RAISING FINANCE

THROUGH
EURO ISSUE
127 SMTP-GROUP B
th

SNEH AMIT

SANJEEV SUNIL

NEHA
 INDEX
1. Introduction
2. EURO ISSUE- Meaning
3. Advantages of Euro Issue
4. Modes of raising finance
5. Meaning of GDRs / ADRs
6. Working Mechanism of ADRs / GDRs
7. About FCCBs
8. Salient Features of FCCBs
9. Benefits of FCCBs
10.Necessary Approvals Required
11.Agencies Involved
12.Documentation
13.Concept of Two Way Fungibility
14.Provision Relating to Pricing
15.Taxation Aspects
16.Stamp duty
17.Some Case Studies
18.A Journey At Glance
 INTRODUCTION

Euro Issue is one of the popular and attractive

mode for Indian Companies for raising funds
from the International market.

Finance Minister Mr. Manmohan Singh initiated

this Scheme on 25th Feb1992 to allow FII’s to

invest in Indian Capital Market.

Guidelines in this regard were issued by Deptt.

of Economic Affairs, Ministry of Finance on 12th
November 1993.
 What is Euro
Issue

EURO ISSUE
Any Issue will be a Euro Issue if :-
Issued Outside India

It is made in any freely convertible Foreign

Currency.

It is listed at one or more Stock Exchanges.

Advantages of Euro Issue

Enhance the image of Co. &

its products in International Market.

Helps to gain Provides

Higher returns
on investments
Advantages more
liquidity

Enables Indian Companies to Provides a competitive

Compete & Operate Globally advantage in interest rates
 Modes of raising finance in
India from International Markets

Euro Issue in India

II. Foreign Currency

I. Depository Receipts Convertible Bonds
(FCCBs)

Global American
Depository Depository
Receipts (GDRs) Receipts (ADRs)
 Concept
of
Depository Receipt
Meaning of GDRs & ADRs
Global Depository Receipt American Depository Receipt

A Negotiable Instrument A Negotiable Instrument

in the form of Certificate in the form of Certificate
or Depository Receipt. or Depository Receipt.

Created by Overseas Created by Overseas

Depository Bank Depository Bank in the
Outside India. US Market.

Issue to NRIs against Issue to NRIs against

Ordinary Shares. Ordinary Shares for
trading in US market.
Working Mechanism of ADRs / GDRs

Underlying Shares Custodian

Issuer Company (Banking Co. situated in
In India India which has the physical
possession of shares
(Through Lead Manager) underlying GDRs / ADRs )

GDR/ADR Listing
Overseas Depository European or U.S.
Stock Exchange

Money Dividend

Overseas Investor
CONCEPT
of
FCCBs
About FCCBs
Foreign Currency Convertible Bonds (FCCBs) are a
mixture of debt and equity issued by the company
for raising the finance in a currency other than the
domestic currency.

FCCBs

I. Debt II. Equity

Regular Coupon Option to

and Principal convert the
Payment bond into stock
Salient Features of FCCBs
FCCB can be secured as well as unsecured.

Issuer Company must have a minimum experience

of 3 years consistent track record of
good performance

FCCBs are generally issued by the Corporate in

which the promoters holdings is at the highest
level.

Amount raised through the mechanism of FCCB

should be parked abroad till the actual
requirement raised in India.
Benefits of FCCBs

Benefits for the Bond Holder Benefits to the Company

Guarantee of periodic Coupon payment on the

payment called coupon; bonds are on lower side;

Guarantee of payment Reduction in debt

of principal amount; financing cost;

Chance to capitalize Global presence.

on increased share
prices. The issuer company
collects the issue
proceeds in foreign
currency.
Necessary Approvals Required
Board of

Directors
In Principle-
consent of Financial Shareholders
Institutions

APPROVALS
Ministry of
In Principle- REQUIRED Finance
consent of stock
(In Principle
exchange
and Final)

Reserve Ministry of
Bank of Corporate
India Affairs
Agencies Involved
1. Lead Manager
2. Co-Lead/Co-Manager
3. Overseas Depository Bank(ODB)
4. Domestic Custodian Bank(DCB)
5. Underwriters
6. Auditors
7. Legal Advisors
8. Listing Agent
9. International Council
Documentation

Prospectus Drafting

Underwriting Agreement

Legal Opinions

Auditor’s Comfort Letter

Listing Application and Listing Agreement

Deposit Agreement (for depository shares)

Concept of Two Way Fungibility

Fungibility (w.e.f. February 13, 2002)

Two way fungibility implies that an investor who holds

ADRs/GDRs can cancel them with the Depository and sell
the underlying shares in the market. The Issuer Company
can then issue fresh DRs to the extent of shares sold in the
market.

Benefits

•Improvement in liquidity;
•Elimination of arbitrage.
Provision Relating to Pricing

The price at which FCCB issue can be made shall not be less
than the higher of the following:

The average of the weekly high and low of the closing

prices of the related shares quoted on the stock
exchange during the six months preceding the
relevant date; or

