has been indented with the required theories and practical outscale s.

1. REVIEW THE
OVERSEAS
SOURCES OF
FINANCE FOR
INDIAN
CORPORATE
- JANIKA MAHESHKUMAR

2. Sources of Finance: Sources of finance for business are equity, debt, debentures, retained earnings, term loans,
working capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in different
situations. They are classified based on time period, ownership and control, and their source of generation. It is ideal
to evaluate each source of capital before opting for it. Sources of capital are the most explorable area especially for the
the entrepreneurs who are about to start a new business. It is perhaps the toughest part of all the efforts. There are
various capital sources, we can classify on the basis of different parameters.
1.Long-Term Sources of Finance
2.Medium Term Sources of Finance
3.Short Term Sources of Finance
4.Owned Capital
5.Borrowed Capital
6.Internal Sources
7.External Sources

4. Long-Term Sources of Finance
Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more
depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building, etc of
business are funded using long-term sources of finance. Part of working capital which permanently stays with the
business is also financed with long-term sources of funds. Long-term financing sources can be in the form of any of
them:
•Share Capital or Equity Shares
•Preference Capital or Preference Shares
•Retained Earnings or Internal Accruals
•Debenture / Bonds
•Term Loans from Financial Institutes, Government, and Commercial Banks
•Venture Funding
•Asset Securitization
•International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR, etc.

5. Medium Term Sources of Finance
Medium term financing means financing for a period of 3 to 5 years and is used generally for two reasons. One,
when long-term capital is not available for the time being and second when deferred revenue expenditures like
advertisements are made which are to be written off over a period of 3 to 5 years. Medium term financing sources
can in the form of one of them:
•Preference Capital or Preference Shares
•Debenture / Bonds
•Medium Term Loans from
•Financial Institutes
•Government, and
•Commercial Banks
•Lease Finance
•Hire Purchase Finance.

6. Short Term Sources of Finance
Short term financing means financing for a period of less than 1 year. The need for short-term finance arises to
to finance the current assets of a business like an inventory of raw material and finished goods, debtors,
minimum cash and bank balance etc. Short-term financing is also named as working capital financing. Short
term finances are available in the form of:
•Trade Credit
•Short Term Loans like Working Capital Loans from Commercial Banks
•Fixed Deposits for a period of 1 year or less
•Advances received from customers
•Creditors
•Payables
•Factoring Services
•Bill Discounting etc.
•According to Ownership and Control:
Sources of finances are classified based on ownership and control over the business. These two parameters are
are an important consideration while selecting a source of funds for the business. Whenever we bring in
capital, there are two types of costs – one is the interest and another is sharing ownership and control. Some
entrepreneurs may not like to dilute their ownership rights in the business and others may believe in sharing
the risk.

7. Owned Capital
Owned capital also refers to equity. It is sourced from promoters of the company or from the general public by issuing
new equity shares. Promoters start the business by bringing in the required money for a startup. Following are the
sources of Owned Capital:
•Equity
•Preference
•Retained Earnings
•Convertible Debentures
•Venture Fund or Private Equity
Further, when the business grows and internal accruals like profits of the company are not enough to satisfy financing
requirements, the promoters have a choice of selecting ownership capital or non-ownership capital. This decision is up to
to the promoters. Still, to discuss, certain advantages of equity capital are as follows:
It is a long-term capital which means it stays permanently with the business.
There is no burden of paying interest or instalments like borrowed capital. So, the risk of bankruptcy also reduces.
Businesses in infancy stages prefer equity for this reason.

8. Borrowed Capital
Borrowed or debt capital is the finance arranged from outside sources. These sources of debt financing include the
the following:
Financial institutions, Commercial banks or The general public in case of debentures.
In this type of capital, the borrower has a charge on the assets of the business which means the company will pay
the borrower by selling the assets in case of liquidation. Another feature of the borrowed fund is a regular
payment of fixed interest and repayment of capital. Certain advantages of borrowing are as follows:
• There is no dilution in ownership and control of the business.
• The cost of borrowed funds is low since it is a deductible expense for taxation purpose which ends up saving on
on taxes for the company.
• It gives the business the benefit of leverage.

