Sourcing Equity Globally

7/30/2019 Sourcing Equity Globally

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Sourcing Equity Globally


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Sourcing Equity Globally

To implement the goal of gaining access to globalcapital markets a firm must begin by designing astrategy that will ultimately attract internationalinvestors.

This would mean identifying and choosingalternative paths to access global markets.

This would also require some restructuring of the

firm, improving the quality and level of its disclosure,and making its accounting and reporting standardsmore transparent to potential foreign investors.


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Designing a Strategy

to Source Equity Globally Designing a capital sourcing strategy requires

that management agree upon a long-runfinancial objective and then choose among the

various alternative paths to get there. Often, this decision making process is aided by

an early appointment of an investment bank as

an official advisor to the firm.


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to Source Equity Globally Most firms raise their initial capital in their own

domestic market.

However, most firms that have only raised capital in

their domestic market are not well known enough toattract foreign investors.

Incremental steps to bridge this gap includeconducting an international bond offering and/orcross-listing equity shares on more highly liquidforeign stock exchanges.


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to Source Equity Globally

Depositary receipts (depositary shares) are negotiablecertificates issued by a bank to represent the underlyingshares of stock, which are held in trust at a foreigncustodian bank.

American depository receipts (ADRs) are certificates tradedin the United States and denominated in US dollars.

ADRs are sold, registered, and transferred in the US in thesame manner as any share of stock with each ADR

representing some multiple of the underlying foreign share(allowing for ADR pricing to resemble conventional USshare pricing between $20 and $50 per share).


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Mechanics of American Depositary Receipts(ADRs)

American Depositary Receipts

issued by a bank representingunderlying shares held

by a custodial bank

Publicly traded firm

outside the U.S.

Receipts for shares

listed on U.S. exchange

Shares traded on local

stock exchange

Shares

Shares

Receipts(ADRs)

Arbitrage

Activity

Traded by

U.S. investors


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Arbitrage with Depository Receipts

There are some stocks which are also allowed to bebought in India and converted into the DR forms, whichis attractive if the DR is trading at a premium to theIndian stock price.

The Process

1. Buy DR2. Sell local stock in India in cash market or futuresmarket.3. Convert shares from DR to local.

4. Deliver shares to stock exchange in India.5. Deposit proceeds in Indian bank account.6. Repatriate funds.7. Repeat process.


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to Source Equity Globally ADRs can be exchanged for the underlying foreign

shares, or vice versa, so arbitrage keeps foreign andUS prices of any given share the same afteradjusting for transfer costs.

ADRs also convey certain technical advantages toUS shareholders.

While ADRs are quoted only in US dollars and

traded only in the US, Global Registered Shares(GRSs) can be traded on equity exchanges aroundthe globe in a variety of currencies.


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Indian Depository Receipts

The rapid technological developments havemade it possible for speedier transfer ofmoney and securities.

Sweeping technological advances and therapid growth of e-commerce have madeconventional, geographic, regulatory and

market barriers irrelevant.


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A number of Indian companies have accessed theglobal markets by ADR/GDR route with a view toraising the foreign exchange for their globaloperations.

With the projected growth rate of the Indianeconomy at 8% and the spurt in the forex markets,India is fast emerging as an important destination for

global companies.


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IDRs is an innovative instrument enabling overseascorporates to raise funds through the Indian capitalmarkets.

It would enable the Indian investors to invest in wellperforming companies and participate in the growthand prosperity of these companies.

It would provide one more investment instrument tothe Indian investors and this increases the choice of

instruments available to them.


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The IDR would be an instrumentdenominated in Indian Rupees andrepresented by underlying securities of the

foreign company, which are listed on aninternational stock exchange.

IDRs would be listed on the Indian stockexchanges in the similar manner in which

GDRs and ADRs issued by domesticcompanies are listed overseas.


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The foreign company would raise funds fromIndian investors by floating IDRs and issuethe securities underlying the IDRs to an

overseas custodian bank, which, in turn,authorize the domestic depository bank inIndia to issue IDRs to Indian investors.


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Structure of IDR


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Depository Receipts of Indian

Companies

Many Indian companies have accessed theglobal equity market primarily for establishingtheir image as global companies.

Other relevant considerations are :1.Visibility and post-issue considerations relatedto investor relations,

2.Liquidity of the stock (or instruments based on

the stock such as depository receipts which arelisted and traded on foreign stock exchanges)

3.The price at which the issue can be placed,costs of issue and factors related to taxation.


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Shares of many firms are traded indirectly inthe form ofdepository receipts e.g. GDR andADR .

