Notes on International Financial Market Prof. C P Ravindranathan

I. Two money market instruments: 1. Certificate of Deposit: Issued by a bank to indicate ownership of a large deposit (over $10,000) often by a company. A negotiable instrument, it can be bought and sold between the time it is issued and the time it is redeemed. 2. Commercial Paper: Short term debt instruments issued by important companies and banks, maturity 5 to 365 days, as large as $10,000 or as large as $1 million. In Euro currency market it is known as Euro Commercial Paper. II. Some important Indian companies which have used ADRs/GDRs: ICICI and HDFC have floated ADRs in the US while SBI, UTI and Kotak Mahindra have raised funds through GDRs

III. Why cross listing (listing of shares of common stock on two or more stock exchanges) 1. Improve the liquidity of existing shares and provided a liquid secondary market for new equity issues in foreign markets. 2. Increase share price by overcoming mispricing in a segmented and illiquid home capital market. 3. Increase the firm’s visibility and political acceptance to its customers, suppliers, creditors and home governments. 4. Establish a secondary market for shares that are used to acquire other firms in the host market (eg: Tata acquiring Corus in Europe) 5. Create a secondary market for shares that may be used to compensate local management and employees in foreign affiliates.

IV. Alternative Instruments to source equity in international markets  Sale of directed public share issue to investors in a target market  Sale of a Euro equity public issue to investors in more than one market including both foreign and domestic markets (international equity issues originating and sold anywhere in the world)  Private placements (Sale of a security to a small set of qualified institutional buyers)  Sale of shares to private equity funds (limited partnerships of institutional and wealthy individual investors  Sale of shares to a foreign firm as part of a strategic alliance.

V. Sourcing Debt Major Sources of Debt Funding:  International bank loans: Traditionally sourced in the Eurocurrency markets. Eurodollar bank loans are also called Eurocredits – given to MNEs, governments, other banks. (Euro currency : domestic currency of one country on deposit in a second country. Euro currency deposits are an efficient and convenient money market device for holding excess corporate liquidity and a major source of short term bank loans to finance corporations and their working capital needs including financing of imports and exports.  Euronote Market: Collective term for short to medium debt instruments sourced in Eurocurrency markets (Note is a written acknowledgement of a debt)  International Bond Market Has variety of instruments, falling within two classifications: Eurobonds and Foreign bonds

Eurobond: Underwritten by an international syndicate of banks and other security firms and sold in countries other than the country in whose currency the issue is denominated. Foreign Bond: Underwritten by a syndicate composed of members from a single country, sold principally within that country and denominated in the currency of that country. The issuer, however, is from another country (A bond issued by a firm resident in Germany, denominated in dollars and sold in the US to American investors is a foreign bond – “Yankee bond”)

International Finance Centres New York Stock Exchange: World’s biggest market for share trading. Merged with Euro next, a pan-European exchange. Nearest rival in US is NASDAQ London Stock Exchange : Surpasses New York in structured finance and new stock listings. Its Alternative Investment Market (AIM) is geared to smaller firms. Alternative Investment Market (AIM) London: A sub market of London Stock Exchange, now becoming an international exchange, for smaller firms to float shares with a more flexible regulatory system than applicable to the big companies. There are no requirements for capitalization or number of shares issued.

Other financial hubs in US: Chicago: World’s derivatives centre. Famous for its Mercantile Exchange. Houston: An active cluster of energy traders and hedge funds. in Europe: Frankfurt: An important centre for banking and derivatives. Geneva: Specialized in private banking and wealth management. Zurich: Specialized in insurance. Paris: Largest market in Europe for trading in mutual funds.

in Asia: Tokyo: World’s second largest share market and Asia’s biggest financial centre. Hong Kong: With half of market capitalization from mainland Chinese companies. Singapore: Noted for strengths in stocks, derivatives, private banking and wealth management. Shanghai: Comes after Tokyo and Hong Kong in value of equities traded. Mumbai: India plans to make it a leading financial centre of Asia

Dubai: Growing as a new financial centre, with offices of several global financial institutions (Its style cramped lately!) Qatar : An important hub for infrastructure finance. Bahrain: Well established in Islamic banking.