International Long Term Sources of Finance

International Long Term Sources of Finance

International Sources of Finance Multilateral Sources: World Bank: International Bank for Reconstruction and Development (IBRD) International Development Agency (IDA) International Finance Corporation (IFC) Asian Development Bank Bilateral Sources: Grants Soft Loans Export Credits

International Sources of Finance Commercial Options Export Credit Buyers/ Suppliers Credit Syndicated Loans Euro Bonds Foreign Bonds Yankee, Bulldog, Samurai, Dragon, etc. Co-financing with Multilateral Institutions Foreign Currency Convertible Bonds Euro Convertibles Equity Instruments Equity, GDRs, ADRs

Role of Development Banks Global and regional development banks have become important in the last 50 years Provide and generate finance for business and infrastructure projects for improving the living standards in developing countries Increasing support for privatisation of state controlled industries and public utilities Also increasing emphasis on social sector and community based projects as against financing only large projects. Some important Multilateral Development Banks (MDBs) are World Bank, Inter-American Development Bank, Asian Development Bank, African Development Bank, European Bank for Reconstruction and Development and Caribbean Development Bank

World Bank Group The most important MDB is the World Bank. The World Bank Group consists of five agencies: the International Bank for Reconstruction and Development (IBRD), established in 1945, the International Finance Corporation (IFC), established in 1956, the International Development Association (IDA), established in 1960, the Multilateral Investment Guarantee Agency (MIGA), established in 1988, and the International Centre for Settlement of Investment Disputes (ICSID), established in 1966.

IBRD IBRD is owned by the governments of the member countries (184), all of which are also members of the IMF. As members, the countries contribute to the capital of both the Bank and the IMF. Subscriptions to IBRD s capital vary according to each member s quota in the IMF. In recent years the World Bank Group has been moving from targeting economic growth in general, to aiming specifically at poverty reduction. Projects involving education, clean water, sustainable development and small scale local enterprises have gained importance. The World Bank, through its main affiliates, IBRD and IDA, lends approximately $20 billion each year to promote economic growth and social progress in the developing world.

IBRD The IBRD lends largely to middle-income and credit worthy developing countries and finances its operations primarily through bond sales on world capital markets. The IBRD s original mission was to finance the reconstruction of nations devastated by World War II. Now, its mission has expanded to fight poverty by means of financing states. Most of the IBRD s funds come from borrowing on the capital markets of the world, repayment of loans, and earnings. The IBRD provides loans to governments and public enterprises, always with a government (or "sovereign") guarantee of repayment. World Bank bonds are rated AAA because they are backed by member states' share capital, as well as by borrowers' sovereign guarantees.

IBRD Loan Terms IBRD loans are made either directly to a member government or to an entity guaranteed by that government. IBRD loans are generally repayable over 15 to 20 years, with a grace period of 3 to 5 years. Loan repayments are due semi-annually. The interest rate paid by borrowers is related to the cost of the Bank s borrowings. Borrowers benefit directly from the Bank s strong credit rating in the international capital markets. Bidding for projects are usually on international competitive bidding (ICB) basis, with local suppliers sometimes eligible for price preference. Co-financing arrangements with other loans possible with cross-default clauses. Such loans endorses the credit for other potential lenders

International Development Association (IDA) IDA finances projects in the world's poorest countries and lends on concessional terms, drawing largely on contributions from its wealthier member countries. Donors get together every three years to replenish IDA funds. IDA credits have maturities of 20, 35 or 40 years with a 10-year grace period before repayments of principal begins. There is no interest charge, but credits carry a service charge, currently 0.75 percent on funds disbursed and outstanding. There is also an annual commitment charge of up to 0.5% on the undisbursed balance. Loans backed by Government guarantees.

International Finance Corporation IFC, a member of the World Bank Group, is the largest multilateral source of loan and equity financing for private sector projects in the developing world. It promotes sustainable private sector development primarily by: - Financing private sector projects located in the developing world. - Helping private companies in the developing world mobilize financing in international financial markets. - Providing advice and technical assistance to businesses and governments IFC has 178 member countries.

International Finance Corporation IFC's equity and quasi-equity investments are funded out of its net worth. Triple-A ratings, and the substantial paid-in capital base have allowed IFC to raise funds for its lending activities on favourable terms in the international capital markets. The loans typically have maturities of 7 to 12 years. As a rule, the enterprises IFC finances must be majority private sector owned and controlled. Exceptions can be made for state-owned enterprises which are in the process of being privatized. IFC operates on a commercial basis. It invests in profit generating projects and charges market rates for its products and services.