After a hesitant start in 1992 following theexperience of the first ever GDR issue by anIndian company , a fairly large number of

them have raised equity capital ininternational markets.


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Indian companies in the ADR/GDR

market Company Industry Date of Issue Size

($m)Arvind Mills Textiles Feb-1994 125Ashok Leyland Auto Mar-1995 138Century Textiles Diversified Sep-1994 100Crompton Electrical Jul- 1996 50Dr. Reddys Pharma Jul-1994 48GE Shipping Shipping Feb-1994 100Indian Hotels Hotels Apr-1995 86Indo Gulf Fertilizers Jan-1994 100ICICI Finance Sep-1999 315Infosys IT Mar-1999 70L&T Diversified Mar-1996 135Mah&Mah Auto Nov-1993 75

Reliance Diversified May-1992 150Satyam Infoway IT Oct-1999 75VSNL Telecom Mar-1997 527Wipro IT Sep-2000


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Foreign Equity Listing

and Issuance A firm must choose one or more stock

markets on which to cross-list its shares andsell new equity.

Just where to go depends mainly on thefirms specific motives and the willingness ofthe host stock market to accept the firm.


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Foreign Equity Listing

and Issuance Cross-listing attempts to accomplish one or more of many

objectives:

Improve the liquidity of its existing shares and support aliquid secondary market for new equity issues in foreign

markets Increase its share price by overcoming mis-pricing in a

segmented and illiquid home capital market

Increase the firms visibility

Establish a secondary market for shares used toacquire other firms

Create a secondary market for shares that can be usedto compensate local management and employees inforeign subsidiaries


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Effect of Cross-Listing and

Equity Issuance on Share Price Cross-listing may have a favorable impact on share price

if the new market values the firm or its industry morethan the home market does.

It is well known that the combined impact of a new equity

issue undertaken simultaneously with a cross-listing hasa more favorable impact on stock price than cross-listingalone.

Even US firms can benefit by issuing equity abroad as

increased investor recognition and participation in theprimary and secondary markets results.


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Barriers to Cross-Listing

and Selling Equity Abroad There are certainly barriers to cross-listing and/or selling equity

abroad.

The most serious of these includes the future commitment toproviding full and transparent disclosure of operating results and

balance sheets as well as a continuous program of investorrelations.

The US school of thought is that the worldwide trend towardrequiring fuller, more transparent, and more standardizedfinancial disclosure of operating results and balance sheetpositions may have the desirable effect of lowering the cost ofequity capital.


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Alternative Instruments to Source Equity

in Global Markets (in the USA)

Alternative instruments to source equity in globalmarkets include the following:

Sale of a directed public share issue to investors in a targetmarket

Sale of a Euroequity public issue to investors in more than onemarket (foreign and domestic markets)

Private placements under SEC Rule 144A

Sale of shares to private equity funds

Sale of shares to a foreign firm as part of a strategic alliance


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Alternative Instruments

to Source Equity in Global Markets A directed public share issue is defined as one that

is targeted at investors in a single country andunderwritten in whole or in part by investmentinstitutions from that country.

The issue might or might not be denominated in thecurrency of the target market.

The shares might or might not be cross-listed on astock exchange in the target market.


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to Source Equity in Global Markets The gradual integration of the worlds capital markets

and increased international portfolio investment hasspawned the emergence of a very viable Euroequitymarket.

A firm can now issue equity underwritten and distributedin multiple foreign equity markets, sometimessimultaneously with distribution in the domestic market.

The Euro market (a generic term for international

securities issues originating and being sold anywhere inthe world), was created by the same financial institutionsthat had previously created an infrastructure for theEuronote and Eurobond markets.


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to Source Equity in Global Markets One type of directed issue with a long history as a

source of both equity and debt is the privateplacementmarket.

A private placement is the sale of a security to asmall set of qualified institutional buyers.

Since the securities are not registered for sale to thepublic, investors have typically followed a buy andhold policy.


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to Source Equity in Global Markets Private equity funds are usually limited

partnerships of institutional and wealthyindividual investors that raise their capital in themost liquid capital markets.

These investors then invest the private equityfund in mature, family-owned firms located inemerging markets.

The investment objective is to help these firms torestructure and modernize in order to faceincreasing competition and the growth of newtechnologies.


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to Source Equity in Global Markets Strategic alliances are normally formed by firms that

expect to gain synergies from one or more of thefollowing joint efforts:

Sharing the cost of developing technology

Gaining economies of scale or scope

Financial assistance (lowering of cost of capitalthrough attractively priced debt or equity

financing)

Documents

Sourcing Equity Globally