FMCB UNIT IV Gaurav Sonkar
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Financial Instruments Instruments • • •
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Financial instruments instruments are are assets that can can be traded. They can also be seen as packages packages of capital that may be traded. Most Most type typess of fina financ ncia iall instr instrum umen ents ts prov provid ide e an ef effi fici cien entt flow flow and and transfer transfer of capital all throughout the world's investors. investors. These These assets assets can be cash, cash, a contr contract actual ual right to del delive iverr or receiv receive e cash or another type of financial instrument, or evidence of one's ownership of an entity. Financial instruments can can be real real or virtual documents representing representing a legal agreement involving any kind of monetary value. Equity-based financial instruments represent represent ownership ownership of an asset. Debt Debt-b -bas ased ed fina financ ncia iall in inst stru rume men nts rep eprresen esentt a lo loan an made made by an investor investor to the owner of the asset. Forei oreign gn exch chan ang ge in insstrum trumen ents ts compr ompris ise e a thir third, d, uniq unique ue type type of financial instrument. Interna International tional Accounting Accounting Standards Standards defines financial financial instrument instrumentss as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”. Gaurav Sonkar
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Shares According to company law, “ Share is the fractional part of the capital of the company which forms the basis of ownership ownership of certain rights and interest interest of a subscriber in the company. It is not a sum of money but an interest or right measured in a sum of money to participate in the profits made by the company or in the assets of the company when it is wound up.” Gaurav Sonkar
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Equity shares:
Equity share holders are the real owners of the organization, they enjoy voting rights and are paid dividend in the last. •
Preference shares:
The The Pre Preferen erence ce shar share e hold holder erss en enjo joyy pre preferen erenti tial al trea treatm tmen entt in the the paym paymen entt of di divi vide dend nd and and thei theirr dividend if unpaid accumulates also but generally they do not possess any voting right what so ever. Gaurav Sonkar
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Classification of Preference shares a) Cumulative and Non-Cumulative Non-Cumulative Preference Preference share b) Participating Participating and Non-Participating Non-Participating Preference Preference share c) Convertible Convertible and Non- Convertible Convertible Preference Preference share d) Redeemable and Non-Redeemable Preference Preference share Gaurav Sonkar
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Cumulative and Non-Cumulative Preference share •
When unpaid dividends on preference shares are treated as arrears and are carried forward to subsequent years, then such
preference
shares
are
known
as cumulative
preference shares. It means unpaid dividend on such
shares is accumulated till it is paid off in full. •
Non-cumulative preference shares are those type of
preference shares, which have right to get fixed rate of dividend out of the profits of current year only. They do not carry the right to receive arrears of dividend. If a company fails to pay dividend in a particular year then that Sonkar need not to be paid out ofGaurav future profits.
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Participating and Non-Participating Preference share •
Those preference shares, which have right to participate in any surplus profit of the company after paying the equity shareholders, in addition to the fixed rate of their dividend, are called participating preference shares.
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Preference shares, which have no right to participate on the surplus profit or in any surplus on liquidation of the company, are called non-participating preference shares. Gaurav Sonkar
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Convertible and Non- Convertible Preference share •
Those preference shares, which can be converted into equity shares at the option of the holders after a fixed period according to the terms and conditions of their issue, are known as convertible preference shares .
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Preference shares, which are not convertible into equity shares, are called non-convertible preference shares.
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Redeemable and Non-Redeemable Preference share •
Those preference shares, which can be redeemed or repaid after the expiry of a fixed period or after giving the prescribed notice as desired by the company, are known as redeemable preference shares. Terms of redemption are
announced at the time of issue of such shares. •
Those preference shares, which can not be redeemed during the life time of the company, are known as nonredeemable preference shares. The amount of such shares
is paid at the time of liquidation of the company. Gaurav Sonkar
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Meaning And Concept Of Debentures •
The total capital of joint stock companies can be divided into owner's capital and borrowed capital.
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Share capital is owner's capital whereas debenture is considered as borrowed capital.
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The buyers of shares i.e. shareholders possess the voting right through which they own control power of the company.
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Debenture is a long-term loan. Companies can raise additional capital by the issue of debentures. Debenture-holders receive fixed income in the form of interest during the loan period, however, they
do not possess the voting right. •
Debenture is a written promise for a debt by a company under its seal which contains the terms and conditions regarding the amount of loan or principal, the rate of interest , maturity date, maturity value etc.
