Other Sources of Borrowed Capital: ADR/GDR, Commercial Banks, Financial Institutions and Trade Credit

An Indian company's shares are ordinarily listed and traded on Indian stock exchanges such as the Bombay Stock Exchange and the National Stock Exchange. As globalisation opened Indian companies to foreign capital, some of them sought to raise funds from investors abroad as well, by getting their shares listed indirectly on major foreign exchanges such as the New York Stock Exchange or NASDAQ — indirectly, because the listing rules of those exchanges differ from India's own, and an Indian company cannot simply list its shares there directly. This is achieved through American Depository Receipts (ADR) and Global Depository Receipts (GDR): the Indian company issues its shares to an intermediary called a depository (a foreign bank, such as the Bank of New York or Citigroup), which in turn issues depository receipts — denominated in dollars or euros — against those shares to investors abroad. These receipts, representing a fixed number of the company's underlying shares, are then bought and sold like ordinary shares on the relevant foreign stock exchange, with their price moving with demand and supply exactly as an equity share's would. The only real difference between the two is where they are traded: a depository receipt traded in the United States is called an ADR, while one traded anywhere else — the London, Luxembourg, Singapore or Hong Kong stock exchanges, or NASDAQ Dubai, among others — is called a GDR. Both instruments let Non-Resident Indians and foreign nationals invest in an Indian company's growth without needing a separate Indian trading account, and the company itself pays dividend in its home currency to the depository bank, which then converts and passes it on to the ADR/GDR holder.

For short- and medium-term financing, commercial banks remain the most important single source available to Indian companies. Banks assist companies chiefly by granting term loans, subscribing to a company's own shares and debentures, and underwriting a company's public issue of securities, and for genuine day-to-day working-capital needs, banks offer several distinct credit facilities. Under an overdraft, a company holding a current account with the bank is allowed to draw more than its account balance, up to a sanctioned limit, and interest is charged only on the amount actually withdrawn. Cash credit works on a broadly similar principle but is granted against the pledge or hypothecation of the company's goods or other security, again with interest charged only on the amount actually drawn rather than on the whole sanctioned limit. A cash loan credits the entire sanctioned amount to the borrower's account at once, with interest payable on the outstanding balance. And discounting of bills of exchange lets a company that has sold goods on credit receive cash immediately by selling the bill of exchange to its bank at a discount, well before the bill's own due date, rather than waiting for the buyer to actually pay.

Beyond commercial banks, a set of specialised development financial institutions was established by the Central and State Governments after India's first industrial policy of 1948, precisely to provide medium- and long-term industrial finance that ordinary commercial banks were not well suited to offer. These institutions are usually grouped into four categories: development banks (such as the Industrial Development Bank of India — IDBI, the Industrial Finance Corporation of India — IFCI, and the Industrial Credit and Investment Corporation of India — ICICI, among others); other specialised financial institutions (for instance, bodies financing risk capital and technology, or tourism-related projects); investment institutions (such as the Life Insurance Corporation of India — LIC, and the Unit Trust of India — UTI); and state-level institutions (such as the various State Finance Corporations and State Industrial Development Corporations). Between them, these institutions provide term loans, subscribe to companies' shares and debentures, underwrite security issues, and sometimes guarantee loans a company raises elsewhere. …