External Sources of Finance

This is finance that comes from outside the business. It involves the business owing money to outside individuals or institutions External sources of finance can either be: Foreign Direct Investment ADR/GDR Foreign Institutional Investment External Commercial Borrowings

Foreign Direct Investment Foreign Direct Investment or FDI is the investment in a country by some foreign country. It is usually a physical investment like building a factory or an office. It usually includes a parent company, who in the effort of expanding establishes its office as a permanent company in a foreign country. In this way the parent company gets the level of Multinational Company and its investment is known as FDI for the host country

ADR/GDR ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Every publicly traded company issues shares and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation). But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. But many good companies get listed on these stock exchanges indirectly using ADRs and GDRs. This is what happens: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).

These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares that is, it stores the shares on behalf of the receipt holders. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.

Foreign Institutional Investment An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market.

External Commercial Borrowings External commercial borrowing also known as Overseas Corporate borrowings is an additional source of funds to Indian Corporates as well as Public Sector Undertakings. This is specifically for expansion of existing capacity and also to expand the resources available domestically. In India, the ECB are permitted by the Govt. of India and further the access of Indian firms to foreign capital markets are monitored and regulated by the Ministry of Finance and the Reserve Bank. The ECB can be used for any purpose OTHERTHAN for investment in the stock market and real estate sector External Commercial Borrowings (ECB) are defined to include commercial bank loans, buyers credit, suppliers credit, securitized instruments such as floating rate notes, fixed rate bonds etc., credit from official export credit agencies,

commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB, AFIC, CDC etc. and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds.