Foreign Funding – Instruments & Institutions – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
Write notes on: “Subscription Agreement”.
Answer:
“Subscription Agreement”:
Subscription Agreement provides that Lead Managers and other managers agree severally and not jointly with the company subject to the satisfaction of certain conditions to subscribe for GDRs at the offering price set forth.

Subscription agreement also provides an option to be exercisable with-in certain period after the date of offer circular to the lead manager and other managers to purchase up to a certain prescribed number of additional GDRs solely to cover over-allotments if any.

Subscription agreement may provide that for certain period from the date of the issuance of GDR, the issuing company will not:

authorise the issuance of, or otherwise issue or publicly announce any intention to issue.
issue offer, accept subscription for, sell, contract to sell or other-wise dispose of, whether within or outside India.
deposit into any depository receipt facility any securities of the company of the same class as the GDRs or the shares or any securities in the company convertible or exchangeable for secu-rities in the company of the same class as the GDRs or the shares or other instruments representing interests in securities in the company of the same class as the GDRs or the shares.

Question 2.
Write notes on: “Road show in Euro issues”.
Or
Write notes on: “Road shows in Euro Issues.”
Or
“Road shows are in fact, a conference by the issuer company with the potential/future/prospective investors”. Elucidate.
Or
Answer:
Infact, the Statement “Road shows are conference by the issuer company with the potential or future or prospective investors” is absolutely correct. The concept of “Road show” is used in case of “Euro issue”, are as follows:

It is a pre-issue key action which ensure the successful launching of Euro-Issue. It can be defined as a meeting organized at different parts of world between’ the lead manager, Issuer Company and prospective investors.

Details & contents of Road show: Since road-show is a ‘information presentation meeting so the following details are included in such presentation:

Historical background i.e. date of incorporation, promoters, first directors etc.
Organizational structure i.e. centralized or decentralized.
Main object as given in object clause of Memorandum of Association.
Business line and product type.
Market position of company at domestic & international level.
Past years performance (if any).
Future plans & strategies, the company wants to achieve.
Challenges the company can face in future.
Financial results & operating performance.
Valuation of shares.

Question 3.
Write notes on the following: “External Commercial Borrowings.”
Answer:
“External Commercial Borrowings”: ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Tracks of ECBs: The framework for raising loans through ECB comprises the following three tracks:

Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

The ECB Framework enables permitted resident entities to borrow from recognized non-resident entities in the following forms:

Loans including bank loans.
Securitized instruments (Example: floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares/debentures).
Buyers’ credit.
Suppliers’ credit.
Foreign Currency Convertible Bonds (FCCBs).
Financial Lease.
Foreign Currency Exchangeable Bonds (FCEBs).

Question 4.
State the conditions required to be fulfilled for conversion of external commercial borrowings (ECBs) into equity.
Answer:
In case of conversion of External Commercial Borrowings (ECBs) into Equity: ‘
Conditions: ECBs are converted into equity subject to following conditions:

The activity of the company is covered under Automatic Route for Foreign Direct Investment or Government approval for foreign equity participation has been obtained by the company, wherever applicable.
Foreign Equity holding after such conversion of debt into equity is within the sectoral cap if any.
Pricing of shares is as per the SEBI guidelines/regulations in the case of listed and unlisted companies as the case may be.

Reporting: Conversion of ECBs into equity must be reported in the Form FC-GPR to the concerned Regional office of the Reserve Bank of India as well as to the RBI within 7 working days in Form ECB-2.

Question 5.
What is ‘parking’ of External Commercial Borrowings (ECB) proceeds?
Answer:
The parking of ECB proceeds can be of two types as per revised ECB framework:
Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization. Till utilisation, these funds can be invested in the following liquid assets:

Deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or AA3 by Moody’s.
Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above.
Deposits with overseas branches/subsidiaries of Indian banks abroad.

Parking of ECB proceeds domestically:

ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category-I banks in India.
ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category-I banks in India for a maximum period of 12 months.
These term deposits should be kept in unencumbered position.

Question 6.
What do you understand by External Commercial Borrowings (ECBs)? Discuss the three tracks of ECBs.
Answer:
“External Commercial Borrowings”: ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Tracks of ECBs: The framework for raising loans through ECB comprises the following three tracks:

Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

Question 7.
Explain the following statement: “External Commercial Borrowing (ECBs) refers to the commercial loans.”
Answer:
External Commercial Borrowings (ECBs) refer to commercial loans in the form of bank loans, buyers, credit, suppliers, credit, securitized instruments (example: floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible debentures or any other financial instruments that could be converted into equity shares at a later) availed of from non-resident lenders with a minimum average maturity of 3 years, ECB for investment in real sector- industrial sector, infrastructure sector-in India and specified service are under – Automatic Route, i.e. do not require Reserve Bank/Government of India approval.

Question 8.
Describe the end use of External Commercial Borrowings (ECBs) through approval route.
Answer:
The permitted end use of proceeds of external commercial borrowings (ECBs) raised under revised ECB guideline, depends upon the tracks under which it was raised. The uses are as:

Track I:
(a) Capital expenditure in the form of:

import of capital goods including for services technical know-how and license fee provided they are the part of these capital goods).
local sourcing of capital goods.
new projects.
modernization/expansion of existing units.
Investment in jointventures(JV)/wholly-owned subsidiaries (WOS) overseas.
acquisition of shares of PSUs under the disinvestment pro-gramme of Government of India etc.

(b) SIDBI – Only for the purpose of lending to borrowers in the MSME sector.

(d) Shipping and airlines companies – Only for import of vessels and aircrafts only.

(e) For general corporate purpose (including working capital) provided the ECB is raised from direct/indirect equity holder or from a group company; for a minimum average maturity of 5 years.

(f) ECBs under the approval route:

For import of second-hand good; as per DGFT guidelines.
For on-lending by Exim Bank.

Track II: Any end use other than following:
(a) Real estate activities.
(b) Investing in capital market.
(c) Using proceeds for equity investment domestically.
(d) On-lending to other entries with any of the above objective.
(e) Purchase of land.

Track III:
(a) All permitted use as per track n.
(b) SEZs/NMIZs Developers Only for providing infrastructure facilities within SEZ/NMIZ.
(c) NBFCs can use ECB proceeds for:

On-lending for any activities including infrastructure sector as permitted by the concerned regulatory department of RBI.
Hypothecated loans to domestic entities for acquisition of capital goods/equipment.
Providing capital goods/equipment to domestic entities by way of lease/hire purchase.
Entities in micro-finance sector – Only for on-lending to self-help, groups or for micro-credit or for bona fide micro-finance activity including capacity building.

Question 9.
What are “External Commercial Borrowings” (ECBs)? Explain various tracks and forms available under ECBs.
Answer:
Meaning of ECBs: ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality.

Tracks of ECBs: The framework for raising loans through ECB comprises the following three tracks:

Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

Forms of ECBs: The ECB Framework enables permitted resident en-tities to borrow from recognized non-resident entities in the following forms:

Loans including bank loans.
Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares/debentures).
Buyers’ credit.
Suppliers’ credit.
Foreign Currency Convertible Bonds (FCCBs).
Financial Lease.
Foreign Currency Exchangeable Bonds (FCEBs).

Question 10.
What do you mean by ECB? Under what circumstances conversion of ECB’s into equity is possible?
Answer:
ECBs are commercial loans raised by eligible resident entities from recognized non-resident entties and should confirm to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Circumstances in which Conversion of ECBs into equity is permitted (including those which are matured but unpaid) subject to fulfilment of following conditions:

The activity of the borrowing company is covered under the automatic route for FDI or approval route from the Foreign Investment Promotion Board (FIPB), wherever applicable for foreign equity participation has been obtained as per the extant FDI policy.
Reporting requirements should be fulfilled.
The conversion, which should be with the lender’s consent and without any additional cost will not result in breach of applicable sector cap on the foreign equity holding.
Applicable pricing guidelines for shares are complied with.
Consent of other lenders, if any.
In case borrower concerned has availed of other credit facilities from the Indian banking system the applicable prudential guidelines issued by RBI are complied with.

Question 11.
Distinguish between the following: “FCCB and FCEB”.
Answer:
“FCCB and FCEB”:
Foreign Currency Convertible Bonds (FCCBs) are issued by a company to non-residents giving them the option to either convert them into shares of the same company at a pre-determined price or have the bonds redeemed. On the other hand, Foreign Currency Exchangeable Bonds (FCEBs) are issued by the investment or holding company of a group to non-residents which are exchangeable for the shares of the specified company at a predetermined price. The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies where the bonds are issued by a company while the shares are of ‘offered company’ whose shares should be listed on stock exchange.

Question 12.
“Both Foreign Currency Exchangeable Bonds (FCEBs) and Foreign Currency Convertible Bonds (FCCBs) are convertible into equity shares.” Since both are convertible into equity shares you are required to highlight the advantages of FCEBs over FCCBs.
Answer:
Both Foreign Currency Exchangeable Bonds (FCEBs) and Foreign Currency Convertible Bonds (FCCBs) are convertible into equity shares, the advantages of FCEBs over FCCBs are:

Foreign Currency Exchangeable Bonds (FCEBs) offers similar benefits of conversion as Foreign Currency Convertible Bond (FCCB).
FCEBs offer one unique advantage over and above FCCB which is that FCEBs are convertible into shares of another company (offered company) that forms part of same promoter group as the issuer company. So it does not result in dilution of shareholding at the offered company level.
FCEB scheme affords a unique opportunity for Indian promoters to unlock value in group companies. They can raise money overseas to fund their new projects and acquisitions, both Indian and global by leveraging a part of their shareholding in listed group entities.

Question 13.
Distinguish between the following: “Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).”
Answer:
Differences between “Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII)”:

Basis of Distinction	Foreign Direct Investment (FDI)	Foreign Institutional Investor (FII)
Meaning	FDI is a direct investment into the production or business by a company in a country other than its domestic country.	FII is an investment made by an investor in the markets of a foreign nation.
Restriction on entry and exit	FDI cannot enter and exit easily.	FII can enter the stock market easily.
Target	FDI targets a specific enterprise.	FII targeted to increases capital availability.
Stability	FDI is considered more stable than FII.	FII is considered less stable than FDI.
Nature of Investment	FDI is “Strategic Investment” i.e. for long period.	FII is Portfolio investment.

Question 14.
Distinguish between the following: “Asian Development Bank and International Monetary Fund”.
Answer:
Asian Development Bank: Asian Development Bank (ADB) assists its member and partners, by providing loans, technical assistance, growth and other equity investments to promote social and economic development ADB is composed of 67 members 48 of which are from the Asia and the Pacific region. The ADB is committed to achieving a prosperous, inclusive resilient and sustainable Asia and the Pacific while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development.

International Monetary Fund (IMF): The IMF’s primary purpose is to ensure the stability of the international monetary system. The system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. Funds mandate was updated in 2012 to include all macro-economic and financial sector issues that bear on global stability.

Question 15.
Briefly explain the principal documents involved in issuance of Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs).
Answer:
Following are principal documents involved in issuance of Global De-pository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs):

Depository Agreement: Depository agreement outlines the detailed arrangements entered into by the company with the Depository, the forms and terms of the depository receipts, rights and duties of the depositor.
Subscription Agreement: Subscription agreement provides that Lead Managers and other managers agree, severally and not jointly, with the company, subject to the satisfaction of certain conditions to subscribe for GDRs at the offering price set forth.
Agency Agreement: In accordance of this agreement, conversion agents are required to make the principal and interest payments to the holders of FCCBs from the funds provided by the company.
Trust Deed: For FCCBs, the company enters into a Covenant (known as Trust Deed) with the Trustee for the holders of FCCBs guaranteeing payment of principal and interest amount on such FCCBs and to comply with the obligations in respect of such FCCBs.
Custodian Agreement: Custodian works in co-ordination with the depository and has to observe all imposed obligations on it including those mentioned in the depository agreement. The custodian is responsible solely to the depository.

Question 16.
What is ‘offering circular’? Explain the contents of offering circular for Euro Issue.
Answer:
Offering Circular: It is a document issued by the issuer company through which the prospective investors can access vital information regarding the company in order to form their investment strategies. It is to be prepared very carefully giving true and complete information regarding the financial strength of the company, its past performance, past and envisaged research and business promotion activities track record of promoters and the company, ability to trade the securities on Euro capital market.