9. ACCORDING TO SOURCE OF GENERATION:
Based on the source of generation, the following are the internal and external sources of finance:

10. Internal Sources
The internal source of capital is the one which is generated internally by the business. These are as follows:
•Retained profits
•Reduction or controlling of working capital
•Sale of assets etc.
The internal source of funds has the same characteristics of owned capital. The best part of the internal sourcing of capital
capital is that the business grows by itself and does not depend on outside parties. Disadvantages of both equity and debt
debt are not present in this form of financing. Neither ownership dilutes nor fixed obligation/bankruptcy risk arises.
External Sources
An external source of finance is the capital generated from outside the business. Apart from the internal sources of funds,
funds, all the sources are external sources.
Deciding the right source of funds is a crucial business decision taken by top-level finance managers. The usage of the
wrong source increases the cost of funds which in turn would have a direct impact on the feasibility of the project under
concern. Improper match of the type of capital with business requirements may go against the smooth functioning of the
business. For instance, if fixed assets, which derive benefits after 2 years, are financed through short-term finances will
create cash flow mismatch after one year and the manager will again have to look for finances and pay the fee for raising
capital again.

11. EQUITY SHARE AND ITS TYPES
Equity share is a main source of finance for any company giving investors rights to vote, share profits and claim on
assets. Various types of equity share capital are authorized, issued, subscribed, paid up, rights, bonus, sweat equity
etc. The expression of the value of equity shares are in terms of face value or par value, issue price, book value,
market value, intrinsic value, stock market value etc.

12. AMERICAN DEPOSITORY RECEIPT
American Depository Receipt (ADR) is a certified negotiable instrument issued by an American bank suggesting the
the number of shares of a foreign company that can be traded in U.S. financial markets.
American Depository Receipts provide US investors with an opportunity to trade in shares of a foreign company.
When the ADRs did not exist, it was very difficult for an American investor to trade in shares of foreign companies
as they had to go through many rules and regulation.
To ease such hardship faced by American investors, the regulatory body Securities Exchange Commission (SEC)
introduced the concept of ADR which made it easier for an American investor to trade in shares of foreign
companies. American depository receipt fee varies from one cent to three cents per share depending upon the
ADR amount and its timing.
EXAMPLE: - Volkswagen, a German company trades on New York Stock Exchange. The investor in America can
easily invest into the German company, through the stock exchange. Volkswagen is listed on the American stock
exchange after complying the required laws. On other hand if the shares of Volkswagen are listed in stock markets
of countries other than US then it is termed as GDR.

13. AMERICAN DEPOSITORY RECEIPT (ADR) PROCESS
•The domestic company, already listed in its local stock exchange, sells its shares in bulk to a U.S. bank to get
itself listed on U.S. exchange.
•The U.S. bank accepts the shares of the issuing company. The bank keeps the shares in its security and issues
issues certificates (ADRs) to the interested investors through the exchange.
•Investors set the price of the ADRs through bidding process in U.S. dollars. The buying and selling in ADR
shares by the investors is possible only after the major U.S. stock exchange lists the bank certificates for
trading.
•The U.S. stock exchange is regulated by Securities Exchange Commission, which keeps a check on necessary
compliances that need to be complied by the foreign company.

