Chapter -6 EURO-ISSUES

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2 Chapter -6 EURO-ISSUES 6.1 Introduction Depository Receipt (DR) is a negotiable instrument evidencing a fixed number of equity shares of the issuing company generally denominated in US dollars irrespective of the currency in which the underlying shares are denominated.' Depository Receipts are commonly used by those companies who want to sell their securities in international market and expand their shareholding abroad. These securities are listed and traded in international stock exchanges. These can be either American Depository Receipt (ADR) or Global Depository Receipt (GDR). ADRs are issued in case the funds are raised through retail market in United States. In case of GDR issue the invitation to participate in the issue can not be extended to retail US investors but under Rule 144A of securities Act, 1993 of USA, Qualified Institutional Buyers (QIBs) can participate in such a deal. QIBs are the institutional investors who have at least US $ 100 Million under their portfolio to invest. As such there are certain restrictions for the issuing company in case they want to the tap QIBs in US market such as no research report of the syndicate members can be circulated in the USA and hence the syndicate members should market the issue in the USA only with the preliminary offering circular. While DRs are issued by the depository in the international VII

3 market, the underlying shares are issued in the domestic market by the issuing company. These shares issued by the company are custodised in the home market with a local bank called custodian. Even though the emergence of DRs as a means to raise equity capital from international market dates back to 1927, it is only after 1980 when the world stock market began to climb and investors became more venturesome, the GDR market got the boost. However, in India the first GDR issue was launched only in 1992 by Reliance Industries Limited since prior to this the Indian regulations did not permit issuance of GDR by an Indian company. 6.2 GDR issues by Indian Companies After four decades of regulated economic policies, the Government of India started a major economic reforms program in 1991 aimed at integration of Indian economy with global economies. The Government took various steps in this directions like reduction in customs duty, delicencing of imports, delicencing of large number of industries, removal of administered pricing and distribution regulations etc. In addition the Government introduced certain financial reforms to help foreign investment in India including * Streamlining the security regulatory regime including abolition of CCI, free pricing of equity issues and setting up of SEBI as a regulatory agency to watch the Indian capital market. \T2

4 * Promotion of foreign investment in India both direct and portfolio. * Allowing Indian companies to tap international capital market to raise funds through issuance of equity under GDR/FCCB route. * Disinvestment of Government equity in select public sector undertakings (PSUs) paving the way for raising of equity funds by these companies from the market. In 1992, the Government of India permitted Indian companies to raise funds through issuance of equity capital in international market though GDR/FCCB. -The Indian companies found this route very attractive to raise funds. Today more and more companies are trying this avenue to raise funds. As the Government disinvested a part of the equity holding in select PSUs, these companies became public with private shareholding. The shares of these PSUs got listed on Indian stock exchanges^ thereby creating a market for these shares which made possible for these PSUs to raise funds through issuance of shares to public at large. This also helped Government of India to successfully implement its policy of withdrawing budgetary support for PSUs and to make them operate more commercially. This policy forced PSUs to operate in more competitive and open environment and to strive to be self sustaining. Taking advantage of changed scenario, the PSUs are approaching domestic and international capital markets for raising equity funds. \T3

5 Raising funds through issue of ADRs has become popular both with the companies and the investors due to : 6.3 Benefit to the issuing Company * International capital market is very large and liquid which can absorb issues of larger size. * It will broaden the shareholder-base and enhance investor quality. * It normally offers better comparative share value. * The cost of raising equity funds from international market is generally lower than the cost of domestic issue. * It helps to enhance the image of the company and its products internationally. * A GDR issue normally increases research coverage on the company, thereby increasing availability of analytical information to the investors which creates buying interest in the shares of the company and improves the valuation. * Shares issued under the GDR program generally do not carry voting right and hence help the management to raise equit}' capital without losing control over the company. * The companies are able to rise funds in foreign currency and thus reduce exchange risk if the funds are required to finance imports. V14

6 6.4 Benefits to the Investors. * GDRs are allowed to be issued only by the companies with proven track record of profitable operations. * GDRs are listed and traded in international stock exchanges and hence are free from delivery and settlement problems. * GDRs are generally denominated in US Dollars and hence reduces the foreign exchange risk. * Dividend and capital gains on investment in GDRs carry concessional tax rates. * GDR market for most of the scrips is more liquid and hence facilitates faster entry and exit. * GDR route helps investors to overcome the local regulations which may prohibit purchase and holding of shares abroad. * Investors in GDRs are not required to comply with a large number of complex formalities and regulations normally required for investment through domestic stock exchanges. 6.5 The Background Many large companies in India require foreign exchange for importing vital capital goods. In the early Eighties, India's rating in the international credit market stood high, so Indian companies with strong finances and which could offer acceptable security could get foreign currency loans from international banks for meeting their foreign exchange requirements. The acceptable security was a VL5

