International Financing

As the economy opened up and businesses became global, Indian companies gained access to funds in global capital markets. Besides the domestic sources already covered, there are several avenues to raise funds internationally.

Inter Corporate Deposits — ICD (Box D): Before the international sources, the text presents ICDs — unsecured short-term deposits made by one company with another company. The ICD market is used for the short-term cash management of large corporates. Per RBI guidelines, the minimum period is 7 days, extendable to one year. There are three types:

• (i) Three-months deposits;
• (ii) Six-months deposits;
• (iii) Call deposits.

The interest rate may be fixed or floating and is higher than a bank's. Borrower companies use ICDs to solve short-term funds shortages.

International sources of finance:

• (i) Commercial Banks: Banks worldwide extend foreign-currency loans for business purposes — an important source of financing non-trade international operations. The loans and services vary by country; for example, Standard Chartered emerged as a major source of foreign-currency loans to Indian industry.

• (ii) International Agencies and Development Banks: These bodies provide long- and medium-term loans and grants to promote the development of economically backward areas. Set up by the governments of developed countries at national, regional and international levels to fund projects, notable examples include the International Finance Corporation (IFC), EXIM Bank and the Asian Development Bank.

• (iii) International Capital Markets: Modern organisations, including multinationals, rely on sizeable borrowings in rupees and foreign currency. The prominent financial instruments are:

  • (a) Global Depository Receipts (GDRs): A company's local-currency shares are delivered to a depository bank, which issues depository receipts against them. When these are denominated in US dollars, they are GDRs. A GDR is a negotiable instrument, traded freely like any other security. In the Indian context, a GDR is issued abroad by an Indian company to raise funds in foreign currency and is listed and traded on a foreign stock exchange; the holder can convert it into the shares it represents at any time and enjoys rights to dividend and capital appreciation. Indian companies such as Infosys, Reliance, Wipro and ICICI have raised money through GDRs.
  • (b) American Depository Receipts (ADRs): Depository receipts issued by a company in the USA. They are bought and sold in American markets like regular stocks. An ADR is similar to a GDR except that it can be issued only to American citizens and listed/traded only on a US stock exchange.
  • (c) Indian Depository Receipts (IDRs): A financial instrument denominated in Indian rupees in the form of a depository receipt, created by an Indian Depository to let a foreign company raise funds from the Indian securities market. The foreign company deposits its shares with an Indian Depository (a custodian registered with SEBI), which then issues receipts to Indian investors. Benefits of the underlying shares (bonus, dividends, etc.) accrue to the IDR holders in India. Per SEBI guidelines, IDRs are issued to Indian residents in the same way as domestic shares — the issuer makes a public offer in India and residents bid just as they do for Indian shares. Standard Chartered PLC was the first company to issue an IDR in the Indian securities market, in June 2010. …