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International Finance for Indian Companies
Workshop on Project FinanceOrganised by WIRC of ICAI
Shailendra JindalC.E.O., Continental Capital AdvisorsMumbai, November 12, 2011
Agenda
Overview of International Finance
Convertible Bonds
Debt for Indian Companies
Q & A
Equity for Indian Companies
Overview of International Finance
Overview of International Finance
Private Equity
GDRS
Overseas Listing
FDI from other sources
ConvertibleEquityDebt
Syndicated Loans
Project Finance
Mezzanine Debt
International Bonds
Medium Term Notes
Floating Rate Notes
Short-term Borrowings
FCCB
Why International Finance?
Diversify investor base
Saturation of limits with the Domestic investors
To reduce financing costs
Create International/ Global Profile
Preserve scarce Domestic bank lines
Flexibility in terms of shifting between fixed/floating rates
and switching between currencies
Lower costs for servicing the debt
Help minimize time commitment from management
Refinance existing debt at competitive cost
Longer debt maturity profile -10 years and more
Create benchmark for future capital markets’ financing
Diversify investor base
Saturation of limits with the Domestic investors
To reduce financing costs
Create International/ Global Profile
Preserve scarce Domestic bank lines
Flexibility in terms of shifting between fixed/floating rates
and switching between currencies
Lower costs for servicing the debt
Help minimize time commitment from management
Refinance existing debt at competitive cost
Longer debt maturity profile -10 years and more
Create benchmark for future capital markets’ financing
Debt for Indian Companies
External Commercial Borrowings (ECB’s)- Legal Framework
External Commercial borrowings are one of the modes for sourcing of funds for corporate. ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route.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. In case of doubt as regards eligibility for the Automatic Route, Approval Route may be taken.
External Commercial borrowings are one of the modes for sourcing of funds for corporate. ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route.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. In case of doubt as regards eligibility for the Automatic Route, Approval Route may be taken.
Automatic Approval
ECB – Eligible Borrowers
Exim bank for specific purposesBanks/ FIs for textile or steelsector restructuring packageInfrastructure Finance NBFC’sFCCBs by HFCs satisfyingspecified critriaSPV’s notified by RBI forfinancing infrastructure Multi-state Co-op Soc in mfgSEZ developersCorporate in service Sector formore than US$ 200 mErring corporateCases falling outside AR
Banks
Financial institutions
Housing Finance Companies
NBFC’s
Individuals
Trusts
Non-Profit making Organizations
Not EligibleApproval RouteAutomatic Route
Indian Corporate including those in hotel, hospital and softwaresectorsInfrastructure Finance Cos
Units in SEZ
NGOs engaged in micro finance
ECB’s – Amount and Maturity
5NGO’s in Micro finance
750Other Corporate
200Hotel, Hospital and Software cos.
Max amount in US $ million
Borrower under Automatic Route
5NGO’s in Micro finance
1000ECB in RMB by Infrastructure sector
250Additional ECB by other corporate with average maturity of more than 10 years
750Other Corporate
200Hotel, Hospital and Software cos.
Max amount in US $ million
Borrower under Approval route
1. ECB up to USD 20 m in a financial year should have a minimum average maturity of 3 years.
2. ECB above USD 20 m should have minimum average maturity of 5 Years
ECB’s and Trade Credits- All-in-cost ceilings
* For the respective currency of borrowing or applicable benchmark.
