![\"Foreign](\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\")
<\/p>\n
Question 3.
\nDistinguish between the following :
\nAsian Development Bank and International Monetary Fund. (June 2019, 5 marks)
\nAnswer:
\nAsian Development Bank: Asian Development Bank (ADB) assists its member and partners, by providing loans, technical assistance, growth and other equity investments to promote social and economic development ADB is composed of 67 members 48 of which are from the Asia and the Pacific region.<\/p>\n
The ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development.<\/p>\n
International Monetary Fund (IMF): The IMF’s primary purpose is to ensure the stability of the international monetary system – the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Funds mandate was updated in 2012 to include all macroeconomic and ‘financial sector issues that bear on global stability.<\/p>\n
Question 4.
\nWhat are the approvals required for issuance of global depository receipts (GDRs)? (Dec 2012, 5 marks)
\nAnswer:
\nVarious approvals required for issuance of Global Depository Receipts<\/p>\n
- \n
- Approval of the Board of Directors<\/li>\n
- Approval of shareholders<\/li>\n
- No need to obtain approval of Ministry of Finance. However, approval if any required under FDI Policy would still be required.<\/li>\n
- Approval of Ministry of Corporate Affairs.<\/li>\n
- Approval of Reserve Bank of India<\/li>\n
- in principal consent of Stock Exchange for listing of underlying shares.<\/li>\n
- in principal consent of Financial Institutions.<\/li>\n<\/ol>\n
Question 5.
\n\u201cRoadshows are in fact, a conference by the issuer company with the potential\/future\/prospective investors\u201d. Elucidate. (Dec 2013, 5 marks)
\nAnswer:
\nThe Statement \u201cRoadshows are infact, a conference by the issuer company with the potential or future or prospective investors\u201d is absolutely correct. The concept of \u201cRoadshow\u201d is used in case of \u201cEuro issue\u201d, which is explained as<\/p>\n(i) Meaning of Road show: It is a pre – issue key action which ensure the successful launching of Euro – Issue. It can be defined as a meeting organized at different parts of world between the lead manager, issuer company and prospective investors.<\/p>\n
(ii) Details & contents of Road show: Since road – show is a \u2018information presentation meeting\u2019 so the following details are presented:-
\n(a) Historical background i.e. date of incorporation, promoters, first directors etc,
\n(b) Organizational structure i.e. centralized or decentralized;
\n(c) Main object as given in object clause of memorandum of Association.
\n(d) Business line and product type,
\n(e) Market position of company at domestic & international level.
\n(f) Past years performance (if any)
\n(g) Future plans & strategies, the company wants to achieve;
\n(h) Challenges the company can face in future;
\n(i) Financial results & operating performance;
\n(j) Valuation of shares.<\/p>\nQuestion 6.
\nDescribe the end use of external commercial borrowings (ECBs) through approval route. (June 2014, 5 marks)
\nAnswer:
\nEnd-uses (Negative list)
\nThe negative list, for which the ECB proceeds cannot be utilised, would include the following:<\/p>\n- \n
- Real estate activities.<\/li>\n
- Investment in capital market.<\/li>\n
- Equity investment.<\/li>\n
- Working capital purposes, except ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans and except ECB raised for<\/li>\n<\/ul>\n
(i) working capital purposes or general corporate purposes
\n(ii) on-lending by Non-Banking Financial Companies (NBFCs) for working capital purposes or general corporate purposes.<\/p>\nGeneral corporate purposes, except in case of ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans and except ECB raised for<\/p>\n
- \n
- working capital purposes or general corporate purposes<\/li>\n
- on-lending by NBFCs for working capital purposes or general corporate purposes.<\/li>\n<\/ol>\n
Repayment of Rupee loans, except in case of ECB raised for<\/p>\n
- \n
- repayment of Rupee loans availed domestically for capital expenditure<\/li>\n
- on-lending by NBFCs for the same purpose and except ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure (ii) on-lending by NBFCs for the same purpose.<\/li>\n<\/ol>\n
On-lending to entities for the above activities, except in case of ECB raised by NBFCs for<\/p>\n
1. working capital purposes or general corporate purposes<\/p>\n
2. on-lending by NBFCs for working capital purposes or general corporate purposes and (i) repayment of Rupee loans availed domestically for capital expenditure (ii) on-lending by NBFCs for the same purpose and except ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure (ii) on-lending by NBFCs for the same purpose.<\/p>\n
<\/p>\nQuestion 7.
\n\u201cBoth foreign currency exchangeable bonds (FCEBs) and foreign currency convertible bonds (FCCBs) are convertible into equity shares.\u201d Since both are convertible into equity shares, you are required to highlight the advantages of FCEBs over FCCBs. (Dec 2014, 4 marks)
\nAnswer:
\nThe Foreign Currency Exchangeable Bonds (FCEBs) offers similar benefits of conversion as Foreign Currency Convertible Bond (FCCB). But it offers one unique advantage over and above FCCB which is that \u201cFCEBs are convertible into shares of another company (offered company) that forms part of same promoter group as the issuer company. So it does not result in dilution of shareholding at the offered company level.<\/p>\nSimply, FCEB scheme affords a unique opportunity for Indian promoters to unlock value in group companies. They can raise money overseas to fund their new projects and acquisitions, both Indian and global, by leveraging a part of their shareholding in listed group entities.<\/p>\n
Question 8.