7 guarantee given by a bank or a financial institution in India. In the early Nineties, the foreign exchange reserves of the country dwindled. The Indian economy was also weak. On account of these, India's credit rating fell below " investment grade".^ At that time Indian companies were finding it difficult to obtain loans from international Banks. Hence, many Indian companies had to approach the Export and Import Bank of India and other financial institutions like The Industrial Credit and Investment Corporation of India Limited who had foreign lines of credit from International Finance corporation or other International agencies, for foreign currency loans. By middle 1991, the liberalization of the Indian economy was set in motion. There was an earnest attempt to integrate India with the global market. The emerging transparency and decontrols attracted the attention of many foreign investors. The foreign equity investors appreciated the liberal policies of the Indian Government and identified huge stakes in the emerging Indian capital market. While presenting the Budget in February 1992, the Finance Minister announced Governments decision to allow the Foreign Institutional Investors to invest in the capital market in India and to allow Indian companies with good track record to float their stocks in foreign markets with a view to augmenting the foreign exchange reserves of the country."* 6.6 What is an Euro Issue? The term Euro issue denotes that the issue is made abroad V16

8 through instruments denominated in foreign currency and the securities issued are listed on any Overseas Stock Exchange. Euro issue is a method of mobilizing resources required by a company in foreign exchange. Most of the Indian companies get their issues listed on the Luxembourg stock exchange. Subscription can come for Euro issues from any part of the World except India. The Euro issue equity or bonds can be traded on the Stock exchange abroad where it is listed or on the OTC Exchange in London.^ 6.7 What is A Global Depository Receipt? Companies making Euro issues can issue two types of instruments namely Global Depository Receipts (GDRs) or Foreign Currency Convertible Bonds (FCCBs). A GDR is an instrument in the form of a depository receipt or a Negotiable Certificate created by the overseas depository bank outside India and issued to non-resident investors against the issue of equity shares or foreign currency convertible bonds of the issuing company outside India. A GDR usually represents one or more shares or convertible bonds of the issuing company. A holder of a GDR is given an option to convert it into number of shares/bonds that it represents after 45 days from the date of allotment. GDR is an instrument denominated in Dollar or in some other freely convertible foreign currency. The shares or bonds which GDR is entitled to get on conversion are denominated in Indian rupees. Once GDR is converted, the shares issued on conversion are listed on an\' one or V17

9 more of the Indian Stock Exchanges. Till conversion the GDR does not carry any voting right. There is no lock-in-period for GDRs. GDRs are issued by the Indian companies to an intermediary abroad called Overseas Depository Bank. The equity shares/bonds representing the GDRs are registered in the name of the overseas depository bank and the relative share Certificates/Bond Certificates are delivered to another intermediary called the Domestic Custodian Bank who acts as the agent of the overseas depository bank in India. 6.8 What is Foreign Currency Convertible Bond? The Foreign Currency Convertible Bond (FCCB) is almost like the convertible debentures issued in India. The bond has a fixed interest or coupon rate and is convertible into certain number of shares at a pre-fixed price. The bonds are listed and traded on one or more stock exchanges abroad. Till conversion the company has to pay interest on FCCBs in Dollars (or in some others foreign currency ) and if the conversion option is not exercised, the redemption also has to be done in foreign currency. The bonds are generallv unsecured. Hence, there is a view that the size of the bond issue should be within the limits prescribed for acceptance of deposits in the companies (Acceptance of Deposits ) Rules 1975.'' In both GDRs and convertible bonds, there could be further sweeteners like warrants attached. Warrants are prospective ownership claims that are sold or issued by a company. Each warrant will give the warrant holder a right (but not an obligation) to applv for a specified VT8

10 number of shares of the company at a pre-fixed price, during a specified period. 6.9 Why Indian Companies Prefer Euro Issues? Indian companies can collect a large volume of funds in US Dollars or Pound Sterling or in any other foreign currency of their choice through Euro issues. It is not possible to collect large volume of funds in the domestic capital market. Till conversion GDRs do not carry any voting rights. There is no exchange risk for the issuing company as shares underlying GDRs are denominated in Indian rupees although the company receives funds in foreign currency. A listing of GDRs on an international stock exchange could provide the companies substantial liquidity and also make the company's securities more attractive to more buyers. Euro issue can raise the profile of the company Why Foreign Investors Prefer Euro Issues? Foreign investors who are generally institutional investors are interested mainly in the return on investment in the form of capital appreciation and dividend income. They are not interested in voting rights. Return on investment in shares in Indian companies is much higher compared to returns available on many stock exchanges in the world. Moreover, they need not register themselves with SEBI. They need not pay tax on capital gains made by them on the sale of GDRs abroad. The}- need not appoint a custodian in India to look V19

11 after their dealing in securities.^ They need not get Reserve bank's permission for investing on GDRs Guidelines for Euro Issues The Department of Economic Affairs announced on a scheme called " Issue of Foreign Currency Convertible Bonds and ordinary shares through depository receipt mechanism scheme, 1993". Subsequently, the department of Economic Affairs framed internal guidelines for Euro issues on Further guidelines have been formulated by the Government on Eligibility for issuing GDR The company which proposes to issue GDR should have a consistent track record of good performance ( financial or otherwise) for a minimum period of 3 years Issue structure The Global Depository Receipt may be issued for one or more underlying shares or bonds held with the domestic custodian bank. The company should decide in consultation with the Lead Managers the following aspects about the issue:- 1) Public or private placement; 2) Number of GDRs to be issued; 3) Issue price and 4) Conversion price, coupon rate and the pricing of the conversion options of the foreign currency convertible bonds. VI.10

