Funds can be raised in the primary market from the domestic market as well as from international markets. After the reforms were initiated in 1991, one of the major policy changes was allowing Indian companies to raise resources by way of equity issues in the international markets. Earlier, only debt was allowed to be raised from international markets. In the early 1990s foreign exchange reserves had depleted and the country’s rating had been downgraded. This resulted in a foreign exchange crunch and the government was unable to meet the import requirement of Indian companies. Hence allowing companies to tap the equity and bond market In Europe seemed a more sensible option. This permission encourages Indian companies to become global.
India companies have raised resources from international capital markets through Global depository receipts (GDRs) / American Depository Receipts (ADRs), Foreign Currency Convertible Bonds (PCCBs) and External Commercial Borrowings (ECBs). The last are used as a residual source after exhausting external equity as a main source of finance for large value projects.
Global Depository Receipts (GDRs):
GDRs essentially equity instruments issued abroad by authorized overseas corporate bodies against the shares/bonds of Indian companies held with nominated domestic custodian banks. The issue of GDR creates equity shares of the issuing company which are kept with a designated bank. GDRs are freely transferable outside India and divided in respect of the share represented by the GDR is paid in Indian rupees only. They are listed and traded on a foreign stock exchange. Trading takes place between professional market makers on an OTC (over the counter) basis. A GDR may represent one or more shares of the issuing company. The shares correspond to other GDR in a fixed ratio. A holder of a GDR can, at any time, convert it into the number of shares that it represents. Till conversion, the GDRs do not carry any voting rights and once conversion takes place the underlying shares are listed and traded on the domestic exchange. Most of the Indian companies have their GDR issues listed on the Luxembourg Stock Exchange and the London Stock Exchange. Indian GDRs are primarily sold to institutional investors and the major demand is in the UK, US, Hong Kong, Singapore, France and Switzerland. Rule 144 A of the Securities and Exchange Commissions (SEC) of the US permits companies from outside the US to offer their GDRs to qualified institutional buyers.
American Depository Receipts (ADRs):
ADRs are negotiable instruments denominated in dollars, and issued by the US Depository Bank. A non-US company that seeks to list in the US, deposits its shares with a bank and receives receipts which enable the company to issue American Depository Shares (ADSs). These ADS’s serve as stock certificates and are used interchangeably with ADRs which represent ownership of deposited shares. There is no legal or technical difference between an ADR and a GDR. As they are listed on the New York Stock Exchange (NYSE) and NASDAQ (National Association of Securities Dealers Automated Association), ADR issued offer access to the US institutional and retail markets while GDR issues offer access only to the US institutional market. GDR listing requires comprehensive disclosures and greater transparency as compared to GDR listing.
GDRs can be converted into ADRs by surrendering the existing GDRs and depositing the underlying equity shares with the ADR depository in exchange for ADRs. The company has to comply with the Securities and Exchange Commission requirements to materialize this exchange offer process. However, the company does not get any funds by this conversion. The trend is towards the conversion of GDRs into ADRs as ADRs are more liquid and cover a wider market. Besides these, many European investors have been disappointed by poor performance of Indian GDRs in traditional industries and are unwilling to provide more capital.
Foreign Currency Convertible Bonds (FCCBs):
FCCBs are bonds subscribed by a non-resident in a foreign currency. They carry a fixed interest coupon rate and are convertible to a certain number of ordinary shares at a preferred price. These bonds are listed and traded abroad.
External Commercial Borrowings (ECBs): Indian corporate companies are allowed to raise foreign loans for financing infrastructure projects.