SOURCES OF INTERNATIONAL FINANCING

Commercial Banks Foreign currency loans can also procured from commercial banks having international operations. Besides, Indian commercial banks provide credit to exporters in the form of pre-shipment and post-shipment finances. Development Banks & Financial Institutions The EXIM Bank of India provides a number of credit facilities to Indian businessmen and foreign importers. The all-India financial institutions are providing foreign currency financial assistance to Indian projects through various lines of credit already procured by them from international financial market. AIFIs are raising funds in the international financial market through issue of bonds to cater the needs of domestic projects. International Agencies A number of international agencies have emerged to finance international trade and business, such as, IBRD, IDA, IFC, IMF ADB, etc. IBRD and IDA make loans for high priority projects in member countries to further their development plans. These are made usually to the governments or the entities enjoying credit of governments. IFC usually assists developing countries in promoting private enterprise. ADB provides financial assistance to its member countries in Asia-Pacific Region. The IMF provides temporary or emergency currency reserves to countries in balance of payments difficulties, just as a local commercial bank provides overdraft facility to the companies. International Capital Markets Lending and borrowing in foreign currencies to finance the international trade and industry has led to development of international capital market. The last decade and a half has witnessed the global dispersal of finance industry. Massive cross-border capital flows have been taking place. While opening up of domestic markets had begun around the end of 1970s, this trend is now spreading to developing countries also. Many developing countries have opened up their markets to NRIs, OCBs and FIIs. Along with liberalization, other qualitative changes have been taking place in the global financial markets. Below is given a detailed discussion on various constituents and instruments of global capital markets:

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Eurocurrency Market: - It refers to funds channeled via financial intermediaries from international lenders to international borrowers. It was originated in Europe, particularly London; with dollar denominated bank deposits and provides loans. However, this market is worldwide and some sectors of this market also exist in Middle East and Far East 9known as Asia dollar Market). Euro-dollar deposits form the main ingredient if Euro-currency market. Banks based in Europe accept dollar denominated deposits and make dollar denominated loans to the customers. Any government does not regulate the Eurocurrency market and, therefore, eurodollar is an international currency. Eurocurrency markets are money markets rather than foreign exchange markets. A Eurocurrency market can be only for a currency, which is freely convertible. The most important Eurocurrency markets are Eurodollar, Euromark and Eurosterling. Eurobond Market: - The second major sector of the unregulated capital market is the Eurobond market. Eurobonds are debt instruments denominated in a currency of one country and issued outside that country, e.g., yen bond floated in Germany. The distinguishing feature of Eurobond markets vis--vis Eurocurrency markets is direct transaction between borrowers and lenders, although the large banks play a major role in underwriting and placing the bonds. Big corporates, public sector organizations, commercial banks and financial institutions issue Eurobonds. Generally, interest on Eurobonds is exempt from taxes, which is an added advantage over domestic or foreign bonds. Further, the unregulated nature of the market means that its costs are lower and its issuing process is faster than domestic or foreign bonds. Foreign Domestic Capital Market: - The third major sector of the international capital market consists of the set of domestic equity, bond and credit markets within which the international borrower/investor can operate, subject to the laws of that country. The domestic markets of US, UK, France, Germany, Switzerland and Netherlands have considerable international importance because they are relatively open to international investors and borrowers. The two most important instruments prevalent in FDCM are: (a) Foreign Bonds: These are debt instruments denominated in a currency that is foreign to borrower/issuer of the bond and sold in the country of that currency. For instance an Indian company placing $ bond in US. (b) American Depository Receipts (ADRs): An ADR is created by the deposit of the securities of a non-US company with a custodian bank in the country of incorporation of the issuing company, The custodian bank informs the depository bank in US that ADRs can be issued. ADRs are USD denominated and traded in the same way as the securities of US companies. An ADR holder is entitled to the same rights and advantages as owners of the underlying securities in the home country. Also, he may ask the depository 21

bank for the original foreign security by exchanging the ADR. The issue of ADRs has to be in accordance with the provisions stipulated by Securities and Exchange Commission of USA, which are very stringent. TYPES OF ADRs: 1. Unsponsered ADRs: These are issued without any formal agreement between issuing company and depository. They are least expensive method of issuing ADRs as they are exempt from most of the reporting requirements of SEC. 2. Sponsored ADRs: These are issued under a formal agreement between the issuing company and a single depository. Basically, there are two types of sponsored ADRs: o Restricted ADRs Restriction is with regard to type of buyer of such ADRs. They are privately placed. They are exempt from reporting requirements of SEC and are not required to be registered with SEC. o Unrestricted ADRs These are issued to and traded by general investing public in US capital markets. There are three classes of unrestricted ADRs: Level I URADR The issuing company is exempt from reporting requirements of SEC and hence, it is least costly amongst various classes of URADRs Level II URADR It is listed on one of the US national exchanges, hence, it must meet the listing requirements of that exchange. Further, the issuing company has to prepare its financial statements as per US GAAP and fulfill disclosure requirements specified by SEC. Level III URADRs The companies who wish to raise capital in US markets by making a public offer of their securities issue these ADRs. Such companies have to fulfill all the requirements of SEC and relevant exchange and prepare their accounts as per US GAAP. Euro Issues: - These are made abroad through instruments denominated in foreign currency and the securities issued are listed in any overseas stock exchange. Euro issue is a method of mobilizing resources required by a company in foreign exchange. Two primary instruments floated by the Indian companies in international markets are: (a)Foreign Currency Convertible Bonds: - These are almost like convertible debentures issued in India. These are subscribed by non-residents in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole or in part, or on the basis of nay equity related warrants attached to the bond. They are listed and traded on one or more overseas stock exchange. The interest on

