RAISING FINANCE RAISING FINANCE THROUGHTHROUGH

EURO ISSUEEURO ISSUE

AMIT

SUNIL

NEHA

SANJEEV

SNEH

127127thth SMTP-GROUP B SMTP-GROUP B

INDEXINDEX 1. Introduction 2. EURO ISSUE- Meaning 3. Advantages of Euro Issue 4. Modes of raising finance 5. Meaning of GDRs / ADRs 6. Working Mechanism of ADRs / GDRs 7. About FCCBs 8. Salient Features of FCCBs 9. Benefits of FCCBs10.Necessary Approvals Required 11.Agencies Involved12.Documentation13.Concept of Two Way Fungibility14.Provision Relating to Pricing15.Taxation Aspects16.Stamp duty17.Some Case Studies18.A Journey At Glance

INTRODUCTIONINTRODUCTION

Euro Issue is one of the popular and attractive mode for Indian Companies for raising funds from the International market.

Finance Minister Mr. Manmohan Singh initiated this Scheme on 25th Feb1992 to allow FII’s to invest in Indian Capital Market.

Guidelines in this regard were issued by Deptt. of Economic Affairs, Ministry of Finance on 12th November 1993.

EURO ISSUE

What is Euro Issue

Issued Outside India

It is made in any freely convertible Foreign Currency.

It is listed at one or more Stock Exchanges.

Any Issue will be a Euro Issue if :-Any Issue will be a Euro Issue if :-

Enhance the image of Co. &its products in International

Market.

Providesmore

liquidity

Provides a competitive advantage in interest rates

Helps to gain Higher returns on investments

Enables Indian Companies to Compete

& Operate Globally

Advantages of Euro Advantages of Euro IssueIssue

AdvantagesAdvantages

Modes of raising finance in Modes of raising finance in India from International MarketsIndia from International Markets

Global Global Depository Depository

Receipts (GDRs)Receipts (GDRs)

AmericanAmericanDepositoryDepository

Receipts (ADRsReceipts (ADRs))

II. Foreign Currency Convertible Bonds

(FCCBs)

Euro Issue in IndiaEuro Issue in India

I. Depository Receipts

Concept of

Depository Receipt

Meaning of GDRs & Meaning of GDRs & ADRsADRs

Global Depository Receipt American Depository Receipt

A Negotiable Instrument in the form of Certificate or Depository Receipt.

Created by Overseas Depository Bank Outside India.

Issue to NRIs against Ordinary Shares.

A Negotiable Instrument in the form of Certificate or Depository Receipt.

Created by Overseas Depository Bank in the US Market.

Issue to NRIs against Ordinary Shares for trading in US market.

Issuer Company

In India

(Through Lead Manager)

Overseas Depository

Overseas Investor

European or U.S. Stock Exchange

Underlying Shares Custodian(Banking Co. situated in

India which has the physical possession of shares

underlying GDRs / ADRs )

Dividend

GDR/ADR Listing

Money

Working Mechanism of ADRs / GDRsWorking Mechanism of ADRs / GDRs

CONCEPTof

FCCBs

About FCCBsAbout FCCBsForeign Currency Convertible Bonds (FCCBs) are a mixture of debt and equity issued by the company for raising the finance in a currency other than the domestic currency.

Regular Coupon and Principal

Payment

II. Equity

FCCBs

I. Debt

Option to convert the

bond into stock

Salient Features of FCCBsSalient Features of FCCBs

FCCB can be secured as well as unsecured.

Issuer Company must have a minimum experience of 3 years consistent track record of good performance

FCCBs are generally issued by the Corporate in which the promoters holdings is at the highest level.

Amount raised through the mechanism of FCCB should be parked abroad till the actual requirement raised in India.

Benefits of Benefits of FCCBsFCCBs

Benefits for the Bond Holder Benefits to the Company

Guarantee of periodic payment called coupon;

Guarantee of payment of principal amount;

Chance to capitalize on increased share prices.

Coupon payment on the bonds are on lower side;

Reduction in debt financing cost;

Global presence.

The issuer company collects the issue proceeds in foreign currency.

Necessary Approvals Necessary Approvals RequiredRequired

In Principle-In Principle-consent of Financial consent of Financial

InstitutionsInstitutions

In Principle- In Principle- consent of stock consent of stock

exchangeexchange

Reserve Reserve Bank of Bank of

IndiaIndia

Ministry ofMinistry ofCorporate Corporate

AffairsAffairs

Ministry of Ministry of FinanceFinance

(In Principle(In Principle and Final)and Final)

ShareholdersShareholders

Board of Board of

DirectorsDirectors

APPROVALSAPPROVALS REQUIREDREQUIRED

AgenciesAgencies InvolvedInvolved

1. Lead Manager1. Lead Manager

2. Co-Lead/Co-Manager2. Co-Lead/Co-Manager

3. 3. Overseas Depository Bank(ODBOverseas Depository Bank(ODB))

4. 4. Domestic Custodian Bank(DCBDomestic Custodian Bank(DCB))

5. Underwriters5. Underwriters

6. Auditors6. Auditors

7. Legal Advisors7. Legal Advisors

8. Listing Agent8. Listing Agent

9. International Council9. International Council

DocumentationDocumentation

Prospectus Drafting

Underwriting Agreement

Legal Opinions

Auditor’s Comfort Letter

Listing Application and Listing Agreement

Deposit Agreement (for depository shares)

Concept of Two Way Concept of Two Way FungibilityFungibilityFungibility (w.e.f. February 13, 2002)

Two way fungibility implies that an investor who holds ADRs/GDRs can cancel them with the Depository and sell the underlying shares in the market. The Issuer Company can then issue fresh DRs to the extent of shares sold in the market.