1. Overseas Borrowings for 3 years or more are ECB’s and Less than 3 years are Trade Credits extended for imports.
2. All-in-cost includes rate of interest, other fees and expenses in foreign currency
3. All-in-cost does not include commitment fee, pre-payment fee and fees payable in Indian rupees
4. All-in-cost does not include withholding taxes payable in Indian rupees
6 Month Libor + 500 bpsMore than 5 years
6 Month Libor + 300 bpsBetween 3 and 5 Years
All-in-cost Ceilings over 6 months LIBOR*ECB Maturity
6 Month Libor + 200 bpsLess than 3 years
All-in-cost Ceilings over 6 months LIBOR*Trade Credits Maturity
ECB – End Use
Import of Capital GoodsNew ProjectsModernization/ ExpansionInfrastructure sectorService Sector viz. Hotels, Hospitals, SoftwareOverseas Direct investmentRefinancing of payment forSpectrumTake out financing forInfrastructureFirst Stage acquisition of disinvestment process in PSU’s and also themandatory second stage offer
On- lending
Investment in Capital Market
Acquiring a Company in India
Money market Mutual Funds
Real Estate Sector
Working Capital
General Corporate Purpose
Repayment of existing Rupee
loans
Not allowedApproval RouteAutomatic Route
Import of Capital GoodsNew Projects
Modernization/ Expansion
Infrastructure sector
Service Sector viz. Hotels,
Hospitals, Software
Overseas Direct investment
First Stage acquisition of
disinvestment process in PSU’s
Micro Credit
Payment for Spectrum
Infrastructure Finance Cos
C
Ba, B, Caa, Ca
Baa
A
Aa
Aaa
Moody’s Rating
In defaultD
Speculative grade. Major risk exposureBB, B, CCC
Adequate capacity to repay. Adverse economic conditions could hurt
BBB
Strong capacity to repay, somewhat susceptible to change in economic conditions
A
Very strong capacity to repayAA
Extremely strong ability to pay principal and interest
AAA
DenotesS&P Rating
Ratings for International Finance
•Moody’s appends numerical modifiers 1, 2 and 3 and S & P appends + or -signs to show relative standing within the major rating categories.
•Fitch has rating parameters similar to S & P
Syndicated Loans - Snapshot
Maturity Up to 7 years (Usually 5 years)
Lenders Entirely Banks - relationship oriented
Pricing The lowest priced option for offshore
borrowing
Liquidity Low
Ratings Not necessary
Documentation Mostly standard with some variations
Disclosure Basic
Timing 6-8 weeks
Advantages Lower Costs and Quicker disbursals
Disadvantages Only Commercial banks, limited appetite and
lower tenure
Project Finance
Financing structure for a green field project.
Generally Project Specific, SPV level.
Can be procured directly from Foreign Banks, Multilateral
Financial Institutions.
Must be physically isolated and provide the lender some type of
tangible security
Overseas banks may secure the assets directly or through
custodians.
Used heavily for high dollar projects in oil, gas, power,
infrastructure etc
Used extensively in infrastructure and large Greenfield projects
Financing structure for a green field project.
Generally Project Specific, SPV level.
Can be procured directly from Foreign Banks, Multilateral
Financial Institutions.
Must be physically isolated and provide the lender some type of
tangible security
Overseas banks may secure the assets directly or through
custodians.
Used heavily for high dollar projects in oil, gas, power,
infrastructure etc
Used extensively in infrastructure and large Greenfield projects
Mezzanine Debt
Mezzanine capital, in finance, refers to a subordinated debt or
preferred equity instrument that represents a claim on a company's
assets which is senior only to that of the common shares.
Mezzanine financings can be structured either as debt (typically an
unsecured and subordinated note) or preferred stock.
Mezzanine capital is often a more expensive financing source for a
company than secured debt or senior debt.
Mezzanine financings are often used by smaller companies and may
involve greater overall leverage levels than issuers in the high-yield
market; as such, they involve additional risk.
In compensation for the increased risk, mezzanine debt holders require
a higher return for their investment than secured or other more senior
lenders.
Mezzanine capital, in finance, refers to a subordinated debt or
preferred equity instrument that represents a claim on a company's
assets which is senior only to that of the common shares.
Mezzanine financings can be structured either as debt (typically an
unsecured and subordinated note) or preferred stock.
Mezzanine capital is often a more expensive financing source for a
company than secured debt or senior debt.
Mezzanine financings are often used by smaller companies and may
involve greater overall leverage levels than issuers in the high-yield
market; as such, they involve additional risk.
In compensation for the increased risk, mezzanine debt holders require
a higher return for their investment than secured or other more senior
lenders.
Usually refers to a company in Country A issuing bonds in Country B in
Country B’s currency
Country B = ?
US: Yankee Bonds
Netherlands: Rembrandt Bonds
Japan: Samurai Bonds
UK: Sterling Bonds
Can also mean a company in Country A issuing bonds in Country B not in
Country B’s currency
Term “Euro”may be misleading
Not restricted to European issuers/investors
Usually refers to a company in Country A issuing bonds in Country B in
Country B’s currency
Country B = ?
