Raising Finance from International Markets

IBS, Mumbai

 An American Depositary Receipt (abbreviated ADR) represents ownership in the shares of a non-U.S. company that trades in U.S. financial markets. The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border & crosscurrency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

 Each ADR is issued by a U.S. depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR often tracks the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. In the case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government.

 Depositary banks have various responsibilities to an ADR shareholder and to the non-US company the ADR represents. The first ADR was introduced by JP Morgan in 1927, for the British retailer Selfridges & Co. There are currently four major commercial banks that provide depositary bank services JPMorgan, Citibank, Deutsche Bank and the Bank of New York Mellon.

 Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS).

 American Depositary Receipt ADR

This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq.

ADR
An ADR is a negotiable US certificate representing ownership of share in an non-US corporation. ADRs are quoted and traded in US dollars in the U.S. securities market. Also, the dividends are paid in US dollars. ADRs were specifically designed to facilitate the purchase, holding and sale of non-US securities by US investor, and to provide a corporate finance vehicle for non- U.S. companies.

 ADRs enable to US investors to buy shares in foreign companies without undertaking cross-border transactions. The shares of a non-US corporation trade on non-US exchange, while the ADR trade on US exchange. The stock of many non-US companies trade on US Stock exchanges through the use of ADRs.

Benefits to companies
Broadening and diversifying a companys US investor base. Enhancing a companys visibility, status and profile in the US and internationally, among investors. Offers a new avenue for raising equity capital, often at highly competitive rates.

Benefits to Investors
Convenient to purchase and hold a nonUS issuers securities. Opportunity to invest and earn in US dollars. Diversifying portfolio. Invest in high growth economies.

 Global Depositary Receipt GDR 1. A GDR is very similar to an American Depositary Receipt. 2. These instruments are called EDRs when private markets are attempting to obtain euros.

Global Depositary Receipt - GDR 1. A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.

 A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on a exchange of another country. American Depository Receipts - ADR make is easier for individual to invest in foreign companies, due to wide spread availability of price information, lower transaction cost and timely dividend distribution.

Foreign Currency Convertible Bond - FCCB

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. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

Foreign Currency Convertible Bond - FCCB

These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. (Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.

 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.

 Essar Oil, Parsvnath Builders, Xl Telecom, Hotel Leela Venture, Fortis Healthcare etc.

 Traditionally, companies have raised capital from their home market but increasingly they are approaching foreign markets.

Raising Finance From International Markets

Equity markets are becoming more integrated. Companies have flexibility in deciding whether to raise public equity capital and where to list and or trade the securities they issue. Various factors influence the decision viz. size, cost involved in the capital raising and listing process.

 Cost of raising equity capital in Londons equity market London Stock Exchange LSE, AIM, Deutsche, Euronext, New York Stock Exchange NYSE and Nasdaq in the USA.

Cost at IPO Stage Direct Costs

On going Cost Direct Costs

Underwriting Fees, Initial Listing Fees Other Direct IPO Cost

Regulation, Corporate Governance and Professional Fees Annual Listing Fees

Indirect Costs IPO Price Discount

Indirect Costs Trading Cost

IPO & On Going Cost is Cost of Equity Capital

 Underwriting fee generally constitute the single largest direct cost element when issuing equity. These are usually expressed in percentage terms as a gross spread charged by the underwriting syndicate i.e. the syndicate receive the percentage of the issue price for each share sold.

NYSE 6.5% Nasdaq 7% LSE 3.25% AIM 4%