Contents of Offering Circular for Euro issue:

Background of the company and its promoters including date of incorporation and objects, past performance, production, sales and distribution network, future, plans etc.
Capital structure of the company existing proposed and consolidated.
Deployment of issue proceeds.
Financial data indicating track record consistent profitability of the company.
Group investments and their performance including subsidiaries, joint venture in India and abroad.
Status of approvals required to be obtained from Government of India.
Summary of significant differences in Indian GAAP, UK GAAP and US GAAP and expert’s opinion.
Report of statutory auditor.
Subscription and sale.
Transfer restrictions in respect of instruments.
Legal matters etc.
Investment considerations.
Description of shares.
Terms and conditions of global depository receipt and any other instrument issued along with it.
Economic and regulatory policies of the Government of India.
Details of Indian securities market indicating stock exchange, listing requirements, foreign investments in Indian securities.
Market price of securities.
Dividend and capitalization.
Securities regulations and exchange control.
Tax aspects indicating analysis of tax consequences under Indian law of acquisition, membership and sale of shares, treatment of capital gains tax, etc.
Other general information not forming part of any of the above.

Question 17.
“Offering circular is a mirror through which the prospective investors can access vital information of the company in order to form their investment strategies.” Explain the statement and list out the contents included in the offering circular.
Answer:

The given statement i.e. “Offering Circular is a mirror through which the prospective investors can access vital information regarding the company in order to form their investment strategies” is correct.
Offering Circular is used in case of “Euro Issue” which gives true and complete information regarding the financial strength of the company, its past performance, past and envisaged research and business pro-motion activities, track record of promoters and the company, ability to trade the securities on Euro capital market.

Contents of Offering Circular for Euro issue:

Background of the company and its promoters including date of incorporation and objects, past performance, production, sales and distribution network, future, plans etc.
Capital structure of the company existing proposed and consolidated.
Deployment of issue proceeds.
Financial data indicating track record consistent profitability of the company.
Group investments and their performance including subsidiaries, joint venture in India and abroad.
Status of approvals required to be obtained from Government of India.
Summary of significant differences in Indian GAAP, UK GAAP and US GAAP and expert’s opinion.
Report of statutory auditor.
Subscription and sale.
Transfer restrictions in respect of instruments.
Legal matters etc.
Investment considerations.
Description of shares.
Terms and conditions of global depository receipt and any other instrument issued along with it.
Economic and regulatory policies of the Government of India.
Details of Indian securities market indicating stock exchange, listing requirements, foreign investments in Indian securities.
Market price of securities.
Dividend and capitalization.
Securities regulations and exchange control.
Tax aspects indicating analysis of tax consequences under Indian law of acquisition, membership and sale of shares, treatment of capital gains tax, etc.
Other general information not forming part of any of the above.

Question 18.
List the approvals required for resources mobilisation by a company in the international capital market.
Answer:
The following approvals are required for issue of GDRs/FCCBs:

Approval of Board of Directors: A meeting of Board of Directors is required to be held for approving the proposal to raise money from Euro Capital market. A board resolution is to be passed to approve the raising of finance by issue of GDRs/FCCBs.
Approval of Shareholders: Proposal for making Euro issue, as proposed by Board of Directors require approval of shareholders through a special resolution.
Approval of Ministry of Finance: In case of FCCB issue exceeding US $ 100 million, the company needs to apply Ministry of Finance for approval. A Company need not obtain approval of Ministry of Finance before issuing depository receipts. However, approval if any required under FDI Policy would still be required.
Approval of Reserve Bank of India: The issuer company has to obtain approvals from Reserve Bank of India under circumstances specified under the guidelines issued by the concerned authorities from time to time.
In-principle consent of Stock Exchanges for listing of underlying shares: The issuing company has to make a request to the domestic stock exchange for in-principle consent for listing of underlying shares which shall be lying in the custody of domestic custodian. These shares, when released by the custodian after cancellation of GDR, are traded on Indian stock exchanges like any other equity shares.
In-principle consent of Financial Institutions: Where term loans have been obtained by the company from the financial institutions, the agreement relating to the loan contains a stipulation that the consent of the financial institution has to be obtained. The company must obtain in-principle consent on the broad terms of the proposed issue.