14. ADVANTAGES OF AMERICAN DEPOSITORY RECEIPT (ADR)
Following are the advantages of ADRs:
• The American investor can invest in foreign companies which can fetch him higher returns.
• The companies located in foreign countries can get registered on American Stock Exchange and have its shares trades in two
different countries.
• The benefit of currency fluctuation can be availed.
• It is an easier way to invest in foreign companies as there are no restrictions to invest in ADR.
• ADR simplifies tax calculations. Trading in shares of foreign company in ADR would lead to tax under US jurisdiction and not in
in the home country of company.
• The pricing of shares of foreign companies in ADR is generally cheaper. Hence it provides additional benefit to investors.
DISADVANTAGES OF AMERICAN DEPOSITORY RECEIPT (ADR)
The following are the disadvantages of American Depository Receipts:
• Even though the transactions in ADR take place in US dollars, still they are exposed to the risk associated with foreign
exchange fluctuation.
• The number of options to invest in foreign companies is limited. Only a few companies feel the necessity to register
themselves through ADR. This limits the choice available to US investor to invest.
• The investment in companies opting for ADR often becomes illiquid as an investor needs to hold the shares for the long term
term to generate good returns.
• The charges for the entire process of ADR are mostly transferred on investors by foreign1 companies.
• Any violation of compliance can lead to strict action by the Securities Exchange Commission.

15. Conclusion
ADRs provide the US investors with ability to trade in foreign companies shares. ADR makes it easier and convenient
convenient for the domestic investors in US to trade in foreign companies shares. ADR provides the investors an
opportunity to diversify their portfolio by investing in companies which are not located in America. This eventually
leads to investors investing in companies located in emerging markets, thereby leading to profit maximization for
investors.

16. GLOBAL DEPOSITORY RECEIPT
Global Depository Receipt (GDR) is an instrument in which a company located in domestic country issues one or more
more of its shares or convertibles bonds outside the domestic country. In GDR, an overseas depository bank i.e. bank
outside the domestic territory of a company, issues shares of the company to residents outside the domestic territory.
territory. Such shares are in the form of depository receipt or certificate created by overseas the depository bank.
Issue of Global Depository Receipt is one of the most popular ways to tap the global equity markets. A company can
raise foreign currency funds by issuing equity shares in a foreign country.
GLOBAL DEPOSITORY RECEIPT EXAMPLE
A company based in USA, willing to get its stock listed on German stock exchange can do so with the help of GDR. The
The US based company shall enter into an agreement with the German depository bank, who shall issue shares to
residents based in Germany after getting instructions from the domestic custodian of the company. The shares are
issued after compliance of law in both the countries.

17. GLOBAL DEPOSITORY RECEIPT MECHANISM
•The domestic company enters into an agreement with the overseas depository bank for the purpose of issue of
of GDR.
•The overseas depository bank then enters into a custodian agreement with the domestic custodian of such
company.
•The domestic custodian holds the equity shares of the company.
•On the instruction of domestic custodian, the overseas depository bank issues shares to foreign investors
.
•The whole process is carried out under strict guidelines.
•GDRs are usually denominated in U.S. dollars.

18. ADVANTAGES OF GDR
The following are the advantages of Global Depository Receipts:
•GDR provides access to foreign capital markets.
•A company can get itself registered on an overseas stock exchange or over the counter and its shares can be traded in
more than one currency.
•GDR expands the global presence of the company which helps in getting international attention and coverage.
•GDR are liquid in nature as they are based on demand and supply which can be regulated.
•The valuation of shares in the domestic market increase, on listing in the international market.
•With GDR, the non-residents can invest in shares of the foreign company.
•GDR can be freely transferred.
•Foreign Institutional investors can buy the shares of company issuing GDR in their country even if they are restricted to
buy shares of foreign company.
•GDR increases the shareholders base of the company.
•GDR saves the taxes of an investor. An investor would need to pay tax if he purchases shares in the foreign company,
whereas in GDR same is not the case.

19. DISADVANTAGES
The following are the disadvantages of Global Depository Receipts:
•Violating any regulation can lead to serious consequences against the company.
•Dividends are paid in domestic country’s currency which is subject to volatility in the forex market.
•It is mostly beneficial to High Net-Worth Individual (HNI) investors due to their capacity to invest high amount in GDR.
•GDR is one of the expensive sources of finance.
Conclusion
GDR is now one of most important sources of finance in today’s world. With globalization, every company is willing to
expand its wings. GDR makes it possible for such companies to reach and tap international markets. GDR provides
companies in emerging markets with opportunities for rapid growth and development.