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FCCBs is payable in dollars and if a FCCB holder do not opts for conversion, the redemption is also done in dollars. (c) Global depository Receipts: - A GDR is basically a negotiable certificate, denominated in US dollars, that represents a non-US companys publicly traded local currency equity shares. GDRs are created when the local currency shares of an Indian company are delivered to the depositorys local custodian bank, against which the depository issues GDRs in USD. It may be marketed in a foreign stock exchange, or OTC market, or to QIBs. A GDR-holder may convert his holdings into shares after a cooling off period of 45 days. Till conversion, he is entitled to all the economic benefits of being ordinary shareholder; however he is not entitled to voting rights. On conversion, the shares are released in favor of the GDR holder by the local custodian bank. For the purpose of ascertaining cost of acquisition of such shares, the price prevailing on the Indian stock exchange of such shares on the date of conversion is relevant.

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INTERNATIONAL PROJECT ANALYSIS

RISK ANALYSIS

RETURN ANALYSIS

A firm can acquire global presence in a variety of ways ranging from simply exporting abroad to having a wholly owned subsidiary or a joint venture abroad. Over the years, phenomenal growth has occurred in the spread of MNCs. India has also now shifted towards more liberal policy. In this section, a discussion on appraisal of a foreign project, the risks involved in a foreign project and NPV model for appraising a foreign project, is covered. RISKS IN INTERNATIONAL PROJECTS: (1) Economic Risks: (a) Business Risks It arises basically due to business cycles. It equally affects domestic as well as international projects. It is higher for new business as compared to established business. (b) Financial Risks It arises due to debt content in the capital employed by a company. It also affects domestic as well as international projects in the same way. However, the attitude of a countrys government and local financial institutions towards domestic concerns may cause different degrees of leverage in the same industry. (2)Monetary Risks: - An international project is exposed to instability of monetary conditions, which give rise to: (a)Inflation Risk The efficiency of the local market and the ability of the market to anticipate future rate of inflation are the factors affecting the local cost of funds depending on inflationary conditions. An international project must have the ability to adjust immediately to changes in prices; otherwise the return obtained from the project will depend on the magnitude of such changes. (b)Exchange Risk Cash flows from a foreign project are in foreign currency, hence, they are subject to exchange risk from the parent companys point of view.

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(3)Political Risks: - These arise out of the policies of the governments. The two most important types of political risks that an international project is exposed to are: (a)Blockage of Funds It involves restrictions on remittances by the subsidiary to the parent. In such case, although the project continues but there is no possibility to repatriate funds from that country. War, revolutions, etc, in a country may also cause blockage of funds in a country. (b) Expropriation It may be defined as the pure nationalization of ownership and complete involvement in the operations of the project by the national government. Thus, assets of a parent company located abroad are subject to risks of appropriation or nationalization by the host country government. Proper assessment of different risks in the investment is essential and accordingly adequate measures must be adopted to mitigate those risks to the extent possible.
RETURN ANALYSIS OF AN INTERNATIONAL PROJECT USING NPV MODEL:

The basic principles of investment analysis are same for domestic as well as foreign project. The incremental cash flow of the investment should be discounted at an opportunity cost of capital appropriate to the risk of investment. The investment should be accepted if the NPV is positive. In an overseas investment, opportunity cost of capital will be risk free rate of return in the host country plus requisite amount of risk premium in accordance with the risk involved in the project. However, certain risks may be accounted for by adjusting the project cashflows rather than discount rate. The foreign project evaluation may be done either in terms of parent countrys currency or in terms of host countrys currency. If it follows first approach, it should convert the estimated cashflows into home countrys currency at the expected future exchange rates and discount them at relevant opportunity cost of capital. The second approach is to determine the NPV in terms of host countrys currency and then convert it into home countrys currency using spot exchange rate. International Taxation: It is an additional aspect, which requires attention while appraising a foreign project. Beside the taxes that the subsidiary pays to the host countrys government, there is usually a provision of withholding taxes on dividends and other income remitted to the parent company. If double taxation avoidance treaty is in existence, the parent company may obtain some credit for the taxes paid abroad. The specific provision of the tax code in the host and home countries will affect the kinds of financial arrangements between the parent and the subsidiary.

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