\nExplain briefly the following:
\nTwo-way fungibility scheme (Dec 2014, 3 marks)
\nAnswer:
\n(I) Meaning: \u201cTwo way fungibility scheme” implies that the re-issuance of Deposit Receipts (DRs) would be permitted to the extent of DRs that have been redeemed and underlying shares are sold in domestic market. \u201cUnder Depository Receipts Scheme, 2014 the holders of permissible securities may transfer permissible securities to a foreign depository for the purpose of the issue of depository receipts, with or without the approval of issuer of such permissible securities, through transactions on a recognized stock exchange, bilateral transactions or by tendering through a public platform\u201d.<\/p>\n(II) Rules about Fungibility: A limited two-way fungibility scheme has been put in place by the Government of India for ADRs\/ GDRs. Under this scheme, a stock broker in India registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs\/ GDRs based on instructions received from overseas investors. Re-issuance of ADRs\/ GDRs would be permitted to the extent of ADRs \/ GDRs which have been redeemed into underlying shares and sold in the Indian market.<\/p>\n
Question 9.
\n\u201cOffering circular is a mirror through which the prospective investors can access vital information of the company in order to form their investment strategies.\u201d Explain the statement and list out the contents included in the offering circular. (June 2016, 5 marks)
\nAnswer:
\n(i) About the statement: The given statement i.e. \u201cOffering Circular is a mirror through which the prospective investors can access vital information regarding the company in order to form their investment strategies\u201d is correct. Offering Circular is used in case of \u201cEuro Issue\u201d, which gives true and complete information regarding the financial strength of the company, its past performance, past and envisaged research and business promotion activities, track record of promoters and the company, ability to trade the securities on Euro capital market.<\/p>\n(ii) Contents of Offering Circular for Euro-issue: Following are the typical contents of offering circular:<\/p>\n
- \n
- Background of the company and its promoters including date of incorporation and objects, past performance, production, sales and distribution network, future plans, etc.<\/li>\n
- Capital structure of the company-existing, proposed and consolidated.<\/li>\n
- Deployment of issue proceeds.<\/li>\n
- Financial data indicating track record of consistent profitability of the company.<\/li>\n
- Group investments and their performance including subsidiaries, joint venture in India and abroad.<\/li>\n
- Investment considerations.<\/li>\n
- Description of shares.<\/li>\n
- Terms and conditions of global depository receipt and any other instrument issued along with it.<\/li>\n
- Economic and regulatory policies of the Government of India.<\/li>\n
- Details of Indian securities market indicating stock exchange, listing requirements, foreign investments in Indian securities.<\/li>\n
- Market price of securities.<\/li>\n
- Dividend and capitalisation.<\/li>\n
- Securities regulations and exchange control.<\/li>\n
- Tax aspects indicating analysis of tax consequences under Indian law of acquisition, membership and sale of shares, treatment of capital gains tax, etc.<\/li>\n
- Status of approvals required to be obtained from Government of India.<\/li>\n
- Summary of significant differences in Indian GAAP, UK GAAP and US GAAP and expert\u2019s opinion.<\/li>\n
- Report of statutory auditor.<\/li>\n
- Subscription and sale.<\/li>\n
- Transfer restrictions in respect of instruments.<\/li>\n
- Legal matters etc.<\/li>\n
- Other general information not forming part of any of the above.<\/li>\n<\/ol>\n
Question 10.
\n\u201cNot only Indian companies are going abroad to raise funds, foreign companies are also coming to India to raise funds.\u201d Name the instrument(s) through which a foreign company can raise funds in India by issuing its own equity shares. Also, state the eligibility and conditions for the issue of such instrument(s) in India. (Dec 2016, 8 marks)
\nAnswer:<\/p>\n(i) Name of Instrument: Indian Depository Receipt (IDR) is the name of the instrument, through which foreign companies can raise funds in India by issuing its own shares.<\/p>\n
(ii) Eligibility for issue of IDRs: Companies (Registration of Foreign Companies) Rules, 2014 provides that an issuing company shall not issue IDRs unless:
\n(a) its pre-issue paid-up capital and free reserves are at least US $50 million and it has a minimum average market capitalization (during the last 3 years) in its parent country of at least US $ 100 million;
\n(b) it has a continuous trading .record or history on a stock exchange in its parent country or home country for at least three immediately preceding years;
\n(c) it has a track record of distributable profits in terms of Section 123 of the Companies Act, 2013, for at least 3 out of immediately preceding 5 years;
\n(d) it has fulfilled such eligibility criteria as may be laid down by SEBI from time to time in this behalf.<\/p>\nApart from above Rules, SEBI (ICDR) Regulation, 2018 provides eligibility criteria for issue of IDR- the issuer company should be listed in its home country; has not been prohibited to issue securities by any Regulatory Body, has a good track record with respect to compliance with securities market regulations and any of its promoters or directors is not a fugitive economic offences.<\/p>\n
(iii) Conditions for issue of IDRs: According to SEBI (ICDR) Regulations, 2018, an issuer company can issue IDRs only, if it satisfies the following conditions:
\n(a) issue size shall not be less than fifty crore rupees;
\n(b) at any given time, there shall be only one denomination of IDRs of the issuer.
