ISSUES IN INDIAN COMMERCE - NOTES OF International Finance:

NOTES OF International Finance: Introduction, Need, Importance, and Sources of Funds , Borrowings (ECB), American Depository Receipt (ADR), Global Depository Receipt (GDR).

Introduction to International Finance:

International finance refers to the branch of financial economics that deals with monetary interactions between countries. It encompasses various financial activities, including foreign exchange markets, international trade finance, international investment, and managing risks associated with international transactions. International finance plays a crucial role in the global economy, facilitating cross-border trade and investments.

Need for International Finance:

Global Trade:

 In an increasingly interconnected world, businesses engage in international trade, which requires mechanisms to facilitate currency exchange, risk management, and financing.

Access to Capital:

 Companies and governments often need access to international capital markets to raise funds for growth and development.

Diversification:

 International finance allows investors to diversify their portfolios, reducing risk by investing in different countries and currencies.

Risk Management: 

International finance provides tools for managing currency and interest rate risks, which are inherent in global transactions.

Importance of International Finance:

Promoting Economic Growth:

 International finance supports economic growth by facilitating trade, investment, and capital flow, which contribute to a country's development.

Currency Exchange: 

It enables the exchange of one currency for another, facilitating international trade and investments.

Risk Mitigation: 

Tools like derivatives and hedging strategies help mitigate currency and interest rate risks associated with cross-border transactions.

Capital Allocation:

 International finance helps allocate capital to its most productive uses, benefitting both investors and the recipient countries.

Sources of Funds in International Finance:

External Commercial Borrowings (ECB): 

ECB refers to loans or financial instruments borrowed by companies or governments from foreign sources. These funds are typically raised through bank loans, bonds, or commercial paper issued in international markets.

Foreign Currency Convertible Bonds (FCCBs): 

FCCBs are bonds issued by a company in a foreign currency. These bonds can be converted into the issuer's equity shares at a later date. They provide companies with an alternative source of financing and can be attractive to investors looking for potential equity participation.

American Depository Receipts (ADR): 

ADRs are certificates representing shares in a foreign company. They allow foreign companies to access U.S. capital markets and provide U.S. investors with a way to invest in foreign companies without buying foreign shares directly.

Global Depository Receipts (GDR): 

GDRs are similar to ADRs but are traded on international stock exchanges other than the United States. They enable foreign companies to raise capital in international markets while giving investors access to global investment opportunities.

Foreign Direct Investment (FDI):

 FDI involves making investments in foreign countries to establish new business operations or acquire significant ownership stakes in existing enterprises. FDI can be a major source of funds for both governments and businesses.

Foreign Portfolio Investment (FPI): 

FPI involves the purchase of foreign financial assets, such as stocks and bonds, with the expectation of financial return. It is a source of funds for countries seeking foreign capital investments.

Multilateral Organizations: 

Governments and institutions may obtain funding from international organizations like the International Monetary Fund (IMF) or the World Bank.

These sources of funds in international finance play a critical role in supporting cross-border trade, investment, and economic development, offering companies and governments various avenues to access global capital markets. 

External Commercial Borrowings (ECB):

External Commercial Borrowings (ECB) are a common method for companies and governments to raise funds from foreign sources, usually through loans or financial instruments. Here are the key aspects of ECB:

Purpose: 

ECB funds can be used for various purposes, including financing capital expenditure, project financing, investment in foreign joint ventures, or meeting foreign exchange requirements.

Sources: 

ECBs can be raised from various sources, such as foreign banks, financial institutions, and international capital markets.

Types: 

ECBs can take the form of commercial bank loans, foreign currency convertible bonds (FCCBs), or other financial instruments like fixed-rate bonds.

Regulations:

 The Indian government, for example, regulates ECBs through the Reserve Bank of India (RBI) and periodically revises the policy based on economic conditions and requirements.

Currency: 

ECBs can be denominated in foreign currencies, allowing companies to manage currency risk effectively. The choice of currency depends on the borrowing entity's needs and market conditions.

American Depository Receipt (ADR):

American Depository Receipts (ADRs) are certificates that represent shares in foreign companies and trade on U.S. stock exchanges. Here are key points about ADRs:

Purpose: 

ADRs enable foreign companies to access U.S. capital markets without directly listing their shares on U.S. exchanges. They provide U.S. investors with the opportunity to invest in foreign companies.

Levels: 

ADRs are typically categorized into different levels. Level I ADRs are less regulated and may not be listed on major U.S. exchanges, while Level II and III ADRs involve higher levels of disclosure and can be listed on exchanges like the NYSE or NASDAQ.

Custodian Banks:

 ADR programs are managed by custodian banks that hold the foreign company's shares and issue ADRs to U.S. investors. These banks also handle dividend payments and facilitate ADR trading.

Dividends: 

ADR investors may receive dividends in U.S. dollars, making it more convenient for U.S. investors. The custodian bank facilitates the conversion of foreign currency dividends.

Reporting Requirements: 

ADR issuers must adhere to U.S. Securities and Exchange Commission (SEC) reporting requirements, providing financial statements and disclosures in English.

Global Depository Receipt (GDR):

Global Depository Receipts (GDRs) are similar to ADRs but are traded on international stock exchanges outside the United States. Here's more about GDRs:

Purpose:

 GDRs allow foreign companies to access capital from international markets. They offer a way to attract global investment while making shares available to investors around the world.

Listing: 

GDRs are typically listed on exchanges such as the London Stock Exchange (LSE), Luxembourg Stock Exchange, or the Hong Kong Stock Exchange.

Custodian Banks: 

Just like ADRs, GDRs are managed by custodian banks that hold the foreign company's shares and issue GDRs. They also handle dividend payments and facilitate GDR trading.

Currency: 

GDRs can be denominated in various currencies, making them attractive to a diverse group of global investors.

Regulations:

 Issuers of GDRs must adhere to the regulations of the stock exchange on which they are listed, as well as international securities regulations.

Both ADRs and GDRs provide a way for foreign companies to access international capital markets, broaden their shareholder base, and increase their visibility among global investors. These instruments offer investors the opportunity to diversify their portfolios by investing in foreign companies without the complexities of trading directly on foreign exchanges.