ACCESSING INTERNATIONAL CAPITAL MARKET

1. ACCESSING INTERNATIONAL CAPITAL MARKET Prepaid by Mitesh Patel

2. INTRODUCTION • Indian corporates can access international capital markets through external equity and commercial borrowing. During last few years, hugh resources have also been raised from the international capital markets by way of Global Depository Receipts/American Depository Receipts (GDR & ADR ), foreign currency convertible bonds (FCCBs) and external commercial borrowings (ECBs).] • SCOPE • External Commercial Borrowings (ECBs) include commercial bank loans, buyer’s credit, suppliers’ credit, securitised instruments such as Floating Rate Notes and Fixed Rate Bonds, etc., credit from official export credit agencies and commercial borrowing from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB,AFIC,CDC, etc. • Who can raise ECB till what limit All infrastructure and Greenfield projects can raise up to 50% of the total project cost while Telecom Projects up to 50% of the project cost (including license fees) In the case of power projects, greater flexibility will be allowed based on merits.

3. GUIDELINES FOR EXTERNAL COMMERCIAL BORROWLING(1992) • The guidelines for external commercial borrowing issued by Government of india on August 7,1992 envisage a cap on ECB to ensure that debt is kept at a sustainable level. The policy on external commercial borrowings has been made transparent with gradual phasing out of end- use restriction, except for invesments in real estate and stock markets. Priority is accorded to infrastructure and core sectors,export oriented and import substitution units and also medium sized/small scale units. • ECB is defined to include suppliers’ credits and credits from officially sponsored agencies but excludes all borrowing with a maturity of less than one year. With a view to keep a cap on borrowing, strict adherence to approval and monitoring is envisaged. • External commercial loans proposed for total export production purposes are given priority. Where such loans are proposed on a self liquidating basis, i.e., the principal instalments and interest are entirely serviced out of export earnings and such loans are forthcoming without any security by way of any guarantee from a commercial bank/financial institution in India, they will be cleared on a priority bases by RBI. • Applicants are free to raise commercial loans from any internationally recognised source including commercial banks, export credit agencies and supplier’s credits. • Repayment of foreign currency loans where where the outstandings do not exceed US 1$ million, or equivalent thereof, may be permitted by the government, provided there are no penalties for prepayment.

4. PROCEDURE FOR APPROVAL 1) The approval of Department of Economic Affairs for all credit proposals would continue to be necessary where the loan is directly taken from foreign lender by either the borrower as an actual user of the loan or by a financial intermediary signing a framework credit agreement. In the case of the latter, sub-borrowers under framework credit agreement would not need separate approvals from the government. 2) Applications should contain the following details. a) Approval of the relevant authorities for the import, where such approval is required. b) Details of offer from one or more lenders. c) Details of contact person/office with telephone numbers to enable quick reference to be made, if clarifications are needed. 3) The approval letter will be issued by the ECB Division of the Department of Economic Affairs, Ministry of Finance.

5. NEW GUIDELINES FOR (ECB)(19.6.1996) • The fresh guidelines issued by the Ministry of Finance in June,1996 allow Indian corporates in the key infrastructure sectors to raise commercial loans abroad. Infrastructure green field projects are allowed to raise up to 35 per cent of total project cost where such projects are appraised by financial institutions. In the case of power projects greater flexibility will be allowed depending on the merits of the case. • Although ECB can be used only to fund import of capital goods, projects in power, telecommunication and railway sectors have been permitted to fund their project related rupee expenditure with ECB. While the average maturity should be seven years for ECB, minimum five years maturity is allowed for projects in oil exploration and telecommunication. The general rule is that all ECBs of more than $15 million must have an average maturity of seven years. • Development finance institutions can raise ECBs of five years maturity and use the proceeds for rupee lending according to priority to small and medium units. • After obtaining approval from ECB division. Development of Economic affairs, Ministry of Finance, the applicant has to obtain approval from RBI and submit an executed copy of the loan agreement to the ministry.

6. MODIFIED GUIDELINES FOR ECBS(1.4.1997) • The union Government announced modified guidelines for external commercial borrowings to provide more flexibility to investors in critical infrastructure areas, give priority to exporters in accessing such resources and assist corporrates incurring longer term debt. The total volume of ECB approvals will continue to be carefully monitored, consistent with prudent debt management, according to the Ministry of Finance. • The modified guidelines extend the flexibility now available for ECBs to other infrastructure sector, like roads, bridges, industrial parks and urban infrastructure. The flexibility for rupee expenditure is at present meant only for the power, telecommunications and railway sectors.