12 The company desirous of making Euro issue has to make an application to the Department of Economic Affairs furnishing the terms of the issue, the issue size, price range and other particulars stated in the issue of Foreign Currency Convertible Bond and ordinary shares through Depository Receipt Mechanism Scheme, 1993 and obtain the in-principle approval. The in-principle approval is valid only for 3 months from the date of its issue. Company should finalize the issue structure and again approach the Department of Economic Affairs within 3 months from the date of in-principle approval and get final approval for the issue. Euro issues are treated by Government as direct foreign investments. Accordingly, a company contained in Annexure-III of the New Industrial Policy of 1991 whose direct foreign investment after the proposed Euro issue is likely to exceed 51 percent or which is implementing projects not predominantly contained in Annexure-III should obtain clearance for investment from the Foreign Investment Promotion Board before final approval for the Euro issue is given by the Finance Ministry Ceiling on Euro Issue The shares and foreign currency convertible bonds issued against GDRs are treated as direct foreign investment in the issuing company. "The aggregate of the foreign investment made either directly or indirectly through GDR issue should not exceed 51 percent of the issued and subscribed capital of the issuing company. The term direct foreign investment includes investment by foreign VI.11

13 collaborators but excludes investment through offshore funds or by foreign institutional investors Listing of GDRs GDRs issued under the scheme may be listed on any of the overseas stock Exchanges or over-the-counter exchanges or through book entry transfer system prevalent abroad.'gdrs may be purchased and sold by any non-resident as defined in FEMA Transfer and Redemption of GDRs 1) A non-resident holder of Global Depository Receipts may transfer those receipts or may ask the overseas depository bank to redeem those receipts.^" In the case of redemption overseas depository bank shall request the domestic custodian bank to get the corresponding underlying shares released in favour of the non-resident, for beings sold directly on behalf of the non-resident or being transferred in the books of account of the issuing company in the name of the non-resident. 2) In case of redemption of the global depository receipts into underlying shares a request for the same will be transmitted by the overseas depository bank to the domestic custodian bank in India with a copy of the same being sent to the issuing company for information and record. VI.12

14 3) On redemption, the cost of acquisition of the shares underlying the Global Depository shall be reckoned as the cost on the date on which the overseas depository bank advises the Domestic Custodian Bank for redemption. The price of the ordinary shares of the issuing company prevailing in the Bombay Stock Exchange or the National stock Exchange on the date of the advice of redemption shall be taken as the cost of acquisition of the underlying ordinary shares. 4) For the purposes of conversion of Foreign Currency Convertible Bonds, the cost of acquisition in the hands of the non-resident investors would be the conversion price determined on the basis of the price of the shares at the Bombay stock Exchange or the National Stock Exchanges, on the date of conversion of Foreign Currency Convertible Bonds into shares Taxation Interest on the bonds (until conversion) is subject to deduction of tax at source at 10 percent. Tax on dividend on converted portion of the bond is subject to a deduction of tax at source at 10 percent. Transfer of GDRs made outside India by one non-resident to another non-resident shall not give rise to capital gains liable to tax in India. Dividend on GDRS will be taxed at the rate of 10 per cent and tax on such dividend will be deducted at source." After the GDRs MB

15 are redeemed, dividend on the underlying shares will be taxed at 10 percent and tax on such dividend will be deducted at source. Long term capital gains arising out of the transfer of shares (after redemption of GDRs) will be taxed at 10 percent and it is liable to be withheld at source. The holding of GDRs by non-residents and the holding of underlying sores by the overseas depository bank in a fiduciary capacity and the transfer of GDRs between non-resident investors, are exempt from wealth tax and gift tax Procedure for GDR Issue Euro issue management needs an extremely well-planned time bound activity. The issuing company has to comply with various enactments, rules, regulations, stock exchange requirements etc. It also calls for a team work and the team comprises all the intermediaries involved in the issue. It is the collective involvement of all which gets the desired results. A compan}' which desires to make a Euro issue has to study its requirements of foreign exchange component in its project or diversification or modernization plans. It has to check up the following aspects:- 1) Whether the size of its issue is more than the economic size of a Euro issue. According to the internal guidelines finalized by the Department of Economic Affairs, on the size of the issue should not be less than 20 million dollars and more than 100 million dollars.''in VI.14

