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FINANCIAL

MANAGEMENT
Foreign Sources of Finance
INTRODUCTION
• Countries like India have to depend on foreign capital for financing their
development programs as they suffer from low level of income and low level of
capital accumulation.
• The degree of dependence varies from country to country depending upon its
level of mobilization of domestic capital, technology development.

Foreign Sources Of Finance

• Official Foreign Sources of Finance


• Non Official Foreign Sources of Finance
NECESSITY OF FOREIGN SOURCES OF
FINANCE
• Lack of Domestic Sources – Foreign Sources of finance is required to meet the
huge requirements of development projects in the path of rapid economic
development and industrialization.
• The Initial Risk - Due to lack of experience, expertise and heavy initial risk, there
is always a lack of flow of domestic capital into lines of production. The foreign
sources of finance taking initial risk stimulates the flow of domestic capital and
stock entrepreneurship.
• Balance of Payment Support - Foreign sources of finance is needed to face the
crisis of balance of payments due to heavy imports of capital goods, technical
know-how, spare parts and even industrial raw materials.
• The Technology Gap - Lot of technology gap which necessitates import of
foreign technology. Such technology usually comes along with foreign capital in
the form of private foreign investment or foreign collaborations.
OFFICIAL FOREIGN SOURCES OF FINANCE
• Foreign Collaboration: In India joint participation of foreign and domestic
capital has been quite common in recent years. Foreign collaboration could be
either in the form of joint participation between private firms, or between
foreign firms and Indian Government, or between foreign governments and
Indian Government.
• NRI Deposits and Investments: Non-resident Indian have always been making a
contribution in economy. Government has been making efforts to encourage
their deposits and investments.
• Bilateral Government Funding Arrangement: Generally, advanced countries
provide aid in the form of loans and advances, grants, subsidies to governments
of under-developed and developing countries.
• Loans from International Financial Institutions : International Bank for
Reconstruction and Development (IBRD), International Monetary Fund (IMF),
Asian Development Bank (ADB), and World Bank have been the major source of
external finance to India.
EXTERNAL COMMERCIAL BORROWINGS (ECB)
• External Commercial Borrowings (ECBs) include bank loans, suppliers' and
buyers' credits, fixed and floating rate bonds (without convertibility) and
borrowings from private sector windows of multilateral Financial Institutions
such as International Finance Corporation. Euro-issues include Euro-convertible
bonds and GDRs.

In India, External Commercial Borrowings are being permitted by the


Government for providing an additional source of funds to Indian corporates
and PSUs for financing expansion of existing capacity and as well as for fresh
investment, to augment there sources available domestically. ECBs can be used
for any purpose (rupee-related expenditure as well as imports) except for
investment in stock market and speculation in real estate.
EXTERNAL COMMERCIAL BORROWINGS (ECB)
ARE DEFINED TO INCLUDE
• Commercial bank loans
• Buyer’s credit
• Supplier’s credit
• Securitized instruments such as floating rate notes, fixed rate bonds etc.,
credit from official export credit agencies,
• Commercial borrowings from the private sector window of multilateral financial
institutions such as IFC, ADB, AFIC, CDC etc.
• Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds
• Applicants are free to raise ECB from any internationally recognized source like
banks, export credit agencies, suppliers of equipment, foreign collaborations,
foreign equity - holders, international capital markets etc.
NON OFFCIAL FOREIGN SOURCES OF FINANCE