7. GUIDELINES ON EXTERNAL COMMERCIAL BORROWINGS:POLICIES & PROCEDURES (1999-2000) • Average Maturities for ECB • USD 5 million Scheme • Exporters/Foreign Exchange Earners • Infrastructure Projects • Long –term Borrowers • On-lending by DFIs and other Financial Intermediaries • Proceeds from Bonds, FRNs and Syndicated Loan • ECB Entitlement for New Projects • Prepayment of ECB • Refinancing the existing Foreign Currency Loan • Liability Management • End use Relaxation • Government Equity Holding in PSUs • Operating Expenses • Simplification of Approval Procedures • Structure Obligation

8. Eurodollar Market • Raising of such funds is subject to the guidelines for external commercial borrowing companies. Eurodollar market consists of international banks, finance companies and foreign exchange banks and special institutions .The annual funds available on an average is about $500 billion. Total international financing which was US $515 billion in 1989 declined to $465 billion in 1990 and further to $245 billion in each of the years in 1991 and 1992 and started rising since 1994. In 1996 it was $745 billion. The market is dominated by eurodollars which consists of dollar denominated deposits in banks outside the United States, including Canadian banks and overseas branches of US banks. Loan syndication The syndication technique in the Eurodollar market arose because of the large size of the loans and wide variety of banks providing the funds. The procedure also helps banks to diversify some of the unique sovereign risk that arise in international lending. Lead banks assemble a management group of other banks to underwrite the loan and to market share in it to other participating banks. In a syndicate there are three levels of banks – lead banks, managing banks and participating banks.The mandate to orgenise the loan is awarded by the borrower to one or two major banks after a competitive bidding procedure.

9. Club Loans • Lead banks normally keep 50-70 per cent initial underwriting shares. In the case of smaller loans to frequent borrowers club loans are often arranged. The club loan is funded by lead banks and manager. In such case no placement memorandum is prepared. Club loans are common in period of market uncertainty when large multinational bank are reluctant to do business. Term Loan • Common type of syndication loan is a term loan with a grace period before repayment of principal commences. Grace period is one of the factor that determines the cost of the loan. Syndicated loans are normally denominated in US$, but loans in Deutsche Marks, Swiss Frances, Japanese Yen and other currencies are also granted. Place & Method of Payment Placement of interest and principal on loan is normally affected by means of transfer of funds from one bank account to another in the country in whose currency the loan is denominated. Borrowers normally receive funds in the place of their choice.

10. Guarantee Clause • Syndicated loans have no collateral. A bank guarantee is required as also the bank should satisfy capital adequacy norms. Reserve Requirement Clause The lending banks in the Eurodollar markets are free of any reserve regulations imposed when subject to a central bank jurisdiction. The reserve requirement clause stipulates that the borrower has to absorb any additional cost the lender incurs when interest free reserve requirements are imposed. Free and Clear of Taxes • Lending banks insist on payments, of principal and interest which should be free of taxes.

11. Eurobonds • Eurobonds are usually for a duration of 10 to 15 years period. Eurobonds are defined as bonds issued by a borrower who is of a nationality different from the capital market in which the securities are issued. Eurobonds are underwritten and sold in more than one market simultaneously, usually through international syndicates. Global Depository Receipts • Global Depository Receipts are essentially equity instruments created by Overseas Depository Banks which are authorised by the issuing companies in India to issue GDRs outside the country to non-resident investors against the shares of the issuing companies held with the nominated domestic custodian banks. Foreign Currency Convertible bonds • They are bonds issued in accordance with this Scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company.

12. Investment in GDRs by FIIs • GDRs are designated in dollars and the holder need not register with SEBI nor appoint a customer. He is appointed by the depository. Cost of acquisition of share through GDR route is cheaper because they are issued at a discount on the market price. There are no ceilings for investment in a company through GDRs. GDRs are cleared through international settlement system such as a company through GDRs. GDRs are cleared through international settlement system such as Euroclear and DTC in USA. • Since there is no lock-in period for GDR issue, after a cooling period of 45 days during which lead managers stabilise prices, the GDR holder can get a GDR cancelled by approaching the depository who directs the custodian to release the shares. On the custodian’s request the company releases multiples of GDR certificates to the counter broker who sells and remits the proceeds of sales in foreign exchange. GDRs can be replaces by an identical security of the same definition or in other words, foreign investors have the option of cancellation of GDr’s by withdrawing foreign exchange from the country without a corresponding inflow of foreign currency by fresh issue of GDRs by the company.

13. Advantage of GDR for the Issuer • After the issued of GDRs the share price of the company may stabilise because of the wideming of the market. The image of the issuer is also enhanced in the global market. Euro issues cost less than domestic rights issue. Companies making Euro issues may have an understanding with a depository bank resulting in assured voting pattern. The indian company does not bear any foreign exchange risk since the securities are denominated in rupees. Advantages to the Investor • In regard to the investors, they enjoy the benefits of international diversification while avoiding long delay of settlement and transfer of shares, confusing trade and tax practices. GDRs are quoted in dollars and dividends are paid in dollar free of foreign exchange risk. They enable the foreign investor to avoid restrictions on purchase and holding of individual company’s shares. GDR s are quite as liquid as the underlying share and they can be a foreign for shares. GDR transactions do not involve the foreign investor the foreign investor in SEBI approval as a foreign investor. Finally, GDRs are attractive to foreign investors because the returns are large.