\n(c) issuer shall ensure that the underlying equity shares against which IDRs are issued have been or will be listed in its home country before listing of IDRs in stock exchange(s).
\n(d) issuer shall ensure that the underlying shares of IDRs shall rank pari passu with the existing shares of the same class.
\n(e) it has made an application to one or more stock exchanges to seek an in-principle approval for listing of the IDRs on such stock exchanges and has chosen one of them as the designated stock exchange.
\n(f) it has entered into an agreement with a depository for dematerialisation of the IDRs proposed to be issued;
\n(g) it has made firm arrangements of finance through verifiable means towards 75% of the stated means of finance for the project proposed to be funded from issue proceeds, excluding the amount to be raised through the proposed issue of IDRs or through existing identifiable internal accruals, have been made.
\n(h) the amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document and the offer document, shall not exceed 25% of the amount being raised by the issuer.<\/p>\nQuestion 11.
\nWhat do you mean by foreign currency convertible bonds (FCCBs)? State the benefits of FCCBs to investors and the issuer. (Dec 2016, 5 marks)
\nAnswer:
\n(I) Meaning of foreign currency convertible bonds (FCCBs):
\nThe FCCBs are unsecured, carry a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company. Interest and redemption price (if conversion option is not exercised) is payable in dollars. FCCBs shall be denominated in any freely convertible Foreign Currency.<\/p>\n(II) Benefits of FCCBs to investors:<\/p>\n
- \n
- It has advantage of both equity and debt.<\/li>\n
- It gives the investor much of the upside of investment in equity, and the debt portion protects the downside.<\/li>\n
- Assured return on bond in the form of fixed coupon rate payments.<\/li>\n
- Ability to take advantage, of price appreciation in the stock by means of warrants attached to the bonds, which are activated when price of a stock reaches a certain point.<\/li>\n
- Significant Yield to Maturity (YTM) is guaranteed at maturity.<\/li>\n
- Lower tax liability as compared to pure debt instruments due to lower coupon rate.<\/li>\n<\/ol>\n
(III) Benefits of FCCBs to issuer:<\/p>\n
1. Being Hybrid instrument, the coupon rate on FCCB is particularly lower than pure debt instrument thereby reducing the debt financing cost.<\/p>\n
2. FCCBs are book value accretive on conversion. It saves risks of immediate equity dilution as in the case of public shares. Unlike debt, FCCB does not require any rating nor any covenant like securities, cover etc.<\/p>\n
3. It can be raised within a month while pure debt takes a longer period to raise. Because the coupon is low and usually payable at the time of redeeming the instrument, the cost of withholding tax is also lower for FCCBs compared with other ECB instruments.<\/p>\n
Question 12.
\nWhat are External Commercial Borrowings (ECBs)? Explain the various tracks and forms available under ECBs.
\n(June 2017, 5 marks)
\nAnswer:
\n(I) Meaning of ECBs: ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.<\/p>\n(I) Meaning of ECBs: ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.
\n(II) ECB Framework: The framework for raising loans through ECB compris\u00e9s the following two options:<\/p>\n\n\n
\n Parameters<\/td>\n Foreign Currency denominated ECB<\/td>\n Indian Rupee denominated ECB<\/td>\n<\/tr>\n \n Currency of Borrowing<\/td>\n Any freely convertible Foreign Currency<\/td>\n Indian Rupee (INR)<\/td>\n<\/tr>\n \n Forms of ECB<\/td>\n Loans including bank loans; floating\/ fixed rate notes\/ bonds\/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; Foreign Currency Convertible Bonds; Foreign Currency Exchangeable Bonds and Financial Lease.
\nIt may be noted that Foreign Currency Convertible Bonds (FCCBs) refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, as amended from time to time. Issuance of FCCBs shall also conform to other applicable regulations. Further, FCCBs should be without any warrants attached. Further, Foreign Currency Exchangeable Bonds (FCEBs) refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Exchangeable Bonds Scheme, 2008, as amended from time to time. FCEBs are exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. Issuance of FCEBs shall also conform to other applicable regulations.<\/td>\nLoans including bank loans; floating\/ fixed rate notes\/bonds\/debentures \/preference shares (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; and Financial Lease. Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.<\/td>\n<\/tr>\n \n Eligible<\/td>\n All entities eligible to receive Foreign Direct Investment (FOI). Further, the following entities are also eligible to raise ECB:<\/p>\n - \n
- Pott Trusts;<\/li>\n
- Units in SEZ;<\/li>\n
- SIDBI; and<\/li>\n
- EXIM Bank of India.<\/li>\n<\/ol>\n<\/td>\n
(a) All entities eligible to raise Foreign Currency ECB; and
\n(b) Registered entities engaged In micro
\nfinance activities, viz., registered Not for Profit companies, registered societies\/ trusts\/ cooperatives and Non- Government Organisations.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nRecognised Lenders
\nThe lender should be resident of Financial Action Task Force (FATF) or International Organisation of Securities Commission’s IOSCO compliant country, including on transfer of ECB. However,<\/p>\n(a) Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;<\/p>\n
(b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds\/debentures listed abroad; and<\/p>\n
(c) Foreign branches \/ subsidiaries of Indian banks are permitted as recognised lenders only for Foreign Currency ECB (except FCCBs and FCEBs). Foreign branches \/ subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers\/underwriters \/market-makers\/traders for Rupee denominated Bonds issued overseas. However, underwriting by foreign branches\/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.<\/p>\n
<\/p>\nQuestion 13.
