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Essay: International business – global capital markets

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  • Published: 12 September 2015*
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With globalization, several companies have expanded their operations across borders which have led to the growth of global capital markets. Developments and improvements in technology have facilitated the movement of capital around the world, enabling the investors to buy and hold stocks in multiple currencies.
The International capital markets serves as link between the capital markets of individual countries. The international capital markets have enabled the companies to raise capital, whether debt or equity, in multiple currencies with maturity periods varying from one month to thirty years. The international capital market has broadly two segments namely:
‘ International Bond Market
‘ International Stock Market
The international bond market is a market where foreign currency bonds (both government and corporate bonds) are issued and traded across countries. The major reason responsible for the emergence and development of international bond market is the difference in the tax laws between countries.
It was in 1950s when the international bonds spurred on a significant scale. Yankee bonds were the most common and popular bonds at that time. These were dollar denominated bonds sold in US markets by issuers belonging to countries other than the US. In 1960, the SEC (Security Exchange Commission) of US started imposing strict regulations on these bonds which paved the way for the birth of Euro bonds.
In the last decade, the international bond market has almost doubled in its size due to the growth and spread of multinational companies.
‘ Foreign Bonds: It refers to a bond offered by a foreign entity to investors in a domestic market which is denominated in that country’s domestic currency. Foreign bonds are lucrative for the investors because they get to diversify their portfolio by addition of foreign content without having to deal with the exchange rate risk. These bonds are regulated by the authorities of economy in which they are issued and are generally given names according to the national markets in which they are issued. For example: Bulldog Bonds are pounds denominated bonds issued in United Kingdom by a foreign company. Similarly Samurai Bonds are yen denominated bonds issued in Japan by foreign companies.
‘ Euro Bonds: A Euro bond is a bond denominated in the currency other than that of the country in which it is issued. A French company selling a dollar denominated Eurobond in Japan is an example of Eurobond. Eurobonds account for around 80% of the bonds issued in international bond market. The first Euro bond was issued in 1963 by an Italian company, Autostrade.
Major differences between Foreign and Euro Bonds
‘ Denomination- Foreign bonds are denominated in the currency of the country in which the bonds are issued, whereas Euro bonds are denominated in the currency other than that of the country in which they are issued.
‘ Regulation- Foreign bonds are regulated by the authorities of the country in which they are issued, whereas Euro bonds are not governed by the rules and regulations of the country in which they are issued.
‘ Global Bonds: The concept of global bonds was created by World Bank and it was the first issuer of global bonds in 1989. These bonds can be issued simultaneously in several countries. Global bonds are more flexible as they can be offered in a country in whose
currency it is denominated as well as in other countries. These are generally issued by large multinationals which have a high credit rating.
‘ Cocktail Bonds: Cocktail bonds are one which are denominated in multiple currencies or basket of currencies such as SDRs (Special Drawing Rights) or ECUs (European Currency Unit). This type of bond provides currency diversification benefits to the investors.
‘ Straight Bonds: The interest rate, also known as the coupon rate is fixed in case of straight bonds i.e. the investors are paid regular and fixed interest payments during the life of the bond. These bonds have a specified maturity date on which the principal amount is returned.
‘ Floating Rate Bonds: Also known as floating rate notes or floaters, these bonds do not carry fixed interest rates rather the interest rate is tied to some reference rate such as LIBOR (London Interbank Offer Rate). The interest payments are generally paid quarterly or semi annually. These bonds were issued for the first time in Italy in 1970s.
‘ Zero Coupon Bonds: In case of zero coupon bonds, no interest is payable over the life of bonds. These bonds are sold at significant discount from the face value. And at maturity, the investor gets the full face value.
‘ Dual Currency Bonds: A dual currency bond is one which is issued in one currency and interest at fixed is also paid in the same currency, say pounds. However, the principal amount is paid in some other currency say dollars.
‘ Convertible Bonds: In case of convertible bonds, investor has an option to convert the bonds into fixed number of shares at a predetermined price and time.
Step-1: The issuer of the bonds approaches a commercial bank or investment bank and asks it to act as the lead manager and advice it on various aspects involved in the issue process. The lead manager is selected after a careful analysis of the performance of various investment banks. The lead manager then advises the issuer on the price, timing, size, and maturity of the issue suitable
for indicators prevailing in the international bond market. In return for the advisory services, the lead manager charges a fee which is known as management fees.
Step-2: After obtaining the advice from the lead manager, the issuer with the help of his accountant, legal consultant, auditor and others, prepares the prospectus and other legal documents. After the preparation of necessary documents, the issuer obtains the approval from regulatory authorities. After the receipt of approval, the issue is launched.
Step-3: The lead manager helps the issuer to get a credit rating from a well-recognized credit rating institution and also functions as the underwriter of the issue for which it charges underwriting fee.
Step-4: This is the stage where the sale of bonds begins. Generally, the lead manager act as the selling group and sells the bonds to the investors in return for commission. The issuer also appoints a trustee who has a duty to protect the interest of investors, especially in case of default by the borrower. Sometimes, the lead manager acts as the trustee.
The international stock or equity markets provide the platform to the companies to get their stock listed and traded on foreign stock exchanges like London or New York Stock exchange (NYSE). For example, Indian companies like ICICI Bank, Wipro, and Tata Motors have got their stock listed on New York stock exchange.
International stock markets enable the firms to mobilize funds from international investors. Investors in turn get the opportunity to diversify their portfolios by adding foreign content to it and also to improve the returns on their portfolios. Many a times, companies issue stock in foreign markets to evade the regulations in the domestic market, since rule and regulations differ across markets. The international integration of equity markets have led to the emergence of the concept of cross listing i.e. listing of the stock in the national stock exchange as well as one or more foreign stock exchange.
There are several benefits that a company gets by getting its stock listed on foreign stock exchange like:
‘ The investor base gets expanded and helps to increase the market price of the stock.
‘ The company gets recognized worldwide and more and more people become familiar with the company which in turn leads to increased demand and increased sales of the company’s products.
‘ The market standing of the company also improves when the company gets the approval for listing by the foreign stock exchange.
‘ As the ownership gets dispersed, the chances of hostile takeover are minimized as it becomes difficult for the firms to gain controlling interest.
5.1 Procedure to issue international equity
Step-1: The company that wants to issue international equity first approaches a lead manager, generally an investment bank. The lead manager after examining the prospects and the risks involved in the international market, advises the company about the size, price and the markets where the equity is to be issued. The issuer than prepares the prospectus and other necessary documents and also takes the necessary approvals from the regulatory authorities.
Step-2: The company then approaches an international depository in whose name the shares are issued. The depository is a bank or financial institution situated in the international market and serves as link between the issuer and investor.
Step-3: The depository appoints a custodian bank in consultation with the issuing company. The custodian bank holds the shares on behalf of the depository and is located in issuing company’s domestic country. After obtaining the approval from the regulatory authorities, the issuing company deposits the shares with the custodian bank.
Step-4: The custodian bank then informs the depository of the receipt of shares and asks the latter to issue depository receipts in lieu of the shares held. Depository receipts are instruments issued by depositories and they represent an interest in the underlying shares held by the depository in the issuing company.

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