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Introduction• The decade of 1990's witnessed opening up of equity

markets of developing countries like South Korea, Taiwan, Indonesia and India to foreign investors albeit with some restrictions

• The trend towards global integration of equity markets is unmistakable though it is punctuated by intermittent crises and consequent investor retreat

• We investigate the determinants of foreign equity investment decision and address the issues related to capital market integration and valuation of foreign equities

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International Investment Vehicles

Direct Purchase of Foreign Shares– This route is usually reserved for large

institutional investors because of the additional considerations involved.

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International Investment VehiclesDepositary Receipts (ADRs, GDRs)

– After a bank has taken custody of foreign shares in its foreign office, ADRs/GDRs can be issued as claims against the foreign shares.

– The issuing bank services the ADRs/GDRs by collecting all dividends (in the issuing company’s home currency), rights offerings, etc., and distributing the proceeds to investors in a convertible currency such as USD.

– In a sponsored ADR, the foreign firm pays a fee to the depositary bank to cover the cost of the ADR program, while in an unsponsored ADR, the issuance of the ADR is demand driven.

– ADRs are directed at US based investors and issued in US while GDRs are issued outside US and are targeted at global investors. The main difference is in regulatory framework, disclosure requirements, accounting standards etc.

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International Investment VehiclesClosed-End and Open-End Mutual Funds

– Mutual funds that invest in foreign stocks can be grouped into several categories from a U.S. perspective:Global - Investing in U.S. and non-U.S. shares.International - Investing in non-U.S. shares only.Regional - Investing in a geographic area.Country - Investing in a single country.Specialty - International investments in an

industry group such as telecommunications, or special themes such as newly privatized firms.

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International Investment Vehicles

– An open-end fund stands ready to issue and redeem shares at prices reflecting the net-asset-value of the underlying foreign shares.

– A closed-end fund issues a fixed number of shares against an initial capital offering. The shares then trade in a secondary market at prices reflecting a premium or discount relative to the net-asset-value of the underlying foreign shares.

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Equity Financing in Global Markets

• Since many Indian companies have accessed the global equity market primarily for establishing their image as global companies, the major consideration has been visibility and post-issue considerations related to investor relations, liquidity of the stock (or instruments based on the stock such as depository receipts which are listed and traded on foreign stock exchanges) in the secondary market and regulatory matters pertaining to reporting and disclosure

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Equity Financing in Global Markets

• Other relevant considerations are the price at which the issue can be placed, costs of issue and factors related to taxation

• With segmented markets, the price that can be obtained would vary from one market to another

• When the issue size is large, the issuer may consider a simultaneous offering in two or more markets

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Equity Financing in Global Markets• Issue costs are an important consideration

• Shares of many firms are traded indirectly in the form of depository receipts e.g. GDR and ADR .

• After a hesitant start in 1992 following the experience of the first ever GDR issue by an Indian corporate , a fairly large number of Indian companies have raised equity capital in international markets

• In recent years, a major driving force has been the desire of Indian IT companies to make acquisitions in the US. The ADS are used as “acquisition currency” in share swaps. For this purpose the ADRs must be listed and actively traded

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Equity Financing in Global Markets

• From the point of view of the issuer, GDRs and ADRs represent non-voting stock with a distinct identity which do not figure in its books

• There is no exchange risk for the issuing firm since dividends are paid by the issuer in its home currency. Exchange risk is borne by the investors.

• Apart from imparting global visibility, the device allows the issuer to broaden its capital base by tapping large foreign equity markets

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Indian ADRs Trading in US

Dr. Reddy's Laboratories Ltd.

HDFC Bank Ltd.

ICICI Bank Ltd.

Infosys Technologies Limited

Mahanagar Telephone Nigam Limited

Rediff.com India Ltd

Satyam Computer Services Limited

Sify Ltd.