\nIndian companies are allowed to raise equity capital in the international market through the issue of ADR\/GDR\/FCCB\/FCEB. Briefly discuss the regulatory framework of ADR & GDR in India. (June 2018, 5 marks)
\nAnswer:
\nIssue of ADR\/GDR\/FCCBs\/FCEBs are regulated by the following regulations in India:<\/p>\n- \n
- The Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.<\/li>\n
- Foreign Currency Exchangeable Bonds Scheme, 2008<\/li>\n
- Depository Receipts Scheme, 2014<\/li>\n
- Notifications\/Circulars issued by Ministry of Finance (MoF), GOI.<\/li>\n
- Consolidated FDI Policy.<\/li>\n
- RBI Regulations\/Circulars.<\/li>\n
- Companies Act and Rules thereunder.<\/li>\n
- Listing Regulations.<\/li>\n<\/ul>\n
Question 14.
\nWhat do you mean by ECB ? Under what circumstances conversion of ECB\u2019s into equity is possible ? (June 2019, 5 marks)
\nAnswer:
\nECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should confirm to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.<\/p>\nConversion of ECB, including those which are matured but unpaid, into equity is permitted subject to the following conditions:<\/p>\n
(i) The activity of the borrowing company is covered under the automatic route for Foreign Direct Investment or Government approval is received, wherever applicable, for foreign equity participation as per extant Foreign Direct Investment policy.<\/p>\n
(ii) The conversion, which should be with the lender\u2019s consent and without any additional cost, should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under Foreign Direct Investment policy;<\/p>\n
(iii) Applicable pricing guidelines for shares are complied with; \u2018<\/p>\n
(iv) In case of partial or full conversion of ECB into equity, the reporting to the Reserve Bank will be as under:<\/p>\n
For partial conversion, the converted portion is to be reported in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in Form ECB 2 Return will be with suitable remarks, viz., “ECB partially converted to equity”.<\/p>\n
For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in Form ECB 2 Return should be done with remarks \u201cECB fully converted to equity\u201d. Subsequent filing of Form ECB 2 Return is not required.<\/p>\n
For conversion of ECB into equity in phases, reporting through Form FC-GPR and Form ECB 2 Return will also be in phases.<\/p>\n
(v) If the borrower concerned has availed of other credit facilities from the Indian banking system, including foreign branches\/subsidiaries of Indian banks, the applicable prudential guidelines issued by the Department of Banking Regulation of Reserve Bank, including guidelines on restructuring are complied with;<\/p>\n
(vi) Consent of other lenders, if any, to the same borrower is available or atleast information regarding conversions is exchanged with other lenders of the borrower,<\/p>\n
(vii) For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.<\/p>\n
Question 15.
\nDiscuss the different modes of Euro Issue detail. (June 2019, 3 marks)
\nAnswer:
\nEuro issue means modes of raising funds by an Indian company outside India in foreign currency. There are different modes of Euro issue which is as follows:<\/p>\n1. Depository Receipts
\n(a) American Depository Receipts<\/p>\n- \n
- Existing shares<\/li>\n
- Fresh shares<\/li>\n<\/ol>\n
(b) Global Depository Receipts<\/p>\n
- \n
- From Euro market<\/li>\n
- From US market<\/li>\n<\/ol>\n
2. Foreign currency convertible bonds\/foreign Currency exchangeable bonds.<\/p>\n
Question 16.
