollar income
streams, which they might use to pay other dollar-denominated obligations. Foreign issuers tend to prefer issuing
Yankee bonds when U.S. interest rates are low because this means lower interest payments for the foreign issuer.
Risks
Foreign investors are also subject to risks over and above the standard credit risk and interest rate risk. Exchange
rates can change quickly and dramatically, which affects the total return for non-U.S. investors. By being issued in
dollars, Yankee bonds avoid this currency risk due to the stringent regulations and standards that must be adhered to,
it may take up to 14 weeks (or 3.5 months) for a Yankee bond to be offered to the public. Part of the process involves
having debt-rating agencies evaluate the credit worthiness of the Yankee bond's underlying issuer.

14. External Commercial Borrowing (ECB)
External Commercial Borrowing aids Indian organizations raise funds in foreign currencies from outside India. This
can be used to bring in fresh investments. External Commercial Borrowing as it is known in its extended form, is an
instrument that helps Indian firms and organisations raise funds from outside India in foreign currencies. Indian
corporates are permitted by the Indian government to raise funds using External Commercial Borrowing in an effort
to help the companies expand their current capacity. External Commercial Borrowing can also be used to bring in
fresh investments.
The sources similar to ECBs include Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency
Exchangeable Bonds (FCEBs). While the main purpose for the issuance of FCCBs is to raise capital, External
Commercial Borrowing is applicable to commercial loans that can include securitised instruments, bank loans,
suppliers’ credit, buyers’ credit, and bonds that are availed from lenders that are not Indian residents. The minimum
maturity of these instruments, on average, is three years.

15. How to Avail External Commercial Borrowing
 Funds can be raised using External Commercial Borrowing either through the approval route or the automatic
route. There are certain eligibility regulations created by the government for availing finance under the
automatic route. These regulations relate to amounts, industry, the end-use of the funds, etc. Companies that
wish to raise finance through ECB will have to meet these eligibility criteria and funds can be raised without the
need for approval.
 The approval route, on the other hand, requires companies that fall under certain pre-specified sectors to get
the RBI’s or the government’s explicit permission before raising funds through External Commercial Borrowing.
Circulars and formal guidelines have been issued by the Reserve Bank of India for the specification of norms for
borrowing.
 Despite the fact that ECBs can be availed at lower rates, there are a number of guidelines and restrictions that
must be followed. Restrictions mainly apply to the amount that can be borrowed and the maturity of the
External Commercial Borrowing. Amounts in excess of $20 million will have maturity periods of at least five
years. Amounts under $20 million will have maturity periods of at least three years on average. The manner in
which the funds are used will also be subject to certain restrictions.
 The funds borrowed through External Commercial Borrowing can be used for the expansion of companies, but
borrowers cannot use the funds for onward lending, repaying existing loans, or investing in real estate. External
Commercial Borrowings are among the most commonly available sources of funding, but companies are
advised to exercise caution regarding the impact the borrowing can have on their balance sheets and the risks
associated with exchange risks if they are to use the funds in an effective manner.

16. CONCLUSION
 When we talk about foreign capital, the first thing which comes to mind is external commercial borrowings
(ECBs). The government has permitted domestic companies to raise funds from foreign financial institutions,
which helps them to expand and quickly scale up their operations. Moreover, since interest rates in international
markets are less than those prevailing in the domestic market, raising funds from abroad is more economical for
Indian companies. Apart from ECBs, corporates use instruments like American Depositary Receipts (ADRs) and
Global Depositary Receipts (GDRs) to raise external funds.
 Setting up a subsidiary of an Indian company in a capital-rich country is another means of securing low cost
finance. Many schemes and growth opportunities are available by this method for reputable companies in India,
through their overseas subsidiaries. With the Indian government accepting that foreign-capital markets are a
valuable source of funding, it is a good time for businesses to access such markets and partners to build up
capital reserves over the coming decade.
 There were reports that Indian market giants will get listed on overseas platforms in the coming years. Reliance
Industries Limited is planning to get its subsidiary Jio Platform listed on NASDAQ by 2021.
Similarly, Flipkart is preparing to list its initial public offering overseas by 2021. This will help the firm to raise
approximately $50 billion. India has taken a significant step on the path to consolidate its presence in the global
arena as it will help it in strengthening cross-border collaboration. Direct Listing will provide Indian companies
with alternate sources of capital, increase the pool of investors, and companies will have higher chances to
obtain better value on their securities. Thus, the overseas listing of Indian companies will have a considerable
impact on the Indian economy. The road ahead for the Indian Government is to make the regulatory measures
more adaptive towards the companies going for direct listing.