Page 49 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes frame. The company places the equity shares, to be offered to the public with a sponsor or the
Merchant Banker. At the right time, the shares are off loaded to the public through the OTCEI
route or by way of public issue and the funds reach the company without much delay. Further,
it affords greater flexibility in terms of issue and matters relating to offloading. Major advantages
of entering into a bought out deal are:
 Companies both existing and new, which do not satisfy conditions laid down by SEBI for
premium issues, may issue at a premium through this route.

 The procedural complexities are reduced, and funds reach faster upfront. Added to this
there is significant reduction in issue cost.

 An advantage accruing to the investor is that the issue price reflects the company's intrinsic
value.

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?
(a) Public issue
(b) Rights issue
(c) Private placement

(d) Bought out deals

3.3.5 Euro Issues

The Government of India as a part of liberalization and deregulation 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 GDRs. 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

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