\nState the procedure laid out for issuance of ADRs\/GDRs. (Dec 2019, 5 marks)
\nAnswer:
\nFollowing are the procedure for the issuance of ADRs\/GDRs<\/p>\n(i) Approvals Required:
\nThe issue of ADRs\/GDRs requires the approval of a Board of Directors, shareholders, \u201dln principle and Final\u201d approval of Ministry of Finance, approval of Reserve Bank of India, In-principle consent of Stock Exchange for listing of underlying shares and In-principle consent of Financial institutions.<\/p>\n(ii) Approval of Board of Directors:
\nA meeting of Board of Directors is required to be held for approving the proposal to raise money from Euro Capital market. A board resolution is to be passed to approve the raising of finance by issue of GDRs\/FCCBs. The resolution should indicate therein specific purposes for which funds are required, quantum of the issue, country in which issue is to be launched, time of the issue etc. A director\/Sub-Committee of Board of Directors is also to be authorised for seeking Government approval in connection with Euro issue and signing agreements with depository, organising road shows for fixation of price of GDRs. The Board meeting shall also decide and approve the notice of Extraordinary general meeting of shareholders at which special resolution is to be considered.<\/p>\n(iii) Approval of Shareholders:
\nProposal for making Euro issue, as proposed by Board of Directors require approval of shareholders. A special resolution under Section 62 of the Companiee Act, 2013 is required to be passed at a duly convened general meeting of the shareholders of the company.<\/p>\n(iv) Approval of Ministry of Finance – “In Principle and Final”:
\nWith respect to ADR\/GDR, guidelines issued on the subject dated 19-1 -2000 brought ADR\/GDR under the automatic route and therefore the requirement of obtaining approval of Ministry of Finance, Department of Economic Affairs has been dispersed with. Further, private placement of ADR\/GDR will also not require prior approval provided the issue is managed by investment banker.<\/p>\n(v) In-Principle Consent of Stock Exchanges for Listing of Underlying Shares:
\nThe issuing company has to make a request to the domestic stock exchange for in-principle consent for listing Of underlying shares which shall be lying in the custody of domestic custodian. These shares, when released by the custodian after cancellation of GDR, are traded on Indian stock exchanges like any other equity shares.<\/p>\n(vi) In-Principle Consent of Financial Institutions:
\nWhere term loans have been obtained by the company from the financial institutions, the agreement relating to the loan contains a stipulation that the consent of the financial institution has to be obtained. The company must obtain in-principle concept on the broad terms of the proposed issue.<\/p>\nQuestion 16.
\n\u201cAchieving a prosperous, inclusive, resilient and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty\u201d – Justify the mission of Asia Development Bank in your own words. (Dec 2019, 3 marks)
\nAnswer:
\nThe Asian Development Bank (ADB) was conceived in the early 1960s as a financial institution that would be Asian in character and foster economic growth and co-operation in one of the poorest regions in the world.<\/p>\nThe Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development.<\/p>\n
Asian Development Bank in partnership with member governments, independent specialists and other financial institutions is focused on delivering projects in developing member countries that create economic and developments impact.<\/p>\n
As a multilateral development finance institution, Asian Development Bank provides:<\/p>\n
- \n
- Loans<\/li>\n
- Technical assistance<\/li>\n
- Grants<\/li>\n<\/ul>\n
Asian Development Bank maximizes the development impact of its assistance by:<\/p>\n
- \n
- Facilitating policy dialogues,<\/li>\n
- Providing advisory services, and<\/li>\n
- Mobilizing financial resources through co-financing operations that top official, commercial, and export credit sources.<\/li>\n<\/ul>\n<\/p>\n
Question 17.
\nState the conditions pertaining to conversion of External Commercial Borrowings (ECBs) into Equity. (Dec 2020, 5 marks)
\nAnswer:
\nConditions for converting ECBs into Equity:
\nConversion of ECBs into Equity is permitted (including those which are matured but unpaid) subject to the following conditions:<\/p>\n(i) The activity of the borrowing company is covered under the automatic route for FDI or approval route from the Foreign Investment Promotion Board (FIPB) wherever applicable, for foreign equity participation has been obtained as per the extent FDI policy.<\/p>\n
(ii) The conversion, which should be with the lender\u2019s consent without any extra cost, will not result in breach of applicable sector cap on the foreign equity holding.<\/p>\n
(iii) Applicable Pricing guidelines of RBI should be fulfilled.<\/p>\n
(iv) If borrower concerned has availed of other credit facilities from the Indian banking system, including overseas branches\/subsidiaries, the applicable prudential guidelines issued by the Department of Banking Regulation of RBI, including guidelines on restructuring are compelled with.<\/p>\n
(v) Consent of other lenders, if any, to the same borrower is available or at least information regarding conversion is exchanged with other lenders of the borrower.<\/p>\n
(vi) In-principle approval of the Stock Exchange where equity shares of the borrower is listed is required before issuance of ECB(FCCBs) which has conversion options.<\/p>\n
(vii) Post conversion of ECBs into equity shares, the listing and trading permission is to be obtained from the Stock Exchange where its equity shares are listed.<\/p>\n
Question 18.