16 the case of power sector and shipping, the limit is higher at 500 million dollars. The funds to be raised will be restricted to 50 per cent of the post-issue market capitalization. Companies can make only one Euro issue in a financial year. There should be a gap of 12 months between two Euro issues. Group companies cannot come out with more than 2 issues in a financial year. The expression group companies' is to be interpreted on the basis of the definition of" same group " as provided in section 372(11) of the companies Act, 1956.^"* 2) The company has to first find out whether the existing authorized capital is sufficient for the purpose of Euro issue. If not the company has to take steps to get its authorized capital increased. If the company has taken term loans from financial institutions/banks or issued debentures, check up the loan agreements/debenture trust deed and find out whether permission of the lenders/ trustees for debenture holders is to be obtained for making the proposed issue. Most of the financial institutions stipulate a condition in the loan agreement/ trust deed for debentures that the borrower company should take their permission for increasing its capital. If the loan agreement/debenture trust deed contains a condition to this effect, make an application to the lenders and obtain prior permission for making the proposed issue. VI.15

17 3) Also check up with the foreign stock exchange where the company proses to list its GDRs through the listing agent which is usually a bank approved by the overseas stock exchange, whether the issue satisfies its listing requirements. Most companies list the GDRs in Luxembourg or Dublin Stock Exchanges. If the size of the issue is big, companies may consider listing the GDRs in London or New York stock Exchanges.^'' 6.19 Other points to be Noted 1) Funds raised by Euro issues can be utilized only for the following purposes:- a) Financing capital goods imports; b) Financing domestic purchase/installation of plant equipment and buildings; c) Prepayment or scheduled repayment of earlier external borrowing; d) A margin of 15 per cent of the total proceeds of an issue for other general corporate restructuring uses; e) Making investments abroad where these have been ap proved by competent authorities. 2) The funds should be utilized within 12 months from the date of issue. 3) Companies should submit quarterly statement of utilization of funds duly certified by Auditors to the Department of Economic Affairs. VI.16

18 4) Government does not encourage financial companies to float Euro issues.'" The check-list of activities for GDR issue (backed by shares is briefly indicated below:- 1. Arrange to convene a board meeting to decide on the Euro issue, pass a suitable resolution for making the euro issue, and for approving the draft notice of the Extraordinary general meeting at which the special resolution for making Euro issue will be considered. The exact amount to be raised by the Euro issue need not be stated in the resolution to be passed by the shareholders of the company, but an upper ceiling may be specified to give the company some flexibility. The explanatory statement as required under section 173 of the companies Act, 1956 to be appended to the notice of extraordinary general meeting should be approved by the Board. 2. Issue the notice for extraordinary general meeting, together with an explanatory statement giving 21 clear days notice to the share holders. 3. Hold the general meeting of shareholders, pass a special resolution under section 81(1A) of the companies Act approving the proposed Euro Issue and file the same with Registrar of companies in Form No. 23, within 30 days from the date of the meeting. 4. Make an application to the Department of Economic VI.17

19 Affairs (Ministry of Finance) seeking permission for the Euro issue, giving the details of the quantum and terms of the issue, the price range, the track record of the company and the objects of the issue. The application should contain the additional information prescribed in the guidelines for the GDR issues by the Department of Economic Affairs in the Ministry of Finance in the notification mentioned above. The Department of Economic Affairs will consider the application and will give an in-principle approval, if it is satisfied with the proposal. The in-principle approval will be valid for 3 months from the date of issue of approval. 5. On getting in-principle approval from the Department of Economic Affairs. Selected merchant bankers (Lead Managers) and under writers for the issue. Lead managers should have exposure to Euro issues made by Indian companies.^^ Hence, reputed merchant bankers in foreign countries are given the assignment. Discuss the issue proposal with the Lead Managers and give him the Balance sheet and all other particulars about the company. He will study the proposal and suggest how to market the issue He will prepare due diligence report which will establish that the company's audit and compliance system are in order. Lead Managers charge a fee of 3 per cent of the issue as fees for managing or underwriting a Euro issue. VI.18

20 6. Discuss with Lead Managers and select the overseas depository bank for the issue (Depository Banks charge 5 per cent of the issue price for rendering their services.) 7. Select in consultation with the overseas depository bank, the custodian bank in India. 8. Select in consultation with the lead managers the solicitors and bankers abroad for the issue. Select the listing Agent (normally a bank in the place where the Overseas Stock Exchanges function is appointed as Listing Agent. The listing agent should have the approval of the stock exchanges concerned to act as such) Make the listing application to the overseas stock exchanges in advance for listing the GDRs. Make an application to the National Association of Securities Dealers (NASDAQ) in London for inclusion of the companies GDRs for dealing in their PORTAL system. 9. The price band for the GDRs should be decided in consultation with the Lead Managers, taking into consideration the following:- a) future earnings for the next 3 years; b) current price of the shares on stock exchanges; c) fundamental analysis of the company and the industry. 10. After finalizing the issue structure and after appointing the intermediaries for the issue, make another application to the Department of Economic Affairs, and get the in-principle approval converted into final approval. VI.19