US: Yankee Bonds
Netherlands: Rembrandt Bonds
Japan: Samurai Bonds
UK: Sterling Bonds
Can also mean a company in Country A issuing bonds in Country B not in
Country B’s currency
Term “Euro”may be misleading
Not restricted to European issuers/investors
International Bonds
Bonds issued internationally outside home country’s market in own or
different currency
For example, a US firm issues a dollar bond outside the US
A firm issuing yen bonds outside Japan
When a Japanese firm issues yen bonds in the Euromarket, it’s a
Sushi bond
Eurobonds are sold in a number of countries by a syndicate of
underwriters
Bonds issued internationally outside home country’s market in own or
different currency
For example, a US firm issues a dollar bond outside the US
A firm issuing yen bonds outside Japan
When a Japanese firm issues yen bonds in the Euromarket, it’s a
Sushi bond
Eurobonds are sold in a number of countries by a syndicate of
underwriters
Euro Bonds
Euro Bonds market- Snapshot
Maturity Up to 10 years
Investors Widespread institutional and retail investor base
outside the U.S.
Pricing Priced over benchmark U.S. Treasuries. Pricing
spread is generally wider for institutional investors
Liquidity Potentially good if well syndicated and distributed
Ratings Advisable but not necessary
Documentation Standard Euromarket
Disclosure Sufficient to meet London or Luxembourg Stock
Exchange requirements
Timing 4-6 weeks
Profile Wide international publicity
End Use Subject to RBI/MoF approval
Maturity Up to 10 years
Investors Widespread institutional and retail investor base
outside the U.S.
Pricing Priced over benchmark U.S. Treasuries. Pricing
spread is generally wider for institutional investors
Liquidity Potentially good if well syndicated and distributed
Ratings Advisable but not necessary
Documentation Standard Euromarket
Disclosure Sufficient to meet London or Luxembourg Stock
Exchange requirements
Timing 4-6 weeks
Profile Wide international publicity
End Use Subject to RBI/MoF approval
International Bonds
Issuer IDBI
Issue Size US$250 Million
Issue Format Reg S
Issue Type Senior Unsecured
Issue Ratings Baa3 (Moody’s) /BB Stable (S&P) / BB+ Stable (Fitch)
Reoffer Spread 5-year UST + 162.5 bps (Mid-swap + 125 bps)
Coupon 5.125% (semi-annual)
Price 99.695%
Listing Singapore
Pricing Date December 17 2004
Settlement Date December 23 2004
Maturity Date December 23 2009
Medium Term Notes
Senior debt securities with fixed coupons and investment grade
ratings
Non-callable and unsecured
Differ from bonds
Money raised in small pieces
Money raised in a continuous process with a shelf offering
Issuers announce a schedule of yields and maturities
While not always medium term, they tend to have maturity of 1 to
10 years
Market making activity
Senior debt securities with fixed coupons and investment grade
ratings
Non-callable and unsecured
Differ from bonds
Money raised in small pieces
Money raised in a continuous process with a shelf offering
Issuers announce a schedule of yields and maturities
While not always medium term, they tend to have maturity of 1 to
10 years
Market making activity
Floating Rate Notes
Maturity Up to 7 years (although 5 years is a more
popular maturity)
Investors Banks and Institutional Investors
Pricing FRN Investors normally demand approx. 20-50
bps more than Syndicated Loans
Ratings Not necessary but can help
Documentation Euromarket Standard
Disclosure Sufficient to meet London or Luxembourg SE
requirements (more accommodating than SEC)
Timing 4-6 weeks
Profile Wide international publicity
End Use Subject to RBI/MoF approval
Short-term Borrowings- Trade credits
Trade Credits’ (TC) refer to credits extended for imports directly by
the overseas supplier, bank and financial institution for maturity of
less than three years. AD banks are permitted to approve trade
credits for imports up to US$ 20 m per transaction.
Depending on the source of finance, such trade credits include
suppliers’ credit or buyers’ credit.
Suppliers’ credit relates to credit for imports into India extended by
the overseas supplier, while buyers’ credit refers to loans for
payment of imports into India arranged by the importer from a bank
or financial institution outside India for maturity of less than three
years.
It may be noted that buyers’ credit and suppliers’ credit for three
years and above come under the category of External Commercial
Borrowings (ECB) which are governed by ECB guidelines.
Trade Credits’ (TC) refer to credits extended for imports directly by
the overseas supplier, bank and financial institution for maturity of
less than three years. AD banks are permitted to approve trade
credits for imports up to US$ 20 m per transaction.