\nWhat do you mean by Foreign Currency Exchangeable Bonds (FCEB)? Explain the pricing norms for issuing of FCEB under the Foreign Currency Exchangeable Bonds Scheme, 2008. (Dec 2020, 3 marks)
\nAnswer:
\nIndian promoters can raise money abroad by issuing foreign currency bonds against the value of their investments in shares of listed groups company, termed as Foreign Currency Exchangeable Bonds. The issue of these bonds helps the promoter to meet the financing requirements within the group.<\/p>\nIssue of FCEBs are governed by Foreign Curiency Exchangeable Scheme, 2008 issued by Ministry of Finance, Department of Economic Affairs. According to the \u201cIssue of Foreign Currency Exchangeable Bonds (FCEBs) Scheme, 2018, Foreign Currency Exchangeable Bond means:<\/p>\n
- \n
- a bond expressed in foreign currency.<\/li>\n
- the principal and the interest in respect of which is payable in foreign currency.<\/li>\n
- issued by an issuing company, being an Indian company.<\/li>\n
- subscribed to by a person resident outside India.<\/li>\n
- Exchangeable into equity shares of another company, being Offered Company in any manner.<\/li>\n<\/ul>\n
Pricing of Foreign Currency Exchangeable Bonds (FCEBs):
\nAt the time of issuance of Foreign Currency Exchangeable Bonds the exchange price of the offered listed equity shares shall not be less than the higher of the two:<\/p>\n- \n
- the average of the weekly high and low of the closing prices of the shares of the offered company quoted on the stock exchange during the six months.<\/li>\n
- the average of weekly high and low of the closing prices of the shares of the offered company quotes on a stock exchange during the two weeks preceding the relevant date.<\/li>\n<\/ol>\n
Question 19.
\nInternational Monetary Fund (IMF) plays a vital role in the global economy. Explain its mission and activities. (Aug 2021, 5 marks)
\nAnswer:
\nThe International Monetary Fund is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world. Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership.<\/p>\nThe IMF’s primary purpose is to ensure the stability of the international monetary system, the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Funds mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.<\/p>\n
The IMF assists countries hit by crises by providing them financial support to create breathing room as they implement adjustment policies to restore economic stability and growth. The IMF’s fundamental mission is to ensure the stability of the international monetary system which it does so in three ways:<\/p>\n
- \n
- keeping track of the global economy and the economies of member countries<\/li>\n
- lending to countries with balance of payments difficulties; and<\/li>\n
- giving practical help to members.<\/li>\n<\/ol>\n
It also provides precautionary financing to help prevent and insure against crises. The IMF\u2019s lending toolkit is continuously refined to meet countries\u2019 changing needs.<\/p>\n
Question 20.
\nMention the Regulatory Framework in India for Issue of ADR\/GDR\/FCCBs\/FCEBs. (Aug 2021, 3 marks)
\nAnswer:
\nCapital can be raised from international capital market in foreign currency by accessing foreign capital market. Funds raised through foreign currency is known as euro equity or debt, Indian companies are allowed to raise capital in the international market through the issue of GDR\/ADR\/FCCB\/FCEB and through External Commercial Borrowings (ECB).<\/p>\nIssuance of ADR\/GDR\/FCCBs\/FCEBs are regulated by the following regulations in India:<\/p>\n
- \n
- The Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993<\/li>\n
- Foreign Currency Exchangeable Bonds Scheme, 20081<\/li>\n
- Depository Receipts Scheme, 2014<\/li>\n
- Notifications\/Circulars issued by Ministry of Finance (MoF), GOI.<\/li>\n
- Consolidated FDI Policy.<\/li>\n
- RBI Regulations\/Circulars.<\/li>\n
- Companies Act and Rules thereunder.<\/li>\n
- SEBI (LODR) Regulations, 2015.<\/li>\n<\/ul>\n
Question 21.
\nOutline the reporting requirements under External Commercial Borrowing (ECB) reporting framework. (Dec 2021, 5 marks)
\nAnswer:
\nReporting Requirements under External Commercial Borrowings Reporting Framework
\nBorrowings under External Commercial Borrowing Framework are subject to following reporting requirements apart from any other specific reporting required under the framework:<\/p>\n1. Loan Registration Number: Any draw-down in respect of an External Commercial Borrowing should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Reserve Bank of India. Although, copies of loan agreement for raising External Commercial Borrowing are not required to be submitted to the Reserve Bank.<\/p>\n
2. Changes in terms and conditions of ECB: Changes in External Commercial Borrowing parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the RBI through revised Form External Commercial Borrowing at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form External Commercial Borrowing the changes should be specifically mentioned in the communication.<\/p>\n
3. Monthly Reporting of actual transactions: The borrowers are required to report actual ECB transactions through Form ECB 2 Return through the AD Category I bank on monthly basis so as to reach Department of Statistics and Information Management within seven working days from the close of month to which it relates. Changes, if any, in External Commercial Borrowing parameters should also be incorporated in Form ECB 2 Return.<\/p>\n
4. Late Submission Fee for delay in reporting: Any borrower, who is otherwise in compliance of ECB guidelines, can regularize the delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of Form ECB 2 returns, by payment of late submission fees.<\/p>\n
5. Standard Operating Procedure for Untraceable Entities: The required SOP has to be followed by designated AD Category-I banks in case of untraceable entities who are found to be in contravention of reporting provisions for External Commercial Borrowing by failing to Submit prescribed return(s) under the External Commercial Borrowing framework, either physically or electronically, for past eight quarters or more.<\/p>\n
Question 22.
\n\u201cThe International Finance Corporation (IFC) is an international financial institution that offers investment, advisory and asset-management services to encourage private sector development in developing countries.” Explain the functions of IFC. (Dec 2021, 3 marks)
\nAnswer:
\nThe International Finance Corporation is a sister organization of the World Bank and member of the World Bank Group and is the largest global development institution focused exclusively on the private sector in developing countries.