Foreign direct investment (FDI) or foreign investment refers to long term


participation by country A into country B. It usually involves participation in management,
joint-venture, transfer of technology and expertise.
There are two types of FDI: inward foreign direct investment and outward foreign direct
investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct
investment", which is the cumulative number for a given period. Direct investment
excludes investment through purchase of shares.
A foreign direct investor may be classified in any sector of the economy and could be any
one of the following:
• An individual, a group of related individuals, an incorporated or unincorporated
entity, a public company or private company, a group of related enterprises, a
government body, an estate (law), trust or other social institution, any combination of
the above.
CONTD…
• Foreign Institutional Investors (FII) are organizations which pool large sums of
money and invest those sums in securities, real property and other investment assets.
They can also include operating companies which decide to invest its profits to some
degree in these types of assets.
• Types of typical investors include banks, insurance companies, retirement or pension
funds, hedge funds, investment advisors and mutual funds. Their role in the economy
is to act as highly specialized investors on behalf of others. For instance, an ordinary
person will have a pension from his employer
• Institutional investors will have a lot of influence in the management of corporations
because they will be entitled to exercise the voting rights in a company. They can
actively engage in corporate governance. Furthermore, because institutional investors
have the freedom to buy and sell shares, they can play a large part in which
companies stay solvent, and which go under. Influencing the conduct of listed
companies, and providing them with capital are all part of the job of investment
management.
EURO ISSUE
Depository
FCCB
Receipt

ADR

GDR
AMERICAN DEPOSITARY RECEIPT (ADR)
• A negotiable certificate issued by a U.S. bank representing a specified number of
shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are
denominated in U.S. dollars, with the underlying security held by a U.S. financial
institution overseas. ADRs help to reduce administration and duty costs that would
otherwise be levied on each transaction.

There are three different types of ADR issues:


• Level 1 - This is the most basic type of ADR where foreign companies either don't
qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs also have
the loosest requirements from the Securities and Exchange Commission (SEC).
• Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs
have slightly more requirements from the SEC, but they also get higher visibility
trading volume.
• Level 3 - The most prestigious of the three, this is when an issuer floats a public
offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain
substantial visibility in the U.S. financial markets.
GLOBAL DEPOSITARY RECEIPT (GDR)
• A bank certificate issued in more than one country for shares in a foreign
company. The shares are held by a foreign branch of an international bank.
The shares trade as domestic shares, but are offered for sale globally
through the various bank branches.
• A financial instrument used by private markets to raise capital denominated
in either U.S. dollars or euros.
FOREIGN CURRENCY CONVERTIBLE BOND -
FCCB
• A type of convertible bond issued in a currency different than the issuer's domestic currency. It
acts like a bond by making regular coupon and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock.
• A foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian listed
company in an overseas market and hence, in a currency different from that of the issuer. The
highlight of the FCCB, however, is the option of converting the bonds into equity at a price
determined at the time the bond is issued.
• It also has the benefits of a debt instrument as it includes guaranteed returns or yields which are
payable in foreign currency.
• FCCBs have a maturity period of about five years during which no call or put option can be
exercised.
• Earlier this week, the RBI announced plans to withdraw the facility of allowing companies to buy
back FCCBs from January. This is line with the improving economy as well as buoying stock prices.
• In fact, a few companies, including L&T , Tata Power and Rai Agro, have started the process of
issuing FCCBs for capital inflow in the last two months, while Unitech is in the process of getting
approvals.
PRO’S OF FCCB:
• FCCB’s are much cheaper than other forms of debt instruments simply because it offers the
advantage of equity conversion. Normally FCCB’s are issued at the cost, which is at least 30-
50% lower than the cost of other debt instruments issued by them.
• Raising finance is considered to be beneficial to both investors and issuers. This is mainly
because investors get an opportunity to convert the bond in to stock and thus become part
owners of the company.
• Investors not only get the benefit of capital protection, but also an opportunity to profit from
the price appreciation of company’s shares after conversion. Whereas as far as companies are
concerned, a low cost debt instrument will definitely give a boost to their margins.

CON’S OF FCCB:
• FCCB’s are considered to be perfect source of financing in the rising market. This
is mainly because investors will get the opportunity to take advantage of price
rise in case of conversion.
• Company issuing FCCB’s will face exchange risk, simply because the repayment
to bond holders will be done in foreign currency, which are quiet volatile.
• FCCB’s will be shown as debt in the company’s books until they are completely
redeemed or converted. This would impact the debt equity ratio of the
company. 
Thank You

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