Videsh Sanchar Nigam Limited

Wipro Ltd

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Indian GDRs

Arvind Mills, Ashok Leyland,Bajaj Auto,Ballarpur Ind.,Bombay

Dye,BSES Ltd,Century Textiles,CESC,Core Parent, Crompton

Greaves,DCW,Dr. Reddy's,E. I. Hotels,EID Parry,Finolex Cab, Flex

Industries,G.E. Shipping,G.N.F.C,GAIL,Garden Silk, Grasim

(1st),Grasim (2nd),Guj Ambuja ,Himachal Futuri,Hindalco

(1st),Hindalco (2nd),Hindustan Dev,India Cements, Indian

Alum.,Indian Hotels,Indian Rayon,Indo Gulf,Indo

Rama,ICICI,Infosys,IPCL,ITC,J.K. Corp,Jain Irrig,JCT Ltd.,Kesoram

Ind,L & T (1st),L & T (2nd)Mah & Mah,MTNL,NEPC Micon,Nippon

Denro,Oriental Hotels,Ranbaxy Labs,Raymond

Woolen,Reliance,Reliance (2nd),Reliance

Petroleum,S.A.I.L.,Satyam Infoway,S.I.E.L.,Sanghi Poly,SIV

Ind ,SPIC,SBI,Sterlite India,Tata Electric,Telco (1st),Telco

(2nd),Tube Invest,United Phos.,Usha Beltron,Videocon

Int.,VSNL,Wockhardt

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Equity Financing in Global Markets

• From the investors' point of view, they achieve portfolio diversification while acquiring an instrument which is denominated in a convertible currency and is traded on developed stock markets

• The investors bear exchange risk and all the other risks borne by an equity holder

• They have all the rights and privileges of ordinary stockholders except the voting rights.

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GDRs and ADRs

GDRs could be offered to US investors only if very stringent requirements of registration with the SEC are complied with. However, under an exemption granted by Rule 144A of the securities act, securities can be offered to Qualified Institutional Buyers without going through the registration process.

As to ADRs, offereings at various levels are possible with more and more stringent accounting and disclosure requirements as one goes from lower to higher levels. There are four types of ADRs : Unsponsored and Levels I to III

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  American Depository Receipts (ADRs)

Unsponsored Depositary Receipts

 These are issued by one or more depositaries in response to market demand, but without a formal agreement with the company. Today, unsponsored Depositary Receipts are considered obsolete.

  Sponsored Level I Depositary Receipts

Level I Depositary Receipts are traded in the U.S. OTC market and on some exchanges outside the United States. The company does not have to comply with U.S. GAAP or full SEC disclosure. Essentially, a Sponsored Level I Depositary Receipt program allows companies to enjoy the benefits of a publicly traded security without changing its current reporting process.

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Level II Depositary ReceiptsThese are listed on a US stock exchange but no new capital is raised.

Level III Depositary ReceiptsThese are listed on a US stock exchange and are used to raise new capital.

Companies that wish to either list their securities on an exchange in the U.S. or raise capital use sponsored Level II or III Depositary Receipts respectively.

These types of Depositary Receipts can also be listed on some exchanges outside the United States. Each level requires different SEC registration and reporting, plus adherence to U.S. GAAP.

The companies must also meet the listing requirements of the national exchange (New York Stock Exchange, American Stock Exchange) or NASDAQ, whichever it chooses.

 

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  American Depository Receipts  Sponsored Level II And III Depositary Receipts

Companies that wish to either list their securities on an exchange in the U.S. or raise capital use sponsored Level II or III Depositary Receipts respectively.

These types of Depositary Receipts can also be listed on some exchanges outside the United States. Each level requires different SEC registration and reporting, plus adherence to U.S. GAAP.

The companies must also meet the listing requirements of the national exchange (New York Stock Exchange, American Stock Exchange) or NASDAQ, whichever it chooses.

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American Depository Receipts

Each higher level of Depositary Receipt program generally increases the visibility and attractiveness of the Depositary Receipt.

Level II is used when the company does not wish to raise funds i.e. just acquire listing while level III is used when funds are to be raised. For Level II issue the issuing firm converts some of its existing stock into ADRs.