MIGA MIGA s role is to provide non-commercial or political investment risk insurance and technical services and help promote investment flows. MIGA cannot provide export credit guarantees and is limited to covering investment projects MIGA was established to promote foreign direct investment into developing countries. Being part of the World Bank Group, the presence of MIGA acts as a potent deterrent against government actions that may adversely affect investments. The International Centre for Settlement of Investment Disputes (ICSID) Provides conciliation & arbitration services for disputes between foreign investors and host governments

Export Credits Leading countries have their own export credit agencies (ECAs) to provide export credits Mostly tied to exports from the lending country The export credits are regulated by guidelines of Organisation for Economic Cooperation and Development (OECD) protocol Maximum Finance 85% of the export content + local costs not exceeding 15% of the export cost 15% down payment to be paid in cash or out of commercial bank loan Disbursement directly to suppliers Repayment in maximum 12 years, starting 6 months after commissioning

Export Credits Buyer s Credit: Buyer takes credit directly Lender takes risk on buyer Credit enhancement / guarantee may be needed Supplier s Credit (Deferred payment facility): Supplier gets credit from banks Credit risk on supplier Supplier extends credit to the Buyer Credit enhancement/ guarantee may be needed

Syndicated Loans Meets specific requirements of the borrowers Maturity 1 to 7 years Floating interest rate pegged to 3 to 6 months LIBOR + margin expressed as % age basis points over LIBOR Loan currency to match project requirement Advantages: Standard loan documentation High flexibility in drawdown and repayment Credit rating not required Minimum disclosure norm Less covenants

External Commercial Borrowings External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds) availed of from non-resident lenders with minimum average maturity of 3 years. Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency. Further, the bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depositary Receipt Mechanism) Scheme, 1993, and subscribed by a nonresident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments. The policy for ECB is also applicable to FCCBs.

ECB under Automatic Approval ECB for investment in real sector-industrial sector, infrastructure sector-in India, and specific service sectors as indicated are under Automatic Route, i.e. do not require the Reserve Bank / Government of India approval. The maximum amount of ECB which can be raised by a corporate in the eligible sectors is USD 500 million or its equivalent during a financial year. There are upper caps on all-in-cost ceilings laid down. Recognised Lenders: Eligible borrowers can raise ECB from internationally recognized sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC, etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators, and (vii) foreign equity holders (other than erstwhile Overseas Corporate Bodies).

Foreign Investment into India Role of Foreign Direct Investment & Foreign Institutional Investment

Issues in FDI Foreign Direct Investment (FDI) is a major means for companies to conduct their international operations. The effort to create favourable investment environment has led many countries to replace obstacles to FDI with incentives for FDI. The sheer size of MNEs is an issue. Some have sales larger than many countries GNP. The effect of an individual FDI may be positive or negative There may be security concerns for both countries The BOP effects of FDI usually are: Positive for the host country and negative for the home country initially Positive for the home country and negative for the host country later Home and host countries may impose repatriation restrictions

Issues in FDI Growth and employment effects are not a zero sum game because MNEs may use resources that were unemployed or underemployed Host countries may gain through: More optimal use of productive factors The use of unemployed resources The upgrading of resource quality Host countries may lose if investments by MNEs: Replace local companies Take the best resources Destroy local entrepreneurship Decrease local R&D undertakings FDI is more likely to generate growth in more advanced developing countries

Joint Ventures Ideally, in JVs, partners should complement each other they should bring different strengths to the JV like innovation, international brand, local distribution strength, etc. Many Governments encourage local firms to tie up with MNCs in order to gain experience and knowledge. Unfortunately, when partners are forced into a JV like situation because of circumstances like local laws, such JVs often tend to collapse.

Modes of International Business International Trade Contractual entry modes e.g. licensing, franchising, management contracts and turn-key projects Foreign investment especially FDI

FDI in India New Policy since 1991 Earlier deficits in Current Account met by borrowing from multilateral financial institutions and commercial borrowings Earlier FDI was linked to imported technology Now two routes available for FDI Automatic approval by RBI Govt. Approval via Foreign Investment Promotion Board (FIPB) Once applicable permissions obtained, foreign companies are treated at par with an Indian company national treatment Under FEMA 2000, approval of RBI required for establishment in India of a branch, liaison office or a project office

