INTERNATIONAL

FINANCIAL INSTRUMENTS
EURO CP ,Euro Bonds, Foreign Bonds,
Global Bonds, Euro Equity, ADR, GDRs
NAME OF THE FACULTY: Ms. N.
RADHIKA
 EURO COMMERCIAL PAPER (ECP)

• Another attractive form of short term debt instrument

that emerged during mid –  1980s came to be known
as Euro commercial paper (ECP). It is a promissory
note like the  short term Euro notes although it is
different from Euro notes in some ways. It is not
 underwritten, while the Euro notes are underwritten.
The reason is that ECP is issued only by  those
companies that possess a high degree of rating. Again,
the ECP route for raising funds  is normally investor
driven, while the  Euro notes is said to be borrower
driven.
 s
• ECP came up on the pattern of domestic market commercial papers that had a  beginning
in the USA and then in Canada as back as in 1950s. The prefix “Euro” means that  the
ECP is issued outside the country in the currency in which it is denominated. Most of the
 ECPs are denominated in US dollars, but they are different from the US commercial
papers  on the sense that the ECPs have longer maturity going up to one year. Moreover,
ECPs are  structured on the basis of all in costs, whereas in US commercial papers, various
charges,  such as front end fee and commission are collected separately.
• The detailed features of ECPs vary from one country to another. They involve market
 based interest rate, LIBOR. The issue is normally arranged through placement agents as
in  the case of Euro notes. The amount varies from US $ 10 million to US $ 1 billion or
above.  The ECPs are issued either in interest bearing form or in a discounted form with
interest built  in the issue price itself. On completion of the maturity, they are settled
generally at the  clearing houses, such as Cedel (Luxembourg), Euroclear (Brussels), First
Chicago (London)  or Chases Manhattan (London) so that the physical delivery is avoided.
The settlement is  complete normally within two days.
• ECPs face minimal documentation. Over and above, they are not underwritten. This is
 why their use has been large since their very inception.
 EUROBONDS
• Eurobonds: A Eurobond is a bond issued outside
the home country of the issuer through an
international syndicate and sold to investors
residing in various countries.
• Eurobonds would be debt investments
whereby an investor loans a certain amount of
money, for a certain amount of time, with a
certain interest rate, to the eurozone bloc
altogether, which then forwards the money to
individual governments.
• Eurobonds constitute a major source of borrowing in the Euro-currency market.
A bond is a debt security issued by the borrower, Which is purchased by the
investor and it involves in the process some intermediaries like underwriters
merchant bankers etc. Eurobonds are bonds of international borrowers sold in
different markets simultaneously by a group of international banks. The bonds
are issued on behalf of governments, big multinational corporations, etc.
• Eurobonds are unsecured securities and hence normally issued by Governments,
Governmental Corporations, and Local Bodies which are generally guaranteed by
the governments of the countries concerned and big multinational borrowers of
goods credit rating.
• The bonds are sold by a group of international banks, which form a syndicate.
The lead banks in the syndicate advise the issuer of the bond on the size of the
issue, terms and conditions, the timing of the issue, etc. And take up the
responsibility of coordinating the issue. Lead managers take the assistance of co-
managing banks. Each issue is underwritten by a group of underwriters and then
is sold.
• Types of Eurobonds
• Straight Euro-Bond: These bonds have fixed maturities and carry a fixed rate
of interest straight Eurobonds are repaid by amortization or in a lump sum at
the maturity date. Straight Euro-bonds are technically unsecured bonds
because almost all of them are not secured by any specific property of the
borrower. Because of this, bondholders become general creditors in the event
of default. The leaders usually look to the nature of the borrower’s assets, its
earning power, and its general credit strength.It has a specified interest coupon
and a specified maturity date.
• Convertible Euro-Bond: These bonds are convertible into parent common
stock and have become increasingly popular because the market for straight
euro-bonds has weakened. Convertible Euro-bonds provide investors with a
steady income and an opportunity to participate in rising stock prices.
International investors are inflation-conscious; they prefer convertible euro-
bonds which maintain the purchasing power of their money. The Eurobond is
a bond having a specified interest coupon and maturity date.
• Bond with Warrants: Some Euro-bonds are issued with warrants. A warrant is an
option to buy a stated number of common shares at a stated price during a
prescribed period. Warrants pay no dividends, have no voting rights, and become
worthless at expiration unless the price of the common stock exceeds the exercise
price.
• Currency option Bonds/ Multiple Currency-Bonds: Currency option bond allows
the bondholder receives the interest payment and the principle in any of the
currencies specified in the bond. The bondholder can choose the currency of their
coupon and principle from among the two or more currencies specified in the
bond at the pre-determined exchange rate.
• Currency Cocktail/ Currency Basket Bonds: Currency basket bonds have been
developed to stabilize the purchasing power of the coupon. This is accomplished
by combining various currencies as per some weighting process. The amount of
each currency in the basket generally remains constant but the value of the basket
changes, as some of the currencies depreciate or appreciate relative to each other.
• Yankee Bonds: Yankee bonds are a dollar bond issued in the U.S by non-
U.S borrowers/ companies. It may be any of the above kinds.
• Samurai Bonds: Samurai Bonds is a Yen denominated bond issued in
Japan by non-Japanese companies. This bond can also be of any of the
above kinds.
• Floating Rate Bonds: These bonds are frequently called Floating-Rate
Notes. The rate of return on these notes is adjusted at regular intervals,
usually every six months, to reflect changes in short-term market rates.
• Stripped Bonds: These bonds are bearer form bonds, easy to sell. U.S.
government first issued these for foreign investors. Treasury regulations
permit U.S. corporations to sell bearer bonds to foreign residents. Also,
securities firms may buy U.S. treasury securities, repackage them in
trusts, and resell claims on the trust to foreigners in bearer form. These
bonds are called stripped bonds.
 FOREIGN BONDS
• : Foreign bonds are issued by foreign issuers in a
foreign national market and are denominated in
the currency of that market. An example of a
foreign bond is a bond denominated in US dollars
issued by a German company in the United
States. ... Examples of foreign bonds are: Yankee
bonds traded in the United States, Bulldog bonds
traded in the United Kingdom, Samurai bonds
traded in Japan, and Matador bonds traded in
Spain.
 GLOBAL BOND
• A global bond is a bond which is issued in several countries
at the same time. It is typically issued by a
large multinational corporation or sovereign entity with a
high credit rating. By offering the bond to many investors,
a global issuance can reduce borrowing cost.
• These bonds are usually issued by large multinational
organizations and sovereign entities, both of which
regularly carry out large fund-raising exercises. By issuing
global bonds, an issuing entity is able to attract funds from
a vast set of investors and reduce its cost of borrowing.
• Global bonds are issued in different currencies and
distributed in the currency of the country where it
is issued. For example, a global bond issued in
the United States will be in US Dollars (USD),
while a global bond issued in the Netherlands will
be in euros. Bonds are loaned in terms of years; for
example, a three-year US$2 billion global loan will
be paid back by the country it is loaned to within
three years at face value plus the interest rate.
 AMERICAN DEPOSITORY RECEIPTS