Benefits

•Improvement in liquidity; •Elimination of arbitrage.

Provision Relating to Provision Relating to PricingPricing

The price at which FCCB issue can be made shall not be less than the higher of the following:

The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; or

The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange sduring the two weeks preceding the relevant date.

Taxation AspectsTaxation Aspects

a) The issuing company shall transfer the dividend to the shareholder after deducting the tax at sources to the Overseas Depositary Bank.

b) All transaction derived from the trading from the GDR outside India, among non-resident investors, will be free from the Tax Liability under the Income Tax Act.

c) If any capital gains arise on the transfer of the aforesaid shares in India to the non-resident, he will be liable to the provisions of the Income Tax Act.

d) After redemption of the Depository Receipts in to underlying shares, the rate of taxation of income by way of dividends on these shares would continue to be at the applicable rates, in accordance with the Income Tax Act.

e) Application of avoidance of double taxation agreement in case of GDR.

f) The holding of the depository receipts in the hands of non-resident investors and the holding of the underlying shares by the ODB in a fiduciary capacity shall be exempt from Gift Tax and Wealth Tax in India.

a) The issuing company shall transfer the dividend to the shareholder after deducting the tax at sources to the Overseas Depositary Bank.

b) All transaction derived from the trading from the GDR outside India, among non-resident investors, will be free from the Tax Liability under the Income Tax Act.

c) If any capital gains arise on the transfer of the aforesaid shares in India to the non-resident, he will be liable to the provisions of the Income Tax Act.

d) After redemption of the Depository Receipts in to underlying shares, the rate of taxation of income by way of dividends on these shares would continue to be at the applicable rates, in accordance with the Income Tax Act.

e) Application of avoidance of double taxation agreement in case of GDR.

f) The holding of the depository receipts in the hands of non-resident investors and the holding of the underlying shares by the ODB in a fiduciary capacity shall be exempt from Gift Tax and Wealth Tax in India.

StampStamp duty duty

Particular Who is Liable Rate of duty

Issuance of GDR/ADR

Issuer Company 0.1% on the value (Per Value plus

Interest)

Transfer of GDR/ADR Not Applicable Not subject to stamp duty

Acquisition of shares upon the

conversion

Non resident holder 0.25% of the market value of GDRs or

equity shares exchanged

Some Case StudiesSome Case Studies

Companies with their FCCBs maturing in a year’s time, face double edged sword:

With the share prices falling below the conversion prices, the exercise of conversion option by the Bond holders is virtually ruled out.

For example: TATA Motors: FCCBs worth 11,760 million yen maturing in March 2011 were issued at a conversion price of Rs.1001. This seems unattractive now in view of its current stock price of Rs.143.

With the Bond holders not exercising the conversion option, Companies forced to payout the liabilities.

Realizing the tough situation of the Companies, RBI, in November 2008 permitted buyback of FCCBs on satisfaction of certain conditions through their forex resources/ new External Commercial Borrowings. Later RBI permitted buyback from Rupee resources of Companies, provided the buyback amount limited to $50 million and the resources were from the Companies’ internal resources.

Reliance Communications, which had issued zero coupon FCCBs in February 2007 for $1 billion (Rs.4700 Crore) at a conversion price of Rs.661 is the first Co. to avail of this buyback facility.

Some Case Studies Some Case Studies Contd….Contd….

Other Companies following suit in this regard:

GTL Infrastructure, pharmaceutical major Jubilant Organosys, Moser Baer, Tulip Communication.

Buyback reduces the unsecured debt of the Companies when they buyback the FCCBs at a discount to the face value of the Bond. However, only Companies with sufficient surplus cash would be in a position to do so.

Buyback, however, seems unlikely to become a trend owing to the size of the issues and the current balance sheet positions of the Companies.

Other Companies following suit in this regard:

GTL Infrastructure, pharmaceutical major Jubilant Organosys, Moser Baer, Tulip Communication.

Buyback reduces the unsecured debt of the Companies when they buyback the FCCBs at a discount to the face value of the Bond. However, only Companies with sufficient surplus cash would be in a position to do so.

Buyback, however, seems unlikely to become a trend owing to the size of the issues and the current balance sheet positions of the Companies.

Some Case Studies Some Case Studies Contd….Contd….Some Case Studies Some Case Studies Contd….Contd….

Year 1992

Year 1993-95

Year 1995-99

Year 1999-00

Year 2000-01

Year 2001-09

Formulation of scheme allowing the Indian companies to have Global Access

Indian Companies raised approx.Rs.14500 crore through Euro Issue during these two years.

Indian companies postpone their plans of raising the money due to the South East Asian crisis and Pokhran blasts and lack of

interest of Foreign Investor in Indian Equity..

For the first time, Indian companies raised the equity from the Wall Street. Infosys Technology was the first Company who tap

the American Market during this Year. In this year, Indian Companies raised around$1 billion

During this year, Indian Companies raised approx. $4 billion through ADRs and becomes the Asia’s biggest issuers of ADRs.

Capital raised from the international market is more than the capital raised from the domestic market Rediff.com become the

first dot company to list at near 100% premium on NASDAQ Between this period, the number of Euro Issue has increased

manifold.

A Journey At A Journey At GlanceGlance

End Use of ProceedsEnd Use of Proceeds

Permitted Not Permitted

Financing capital goods imports;

Capital expenditure;

Prepayment or scheduled repayment of earlier external borrowings;

Equity investments in Joint Venture/ Wholly Owned Subsidiaries in India.

On-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate;

Real estate;

Working capital, general corporate purpose and repayment of existing Rupee loans.