RBI Automatic Route RBI approval in many industries within sectoral caps: 100%, 74%, 51% and 26%. The lists are comprehensive and cover most industries of interest to foreign companies. The RBI s approval is automatic (provided certain parameters are met) and only a filing is to be made after allotting shares to foreign equity holder(s). Foreign technology agreement: not compulsory Automatic clearance for foreign technology agreements if lump sum payments up to USD 2 million and royalty payments up to 5% of domestic sales and 8% of exports Payment of royalty up to 1% on domestic sales and 2% on exports on the use of trade marks and brand name of the foreign collaborator without technology transfer

FIPB Foreign Investment Promotion Board (FIPB) consists of a group of Secretaries (Finance, External Affairs, SSI, Commerce) under the Chairmanship of Secretary, Department of Economic Affairs, Ministry of Finance. Representation of the Ministry under whose jurisdiction a particular investment is proposed, is also invited. FIPB recommends projects to Finance Minister for approval. Foreign investments exceeding Rs.1300 crores require the approval of the Cabinet Committee on Foreign Investment (CCFI)

Sectors prohibited for FDI I. Retail Trading (except single brand product retailing) II. Atomic Energy III. Lottery Business IV. Gambling and Betting V. Business of chit fund VI. Nidhi Company VII. Trading in Transferable Development Rights (TDRs) VIII. Activities/sector not opened to private sector investment IX. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandary, Pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea Plantations) X. Real estate business, or construction of farm houses. Recently cigarette manufacturing industry has also been put on the negative list

Examples of Sectoral Guidelines Sector/ Activity FDI Cap/ Equity Sector/ Activity FDI Cap/ Equity Airports Greenfield Airports - Existing 100% 100% Floriculture, Horticulture, etc. 100% Scheduled Air transport services 49% - FDI, 100% - NRI Power (excl. atomic energy) 100% Mining 100% Coal & Lignite 100% Banking Pvt. Sector 74% (FDI + FII) Drugs & Pharma 100% Defence Production 26% NBFCs 100% Insurance 26% Refining (petroleum & natural gas) 49% - PSUs, 100% - Pvt. Wholesale/ Cash and carry trading 100% Newspapers 26% Special Economic Zones 100% Telecommunication Services 74% (incl FDI,FII,NRIs,etc)

International Portfolio Investment Portfolio investment represents purchases and sales of foreign financial assets such as stocks and bonds that do not involve a transfer of management control. International portfolio investments have become popular in recent years due to the desire of investors to diversify risk globally. Global investors may feel that they may also benefit from higher expected returns from some foreign markets. Such investments can be in the form of bonds (convertible and non-convertible) as well as equity (say in the form of ADRs/ GDRs). Investments may be made directly or through institutional investments (say FIIs).

Issue of shares by Indian companies under ADR/GDR An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). An Indian Company, which is not eligible to raise funds from the Indian Capital Market will not be eligible to issue ADRs/GDRs/ FCCBs The guidelines allow an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing ADRs and/or GDRs. The ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time

Issue of Shares by Indian Companies under ADRs/ GDRs Depositary Receipts (DRs) are negotiable securities issued outside India by a Depository Bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian Bank in India. DRs are traded in Stock Exchanges in the US, Singapore, Luxembourg etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs). In the Indian context, DRs are treated as FDI for applicable sectoral FDI guidelines

Issue of shares by Indian companies under ADR/GDR These instruments are issued by a Depository abroad and listed in the overseas stock exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually required in India. There are no end use restrictions except for a ban on deployment/ investment of these funds in Real Estate and the Stock Market. There is no monetary limit up to which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy and the foreign shareholding after issue should be in compliance with the FDI policy.

Issue of shares by Indian companies under ADR/GDR The ADR/GDR can be issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager of the issue. The Indian company will issue its rupee denominated shares in the name of the Overseas Depository and will keep the shares in the custody of the domestic Custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic Custodian, the Depository will issue ADRs/GDRs abroad. 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 the shares from the market for conversion into ADRs/GDRs. Re-issuance of ADRs/GDRs would be permitted to the extent of ADsRs/GDRs which have been redeemed into underlying shares and sold in the domestic market.

Issue of shares by Indian companies under ADR/GDR An Indian company can also sponsor an issue of ADR/GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs/GDRs can be issued abroad. The proceeds of the ADR/GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion.

Portfolio Investment Scheme Foreign Institutional Investors (FIIs) registered with SEBI and Nonresident Indians (NRIs) are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme (PIS). The FIIs who have been granted registration by SEBI should approach their designated Authorised Dealer bank (known as Custodian Bank), for opening a foreign currency account and/or a Non Resident Special Rupee Account. NRIs can approach the designated branch of any AD bank authorised by RBI to administer the Portfolio Investment Scheme for permission to open a NRE/NRO account under the Scheme for routing investments.