• The ADRs are similar to GDR in all major

aspects; however the differentiating feature
is that the ADRs are more likely to be listed
and traded on New York Stock
Exchange while GDRs are usually listed on
exchanges in Europe.
• American Depositary Receipts (ADR) are negotiable security
instruments that are issued by a US bankTop Banks in the
USA.According to the US Federal Deposit Insurance Corporation,
there were 6,799 FDIC-insured commercial banks in the USA as of
February 2014.  that represent a specific number of shares in a foreign
company that is traded in US financial markets Primary MarketThe
primary market is the financial market where new securities are
issued and become available for trading by individuals and
institutions. The trading activities of the capital markets are separated
into the primary market and secondary market.. ADRs pay dividends
in US dollars and trade like regular shares of stock StockWhat is a
stock? An individual who owns stock in a company is called a
shareholder and is eligible to claim part of the company’s residual
assets and earnings (should the company ever be dissolved). The terms
"stock", "shares", and "equity" are used interchangeably.. Companies
can now purchase stocks of foreign companies in bulk and reissue
them on the US market. ADRs are listed on the NYSE, NASDAQ,
• Before the introduction of ADRs in 1927, investors in the US
faced numerous hurdles when attempting to invest in stocks
of foreign companies. American investors could purchase the
shares on international exchanges only, and that meant
dealing with currency exchange rates and regulatory
differences in foreign jurisdictions.
• They needed to familiarize themselves with different rules
and risks related to investing in companies without a US
presence. However, with ADRs, investors can diversify their
portfolio by investing in foreign companies without having to
open a foreign brokerage account.
• 
 HOW AMERICAN DEPOSITARY RECEIPTS WORK