20. BONDS AND THEIR TYPES
Bond is a financial instrument whereby the
issuer of the bond raises (borrows) capital
or funds at a certain cost for certain time
period and pays back the principal amount
on maturity of the bond. Interest paid on
bonds is usually referred to as coupon. In
simple words, a bond is a loan taken at a
certain rate of interest for a definite time
period and repaid on maturity. From a
company’s point of view, the bond or
debenture falls under the liabilities section
of the balance sheet under the heading of
Debt. A bond is similar to the loan in many
aspects however it differs mainly with
respect to its tradability. A bond is usually
tradable and can change many hands
before it matures; while a loan usually is
not traded or transferred freely

21. YANKEE BONDS
A dollar-denominated bond issued in the US by an issuer who is outside the US is called as Yankee bond.
KEY TAKEAWAYS
 A Yankee bond is a debt obligation denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and
corporation, and sometimes even governments.
 Yankee bonds are subject to U.S. securities laws, as they trade on U.S. exchanges.
 Yankee bonds offer the issuer to chance to get cheaper financing and reach a broader investment audience; they offer
investors the chance for better yields.
 On the downside, Yankee bonds can take a long time to come to market, subjecting them to interest rate risk; they are
also vulnerable to currency risk and other problems in their home country's economy.
Yankee bonds are frequently issued in tranches, individual portions of a larger debt offering or structured financing
arrangement that have differing risk levels, interest rates and maturities, and offerings may be extremely large, as much
as $1 billion.

22. There are also Yankee certificate of deposits, CDs that are issued in the United States by a branch or agency of a foreign bank.
Advantages of Yankee Bonds
Yankee bonds can represent a win-win opportunity for both issuers and investors. One of the primary potential advantages for a Yankee bond issuer is the
opportunity to obtain cheaper financing capital at a lower cost if comparable bond rates in the United States are significantly lower than the current rates in a
foreign company’s own country. The size of the U.S. bond market and the fact U.S. investors very actively trade it also confers an advantage for the issuer,
especially if the bond offering is a large one. Although U.S. regulatory requirements may initially hamper a foreign issuer in regard to obtaining approval to offer
bonds, conditions for lending in the United States may still be less stringent overall than those in the issuer’s own country, allowing the issuer greater flexibility in
terms of the offering.
A major advantage for U.S. investors in Yankee bonds is such bonds frequently offer higher yields than the yields available on comparable, or even lower-rated, bond
issues from U.S. issuers. Another potential advantage is the fact that Yankee bonds offer investors a means of obtaining international diversification in a portfolio of
bond investments. Yankee bonds also offer U.S. investors an advantage over investing in foreign corporation bond issues made in the foreign company’s home
country. Since Yankee bonds are denominated in U.S. dollars, the currency risk commonly associated with foreign bond investments is virtually eliminated.
Disadvantages of Yankee Bonds
One of the drawbacks of Yankee bonds for issuers is the time involved. Because of strict U.S. regulations for the issuing of such bonds, it can take more than three
months for a Yankee bond issue to be approved for sale. The approval process includes an evaluation of the issuer’s creditworthiness by a debt-rating agency such
as Moody’s or Standard & Poor’s.
Another consideration is the interest rate environment. Foreign issuers usually favor issuing Yankee bonds when there is a low-interest-rate environment in the
United States, since that means the issuer can offer the bond with lower interest payments. But should something send interest rates soaring or plummeting in three
months, it could mess up the carefully calibrated pricing of the Yankee bond, affecting how well it sells.
Finally, a Yankee bond can be affected by the economy of its home country. So if that country has a shaky economy, its price could topple, or the issuer could run
into problems—which could affect its coupon payments. And while the Yankee bond is issued in dollars, it could be vulnerable to some currency risk as well, as a
nation's economic woes often affect its money's performance in the foreign exchange markets.