Question 19.
Explain briefly the following statement: “FCCB and ECB are different modes for raising foreign capital”.
Answer:
FCCB and ECB are two different modes for raising capital foreign sources

Foreign Currency Convertible Bonds (FCCBs) means bonds issued in accordance with the FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole or in part of the basis of any equity related warrants attached to debt instruments.
External Commercial Borrowings are one of the modes for sourcing of funds for corporate. External Commercial Borrowings (ECB) include commercial bank loans, buyer’s credit, suppliers credit, securitized instruments such as floating rate notes and fixed rate bonds. As per revised ECB guideline, ECB can be accessed as per three tracks i.e. Track-I, Track-II and Track-in.

Question 20.
What are the approvals required for issuance of Global Depository Receipts (GDRs)?
Answer:
Various approvals required for issuance of Global Depository Receipts (GDRs):

Approval of the Board of Directors.
Approval of shareholders;
No need to obtain approval of Ministry of Finance. In case approval if any required under FDI Policy would still be required.
Approved of Ministry of Corporate Affairs.
Approval of Reserve Bank of India.
In principal consent of
- Stock Exchange for listing of underlying shares.
- Financial Institutions.

Question 21.
Explain briefly: “Two-way Fungibility Scheme”.
Answer:
“Two-way Fungibility Scheme”:

“Two-way Fungibility Scheme” means that the shares so released can be reconverted by the company into DRs for purchase by the overseas investors.
Two-way Fungibility Scheme implies that the re-issuance of DRs would be permitted to the extent of Depository Receipts that have been redeemed and underlying shares are sold in domestic market.
Limited two-way fungibility scheme has been put in place by the Government of India for ADRs/GDRs. Under this scheme, a stock broker in India registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/ GDRs based on instructions received from overseas investors. Re-issuance of ADRs/ GDRs would be permitted to the extent of ADRs/GDRs which have been redeemed into underlying shares and sold in the Indian market.

Question 22.
“Not only Indian companies are going abroad to raise funds, foreign companies are also coming to India to raise funds.” Name the instrument(s) through which a foreign company can raise funds in India by issuing its own equity shares. Also, state the eligibility and conditions for the issue of such instrumcnt(s) in India.
Answer:
A foreign company can raise funds in India by issuing its own equity shares through Indian Depository Receipts (IDRs).

According to Section 2(48) of the Companies Act, 2013 “Indian Depository Receipt” means any instrument in the form of a depository receipt created by a domestic depository in India and authorised by a company incorporated outside India making an issue of such depository receipts.
Section 390 of the Companies Act, 2013 and Rule 13 of Companies (Registration of Foreign Companies) Rules, 2014 lays down the eligibility criteria and conditions for issue of Indian Depository Receipts.

Eligibility for Issue of IDRs:
As Rule 13(2) of the Companies (Registration of Foreign Companies) Rules, 2014 stipulates that the issuing company shall not issue IDRs unless:

its pre-issue paid-up capital and free reserves are at least US$ 50 million and it has a minimum average market capitalization (during the last three years) in its parent country of at least US$ 100 million.
it has been continuously trading on a stock exchange in its parent or home country (the country of incorporation of such company) for at least three immediately preceding years.
it has a track record of distributable profits in terms of section 123 of the Act, for at least three out of immediately preceding five years.
it fulfils such other eligibility criteria as may be laid down by the SEBI from time to time in this behalf.

Conditions:
Following conditions required to be fulfilled for issue of prospectus which is as under:
(a) No application form for the securities of the issuing company shall be issued unless the form is accompanied by a memorandum containing the salient features of prospectus in the specified form.

(b) An application form can be issued without the memorandum as specified in clause (a), if it is issued in connection with an invitation to enter into an underwriting agreement with respect to the IDRs.

(c) The prospectus for subscription of IDRs of the Issuing company which includes a statement purporting to be made by an expert shall not be circulated, issued or distributed in India or abroad unless a statement that the expert has given his written consent to the issue thereof and has not withdrawn such consent before the delivery of a copy of the prospectus to SEBI and the Registrar of Companies, New Delhi, appears on the prospectus.

(d) The provisions of the Act shall apply for all liabilities for mis-statements in prospectus or punishment for fraudulently inducing persons to invest money in IDRs.