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In other words, debenture is a certification of acknowledgment issued with the seal of company in favor of lender as an evidence of debt.
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This written document grants the holder the right to receive interest and return of principal as per the terms under which debentures are issued.
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Thus, debenture is a part of total capital of a company and debenture-holders are the creditors.
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Debenture-holders are entitled the right to receive interest on their fund invested in debenture.
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The rate of interest is predetermined and stated in the bond certificate.
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The interest is payable whether there is profit or loss.
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The amount of debenture is returned to the holders at the end of Gaurav Sonkar predetermined maturity period.
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Characteristics Of Debentures •
1. 2. 3. 4. 5. 6. 7. 8. 9.
Debentures are ranked as creditors of the company. Debenture is long-term debt and issued under the common seal of the company. In brief, a debenture possesses the following characteristics. Debenture is an instrument of loan. Interest is paid at fixed rate every year and debentures is known as "fixed cost bearing capital". Debenture has common seal of the company. Debenture is redeemable at a fixed and specified time. Debenture-holders are the creditors of company not owners. Debenture is a form of long-term borrowed capital. Debenture-holders have no right to cast vote in company's general meting. At the time of liquidation, first priority is given to debenture-holders at the time of repayment. Debentures can be issued to fulfill the requirement of huge capital. Small firms most often find it more expensive source of financing. Gaurav Sonkar
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Differences Between Shares And Debentures 1.
Ownership
The share of a company provides ownership to the shareholders. Debenture-holders are creditors of a company who provide loan to the company. 2.
Identity
Person holding share is known as shareholder. person holding debenture is known as debenture-holder. 3.
Certainty Of Return
No certainty of return in case of loss for the shareholder. Debenture-holder receives the interest even if there is no profit. 4.
Convertibility
Shares can not be converted into debentures. Debentures can be converted into shares. 5.
Control
Shareholders have the right to participate and vote in company's meeting. Debenture holders do not possess any voting right and can 13 not participate in meeting. Gaurav Sonkar
BONDS •
Bond refers to a security issued by a Company, Financial Institution or Government, which offers regular or fixed payment of interest in return for borrowed money for a certain period of time.
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By purchasing a bond, an investor loans money for a fixed period of time at a predetermined interest rate. While the interest is paid to the bond holder at regular intervals, the principal amount is repaid at a later date, known as the maturity date.
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While both bonds and stocks are securities, the principle difference between the two is that bond holders are lenders, while
stockholders are
the part-owners/owners of
firm/organization/company.Gaurav Sonkar
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Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely.
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Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Gaurav Sonkar
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ZERO COUPON BONDS •
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As the name suggests, there is no periodic interest payment and they are sold at a huge discount to the face value. These bonds benefit both the issuers and investors by limiting funding cost when interest rates are volatile for the issuers and by reducing reinvestment risk for the investor. ZCB are sometimes convertible into maturity which entails no outflow for the issuers, or into a regular interest bearing bond after a particular period of time. These bonds are the best options for individuals or institutional investors who look for safe and good returns and are ready to hold them till the bond matures. Moreover, these bonds do not carry any interest, which is otherwise taxable. Companies such as M&M, HB leasing and Finance have been Gaurav Sonkar 16 pioneers in introducing these bonds in Indian market.
DEEP DISCOUNT BONDS •
A deep discount bond is a zero coupon bond whose maturity is very high, 15 years or onwards and is offered at discount to the face value.
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The Industrial Development bank was the first financial institution to offer DDBs in 1992.
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The issuers have successfully marketed these bonds by luring the investors to become a ‘lakhpati’ in 25 years.
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Moreover these instruments are embedded with ‘call’ and ‘put’ options, providing an early redemption facility both to the issuer and the investor at a predetermined price and date. Gaurav Sonkar
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Warrants •
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Warrants are financial derivatives, which are frequently traded in the market. Warrant is just like an option contract where the holder has the right to buy shares of a specified company at a certain price during the given time period. In other words, the holder of a warrant instrument has the right to purchase a specific number of shares at a fixed price in a fixed period from an issuing company. If the holder exercised the right, it increases the number of shares of the issuing company, and thus, dilutes the equities of its shareholders. Warrants are usually issued as sweeteners attached to senior securities like bonds and debentures so that they are successful in their equity issues in terms of volume and price. Warrants can be detached and traded separately. Warrants are highly speculative and leverage instruments, so trading Gaurav Sonkar
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DERIVATIVES •
The term “Derivative” indicates that it has no independent value, i.e., its value is entirely derived from the value of the underlying asset.