21 While giving the final approval, the department of economic affairs prescribes a 45-day " cooling period" during which the market makers, who are usually the Managers to the Euro issue, are obliged to give two way quotations for the GDRs to stabilize.'^ The final approval is valid only for 3 months. So the issue should be made within 3 months from the date of issue of final approval. 11. Arrange for drafting of the offering circular by the solicitors and merchant bankers keeping in view the international disclosure standards. Before drafting the offering circular which is equivalent to prospectus, make necessary changes in the audited accounts to conform to the international accounting standards by regrouping the items in the profit and loss account and balance sheet and if necessary get the revised accounts audited by the auditors of the company. Stated in the offering circular, is the following:- (a) The quantum of over-subscription in percentages terms which the company proposes to retain. (b) Standstill period- i.e. the period during which the company will not make further issue of shares, with a view to protecting the value of shares represented by GDRs. (c) The "cooling period" that is a period of 45 days during which market makers will give two-way quotations for the GDRs to stabilize. VT20

22 (d) Procedure for transfer of GDRs. (e) A statement that any foreign institutional investor can apply for GDRs representing not more than 5 percent of the companies issued and subscribed capital. (f) GDR holders have no voting rights. (g) Whether depository can exercise voting rights and if so how it can exercise the same. (h)procedure for redemption/conversion of GDR into shares, (i) Overseas stock exchange in which the GDRs will be listed, (j) The rate at which income-tax at source will be deducted from dividend ( the rate of tax deduction is 10 percent at present) (k) Owners of the GDRs will be entitled to receive from the depository an amount equal to the net amount (after Indian withholding tax and other expenses of depository if any^ of the rupee dividend per share which the depository receives from the company, converted into US Dollars. (1) Details of government of India's approvals, (m) Share price data (n) Shareholding pattern (i.e. composition of shareholders) (o) Dividend paid in the last 5 years, (p) Brief history of the company and details of business activities. VI.21

23 (q) Use of funds collected by the GDR issue. (r) Directors and management. (s) General information about the business in which the company is engaged. (t) The law which governs the Depository agreement. (u) How Indian securities market operates. (v) Where and how documents can be inspected by prospective investors. (w) A summary of information contained in the offering circular. (x) Any notice to be given by the company to the holders of GDR should be published in a daily newspaper of general circulation in the city where the overseas stock exchange in which GDRs are listed, is located. It would be advisable to state in the offering circular, the name of the newspaper in which notices to GDR holders will be a published. (y) Reformatted Financial statements and auditor's report and annotated financial results, if any. (z) Table of contents (index) for easy reference. By leaving a blank space in the offering circular for enter ing the issue price of the shares and GDRs, this offering circular is called the" red herring" prospectus. 12) Arrange to keep ready all the original and copies of material contracts and documents mentioned in the offering circular for filling the same with the Registrar of companies. 13) Get the offering circular approved by the board. File VI.22

24 the offering circular with the Registrar of companies and the stock exchange where GDRs will be listed for the purpose of record. Deliver a copy of the offering circular to the Securities and Exchange Board of India for the purpose of record. 14) Arrange for printing the offering circular and application forms with the printers abroad selected by the Lead managers so that distribution of application forms and offering circular will be easy. 15) Settle the draft of the depository agreement between the issuing company and the overseas depository bank in accordance with international law in consultation with the solicitors and execute the same. 16) Finalize the draft of the custodian agreement between the overseas depository bank and the domestic custodian bank in consultation with the solicitors and lead managers and arrange to execute the same. 17)Finalize the draft of the subscription agreement between in the inventors and the overseas depository bank in consultation with solicitors and Lead Managers. 18) Decide the marketing strategy to be adopted for the issue in consultation with the Lead Managers and the underwriters. 19) Make an application to reserve bank in form ISD seeking their approval for making Euro issue. Application has to be submitted to central office of Reserve Bank of VL23

25 India at Bombay- Obtain Reserve Bank's in-principle approval before making the issue. 20) Make an application to the Reserve Bank for release of foreign exchange for meeting 1) the travel requirement of the company's executive to visit different countries for holding the roadshows; 2) roadshow expenses; 3) listing fee payable to overseas stock exchange; 4) For payment of brokerage, underwriting commission etc.; and 5) expenses for printing prospectus and application forms and for distributing the same; and get RBI's approval for the foreign exchange requirements After getting Reserve Bank's approval and getting foreign exchange release by the bank, the company's executives can visit different countries for holding roads shows. Make another application to the Reserve Bank seeking their permission for opening a bank account abroad with the bankers to the issue and get their permission before the issue opens. 21) Arrange to hold roadshows in different countries 4 to 5 weeks before the issue opens to ascertain the response of foreign/non-resident investors. Roadshows are held in different countries to build demand for the GDR issue. In the roadshows, the Chairman or the Chief Executive of the company will brief the activities and highlight the various aspects of the Euro issue. A video presentation will be made. These conferences are generallv V124

26 attended by institutional investors, pension funds and big non-resident investors who ask more pointed questions. The chairman or the Chief Executive of the company has to answer the queries raised in the roadshows. Normally, roadshows are held in big hotels. Roadshows may go on for 15 days to 30 days before the launch of the issue. 22)Settle,well in advance, the format of GDR to be issued by overseas depository bank in consultation with the solicitors and lead managers. 23)Decide on the timing of the issue and issue price after assessing the response to the roadshows and keeping in view the prices of the securities on the Bombay stock exchange for 10 days prior to the date of issue. Pricing is to be done very carefully. Issue should be attractively and not aggressively priced. Euro market investors scoff at premia, so premium should be fixed properly. 24) Make an application to the state government for payment of consolidated stamp duty on the share certificates proposed to issued and get the necessary order. 25) Make an application to the stock exchange abroad (where listing is proposed )for listing the GDRs. 26) Announce the openings of the issue and the price of GDRs. Actual issue price is determined just a day prior the launch of the issue on the basis of the feedback received by the compan}' from its underwriters. The price VI.25