Investment by FIIs under PIS Reserve Bank has given general permission to SEBI registered FIIs/sub-accounts to invest under the PIS. Total holding of each FII/sub account under this Scheme shall not exceed 10% of the total paid up capital or 10% of the paid up value of each series of convertible debentures issued by the Indian company. Total holdings of all FIIs/sub-accounts put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures. This limit of 24% can be increased to the sectoral cap / statutory limit as applicable to the Indian company concerned, by passing a resolution of its Board of Directors followed by a special resolution to that effect by its General Body.

Accounts with ADs FIIs/sub-accounts can open a Foreign Currency denominated Account and / or a Special Non-Resident Rupee Account for the purpose. They can transfer sums from the foreign currency account to the rupee account for making genuine investments in securities in terms of the SEBI (FII) Regulations, 1995. The sums may be transferred from foreign currency account to rupee account at the prevailing market rate and the Authorised Dealer bank may transfer repatriable proceeds (after payment of tax) from the rupee account to the foreign currency account.

Allocation of Funds The SEBI registered FII shall restrict allocation of its total investment between equities and debt in the Indian capital market in the ratio of 70:30. The FII may form a 100% debt fund and get such fund registered with SEBI. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard.

Monitoring of Investment Position by RBI RBI monitors the investment position of FIIs/NRIs in listed Indian companies, reported by Custodian Banks on a daily basis in Forms LEC (FII) and LEC(NRI). When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit, which is 2% below the applicable limit, Reserve Bank will issue a notice to all designated branches of Authorised Dealer banks stating that any further purchases of shares of the particular Indian company will require prior approval of Reserve Bank. Once the shareholding by FIIs/NRIs reaches the overall ceiling / sectoral cap / statutory limit, Reserve Bank puts the company on the Ban List.

Foreign Institutional Investors Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard. FII Cap in govt. securities and T-bills is at present USD 6.00 billion, while FII investments in corporate debt (including debt oriented mutual funds) has been capped at USD 15 billion. Till June 2009, number of registered FIIs touched 1660, while number of registered sub-accounts crossed 5000.

Investments by NRIs In the case of NRIs under PIS it is to be ensured that the paidup value of shares/ convertible debentures purchased by an NRI on repatriation and non-repatriation basis under PIS route should not exceed 5% of the paid up capital/ paid up value of each series of debentures. The aggregate paid-up value of shares/ convertible debentures purchased by all NRIs should not exceed 10% of the paid-up capital of the company/paid-up value of series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company concerned passes a special resolution to that effect.

Investments by NRIs Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis. With effect from November 29, 2001, Overseas Corporate Bodies (OCBs) are not permitted to invest under the PIS in India. Further, the OCBs that have already made investments under the Portfolio Investment Scheme, may continue to hold such shares/convertible debentures till such time these are sold on the stock exchange.

Investments by Overseas Corporate Bodies (OCBs) Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least sixty per cent by Non-Resident Indians and includes overseas trust in which not less than sixty per cent beneficial interest is held by Non-Resident Indians, directly or indirectly, but irrevocably. OCBs have been de-recognised as a class of investors in India with effect from September 16, 2003.

Taxation Withholding tax rates for payment to non-residents are determined by the Finance Act passed by Parliament for each year. The current rates are: (i) Interest: 20% (ii) Dividends paid by domestic companies: Nil (iii) Royalties: 10% (iv) Technical Services: 10% (v) Any Other Services - Individuals: 30% of the Income, Companies: 40% of the net income The above rates are general and in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).

Direct Investment Outside India: Automatic Route Any Indian party has been permitted to make investment in JVs/WOS by submitting form ODA, duly completed to an Authorised Dealer up to the amounts: Up to 400% of the net worth of the Indian party as on the date of the last audited Balance Sheet. This ceiling will not be applicable where the investment is made out of balances held in Exchange Earners Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. Higher level of investments allowed in the energy and natural resources sectors such as oil, gas, coal and mineral ores. The investments in excess of 400 per cent of the net worth shall be made only with the prior approval of the Reserve Bank. Investments in Nepal allowed only in Indian Rs. Automatic route not available for investments in Pakistan.

Net Capital Inflows

India s External Debt

Government and Non-Government External Debt

India s External Debt Service Payments

India s International Investment Position