• Investors willing to invest in American Depositary Receipts can purchase them from
brokers or dealers. The brokers and dealers obtain ADRs by buying already-issued
ADRs in the US financial markets or by creating a new ADR. Already-issued ADR can
be obtained from the NASDAQ or NYSE.
• Creating a new ADR involves buying the stocks of the foreign company in the issuer’s
home market and depositing the acquired shares in a depository bank in the overseas
market. The bank then issues ADRs that are equal to the value of the shares deposited
with the bank, and the dealer/broker takes the ADR to US financial markets to sell
them. The decision to create an ADR depends on the pricing, availability, and demand.
• Investors who purchase the ADRs are paid dividends in US dollars. The foreign bank
pays dividends in the native currency, and the dealer/broker distributes the dividends
in US dollars after factoring in currency conversion costs and foreign taxes.
• Such a practice makes it easy for US investors to invest in a foreign company without
worrying about currency exchange rates. The US banks that deal with ADRs require
the foreign companies to furnish them with their financial information, which
investors use to determine the company’s financial health.
 TYPESOF AMERICAN DEPOSITARY RECEIPTS

• The ADRs that are sold in US financial markets can be categorized into sponsored and
unsponsored.
• 1. Sponsored ADR
• For a sponsored ADR, the foreign company issuing shares to the public enters into an
agreement with a US depositary bank to sell its shares in US markets. The US bank is
responsible for recordkeeping, sale, and distribution of shares to the public, distribution
of dividends, etc. Sponsored ADRs can be listed on the US stock exchanges. 
• 2. Non-Sponsored ADR
• A non-sponsored ADR is created by brokers/dealers without the cooperation of the
foreign company issuing the shares. Non-sponsored ADRs are traded in US over-the-
counter markets without requiring registration with the Securities and Exchange
Commission (SEC).
• Before 2008, any brokers and dealers trading in ADRs were required to submit a written
application before being allowed to trade in the US. The 2008 SEC amendment provided
an exemption to foreign issuers that met certain regulatory conditions. Non-sponsored
ADRs are only traded on over-the-counter markets. 
 LEVELSOF AMERICAN DEPOSITARY RECEIPTS

• ADRs are grouped into three levels depending on the extent of the foreign company’s
access to the US trading market. 
• 1. Sponsored Level I
• Level I is the lowest level at which sponsored ADRs can be issued. It is the most common
level for foreign companies that do not qualify for other levels or that do not want their
securities listed on US exchanges. Level I ADRs are subject to the least reporting
requirements with the Securities and Exchange Commission, and they are only traded
over the counter.
• The companies are not required to issue quarterly or annual reports like other publicly
traded companies. However, Level I issuers must have their stock listed on one or more
exchanges in the country of origin. Level I can be upgraded to Level II when the
company is ready to sell through US exchanges.
• 2. Sponsored Level II ADRs
• Level II ADRs have more requirements from the SEC than Level I, and the company
gets an opportunity to establish a higher trading presence on the US stock markets. The
company must file a registration statement with the SEC.
• Also, the company must file Form-20-F in accordance with the GAAP or IFRS
standards. Form 20-F is the equivalent of Form-10-K, which is submitted by US publicly
traded companies. If the issuer fails to comply with these requirements, it may be
delisted or downgraded to Level I.
• 3. Sponsored Level III ADRs
• Level III is the highest and most prestigious level that a foreign
company can sponsor. A foreign company at this level can float a
public offering of ADRs to raise capital from American investors
through US exchanges. Level III ADRs also attract stricter
regulations from the SEC.
• The company must file Form F-1 (prospectus) and Form 20-F
(annual reports) in accordance with GAAP or IFRS standards. Any
materials distributed to shareholders in the issuer’s home country
must be submitted to the SEC as Form 6-K.
• Examples of foreign companies that have managed to enter this
ADR level include Vodafone, Petrobras, and China Information
Technology. 
• Termination or Cancellation
• ADRs are subject to cancellation at the discretion of either the
foreign issuer or the depositary bank that created them. The
termination results in the cancellation of all ADRs issued and
delisting from the US exchange markets where the foreign stock was
trading. Before the termination, the company must write to the
owners of ADRs, giving them the option to swap their ADR for
foreign securities represented by the receipts.
• If the owners take possession of the foreign securities, they can look
for brokers who trade in that specific foreign market. If the owner
decides to hold onto their ADR certificates after the termination, the
depositary bank will continue holding onto the foreign securities
and collect dividends but will not sell more ADR securities. 
 GLOBAL DEPOSITARY RECEIPTS (GDR’S)