27 of a GDR is generally lower of the average of the prices for the last week and that of the last day, on the Bombay Stock Exchange, prior to the date of launch. Sometimes the price is fixed at an appropriate discount. Companies generally fix the issue opening and closing time according to New York time. Timing the issue is very important, see that no other euro issue from India simultaneously opens. 27) Ascertain the response of the issue from the underwriters/ bankers to the issue. If the issue is oversubscribed, decide the quantum of over subscription to be retained. Announce the closure of the issue in consultation with the lead manager. 28) Make an application to Reserve Bank in form ISD and request Reserve Bank to convert its earlier in-principle approval into final approval for making the allotment of shares and for issuing GDRs. 29) Hold a board meeting for approving the draft depository agreement with overseas depository bank. After the board approves the same, execute the agreement with the depository bank. 30) Hold a board meeting, allotment committee meeting (if the board has formed an allotment committee) and allot shares in favour of the overseas depository bank as provided in the depository agreement. 31) Memorandum and articles of association of the company, VI.26

28 bye-laws of the depository, copy of depository agreement/ a legal notice relating to the issuance of the GDRs, are to be deposited prior to listing, with the chief registrar of the District court of Luxembourg (if listing is to be made on Luxembourg stock exchange. All these documents should also be deposited with listing agent who should make them available for the inspection of investors. Get the GDRs listed on the overseas stock exchange mentioned in the offering circular. 32) Arrange for transfer of the subscription in foreign exchange collected by the bankers to the issue to the companies bank account in India. Government has stipulated that companies making Euro issues should remit the entire foreign currency raised to India within 2 weeks from the date of closure of the issue unless the government has permitted the company to retain the same abroad for specified purposes, while granting approval for making the euro issue. 33) Arrange to execute the custodian agreement between the overseas depository bank and the custodian bank in India. 34) After the Board Meeting is over, the return of allotment in Form No.2 with the ROC and issue the share certificates to the custodian bank in India by complying with the companies (issue of share certificates) rules, ) Ask the custodian bank in India to intimate the overseas depository bank that the company has lodged with it the VI.27

29 share certificates underlying the GDRs. 36)See that the global depository receipts are issued by the overseas depository bank to the underwriters who will place the same with the investors. 37)Pay the fees to the lead managers/co-managers / advisers to the issue, pay commission to the underwriters, pay fees to custodian bank, overseas depository bank, listing agent etc. pay brokerage to the brokers who have procured subscription for the issue etc. 38) Send quarterly reports about utilization of funds duly certified by Auditors to the Department of Company Affairs, Ministry of Finance. It has to be seen that the funds are utilized within 12 months from the date of issue. 39)If the issue is over subscribed and if any application is rejected or allotment is made for lesser number than applied for, make refund of the application money by cheque or pay order or demand draft. 40) Send copies of company's annual reports and half yearly results to the listing agent so that he can make them available to the investors for their inspection. 41) Dividend for the shares pertaining to GDRs is to be paid in rupees to the overseas depository bank after deduction of 10 percent income-tax at source. The depository has to convert the dividend received from the companv into Dollars and pay it to the holders of GDRs. VI.28

30 6.20 Euro Issues : Statuary Procedural Requirements The procedural requirements for issue of GDRs and FCCBs briefly are as under. (a) Authorization by the Board of Directors. (b) Authorization by the shareholders in General Meeting. (c) Government approvals: i) Ministry of Finance ii) Department of Company Affairs, iii) Reserve Bank of India. (d) Consent of Stock Exchange Authorization by the Board of Directors The issuer company should pass a board resolution for taking a decision to float GDR/FCCB in the Global Market. The board should approve the notice calling a General Meeting of the shareholders for the purpose. It is advisable to constitute a Committees of Directors and confer necessary mandate to it for approving various matters/ documents connected with the Euro issue once the Board of Directors of the issuer company has decided to float GDRs/FCCBs in the Global Market. The following matters/documents will be approved by the committee, namely:- (a) Offering memorandum. VI.29

31 (b) Fixation of the issue price. (c) Subscription agreement. (d) Deposit agreement. (e) Agreement with company's process agent. (f) Allotment of shares in favour of depository. (g) Opening of Bank account outside India and operation of the said account. (h) Approval of green-shoe option. (i) Making/filing necessary application with the securities and Exchange Commission USA. and /or making applications to Luxembourg stock exchange, or other exchanges. (j) To sign and execute any deed, document, writing, confirmation, undertaking, indemnity in favour of any party including managers, legal advisers, accountants or others who may be related to the issue. Note :- The company should notify the stock exchange the date of board meeting at which the proposal will be considered as also inform the stock exchange the decision of the board. 6,22 Authorization by the Shareholders The shareholders must approve the proposal by passing a special Resolution as per section 81 of the Companies Act Approvals as per sections 94, 16 and 31 of the Companies Act, 1956, should also be taken from the shareholders, if required. VI.30