23. SAMURAI BONDS

24. What are Rupee Denominated Bonds or Masala Bonds?
A rupee denominated bond is a bond issued by an Indian entity in foreign markets and the interest payments and principal
reimbursements are denominated (expressed) in rupees.
The peculiarity of rupee denominated bond is that buying of bonds, interest payments and repayment all are expressed in
rupees. All payments are converted into corresponding dollar values at the time of payment. The term ‘masala bond’ is also
used to describe rupee denominated ever since the first issuer of rupee-denominated bonds used the name masala bonds in its
its first issue. RBI in its August 2016 regulations also used this name.
Why the masala bonds are attractive for foreign investors?
For the foreign investor, the rupee denominated bonds is attractive as it will give him higher interest rate compared to the
standard interest rate prevailing in their markets. On an average, the rupee denominated bonds have an interest rate of 2 to 3 %
higher compared to the standard LIBOR (London Interbank Offer Rate).
An additional benefit of rupee denominated bonds is that it will encourage foreign buyers to deal more in rupees (and products
that help them to reduce exchange rate risks). Hence, internationalization of rupee can be promoted by rupee denominated
bonds.
The International Finance Corporation (IFC) – a World Bank affiliate is the first major issuer of rupee denominated bonds in the
name tag of ‘masala bonds’. Later, in September 2015, the RBI came out with detailed regulatory guidelines for the issue of
rupee denominated bonds. As per the RBI’s regulation on masala bonds, the money can be used only for infrastructure financing
purposes. In August 2016, the RBI allowed banks to issue masala bonds to procure money to meet their capital needs and to
collect fund to finance infrastructure projects. The overall guidelines for rupee denominated bonds will be same as that for
External Commercial Borrowings.

25. External Commercial Borrowings (ECB)
ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to
parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The
parameters apply in totality and not on a standalone basis. The framework for raising loans through ECB (herein after referred
to as the ECB Framework) comprises the following three tracks:
• Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years. 5Manufacturing
sector companies may raise foreign currency denominated ECBs with minimum average maturity period of 1 year.
• Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
• Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years. 6Manufacturing sector
companies may raise INR denominated ECBs with minimum average maturity period of 1 year.
Loans including bank loans;
Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially
convertible preference shares / debentures);
•Buyers’ credit;
•Suppliers’ credit;
•Foreign Currency Convertible Bonds (FCCBs);
•Financial Lease; and
•Foreign Currency Exchangeable Bonds (FCEBs)
However, ECB framework is not applicable in respect of the investment in Non-convertible Debentures (NCDs) in India made by
Registered Foreign Portfolio Investors (RFPIs).

26. Currency of Borrowing: ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees. Further details
are given below:
i. In case of Rupee denominated ECB, the non-resident lender, other than foreign equity holders, should mobilise Indian Rupees
Rupees through swaps/outright sale undertaken through an AD Category I bank in India.
ii. Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency as well as to INR is
is freely permitted. Change of currency from INR to any foreign currency is, however, not permitted.
iii. Change of currency of ECB into INR can be at the exchange rate prevailing on the date of the agreement between the parties
parties concerned for such change or at an exchange rate which is less than the rate prevailing on the date of agreement if
consented to by the ECB lender.
Security for raising ECB: AD Category I banks are permitted to allow creation of charge on immovable assets, movable assets,
financial securities and issue of corporate and/ or personal guarantees in favor of overseas lender / security trustee, to secure
the ECB to be raised / raised by the borrower, subject to satisfying themselves that:
•the underlying ECB is in compliance with the extant ECB guidelines,
•there exists a security clause in the Loan Agreement requiring the ECB borrower to create charge, in favour of overseas lender /
security trustee, on immovable assets / movable assets / financial securities / issuance of corporate and / or personal guarantee,
and
•No objection certificate, as applicable, from the existing lenders in India has been obtained.