(e) The person(s) responsible for issue of the prospectus shall not incur any liability by reason of any non-compliance with or contravention of any provision of this rule if:

as regards any matter not disclosed, he proves that he had no knowledge thereof; or
contravention arose in respect of such matters which in the opinion of the Central Government or SEBI were not material.

Question 23.
Indian companies are allowed to raise Equity Capital in the Inter-national Market through the issue of ADR/GDR/FCCB/FCEB. Briefly, discuss the regulatory framework of ADR & GDR in India.
Answer:
Indian companies are allowed to raise capital in the international market through issue of ADR/GDR which are regulated by the following legislations in India:

The Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.
Depository Receipts Scheme, 2014.
Notifications/Circulars issued by Ministry of Finance (MoF), GOI. Consolidated FDI Policy.
RBI Regulations/Circulars.
Companies Act, 2013 and Rules there under.
Listing Regulations.

Question 24.
Discuss the different modes of Euro Issue detail.
Answer:
Euro issue means modes of raising funds by an Indian company outside India in foreign currency. There are different modes of Euro issue which is as follows:
1. Depository Receipts:
a. American Depository Receipts
i Existing shares;
it Fresh shares.

b. Global Depository Receipts
i From Euro market.
ii From US market.

2. Foreign Currency Convertible Bonds/Foreign Currency exchangeable bonds.

Question 25.
States the procedure laid out for issuance of ADRs/GDRs. ;
Answer:
Following are the procedure for the issuance of ADRs/GDRs: The issue of ADRs/GDRs requires the approval of a Board of Directors, share holders, “In principle and Final” approval of Ministry of Finance, approval of Reserve Bank of India, In-principle consent of Stock Exchange for listing of underlying shares and In-principle consent of Financial institutions.
1. Approval of Board of Directors:
Meeting of Board of Directors is required to be held for approving the proposal to raise money from Euro Capital Market. Board Resolution is to be passed to approve the raising of finance by issue of GDRs/ FCCBs. The resolution should indicate therein specific purposes for which funds are required, quantum of the issue, country in which issue is to be launched, time of the issue etc.

2. Approval of Shareholders:
Proposal for making Euro issue, as proposed by Board of Directors requires approval of shareholders. A special resolution under section 62 of the Companies Act, 2013 is required to be passed at a duly convened general meeting of the shareholders of the company.

3. Approval of Ministry of Finance- “In-Principle and Final”:
With respect to ADR/GDR guidelines issued on the subject brought ADR/GDR under the automatic route and therefore the requirement of obtaining approval of Ministry of Finance, Department of Economic Affairs has been dispersed with.

Further, private placement of ADR/GDR will also not require prior approval provided the issue is managed by investment banker.

4. In-Principle Consent of Stock Exchanges for Listing of Underlying Shares:
The issuing company has to make a request to the domestic stock ex-change for in-principle consent for listing of underlying shares which shall be lying in the custody of domestic custodian. These shares, when released by the custodian after cancellation of GDR, are traded on Indian stock exchanges like any other equity shares.

5. In-Principle Consent of Financial Institutions:
Where term loans have been obtained by the company from the financial institutions, the agreement relating to the loan contains a stipulation that the consent of the financial institution has to be obtained. The company must obtain in-principle consent on the broad terms of the proposed issue.

Question 26.
“Achieving a prosperous, inclusive, resilient and sustainable Asia and the pacific, while sustaining its efforts to eradicate extreme poverty”- Justify the mission of Asia Development Bank in your own words.
Answer:

Asian Development Bank (ADB) as a financial institution that would be Asian in character and foster economic growth and co-operation in one of the poorest regions in the world in early 1960s.
Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants and equity investments to promote social and economic development.
Asian Development Bank in partnership with member governments, independent specialists and other financial institutions is focused on delivering projects in developing member countries that create economic and developments impact.
As a multilateral development finance institution, Asian Development Bank provides:
- Loans.
- Technical assistance.
- Grants.
Asian Development Bank maximizes the development impact of its assistance by:
- Mobilizing financial resources through co-financing operations that top official, commercial and export credit sources.
- Facilitating policy dialogues.
- Providing advisory services.

