Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – II - Question Paper

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Suggested Answers
International Finance and Trade II (222) : July 2006

part D : Case Study

1. For an Indian company, the option ranging from the domestic and international market would depend on a number of criteria, a few of which are listed below:

i. Currency Requirements: A decision has to be taken about the currency needs of the company, keeping in view the future expansion plans, capital imports, export earnings/potential export earnings. A conscious view on the exchange rate also needs to be taken.

ii. Pricing: Pricing of an international problem would be a factor of interests rates and the value of the underlying stock in the domestic market. Based on these factors, the problem price conversion (for convertible) premium would be decided. provided the arbitrage available ranging from interest rates in rupees and say, US dollars, and provided the strength of the rupee, as well as the resilience a company can have in its operations against exchange fluctuation risk, due to export earnings, it is possible to take advantage of the low interest rates that are prevailing in the international markets. The above is possible without dilution of the value of the underlying stock. This is so, because, in the case of international issues, open pricing/book building is possible, which has the advantage of allowing the foreign investors to set the premium ensuring transparency and creating price tension.

iii. Investment: At current greater flexibility is available in structuring an international problem in terms of pure equity offering, a debt instrument or a hybrid instrument like foreign currency convertible bond (FCCB). every company can take a view on instrument depending upon the financials of the company and its future plans.

iv. Depth of the Market: Relatively larger problems can be floated, marketed and absorbed in international markets more easily than in the domestic markets.

v. International Positioning: Planning for an international offering has to be a part of the long-term perspective of a company. An international problem positions the issuing company, for a much higher visibility and an international exposure. Besides, it opens up new avenues for further fund-raising activities.

vi. Regulatory Aspects: For an international issue, approvals are needed from the government of India and the Reserve Bank of India, whereas for a domestic problem the requirements to be satisfied are those of the SEBI and the stock exchanges.

Earning:   Approval pending.