The average of the weekly high and low of the closing

prices of the related shares quoted on a stock exchange
sduring the two weeks preceding the relevant date.
Taxation Aspects
a)a) The
Theissuing
issuingcompany
companyshallshalltransfer
transferthe
thedividend
dividendtotothe
theshareholder
shareholderafter
afterdeducting
deducting
the
thetax
tax atatsources
sourcestotothe
theOverseas
OverseasDepositary
DepositaryBank.
Bank.
b)b) All
Alltransaction
transactionderived
derivedfrom
fromthethetrading
tradingfrom
fromthe
theGDR
GDRoutside
outsideIndia,
India,among
amongnon-
non-
resident
residentinvestors,
investors,will
willbe
befree
freefrom
fromthe
theTax
TaxLiability
Liabilityunder
underthe
theIncome
IncomeTax
TaxAct.
Act.
c)c) IfIfany
anycapital
capitalgains
gainsarise
ariseon
onthe
thetransfer
transferofofthe
theaforesaid
aforesaidshares
sharesininIndia
Indiatotothe
thenon-
non-
resident,
resident,he
hewill
willbe
beliable
liabletotothe
theprovisions
provisionsofofthe
theIncome
IncomeTax
TaxAct.
Act.
d)d) After
Afterredemption
redemptionofofthe theDepository
DepositoryReceipts
Receiptsinintotounderlying
underlyingshares,
shares,the
therate
rateofof
taxation
taxationofofincome
incomeby byway
wayofofdividends
dividendson
onthese
theseshares
shareswould
wouldcontinue
continuetotobe
beatatthe
the
applicable
applicablerates,
rates,ininaccordance
accordancewith
withthe
theIncome
IncomeTax TaxAct.
Act.
e)e) Application
Applicationofofavoidance
avoidanceofofdouble
doubletaxation
taxationagreement
agreementinincase
caseofof GDR.
GDR.
f)f) The
Theholding
holdingofofthe
thedepository
depositoryreceipts
receipts ininthe
thehands
handsofofnon-resident
non-residentinvestors
investorsand
and
the
theholding
holdingofofthe
theunderlying
underlying shares
sharesbybythetheODB
ODBininaafiduciary
fiduciarycapacity
capacityshall
shallbe
be
exempt
exemptfrom
fromGift
GiftTax
Taxand
andWealth
WealthTax
TaxininIndia.
India.
Stamp duty

Particular Who is Liable Rate of duty

Issuance of GDR/ADR Issuer Company 0.1% on the value

(Per Value plus Interest)

Transfer of GDR/ADR Not Applicable Not subject to stamp duty

Acquisition of shares upon Non resident holder 0.25% of the market value
the conversion of GDRs or equity shares
exchanged
Some Case Studies

Companies with their FCCBs maturing in a year’s time,

face double edged sword:
 With the share prices falling below the conversion prices, the
exercise of conversion option by the Bond holders is virtually
ruled out.
For example: TATA Motors: FCCBs worth 11,760 million yen
maturing in March 2011 were issued at a conversion price of
Rs.1001. This seems unattractive now in view of its current stock
price of Rs.143.

 With the Bond holders not exercising the conversion option,

Companies forced to payout the liabilities.
Some Case Studies Contd….

 Realizing the tough situation of the Companies, RBI, in

November 2008 permitted buyback of FCCBs on satisfaction
of certain conditions through their forex resources/ new
External Commercial Borrowings. Later RBI permitted
buyback from Rupee resources of Companies, provided the
buyback amount limited to $50 million and the resources were
from the Companies’ internal resources.

 Reliance Communications, which had issued zero coupon

FCCBs in February 2007 for $1 billion (Rs.4700 Crore) at a
conversion price of Rs.661 is the first Co. to avail of this
buyback facility.
Some
SomeCase
CaseStudies
Studies Contd….
Contd….

Other
OtherCompanies
Companiesfollowing
followingsuit
suitin
inthis
thisregard:
regard:
GTL
GTLInfrastructure,
Infrastructure,pharmaceutical
pharmaceuticalmajor
majorJubilant
Jubilant
Organosys,
Organosys,Moser
MoserBaer,
Baer,Tulip
TulipCommunication.
Communication.

Buyback
Buybackreduces
reducesthetheunsecured
unsecureddebt
debtofofthe
theCompanies
Companieswhen whenthey
they
buyback
buybackthetheFCCBs
FCCBsatataadiscount
discounttotothe
theface
facevalue
valueofofthe
theBond.
Bond.
However,
However,only
onlyCompanies
Companieswithwithsufficient
sufficientsurplus
surpluscash
cashwould
wouldbe
be
ininaaposition
positiontotodo
doso.
so.

Buyback,
Buyback,however,
however,seems
seemsunlikely
unlikelytotobecome
becomeaatrend
trendowing
owingtotothe
the
size
sizeofofthe
theissues
issuesand
andthe
thecurrent
currentbalance
balancesheet
sheetpositions
positionsofofthe
the
Companies.
Companies.
 A Journey At
Year 1992
GlanceFormulation of scheme allowing the Indian companies to have Global Access

Year 1993-95 Indian Companies raised approx.Rs.14500 crore through Euro Issue during these two
years.

Indian companies postpone their plans of raising the money due to the South East
Year 1995-99 Asian crisis and Pokhran blasts and lack of interest of Foreign Investor in Indian
Equity..

For the first time, Indian companies raised the equity from the Wall Street. Infosys
Year 1999-00 Technology was the first Company who tap the American Market during this Year. In
this year, Indian Companies raised around$1 billion

Year 2000-01 During this year, Indian Companies raised approx. $4 billion through ADRs and
becomes the Asia’s biggest issuers of ADRs.

Capital raised from the international market is more than the capital raised from the
Year 2001-09 domestic market Rediff.com become the first dot company to list at near 100%
premium on NASDAQ Between this period, the number of Euro Issue has increased
manifold.
End Use of Proceeds

Permitted Not Permitted

Financing capital goods On-lending or
imports; investment in capital
Capital expenditure; market or acquiring a
company (or a part
 Prepayment or thereof) in India by a
scheduled repayment corporate;
of earlier external
borrowings; Real estate;
Equity investments Working capital, general
in Joint Venture/ Wholly corporate purpose and
Owned Subsidiaries in repayment of existing
India. Rupee loans.