32 6,23 Government Approvals Approval of Ministry of Finance, Department of Economic Affairs 1) Government approval is inter alia sought for issue size, terms of issue as to issue price, payment of interest, conversion, redemption, payment of fees and expenses of the issue. Appointment of Lead Manager, Depository, Indian Custodian and w^here listing of securities will be made including trading provisions and settlement provisions. 2) Approval to the effect that rule 19(2) (b) of the rules under Securities Contracts (Regulation) Act, 1956, is not applicable. 3) Direction to the effect that a copy of the offering Memorandum is to be filed with (a) SEBI, (b) Regional Stock Exchange and c) Registrar of Companies for record. 4) Approval to the effect whether the issue proceeds should be kept outside the country or remitted to India. 5) Direction to the effect that the company shall submit a statement within 2 weeks of the closing of the issue on the following namely: a) Full particulars of issue price; b) Listing arrangements completed; c) Total amount realized; and d) Other relevant details regarding launching and initial trading of GDR/FCCBs. Note:- 1) An application should be made by the company when an Euro issue is conceived for obtaining " in-principle" VL31

33 approval from the Ministry of Finance, Department of Economic Affairs. 2) Approval of the Central Government is valid for a period of 6 months Approvals/Clarification of Department of Company Affairs Approval/ clarification of the department of company affairs is sought inter alia for:- 1. Permission under section 81(3)(b) for issue of Euro convertible bonds. 2 Approval to the effect that provisions relating to issue of prospectus are not applicable. 3. Clarification as to non-applicability of provisions of section 108 of the Companies Act, 1956 for GDR/ ECBs issued Grey Areas * Applicability of section 58 A of the Companies Act, 1956, for issues of ECBs which are unsecured. * Compliance of provisions of section 187C for beneficial ownership Approval/Clarification from Reserve Bank of India Approval from Reserve Bank of India is sought inter alia for:- 1. Approval under section 19(1) (b) of FEMA to make an international offering to foreign investors through the GDRs mechanism. VI.32

34 2. Approval/General permission for the following: i) To acquire GDRs by foreign investors under section 29(1) (b) of FEMA. ii)to redeem the bonds (FCCB) after a specified period, iii) To pay interest on due dates. iv) To convert the FCCBs into either GDRs or ordinary shares of the company after a specified period, v) To export certificates to the nonresident holders under section 19 (1) (a) of FEMA vi) To appoint Lead Managers to the issue, vii) To appoint depositories and custodians for the purpose of GDR. viii) To pay issue related expenses. ix) To remit and pay for filing, listing, agency and other fees on on-going basis in respect of any international stock exchange. x) To maintain a foreign Register of Bond holders/ GDR holders if required. xi) To open an account abroad to receive subscription moneys in foreign currency and repatriate funds through banking channels to India. xii) To pay any foreign tax in the nature of sales or value added tax in respect of services provided reimbursement of out of pocket expenses, xiii) To pay/remit dividends on shares, xiv) To issue securities by way of Rights/Bonus that may accrue. VI.33

35 xv) To appoint Trustees Agents and registrars to the issue and payment of fees to them for services rendered. Note:- Validity period of the permission is for a period of six months from the date of Government of India's letter Consent of the Stock Exchange Approval of stock exchange is sought to the effect:- a) That the equity shares issued upon conversion of GDRs would be listed and admitted to dealings on the Exchange. b) That the usual pre-listing requirements relating to purely Indian/domestic issues are not applicable Appointment of Intermediaries The company generally holds preliminary discussion with the global merchant bankers before taking decision for floating the GDRs. A formal appointment of the global merchant bankers is made only after approval of the government for issue of GDRs. The merchant Bankers select the following intermediaries, namely :- * Overseas underwriters to market the issue by organizing road shows with the issuer. * Lead managers to the issue. * Depositories to issue GDRs to the underwriters who arrange to place them with the ultimate investors VI.34

36 * Custodians to hold the shares of the Indian companies physically on behalf of the depository. * Bankers etc Due Diligence Requirements A team consisting of legal, technical and financial key persons from the Lead Manager's side visit the company. During the visit:- a) Financial Team goes through the detailed balanced sheet of the company, and its subsidiary, its financial arrangement with the group, investment pattern and also analyse the future prospects of the company. b) Technical Team goes through the project, its technology, life of technology etc. c) Legal Team goes through the minutes of the company, various agreements entered into by the company with regard to marketing, purchase tie-up and also employment strategy, personnel policy and any other litigation which may have an impact on the profitability or on the profit of the company. During the diligent activities, they also collect various documents which help and assist them for preparing the Prospectus. Senior Directors/ Executives of the issuer will be interviewed by the Lead Managers/ Legal Advisors at the due diligence meeting to ensure the accuracy of the description of the compan\' in the Prospectus. VI.35