Depending on the source of finance, such trade credits include
suppliers’ credit or buyers’ credit.
Suppliers’ credit relates to credit for imports into India extended by
the overseas supplier, while buyers’ credit refers to loans for
payment of imports into India arranged by the importer from a bank
or financial institution outside India for maturity of less than three
years.
It may be noted that buyers’ credit and suppliers’ credit for three
years and above come under the category of External Commercial
Borrowings (ECB) which are governed by ECB guidelines.
Equity for Indian Companies
Eligible instruments for FDI
Only equity shares, fully, compulsorily and mandatory convertible
debentures and fully, compulsorily and mandatory convertible
preference shares, with no in-built options of any type, would qualify as
eligible instruments for FDI.
Equity instruments issued/transferred to non-residents having in-built
options or supported by options sold by third parties would lose their
equity character and such instruments would have to comply with the
extant ECB guidelines.
Other types of Preference shares/Debentures i.e. non-convertible,
optionally convertible or partially convertible for issue of which funds
have been received on or after May 1, 2007 are considered as debt.
Accordingly all norms applicable for ECBs relating to eligible borrowers,
recognized lenders, amount and maturity, end-use stipulations, etc.
shall apply.
Only equity shares, fully, compulsorily and mandatory convertible
debentures and fully, compulsorily and mandatory convertible
preference shares, with no in-built options of any type, would qualify as
eligible instruments for FDI.
Equity instruments issued/transferred to non-residents having in-built
options or supported by options sold by third parties would lose their
equity character and such instruments would have to comply with the
extant ECB guidelines.
Other types of Preference shares/Debentures i.e. non-convertible,
optionally convertible or partially convertible for issue of which funds
have been received on or after May 1, 2007 are considered as debt.
Accordingly all norms applicable for ECBs relating to eligible borrowers,
recognized lenders, amount and maturity, end-use stipulations, etc.
shall apply.
FDI limits – Illustrative list
Existing Airports 100%
ARC’s 49%
Titanium Minerals 100%
Tea plantations 100%
Broadcasting*
Courier 100%
Print Media* 26%
Single brand retailing 51%
Cigars & Cigarettes
Atomic energy
Retail trading*
Lottery, betting and gambling
Chit fund, Nidhi company
Trading in TDR’s
Negative ListApproval RouteAutomatic Route
NBFC * IT / ITes
Financial services*
Telecom Sector (74% cap)*
Insurance (26 % cap)*
Real Estate*
Special Economic Zones
Infrastructure
Shipping
Manufacturing sector
Hotels and tourism
Agriculture
* Subject to conditions
Equity for Indian Companies ( FDI)
Private Equity
American Depository Receipts (ADR’s)
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.
ADR’s are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas.
ADR’s help to reduce administration and duty costs that would otherwise be levied on each transaction
Global Depository Receipts (GDR’s)
A bank certificate issued in more than one country for shares in a foreign company.
The shares are held by a branch of an international bank.
The shares trade as domestic shares, but are offered for sale globally through the various bank branches.
A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros
Overseas Listing
FDI from Other Sources
Private Equity
American Depository Receipts (ADR’s)
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.
ADR’s are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas.
ADR’s help to reduce administration and duty costs that would otherwise be levied on each transaction
Global Depository Receipts (GDR’s)
A bank certificate issued in more than one country for shares in a foreign company.
The shares are held by a branch of an international bank.
The shares trade as domestic shares, but are offered for sale globally through the various bank branches.
A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros
Overseas Listing
FDI from Other Sources
Convertible Bonds
Foreign Currency Convertible Bonds (FCCB) are
Type of convertible bond issued in a currency different than the issuer's
domestic currency.
A convertible bond is a mix between a debt and equity instrument.
It acts like a bond by making regular coupon and principal payments, but
these bonds also give the bondholder the option to convert the bond into
stock.
Foreign Currency Convertible Bonds (FCCB) are
Type of convertible bond issued in a currency different than the issuer's
domestic currency.
A convertible bond is a mix between a debt and equity instrument.
It acts like a bond by making regular coupon and principal payments, but
these bonds also give the bondholder the option to convert the bond into
stock.
What are FCCBs ?
FCCBs – Snapshot
FCCBs are very effective instruments for raising funds overseas
FCCBs represent an unsecured debt obligation for the Corporate.