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Derivatives are specific types of instruments that derive their value over time from the performance of an underlying asset: eg equities, bonds, commodities.
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A derivative is traded between two parties – who are referred to as the counterparties. These counterparties are subject to a preagreed set of terms and conditions that determine their rights and obligations. Gaurav Sonkar
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Derivatives can be traded on or off an exchange and are known as:
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Exchange-Traded Derivatives (ETDs):
Standardised contracts traded on a recognised exchange, with the counterparties being the holder and the exchange. The contract terms are non-negotiable and their prices are publicly available. •
Over-the-Counter Derivatives (OTCs):
Customized contracts traded off-exchange with specific terms and conditions determined and agreed by the buyer and seller (counterparties). As a result OTC derivatives are more illiquid, eg forward contracts and swaps.
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Need For Financial Derivatives There are several risks inherent in financial transactions and asset liability positions. Derivatives are risk-shifting devices; they shift risk from those ‘who have it but may not want it’ to those who have appetite and are willing to take it.’ The three broad types of risk are as follows: 1. Market risk: Arises when security prices go up due to reasons
affecting the sentiments of the whole market. MR is also referred as ‘systematic risk’ since it can’t be diversified away because the stock market as a whole go up or down from time to time. 2. Interest rate risk: This risk arises in the case of fixed income
securities, such as TBs, govt securities and bonds, whose market price could fluctuate heavily if interest rates change. 3. Exchange rate risk: In the case of imports, exports, foreign loans or
investments, foreign currency is involved which gives rise to exchange rate risk. Gaurav Sonkar
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Types of Financial Derivatives •
Financial derivatives are those assets whose values are determined by the value of some other assets, called as the underlying.
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One form of classification of derivative instruments is between commodity derivatives and financial derivatives.
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The basic difference between these is the nature of the underlying instrument or asset.
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In a commodity derivatives, the underlying instrument is a commodity which may be wheat, cotton, pepper, sugar, jute, turmeric, corn, soya beans, crude oil, natural gas, gold, silver, copper and so on.
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In a financial derivative, the underlying instrument may be treasury bills, stocks, bonds, foreign exchange, stock index, gilt-edged securities, cost of living index, etc.
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It is to be noted that financial derivative is fairly standard and there are no quality issues whereas in commodity derivative, the quality may be the underlying matters. Gaurav Sonkar
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1. Forward Contract •
A forward contract is a simple customized contract between two parties to buy or sell an asset at a certain time in the future for a certain price.
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Unlike future contracts, they are not traded on an exchange, rather traded in the over-the-counter market.
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Forward contracts are bilateral contracts, and hence, they are exposed to counterparty risk. There is risk of non-performance of obligation either of the parties, so these are riskier than to futures contracts.
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Each contract is custom designed, and hence, is unique in terms of contract size, expiration date, the asset type, quality, etc. Gaurav Sonkar
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Futures Contracts •
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A futures contract is a standardized forward contract, with fixed amount of the underlying asset, fixed maturity date, which can be bought and sold at exchanges. The idea behind the futures is the futures contract is eliminate the default risk of the forward contract to make it possible to trade the futures contract on secondary markets (exchanges). This is done through daily settlements on a marking account, and an institution called a “clearing house” and daily settlements according to a principle called “marking to market”. If one counterparty defaults there should be money in the margin account to cover the defaulting partner’s obligations. Futures contract involve daily cash settlements of the contract, on a margin account. This mechanism is called marking to market, and solves most of the credit risk. The remaining risk is insured by the exchange through a Clearing Gaurav Sonkar 26 house.