27. Conclusion
Though external commercial borrowings come at lower costs, it comes with various restriction and guidelines that need to be
followed. There exists restriction on the amount and maturity of the ECB. ECBS above $ 20 million need to be of minimum
average maturity of 5 years and below $ 20 million should have a minimum average maturity of 3 years. There are restrictions
with regards to end use of the funds too. The companies may use it for expansion, but they cannot use it for onward lending,
real estate investments, repayment of existing loans and many such limitations. ECBs are one of the commonly availed sources
of cheaper funds by eligible companies. However, the companies need to be cautious about the exchange rate risk and impact
on balance sheet debt to use it effectively.

31. • It is evident from above that it is essential that good governance practices must be effectively implemented and enforced
preferably by self-regulation and voluntary adoption of ethical code of business conduct and if necessary, through relevant
regulatory laws and rules framed by Government or its agencies such as SFBI, RBI.
• The effective implementation of good governance practices would ensure investors confidence in the corporate companies
which will lead to greater investment in them ensuring their sustained growth. Thus, good corporate governance would
greatly benefit the companies enabling them to thrive and prosper.
• Further, in the context of liberalization and globalisation there is growing realization in the emerging economies including
India that a country’s business environment must be maintained and operated in a manner that is conducive to investors’
confidence so that both domestic and foreign investors are induced to make adequate investment in corporate companies.
This will be conducive to rapid capital formation and sustained growth of the economy.
• Some persons regard certain good corporate practices as ‘irritants’ to the growth of their businesses since they require the
implementation of minimum standards of corporate governance. However, fact of the matter is that the observance of
practices of good corporate governance will ensure investors’ confidence in the companies which have record of good
corporate governance.
• Further, it needs to be emphasized that practices and principles of good corporate governance have been evolved which
stimulate business rather than stifle it. In fact in good corporate governance structure what is ensured is that companies
must preferably follow voluntarily ethical code of business conduct which are conducive to the expansion of investment in
them and ensure good outcome in terms of rates of return.

32. • The ministry of corporate affairs (MCA) is close to releasing a draft report which will pave way for Indian companies to list
their shares in overseas markets without listing in India first, two regulatory officials aware of the matter said.
• The ministry will propose changes to Foreign Exchange Management Act (FEMA), Income Tax Act and Companies Act, the
officials said on condition of anonymity. These will include amendments on taxing share transfers in India and adding
enabling provisions under the Companies Act 2013 to allow listing of certain classes of securities on stock exchanges in
permissible foreign jurisdictions. The proposal was cleared by the Union cabinet in March.
• FEMA would be amended to include a category of ‘permissible investors’ from select jurisdictions. These companies will also
be governed by the rules of the jurisdiction in which they are listed,” said the first of the two persons, both of whom spoke
on condition of anonymity.
• Currently, a company incorporated in India can list on a foreign stock exchange only after it is listed in India. MakeMyTrip,
which is listed on Nasdaq, had to incorporate itself in Mauritius to facilitate overseas listing without going public in India.
• After the Union cabinet green-lighted the proposal in March, finance minister Nirmala Sitharaman reiterated the policy
intent in May, on the last of a five-day-long series of announcements on the Rs20 trillion financial package to ease covid-19
related hardships.

33. • The idea for overseas listing was first floated by a committee set up by the Securities and Exchange Board of India (Sebi). In its
recommendations in December 2018, it said listing Indian companies abroad would require simultaneous easing of provisions
of taxation and foreign exchange management act (FEMA) among others.
• FEMA, at present, does not contemplate a company incorporated in India and listed on a foreign stock exchange selling shares
to a person resident outside India. Companies Act 2013 currently has rules for public offers and private placements of
securities, is applicable to all companies incorporated in India, including companies that issue ADRs/GDRs as well as those
which would propose to list their equity shares on foreign stock exchanges.
• The ministry is also in favor of allowing listing in certain key permissible jurisdictions. These jurisdictions will have strong anti-
money laundering norms, know your client norms and would need to be compliant with foreign action task force (FATF).
• A Sebi discussion paper had suggested 10 permissible jurisdictions which have strong anti-money laundering laws such as US,
UK, China, Japan, Hong Kong, South Korea, Switzerland, France, Germany, Canada.
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