Investors have the option to convert them into GDRs or underlying shares
at a predetermined future conversion price.
If investors prefer to hold the Bonds till maturity date, the Corporate has to
redeem the Bonds on that date.
FCCBs are unrated.
FCCBs can be issued only by listed companies except those restrained by
SEBI, otherwise a prior or simultaneous listing in required on Indian Stock
Exchanges.
FCCBs are very effective instruments for raising funds overseas
FCCBs represent an unsecured debt obligation for the Corporate.
Investors have the option to convert them into GDRs or underlying shares
at a predetermined future conversion price.
If investors prefer to hold the Bonds till maturity date, the Corporate has to
redeem the Bonds on that date.
FCCBs are unrated.
FCCBs can be issued only by listed companies except those restrained by
SEBI, otherwise a prior or simultaneous listing in required on Indian Stock
Exchanges.
FCCBs –Indian Legal Framework
Foreign Direct Investment (FDI) Policy
Relevant provisions of the Companies Act, 1956
Relevant clauses of the Listing Agreements with the Stock Exchanges
Issue of FFCB and Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993
Foreign Exchange Management (Transfer or issue of any Foreign Security)
Regulations, 2004
External Commercial Borrowings (ECB) guidelines
Foreign Exchange Management (Transfer or Issue of Security by a person
resident outside India) Regulations, 2000
Foreign Direct Investment (FDI) Policy
Relevant provisions of the Companies Act, 1956
Relevant clauses of the Listing Agreements with the Stock Exchanges
Issue of FFCB and Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993
Foreign Exchange Management (Transfer or issue of any Foreign Security)
Regulations, 2004
External Commercial Borrowings (ECB) guidelines
Foreign Exchange Management (Transfer or Issue of Security by a person
resident outside India) Regulations, 2000
Issuance of FCCBs are primarily governed by following regulations:
FCCB Process – Stage 1
ISSUER
Decide on FCCB issue
Seek Board approval
Appoint all participants
Prepare Offer Memorandum Listing Circular - in line with Overseas Stock Exchange regulations
LEAD MANAGER
Liaise with potential investorsOffer MemorandumInvestor conference calls Obtain FCCB Term sheet
Vet listing particularsEnsure it complies with disclosure requirements of Overseas Stock Exchange
Co-ordinate with all participants
Apply to Stock Exchange for in-principle approvalTo RBI for obtaining Loan Number
FCCB Process – Vetting & Approval
Issuer
• Make changes as required by Stock Exchange
• Obtain approval
Prepare Final listing particulars
LEAD MANAGER
Send Draft listing particulars to Overseas Stock Exchange for Comments and Approval
Feedback fromSE
Open Escrow Account with overseas Bank to collect FCCB proceeds
Circulate Final Listing particulars, subscription letter to all investors
Consult Issuer, all participants and Fix FCCB opening & closing dates
All participants
FCCB Process – Collection of Application Money and Distribution of FCCBs
Issuer Lead Manager
Escrow Account
Investors
All participants
Trustee BankWire
transfe
r mon
ey
Subscription letter
Closing Date
FCCB distribution details
Transfer Securities
List FCCBs, Authorize release of money to Issuer
FCCB Money
Board Approval, Allot Bonds
About Continental Capital Advisors (CCA)
Investment Banking firm based at Mumbai with
network partners across the globe
Team of Expert PE advisors and Corporate
Finance Specialists
Services include:
- Raising Private Equity
- Local and Overseas Debt
- Promoter and Acquisition funding
- Overseas Listing/ QIP/ Placements
- Mergers & Acquisitions
- Overseas Business Consulting
- Corporate and Business Advisory Services
Investment Banking firm based at Mumbai with
network partners across the globe
Team of Expert PE advisors and Corporate
Finance Specialists
Services include:
- Raising Private Equity
- Local and Overseas Debt
- Promoter and Acquisition funding
- Overseas Listing/ QIP/ Placements
- Mergers & Acquisitions
- Overseas Business Consulting
- Corporate and Business Advisory Services
Communications
Email : [email protected]
Continental Capital Advisors
204 B, Town Centre No.2
Andheri Kurla Road, Andheri (E)
Mumbai, India 400069
Mr. Shailendra Jindal
Any clarifications can be addressed to the following:
C A Shailendra Jindal
Thanks for your patient hearing and Participation