\nFunctions of IFC<\/p>\n1. It provides a wide range of investment and advisory services that help businesses and entrepreneurs in the developing world meet the challenges they face in the marketplace.<\/p>\n
2. It offers innovative financial products to private sector projects in developing countries. These include loans for IFC’s own account (also called A-loans), equity financing, quasi-equity financing, syndicated loans (or B-loans), risk management products, and partial credit guarantees. IFC often provides funding to financial intermediaries that on-lend to clients, especially small and medium enterprises.<\/p>\n
3. It also provides advisory services that help build businesses. Much of IFC’s advisory work is conducted by facilities managed by IFC but funded through partnerships with donor Governments and other multilateral institutions. Other sources 4. It can provide a mix of financing and advisory services that is tailored to meet the needs of each project. However, the bulk of the funding, as well as leadership and management responsibility, lies with private sector owners and investors.<\/p>\n
<\/p>\nQuestion 23.
\n“The External Commercial Borrowings (ECB) proceeds can be parked abroad.” Explain. (Dec 2021, 3 marks)
\nAnswer:
\nThe External Commercial Borrowings proceeds are permitted to be parked abroad in a prescribed manner. ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization. Till utilisation, these funds can be invested in the following liquid assets:<\/p>\n(a) deposits or Certificate of Deposit (COD) or other products offered by banks rated not less than AA(-) by Standard and Poor\/ Fitch IBCA or Aa3 by Moody;
\n(b) treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above; and
\n(c) deposits with foreign branches\/ subsidiaries of Indian banks abroad.<\/p>\nQuestion 24.
\nExplain in brief manner of parking of ECB proceeds abroad & domestically. (June 2022, 3 marks)<\/p>\nQuestion 25.
\nSpeed Information Ltd. would like to issue US $ 750 million Global Depository Receipts (GDRs) for setting up cloud computing services. Managing Director of the company requests you as a Company Secretary to prepare a checklist for the issue of Depository Receipts. Prepare a checklist considering conditions to be fulfilled by a company as per the provisions of Companies (Issue of Global Deposit) Rules, 2014. (June 2022, 5 marks)<\/p>\nForeign Funding-Instruments & Institutions Notes<\/strong><\/p>\n
1. Modes of raising capital from international market
\nIndian companies are allowed to raise equity capital in the international market through the issue of:<\/p>\n- \n
- GDR<\/li>\n
- ADR<\/li>\n
- FCCB<\/li>\n
- FCEB.<\/li>\n<\/ul>\n
2. Regulatory framework governing issue of ADR\/GDR\/ FCCBs\/ FCEBs[Euro Issue]
\nIssue of ADR\/GDR\/FCCBs\/FCEBs are regulated by the following regulations in India:<\/p>\n- \n
- The Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme,1993.<\/li>\n
- Foreign Currency Exchangeable Bonds Scheme, 2008.<\/li>\n
- Depository Receipts Scheme, 2014.<\/li>\n
- Notifications\/Circulars issued by Ministry of Finance (MoF), GOI.<\/li>\n
- Consolidated FDI Policy.<\/li>\n
- RBI Regulations\/Circulars.<\/li>\n
- Companies Act and Rules thereunder.<\/li>\n
- Listing Regulations.<\/li>\n<\/ul>\n
3. Depository Receipt
\nDepository Receipt (DR) is a negotiable instrument evidencing a fixed number of equity shares of the issuing company being an Indian company, denominated in foreign currency and is being traded in foreign exchanges.<\/p>\n4. American Depository Receipts (ADRs) and Global Depository Receipts (GDRs)
\n(I) ADRs: An ADR is a dollar denominated form of equity ownership in the form of depository receipts in a non-US company. It represents the foreign shares of the company held on deposit by a custodian bank in the company\u2019s home country and carries the corporate and economic rights of the foreign shares.<\/p>\n(II) GDRs: GDRs have access usually to Euro market and US market. The US portion of GDRs to be listed on US exchanges to comply with SEC requirements and the European portion are to be complied with EU directive. Listing of GDR may take place in international stock exchanges such as London Stock Exchange, New York Stock Exchange, American Stock Exchange, NASDAQ, Luxemburg Stock Exchange etc.<\/p>\n
5. Regulation of FCCB
\nFCCB are regulated by the FCCB and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993.<\/p>\n6. About FCCB
\nThe FCCBs are unsecured, carry a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company.<\/p>\n7. Approval required for issue of GDRs\/FCCBs
\nThe issue of GDRs\/FCCBs requires the Approval of a Board of Directors, shareholders’. \u201cIn principle and Final\u201d approval of Ministry of Finance, Approval of Reserve Bank of India, In-principle consent of Stock Exchange for listing of underlying shares and In-principle consent of Financial Institutions.<\/p>\n8. Definitions of ECBs
\nExternal Commercial Borrowings (ECBs) include commercial bank loans, buyers\u2019 credit, suppliers credit, securitised instruments such as floating rate notes and fixed rate bonds.<\/p>\n9. Minimum Average Maturity Period (MAMP)
\nMinimum Average Maturity Period (MAMP) for ECB will be 3 years. Call and put options, if any, shall not be exercisable prior to completion of minimum average maturity.
