Page 48 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes

Task A company is in dire need for funds but lost the confidence of its shareholders due
to the inadequate return on investments. Which of the following methods is/are suitable
to that company to raise funds? Why.
1. Public issue

2. Rights issue
3. Private placement
4. Bought out deals

3.3.5 Euro Issues

The Government of India as a part of liberalization and de-regulation of industry and to augment
the financial resources of Indian companies, has allowed the companies to directly tap foreign
resources for their requirements. The liberalized measures have boosted the confidence of
foreign investors and also provided an opportunity to Indian companies to explore the possibility
of tapping the European Market for their financial requirements. Where the resources are raised
through the mechanism of EURO ISSUES i.e., Global Depository Receipts (GDRs), Foreign
Currency Convertible Bonds (FCCB) and pure debt bonds. These investments are issued abroad
and listed and traded as a foreign stock exchange. Once they are converted into equity, the
underlying shares are listed and traded on the domestic exchange.
GDRs are created when the rising company delivers ordinary shares issued in the name of
overseas depository bank (depository) to the domestic custodian bank (who is an agent of the
depository) against which the depository issues GDRs representing the underlying equity shares
to the foreign investors. The physical possession of the shares remains with the depository and
the respective foreign investors obtain GDRs from the depository evidencing their holding. The
main advantage of the issue is that there is an inflow of foreign exchange through the proceeds
of the issue whereas the dividend outflow is in Indian rupees. The Department of Economic
Affairs, Ministry of Finance has given detailed Guidelines Regarding Issue of GD GDRs can be
treated freely among non-resident investors like any other dollar-dominated security either on
a foreign exchange market or in the OTC market.
Foreign currency convertible bond is an equity-linked unsecured debt instrument carrying a
fixed rate of interest and an option of conversion into fixed number of equity shares or GDRs of
the issuer company. However, the option to retain FCCB as a bond also exists. As a bond, the
issuer has the responsibility to repay the principal amount and make the specified interest
payment for the given period. These bonds are listed and traded on one or more such exchanges
abroad till conversion interest and well as redemption is paid in dollars or freely convertible
currency.

Self Assessment
Fill in the blanks:
6. The private placement method involves …………selling of securities to a limited number
of institutional or high net worth investors.
7. Foreign currency convertible bond is an equity-linked unsecured ………..instrument
carrying a fixed rate of interest.

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