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Suppose a farmer produces rice and he expects to have an excellent yield on rice; but he is worried about the future price fall of that commodity. How can he protect himself from falling price of rice in future? He may enter into a contract on today with some party who wants to buy rice at a specified future date on a price determined today itself. In the whole process the Farmer will deliver rice to the party and receive the agreed price and the other party will take delivery of rice and pay to the farmer. In this illustration there is no exchange of money and the contract is binding on both the parties. Hence future contracts are forward contracts traded only on organized exchanges and are in standardized contract-size. The farmer has protected himself against the risk by selling rice futures and this action is called short hedge while on the other hand, the other party also protects against-risk by buying rice futures is called long hedge. Gaurav Sonkar 27
Options •
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Option may be defined as a contract, between two parties whereby one party obtains the right, but not the obligation, to buy or sell a particular asset, at a specified price, on or before a specified date. The person who acquires the right is known as the option buyer or option holder, while the other person is known as option seller or option writer. The seller of the option for giving such option to the buyer charges an amount which is known as the option premium. Options can be divided into two types: calls and puts. A call option gives the holder the right to buy an asset at a specified date for a specified price whereas in put option, the holder gets the right to sell an asset at the specified price and time. The specified price in such contract is known as the exercise price or the strike price and the date in the contract is known as the expiration date or the exerciseGaurav date or the maturity date. Sonkar 28
Call Option •
A call option is a contract between two parties to exchange a stock at strike price by a predetermined date.
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One party, the buyer of ‘call’, has the right, but not an obligation, to buy the stock at the strike price by the future date, while the other party, the seller of the call, has the obligation to sell the stock to the buyer at the strike price if the buyer exercises the option.
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Foreg: if a stock trading at Rs500 and you think it’s going up to Rs600, you might buy a Rs550 “call” option for say, Rs10. If the stock rose to Rs600, that would allow you to buy the stock at Rs550 even though its valued at Rs600, netting you a Rs40 profit on each share.
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On the other hand, the person that sold you the “call option” would be obligated to sell you the stock at Rs550 at a loss of Rs 40.
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If the stock never rises above Rs 550 by expiration date, the “call” expires worthless and the “call” buyer is out Rs 10 and the call seller keeps Rs 10. Gaurav Sonkar
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Put Option •
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A put option is a contract between two parties to exchange a stock at a strike price, by a predetermined date. One party, the buyer of the put has the right, but not an obligation, to sell the stock at the strike price by the future date, while the other party, the seller of the put, has the obligation to buy the stock from the buyer at the strike price if the buyer exercises the option. Example: Suppose the current price of CIPLA share is Rs 750 per share. X owns 1000 shares of CIPLA Ltd. and apprehends in the decline in price of share. The option (put) contract available at BSE is of Rs 800, in next two-month delivery. Premium cost is Rs 10 per share. X will buy a put option at 10 per share at a strike price of Rs 800. In this way X has hedged his risk of price fall of stock. X will exercise the put option if the price of stock goes down below Rs 790 and will not exercise the option if price is more than Rs 800, on the exercise date. In case of options, buyer has a limited loss and unlimited profit potential unlike in case of forward and futures. Gaurav Sonkar 30
SWAPS •
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A swap is an agreement between two counter parties to exchange cash flows in the future. Under the swap agreement, various terms like the dates when the cash flows are to be paid, the currency in which to be paid and the mode of payment are determined and finalized by the parties. There are two most popular forms of swap contracts, i.e., interest rate swaps and currency swaps. In the interest rate swap one party agrees to pay the other party interest at a fixed rate on a notional principal amount, and in return, it receives interest at a floating rate on the same principal notional amount for a specified period. The currencies of the two sets of cash flows are the same. In case of currency swap, it involves in exchanging of interest flows, in one currency for interest flows in other currency. In other words, it requires the exchange of cash flows in two currencies. –
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A swap is an agreement between two counter parties to exchange cash flows in the future. Under the swap agreement, various terms like the dates when the cash flows are to be paid, the currency in which to be paid and the mode of payment are determined and finalized by the parties. Usually the calculation of cash flows involves the future values of one or more market variables. There are two most popular forms of swap contracts, i.e., interest rate swaps and currency swaps. In the interest rate swap one party agrees to pay the other party interest at a fixed rate on a notional principal amount, and in return, it receives interest at a floating rate on the same principal notional amount for a specified period. The currencies of the two sets of cash flows are the same. In case of currency swap, it involves in exchanging of interest flows, in one currency for interest flows in other currency. In other words, it requires the exchange of cash flows in two currencies. There are various forms of swaps based upon these two, but having different Gaurav Sonkar
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American Depository Receipt •
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American Depository Receipt represents the shares of a foreign
company issued by U.S bank which can be traded in U.S. equity markets. American Depository Receipt (ADR) is a certified negotiable instrument issued by an American bank suggesting the number of shares of a foreign company that can be traded in U.S. financial markets. American Depository Receipts provide US investors with an opportunity to trade in shares of a foreign company. Example of securities markets in the U.S.A. New York Stock Exchange (NYSE) National Association of Securities Dealers Automated Quotation System (NASDAQ) American Stock Exchange (AMEX) –
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AMERICAN DEPOSITORY RECEIPT PROCESS •
The domestic company, already listed in its local stock exchange, sells its shares in bulk to a U.S. bank to get itself listed on U.S. exchange.