\nHowever, for the specific categories mentioned below, the Minimum Average Maturity Period (MAMP) are as under:<\/p>\n\n\n
\n Category<\/td>\n Minimum Average Maturity Period (MAMP)<\/td>\n<\/tr>\n \n ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year<\/td>\n 1 Year<\/td>\n<\/tr>\n \n ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans.<\/p>\n It may be noted that:<\/p>\n
- \n
- ECB cannot be raised from foreign branches\/ subsidiaries of Indian banks<\/li>\n
- the prescribed MAMP will have to be strictly complied with under all circumstances.<\/li>\n<\/ol>\n<\/td>\n
5 Year<\/td>\n<\/tr>\n \n ECB raised for<\/p>\n - \n
- Working capital purposes or general corporate purposes<\/li>\n
- on-lending by NBFCs for working capital purposes or general corporate purposes.<\/li>\n<\/ol>\n
It may be noted that:<\/p>\n
- \n
- ECB cannot be raised from foreign branches\/ subsidiaries of Indian banks<\/li>\n
- the prescribed MAMP will have to be strictly complied with under all circumstances.<\/li>\n<\/ol>\n<\/td>\n
10 Years<\/td>\n<\/tr>\n \n ECB raised for<\/p>\n - \n
- repayment of Rupee loans availed domestically for capital expenditure<\/li>\n
- on-lending by NBFCs for the same purpose.<\/li>\n<\/ol>\n
It may be noted that:<\/p>\n
- \n
- ECB cannot be raised from foreign branches\/ subsidiaries of Indian banks<\/li>\n
- the prescribed MAMP will have to be strictly complied with under all circumstances.<\/li>\n<\/ol>\n<\/td>\n
7 Year<\/td>\n<\/tr>\n \n ECB raised for<\/p>\n - \n
- repayment of Rupee loans availed domestically for purposes other than capital expenditure<\/li>\n
- on-lending by NBFCs for the same purpose.<\/li>\n<\/ol>\n
It may be noted that:<\/p>\n
- \n
- ECB cannot be raised from foreign branches \/ subsidiaries of Indian banks<\/li>\n
- the prescribed MAMP will have to be strictly complied with under all circumstances.<\/li>\n<\/ol>\n<\/td>\n
10 Years<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n 10. Conversion of ECBs into Equity
\nConversion of ECB, including those which are matured but unpaid, into equity is permitted subject to the following conditions:<\/p>\n(i) The activity of the borrowing company is covered under the automatic route for Foreign. Direct Investment or Government approval is received, wherever applicable, for foreign equity participation as per extant Foreign Direct Investment policy.<\/p>\n
(ii) The conversion, which should be with the lender\u2019s consent and without any additional cost, should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under Foreign Direct Investment policy;<\/p>\n
(iii) Applicable pricing guidelines for shares are complied with;<\/p>\n
(iv) In case of partial or full conversion of ECB into equity, the reporting to the Reserve Bank will be as under:<\/p>\n
For partial conversion, the converted portion is to be reported in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in Form ECB 2 Return will be with suitable remarks, viz., “ECB partially converted to equity”.<\/p>\n
For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in Form ECB 2 Return should be done with remarks \u201cECB fully converted to equity\u201d. Subsequent filing of Form ECB 2 Return is not required.<\/p>\n
For conversion of ECB into equity in phases, reporting through Form FC-GPR and Form ECB 2 Return will also be in phases.<\/p>\n
(v) If the borrower concerned has availed of other credit facilities from the Indian banking system, including foreign branches\/subsidiaries of Indian banks, the applicable prudential guidelines issued by the Department of Banking Regulation of Reserve Bank, including guidelines on restructuring are complied with;<\/p>\n
(vi) Consent of other lenders, if any, to the same borrower is available or atleast information regarding conversions is exchanged with other lenders of the borrower.<\/p>\n
(vii) For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.<\/p>\n
<\/p>\n11. Parking of ECB Proceeds
\nECB proceeds are permitted to be parked abroad as well as domestically in the manner given below:<\/p>\nParking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilisation. Till utilisation, these funds can be invested in the following liquid assets<\/p>\n
(a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor\/Fitch IBCA or Aa3 by Moody\u2019s;
\n(b)Treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above and
\n(c) deposits with foreign branches\/subsidiaries of Indian banks abroad.<\/p>\nParking of ECB proceeds domestically: ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position.<\/p>\n","protected":false},"excerpt":{"rendered":"
Chapter 9 Foreign Funding-Instruments & Institutions – Corporate Funding and Listing in Stock Exchange ICSI Study Material is designed strictly as per the latest syllabus and exam pattern. Foreign Funding-Instruments & Institutions – Corporate Funding & Listing in Stock Exchange Study Material Question 1. Distinguish between the following: \u2018FCCB and \u2018FCEB\u2019. (Dec 2015, 2 marks) …<\/p>\n