• A depositary receipt (DR) is a type of negotiable (transferable)

financial security that is traded on a local stock exchange but
represents a security, usually in the form of equity, which is issued by a
foreign publicly listed company. The DR, which is a physical
certificate, allows investors to hold shares in equity of other countries.
One of the most common types of DRs is the American depositary
receipt (ADR), which has been offering companies, investors and
traders global investment opportunities since the 1920s. Since then,
DRs have spread to other parts of the globe in the form of global
depositary receipts (GDRs) (the other most common type of DR),
European DRs and international DRs. ADRs are typically traded on a
U.S. national stock exchange, such as the New York Stock Exchange
(NYSE) or the American Stock Exchange, while GDRs are commonly
listed on European stock exchanges such as the London Stock
Exchange. Both ADRs and GDRs are usually denominated in U.S.
dollars, but can also be denominated in Euros.
 AN OVERVIEW OF GLOBAL DEPOSITARY RECEIPTS

• Global Depositary Receipts (GDR’s)  are a type of straight

equity issues, which are issued in the offshore market.
These are essentially those instruments, which possess a
certain number of underlying shares in the custody of
a depository bank. It is a negotiable instrument, which
represents publicly traded local currency equity share. It
is an instrument in the form of a deposition receipt or
certificate issued by the overseas depositary bank outside
India and issued to non-resident investors against the issue
of ordinary shares or foreign currency convertible bonds
of the issuing company.
• If the depository receipt is traded in a country other than USA, it is called a Global
Depository Receipt, or a GDR. It represents a certain number of underlying equity
share. GDRs are not for investors in India – They can invest directly in the shares of
various Indian companies. But the GDRs are an excellent means of investment for
NRIs and foreign nationals wanting to invest in India. By buying these, they can
invest directly in Indian companies without going through the hassle of
understanding the rules and working of the Indian financial market–since GDRs are
traded like any other stock. NRIs and foreigners can buy these using their regular
equity trading accounts. Though the GDR is quoted and traded in dollar terms, the
underlying equity shares are denominated in rupees. GDR is issued through the
under writers, who arrange to sell the GDR to the investors. After the final issue, a
depository is chosen, and the company registers the equivalent equity shares of GDR
issue in the name of this depository. Though the shares are registered in the name of
this depository, the physical possession of the shares is with the local custodian, who
acts as the trustee of the depository. The depository subsequently issues the GDR to
the under-writer who distributes these negotiable instruments to the investors.
• So it is evident that the Indian capital market has remarkably changed through the
issue of GDRs and able to mobilize considerable foreign investment. The capital
market has become very active, and Financial Institutions (FIs), FIIs, Asset
management companies have shown increasing interest in investing in India. With a
view to achieve the goal, Euro-issue is taken as one of the viable alternatives. GDR is
envisaged as an innovative and easily accessible route to reach the international capital
market by Indian corporate sector. The response of foreign investment flows to
reforms was to a great extent encouraging. It clearly shows that the sizes of euro-issues
have grown tremendously just after new economy policy measures announced. A GDR
is a dollar denominated instrument listed and traded on foreign stock exchanges like
NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities
Dealers Automated Quotation) both. The Reliance Industries Ltd, in May 1992, made
the first GDR issue of $150 million. The first Indian GDR issues made by Reliance
Industries and Grasim Industries were at a premium. There are 22 ADR issues from
India between 2004 and 2009. Since ADRs are traded in the U.S. market they have
been considered as an alternative to such cross-border investments while ensuring a
higher diversification benefits.
• Global Depositary Receipts can be converted into equity shares by the cancellation of
GDRs through the intermediaries, if so desired by the investor and the sale of
underlying share in the domestic market through the local custodian. They are
treated as common equity of the issuing company and are eligible to receive dividends
and noting rights from the date of issuance. The depository receives the divided from
the company in local currency and distributes the same to the holders of GDRs into
dollars after converting them at the prevailing rate of exchange. The voting rights are
exercised by the depository as per the agreement between the company / issuer the
GDR holders.
• Global Depositary Receipts  are bearer securities and trading / settlements are done
through book entries through CEDEL (Clearing System for Eurobonds based in
Luxembourg, where Eurobonds are physically exchanged and stored) or Euroclear.
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and
building and investment in software development, prepayment or scheduled
repayment of earlier external borrowings, and equity investment in Joint Venture’s
etc.