37 Issuer's Auditors also will be interviewed with regard to the financial statements appearing in the Prospectus Disclosure & Accounting Requirements Indian companies should get their balance sheets verified or overhauled by internationally recognized firms of Chartered Accountants for complying with the listing norms on Overseas Stock Exchanges especially European exchanges. This exercise starts well ahead of time before launching the Euro issue. It is necessary, for, there is a wide difference between the Indian Generally Accepted Accounting Principles (I. GAAP) and U.S. Generally Accepted Accounting Principles (U.S. GAAP). Companies issuing GDRs have to disclose these differences in the Offering Memorandum. Hence, it is all the more necessary to know about this. Disclosure and Accounting requirements in a Euro issue prospectus can be categorized as under a) Accounting requirements; b) GAAP differences; and c) Other information Accounting Requirements *Audited Financial statements for 3-5 years *Reformatting is optional * Statement of GAAP Differences VI.36

38 * Reconciliation of net profit & net assets GAAP Differences Summary of significant differences between I GAAP, U.K. and U.S. GAAP is given below:- I. GAAP 1. Revaluation of Fixed Assets is permitted. 2. Excess depreciation is allowed. 3. Consolidation for subsidiaries is not required. 4. Cash flow statement is not required. 5. Taxation is provided on estimated tax liability. 6. Goodwill is capitalized and no requirement to amortize. 7. Information regarding Earning Per Share (EPS) is not required to be disclosed. 8. Share issues expenses can be deferred. 9. Capitalization of interest on Fixed Assets is required while assets are under construction. 10 Distinction is not made between Fixed assets and Current asset investments. All investment are carried at cost; but market value is disclosed. 11 Extraordinary items are disclosed as additional information without adjustment for tax effect thereof. 12 Capitalization of lease is not required. 13 Depreciation is on straight line method (SLM) or written down value (WDV) as adopted. \a37

39 14 Gains/losses from Foreign Exchange currency transactions relating to assets and liabilities are adjusted in the respective accounts other gains losses are taken to P&L account. 15 Research & Development (R & D) expenditure is charged to P & L account except equipment, machinery, which are capitalized and depreciated. 16 There is no requirement to classify the current portion of long-term debts as a current liability. U.K. GAAP 1. Permitted 2. Not allowed. 3. Consolidation is required. 4. Required. 5. Deferred taxation on timing differences reversible 6. Required to capitalize and amortize or adjust against reserves. 7. EPS data before Extraordinary items is disclosed. 8. To be written off against share premium 9. Permitted while Fixed Assets are under construction 10. Fixed asset investments are carried at cost current asset investments are carried at the lower of cost and net realization value-investments in associated companies are accounted for under the Equity method. 11.Extraordinary items are separately disclosed with in \138

40 come-tax effect thereon. 12. Financial leases are to be capitalized 13. Depreciation is on the straight line method with reference to useful economic life of the asset. 14 Gains/losses from Foreign currency trisections are taken to P & L account and /or shareholders equity. 15.R & D is expensed as incurred. 16. Current portion of long term debt is shown as current liability U. S. GAAP 1. Not permitted. 2. Not allowed 3. Consolidation is required. 4. Required 5. Deferred taxation on temporary timing differences 6. Goodwill is capitalized and amortized over a period not exceeding 40 years 7 EPS data after Extraordinary items is disclosed 8. Same as U K GAAP 9. Required as per GAAP 10. Equity method is generally used if the investing company influence the financial policies of the investee company. Other investments are valued at lower of cost or market value. 11.Extraordinary items are reported. \a.39

41 12. Same as U. K. GAAP 13. Same as U. K. GAAP 14. Same as U. K. GAAP 15 R & D is expensed as incurred ( except for certain software R&D) 16. As per U. K. GAAP Other Information Financial a) Capitalization Table b) Select financial information and other data c) Investment considerations d) Use of proceeds e) Market price information f) Dividends g) Capital structure and description of shares h) Description of security issued i) Taxation j) Stamp duty Non- Financial a) Company background. b) Management analysis of operations c) Business details d) The Indian economic environment e) Recent economic & regulatory policies. VI.40

42 f) Indian securities Market g) Transfer restrictions h) Legal matters i) Professional experts Listing on Overseas Stock Exchanges Mostly Euro bond issues are offered publicly and listed either on the international stock exchange in London or the Luxembourg stock exchange. The main purpose of a listing is to satisfy the investment restrictions to which many institutional investors, such as pension fund and insurance companies are subjected. These restrictions prohibit the investors from acquiring securities they are listed on a recognized stock exchange. Almost all the Euro issues made by the Indian companies are on private placement basis in the U.S. under rule 144a wherein registration under the Securities Act is not required or is exempt. Listing requirements at Luxembourg are simpler, less expensive, not requiring major disclosure and recasting of accounts Depository Receipts (DRs) are Offered for Subscription as Under 1. Unsponsored issued by one or more depositories in response to market demand. Today this is obsolete. 2. Sponsored. This is prominent Today thanks to VI.41