Euromarkets

The term Euromarkets seems t be misnomer because they don not have a physical location. Euromarkets, more accurately offshore markets, refer to a collection of international banks that helps firms in raising capital in a global market which beyond the purview of any national regulatory body. An Indian firm can access the Euromarkets to raise a Eurocurrency loan or issue a euro bond or issue global depository receipts or issue Eurocurrency convertible bonds. Eurocurrency Loan Subject to certain terms and conditions, the Government of India permits Indian firms to resort to external commercial borrowings for the import of plant and machinery. The most common instrument of external commercial borrowing is the Eurocurrency loan. A Eurocurrency is simply a deposit of currency in a bank outside the country of the currency, for example, a Eurodollar is a dollar deposit in a bank outside the US. Likewise, a Euro yen is a yen deposited in a bank outside Japan. The main features of Eurocurrency loan, which represent the principal form of external commercial borrowings, are: Eurocurrency loans are often syndicated loans, wherein a group of lenders, particularly banks, participate jointly in the process of lending under a single loan agreement. The syndicate of lenders is represented by the lead bank. The borrower is required to pay a syndication fee, which is a frond-end payment usually ranging between percent and 2 percent to the lead bank. This represents the management fee payable to the lead bank, participation fee to the other banks, and other charges. The rate of interest on Eurocurrency loans is floating rate. It is usually linked to LIBOR (London Inter Bank Offer Rate) or SIBOR (Singapore Inter Bank Offer Rate). The spread over the LIBOR or SIBOR rate is mainly a function of the

creditworthiness of the borrower and size of the loan. Air India International, for example, obtained a Eurodollar loan of US dollar 88 million in 1982, at an interest rate of 3/8 percent above the LIBOR. The interest period may be 3, 6, 9, or 12 months in duration. It is largely left to the option of the borrower. The borrower often enjoys the multi-currency option which enables it to denominate the interest and principal in the new currency opted for. This option is exercisable at the end of each interest period. The Eurocurrency loans are repayable in bullet payment or in installments, which are typically equal, over a period of time as agreed to by the parties. The borrower may prepay the loan after giving due notice to the lead bank. When prepayment is done, some premium is payable. The lender may also reserve the right to recall the outstanding loan under certain circumstances. Eurocurrency Bonds Firms using the Euromarkets for debt financing can take out loans (called Eurocurrency loans) or sell bonds (referred to as Eurocurrency bonds). The important features of Eurocurrency bond are: It is issued outside the country in whose currency it is denominated. For example, Eurodollar bonds are sold outside the US and Euro yen bonds are sold outside Japan. It is usually managed by a syndicate of investment banks and offered to investors in many countries. It is bearer bonds. This means that it is unregistered and payable to the person who carries it. The interest on it is usually paid annually or half-yearly.

While the Eurocurrency loan s the most popular form of external commercial borrowing, some firms have raised money by issuing Eurocurrency bonds (Eurocurrency notes).