Factors leading to increase in the popularity of international Markets as a source of finance

Many of the firms from 1993 have chosen to use the offshore primary market instead of the domestic primary market for raising resources. The factors that can be attributed this behavior are as follows:

1. The time involved in the entire public issue on the offshore primary market is shorter and the issue costs are also low as the book building procedure is adopted.
2. Offshore issues allow foreign ownership to cross the ceiling
3. Foreign Institutional Investors (FIIs) prefer euro-issues as they do not have to register with SEBI nor do they have to pay any capital gains tax on GDRs traded in the foreign exchanges. Moreover, arbitrage opportunities exist as GDRs are priced at a discount compared with their domestic price.
4. Indian companies can collect a larger volume of funds in foreign exchange from international markets than through domestic markets.

Guidelines relating to international Issues:

ADR/GDRs are considered to be a part of Foreign Direct Investment (FDI). Therefore such issues would need to confirm to the existing FDI policy and only in areas where FDI is permissible. Indian companies raising money from ADRs/GDRs through registered exchanges are now free to access the ADR/GDR markets automatically, without the prior approval of the Ministry of Finance, Department of Economic Affairs. Prior permission from the government of India is essential for the issue of FCCBs. A company seeking to raise funds abroad through these instruments should have a consistently good track record of at least three years. The foreign equity participation directly or ingirectly is restricted to 51 per cent of the issued and subscribed capital of a company capital of a company.

Banks, financial institutions, and registered non-bank financial institutions were made eligible for euro issues in June 1996 subject to the conditions that the proceeds from such issues would not be invested in stock market and real estate. The end use of the GDR proceeds and external commercial borrowings have been prescribed and modified from time to time. As GDRs/ADRs are full risk equity end use restrictions on GDR/ADR issue proceeds have been removed. Funds raised through FCCBs can be used for restructuring of external debt and not more than 25 per cent of the FCCB issue proceeds may be used for general corporate restructuring, including working capital requirements.

Indian companies are free to utilize, without any prior approval, the 100 per cent of the proceeds for overseas investments. There is no restriction now on the number of euro issues failed in a year by a company or a group of companies.

A special stock option scheme for Indian software companies liked with ADR/GDR offerings to enable them to provide incentive to retain their highly skilled professionals.

In March 2001, the government allowed two way fungibility for Indian GDRs/ADRs by which converted local shares could be reconverted into GDRs/ADRs subject to sectoral caps. With this, the reverse fungibility of ADRs and GDRs has gathered momentum. With the reconversions there was no headroom in case of the ICICI bank’s counter. Headroom denotes the number of domestic shares which are available for reconversion into ADR are GDR.

In September 2002, the government further liberalized the guidelines for external commercial borrowings (ECBs) allowing companies to raise foreign loans from any internationally recognized source. Foreign sources from which companies can raise funds have been identified as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders and international capital markets. For more than one borrowing during a financial year, the minimum average maturity for ECBs up to $20m has been fixed at three years and for amounts exceeding $20m, the average maturity has been prescribed as five years. The government has authorized the Reserve Bank to issue the required guidelines for prepayment of ECBs.

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