Question 27.
What do you mean by “Foreign Currency Convertible Bonds” (FCCBs)? State the benefits of FCCBs to investors and the issuer.
Answer:
Foreign Currency Convertible Bonds (FCCBs) are unsecured carrying a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company. Interest and redemption price (if conversion option is not exercised) is payable in dollars. FCCBs shall be denominated in any freely convertible Foreign Currency. However, it must be kept in mind that FCCB issue proceeds need to conform to ECB end use requirements.

Benefits to the Issuer Company:

Being Hybrid instrument, the coupon rate on FCCB is particularly lower than pure debt instrument thereby reducing the debt financing cost.
FCCBs are book value accretive on conversion. It saves risks of immediate equity dilution as in the case of public shares. Unlike debt, FCCB does not require any rating nor any covenant like securities, cover etc.

Benefits to Investors:

Has advantage of both equity and debt.
Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds which are activated when price of a stock reaches a certain point.
It gives the investor
- upside of investment in case equity and
- debt portion protects the downside.
Assured return on bond in the form of fixed coupon rate pay-ments.

Question 28.
Discuss five elements of framework for raising External Commercial Borrowings (ECBs) for Start-ups?
Answer:
1. Eligibility: An entity recognised as a Start-up by the Central Government as on date of raising ECB.

2. Maturity Minimum average maturity period will be 3 years.

3. Forms: The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares.

4. Currency: The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof.

In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.

5. Amount: The borrowing per Start-up will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.

Question 29.
Discuss about four intermediaries’ agencies in Euro Issue?
Answer:
Four intermediaries’ agencies in Euro Issue are as follows:

1. Lead Manager: The company has to choose a competent lead manager to structure the issue and arrange for the marketing. Lead managers usually charge a lee as a per cent of the issue. The issues related to public or private placement, nature of investment, coupon rate on bonds and conversion price are to be decided in consultation with the lead manager.

2. Co-Lead/Co-Manager: In consultation with the lead manager, the company has to appoint co-lead/co-manager to coordinate with the issuing company/lead manager to make the smooth launching of the Euro issue.

3. Overseas Depository Bank: It is the bank which is authorised by the issuing company to issue Depository Receipts against issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.

4. Listing Agent: One of the conditions of Euro-issue is that it should be listed at one or more Overseas Stock Exchanges. The appointment of listing agent is necessary to coordinate with issuing company for listing the securities on Overseas Stock Exchanges.

Question 30.
What are the benefits of FCCBs to the Investor?
Answer:
Benefits of Foreign Currency Convertible Bonds to the Investor are as follows:

It has advantage of both equity and debt.
It gives the investor much of the upside of investment in equity and the debt portion protects the downside.
Assured return on bond in the form of fixed coupon rate payments.
Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds which are activated when price of a stock reaches a certain point.
Significant Yield to maturity (YTM) is guaranteed at maturity.
Lower tax liability as compared to pure debt instruments due to lower coupon rate.

Question 31.
Write short note on: “International Monetary Fund”.
Answer:
“International Monetary Fund”:

IMF is governed by and accountable to the 189 countries that make up its near-global membership.
IMF is working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
The IMF’s fundamental mission is to ensure the stability of the international monetary system in three ways:
- keeping track of the global economy and the economies of member countries;
- lending to countries with balance of payments difficulties; and
- giving practical help to members.

Question 32.
Write short note on: “Custodian Agreement”.
Answer:

Custodian works in coordination with the depository and has to observe all obligations imposed on it including those mentioned in the depository agreement. In nutshell, the custodian is responsible solely to the depository.
In the case of the depository and the custodian being same legal entity references to them separately in the depository agreement or otherwise may be made for convenience and the legal entity will be responsible for discharging both functions directly to the holders and the company.
The depository in its discretion determines that it is in the best interests of the holders to do so it may after prior consultation with the company terminate.
The depository shall notify holders of such change promptly and any successor custodian appointed shall agree to observe all imposed obligations.
The appointment of the custodian and in such an event the depository shall promptly appoint a successor custodian which shall upon acceptance of such appointment become the custodian under the depository agreement.

Foreign Funding – Instruments & Institutions – Corporate Funding and Listings in Stock Exchanges Important Questions

Foreign Funding – Instruments & Institutions – Corporate Funding and Listings in Stock Exchanges Important Questions

Corporate Funding and Listings in Stock Exchanges Notes