Euro issue is a name given to sources of finance or capital available to raise money outside the home country in foreign currency. The most commonly used sources of funds that fall under Euro issues are American Depository Receipts (ADR), Global Depository Receipts (GDR), and Foreign Currency Convertible Bonds (FCCB) among others.
Let us try and understand each of these sources of finance used by companies to raise capital:
Global Depository Receipts (GDR)
Under GDR option, the company is permitted to issue equity shares and companies can keep them in the custody of a domestic custodian. The overseas depository bank, upon instruction from domestic custodian bank, issues fresh securities in the nature of GDR for the foreign market against shares kept under local custodian bank.
All this happens under strict guidelines permitted by the government of India. In simple words, this essentially is a process of issuing securities in a foreign country by a foreign depository bank which are authorised by the issuing company in the domestic country. These are denominated in foreign currency, usually in U.S. dollars and are listed on exchanges outside the home country.
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.
Foreign Currency Convertible Bonds (FCCBs)
FCCBs are very similar to bonds in nature and can be converted into an equity stock by the bond holder at a later date at a pre-agreed price. These, like ADR and GDR, are issued by Indian companies outside the home country in foreign currency. These enjoy higher preference as they are issued as bonds, but at the same time, do not dilute the holding on an immediate basis and can help companies to raise money at a cheaper rate of interest. The FCCBs issued by companies also have to be done within the set of guidelines permitted by the government of India.
Let us have a look at some of the major advantages and limitations of Euro issues to enable the better understanding of the concept and understand why companies find it attractive to raise money through this route.
Advantage of Euro issues
- Raising funds by way of euro issue acts as a cheap source of foreign currency funds for the company without exchange risks especially for companies that have foreign currency receivables.
- In a case of funding by way of equity, debt to equity ratios and debt service coverage ratio wouldn’t be an issue.
- Euro issues provide a larger market and international access to funds and may lead to easy larger volume funding which may be difficult from domestic sources. It opens up many new opportunities for the companies in new markets.
- Companies gain international exposure and can enhance liquidity for its shares.[adsense_bottom]
Despite many advantages of euro issues making it an attractive source of finance for companies, there are few limitations of euro issues which need to be evaluated before choosing the right option. The limitations are given below:
- Though euro issues are usually available at lower costs, companies which do not have adequate receivables may run currency exchange risk and may have to incur hedging costs which may turn out to be higher than the cost saved.
- Not all companies can avail funds via euro issues. The companies have to follow the guidelines issued by Reserve Bank of India and meet the criterions to avail funding through this route.
- Companies may have to undergo stake dilution if raised by way of equity or convertible bonds.
Conclusion: Companies have enough motivation to raise funds from foreign markets despite some of the limitations as listed above. The government of the country has its own set of worries which still remain a matter of debate. Capital flowing out of the country and money laundering probabilities has remained prime concerns of the regulator and hence there exists various restrictions by the government on the amount, tenure, and sectors where such funding can be availed. With financial markets interlinking globally and increasing transparency and prudent regulatory guidelines, raising funds through these sources are likely to grow much more in future than now.1,2