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The U.S. bank accepts the shares of the issuing company. The bank keeps the shares in its security and issues certificates (ADRs) to the interested investors through the exchange.
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Investors set the price of the ADRs through bidding process in U.S. dollars. The buying and selling in ADR shares by the investors is possible only after the major U.S. stock exchange lists the bank certificates for trading.
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The U.S. stock exchange is regulated by Securities Exchange Commission, which keeps a check on necessary compliances that need to be complied by the foreign company. Gaurav Sonkar
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ADVANTAGES OF AMERICAN DEPOSITORY RECEIPT Following are the advantages of ADRs: •
The American investor can invest in foreign companies which can fetch him higher returns.
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The companies located in foreign countries can get registered on American Stock Exchange and have its shares trades in two different countries.
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The benefit of currency fluctuation can be availed.
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It is an easier way to invest in foreign companies as there are no restrictions to invest in ADR.
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ADR simplifies tax calculations. Trading in shares of foreign company in ADR would lead to tax under US jurisdiction and not in the home country of company.
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The pricing of shares of foreign companies in ADR is generally cheaper. Hence it provides additional benefit to investors. Gaurav Sonkar
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DISADVANTAGES OF AMERICAN DEPOSITORY RECEIPT The following are the disadvantages of American Depository Receipts: •
Even though the transactions in ADR take place in US dollars, still they are exposed to the risk associated with foreign exchange fluctuation.
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The number of options to invest in foreign companies is limited. Only few companies feel the necessity to register themselves through ADR. This limits the choice available to US investor to invest.
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The investment in companies opting for ADR often becomes illiquid as investor needs to hold the shares for long term to generate good returns.
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The charges for entire process of ADR are mostly transferred on investors by the foreign companies.
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Any violation of compliance can lead to strict action by Securities Exchange Commission.
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GDR - Global Depository Receipt •
Global Depository Receipt (GDR) is an instrument in which a company located in domestic country issues one or more of its shares or convertibles bonds outside the domestic country.
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In GDR, an overseas depository bank i.e. bank outside the domestic territory of a company, issues shares of the company to residents outside the domestic territory. Such shares are in the form of depository receipt or certificate created by overseas the depository bank.
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Issue of Global Depository Receipt is one of the most popular ways to tap the global equity markets.
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A company can raise foreign currency funds by issuing equity shares in a foreign country.
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GDR - Global Depository Receipt GLOBAL DEPOSITORY RECEIPT EXAMPLE •
A company based in USA, willing to get its stock listed on German stock exchange can do so with the help of GDR.
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The US based company shall enter into an agreement with the German depository bank, who shall issue shares to residents based in Germany after getting instructions from the domestic custodian of the company.
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The shares are issued after compliance of law in both the countries. Gaurav Sonkar
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GLOBAL DEPOSITORY RECEIPT MECHANISM •
The domestic company enters into an agreement with the overseas depository bank for the purpose of issue of GDR.
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The overseas depository bank then enters into a custodian agreement with the domestic custodian of such company.
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The domestic custodian holds the equity shares of the company.
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On the instruction of domestic custodian, the overseas depository bank issues shares to foreign investors.
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The whole process is carried out under strict guidelines.
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GDRs are usually denominated in U.S. dollars Gaurav Sonkar
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ADVANTAGES OF GDR • •
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GDR provides access to foreign capital markets. A company can get itself registered on an overseas stock exchange or over the counter and its shares can be traded in more than one currency. GDR expands the global presence of the company which helps in getting international attention and coverage. GDR are liquid in nature as they are based on demand and supply which can be regulated. The valuation of shares in the domestic market increase, on listing in the international market. With GDR, the non-residents can invest in shares of the foreign company. GDR can be freely transferred. Foreign Institutional investors can buy the shares of company issuing GDR in their country even if they are restricted to buy shares of foreign company. Gaurav Sonkar of the company 40 GDR increases the shareholders base
DISADVANTAGES OF GDR •
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Violating any regulation can lead to serious consequences against the company. Dividends are paid in domestic country’s currency which is subject to volatility in the forex market. It is mostly beneficial to High Net-Worth Individual (HNI) investors due to their capacity to invest high amount in GDR. GDR is one of the expensive sources of finance.
Conclusion
GDR is now one of most important source of finance in today’s world. With globalization, every company is willing to expand its wings. GDR makes it possible for such companies to reach and tap international markets. GDR provides companies in emerging markets with opportunities Gaurav for Sonkar rapid growth and development. 41
Indian Depository Receipts •
A foreign company can access Indian securities market for raising funds through issue of Indian Depository Receipts (IDRs).
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An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets.
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IDRs are like American Depository Receipts or Global Depository Receipts, except that the issuer is a foreign company raising funds from the Indian market. IDRs are rupee-denominated and created by a domestic depository against the underlying equity shares of a foreign company
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Which intermediaries are involved in issuance of IDRs? •
Overseas Custodian Bank is a banking company which is established
in a country outside India and has a place of business in India and acts as custodian for the equity shares of issuing company against which IDRs are proposed to be issued in the underlying equity shares of the issuer is deposited. •
Domestic Depository who is a custodian of securities, registered with
SEBI and authorised by the issuing company to issue Indian Depository Receipts; •
Merchant Banker registered with SEBI who is responsible for due
diligence and through whom the draft prospectus for issuance of the IDR and due diligence certificate is filed with SEBI by the issuer company.
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How will it work? •
The process is similar to an initial public offering where a draft prospectus is filed with the Securities and Exchange Board of India.
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The minimum issue size is $500 million (around Rs 2,250 crore). Shares underlying IDRs will be deposited with an overseas custodian who will hold shares on behalf of a domestic depository.
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IDRs will be issued through a public offer in India in the demat form and will be listed on Indian exchanges. Trading and settlement will be similar to those of Indian shares.
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At least half of the investors have to be qualified institutional investors with 30 per cent of the issue size reserved for small investors.
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Recently, the regulators allowed a single institutional investor to acquire up to 15 per cent of the issue size. Gaurav Sonkar In addition, banks have also been allowed to participat
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Regulatory Framework for Foreign Investments in India •
Foreign investments in India are governed under the Foreign Exchange Management Act, as notified by Reserve Bank of India from time to time. The below schematic representation gives the different routes for foreign investments in India,
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1. Foreign Direct Investments – Equity and Convertible Instruments •
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Foreign Direct Investment (FDI) in India is undertaken as per the FDI Policy formulated by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India. Under FDI, investments can be made in equity shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes: Automatic Route: Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Government Route: Under the Government Route, the foreign investor or the Indian company should obtain prior approval of the Government of India through the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case Gaurav Sonkar 46 may be.
2. Foreign Portfolio Investors and Other Investors a) Equity and Convertible Instruments
Foreign Institutional Investors - FIIs, sub accounts of FIIs, Qualified Foreign Investors – QFIs (these three categories has now been merged into a single category of FPIs), Non-Resident Indians (NRIs) and People of Indian Origin (PIOs) are eligible to purchase shares and convertible debentures issued by Indian companies through stock exchanges in India, either in the primary or secondary market. FIIs, sub accounts, NRIs and PIOs can invest in equity and convertible instruments under the Portfolio Investment Scheme (PIS). Under PIS, the limits for investment are as follows, The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. Similarly, the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing •
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b) Debt Instruments FPIs, NRIs, PIOs and Long Term Investors can buy a host of debt instruments like dated Government securities/treasury bills, listed or to be listed non-convertible debentures/bonds , commercial papers issued by Indian companies, units of domestic mutual funds, security receipts issued by Asset Reconstruction Companies, perpetual debt instruments eligible for inclusion as Tier I capital and debt capital instruments as upper Tier II Capital. Gaurav Sonkar
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3. Foreign Venture Capital Investments – Equity and Debt Instruments •
A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from the Reserve Bank of India can invest in Indian Venture Capital Undertaking (IVCU) or a Venture Capital Fund (VCF) registered with SEBI.
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An IVCU is defined as a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity under the negative list specified by SEBI.
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A VCF is defined as a fund and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996. Such funds will now move to the new regime of Alternative Investment Funds in India.
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FVCIs
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linked
instruments/debt/debt
instruments of an IVCU or units of a VCF through initial public offer, private placement, private arrangement or purchase from third party. Gaurav Sonkar
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