CAIIB BFM Module C Unit 3 : International Equity and Debt Products

22/09/2023

Table of Contents

CAIIB Paper 2 BFM Module C Unit 3 : International Equity and Debt Products (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 2 (Bank Financial Management) includes an important topic called “International Equity and Debt Products”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 2 (BFM) Module C (TREASURY MANAGEMENT) Unit 3 : International Equity and Debt Products, Aspirants must go through this article to better understand the topic, International Equity and Debt Products and practice using our Online Mock Test Series to strengthen their knowledge of International Equity and Debt Products. Unit 3 : International Equity and Debt Products

Regulatory Environment

Foreign Investment in India is regulated in terms of clause (b) sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017.

‘Foreign Direct Investment’ (FDI) is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. If an existing investment by a person resident outside India in capital instruments of a listed Indian company falls to a level below 10 percent of the post issue paid-up equity capital on a fully diluted basis, the investment will continue to be treated as FDI.

Prohibited Sectors/Persons

Investment by a person resident outside India is prohibited in the following sectors:

Lottery Business including Government/ private lottery, online lotteries.
Gambling and betting including casinos.
Chit funds (except for investment made by NRIs and OCIs on a non-repatriation basis).
Nidhi company.
Trading in Transferable Development Rights (TDRs).
Real Estate Business or Construction of Farm Houses.
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. The prohibition is on manufacturing of the products mentioned and foreign investment in other activities relating to these products including wholesale cash and carry, retail trading etc. will be governed by the sectoral restrictions laid down in Regulation 16 of FEMA 20(R).
Activities/ sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations.
Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Any investment by a person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan requires prior Government approval.

A person who is a citizen of Pakistan or an entity incorporated in Pakistan can, only with the prior Government approval, invest in sectors/ activities other than defence, space, atomic energy and sectors/ activities prohibited for foreign investment.

Global Depository Receipts (GDRs)

GDRs represent Receipts that entitle the holder to convert into specified number of equity shares of Indian Company. The Receipts are issued by a Depository abroad and are traded in overseas markets. They are negotiable Receipts. The underlying shares, issued by the Indian Company, are held by an Indian Custodian on behalf of the Overseas Depository. They are denominated in foreign currency.

The exchange risk on the GDR is borne by the overseas investor. The equivalent number of equity shares is fixed as per pricing norms of SEBI. On issuance of GDR, the equity of the issuing company increases. Therefore, its Debt Equity Ratio is not adversely affected. Dividend is paid out in Rupees to the Depository. The Depository is entitled to voting rights as it holds the equity shares on behalf of the GDR holders.

Important Point

A limited two way fungibility scheme is in operation by Government of India for ADRs/ GDRs.
Under this, a SEBI registered Stock Broker can purchase the shares from the market for conversion into ADRs/ GDRs.
Reissuance of ADR/GDR would be permitted to the extent of ADRs/GDRs that have been redeemed into underlying shares and sold in the domestic market.
As such, the total outstanding shares under the GDR issuance remains at same level of original issue for which approval would have been obtained from Ministry of Finance.
American Depository Receipts (ADRs) are traded only in US while GDRs are traded in other overseas markets too. Soliciting investors for ADRs can be done only from US and the disclosure standards of the document must comply with US GAAP accounting standards.

INDIAN DEPOSITORY RECEIPTS (IDRS)

Issue of IDRs Companies incorporated outside India may issue IDRs through a Domestic Depository, to a person resident in India and a person resident outside India. The issue of IDRs should comply with the Companies (Registration of Foreign Companies) Rules, 2014 and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
Any issue of IDRs by financial/ banking companies having presence in India, either through a branch or subsidiary, shall require prior approval of the sectoral regulator(s);
IDRs shall be denominated in Indian Rupees only;
The proceeds of the issue of IDRs shall be immediately repatriated outside India by the companies issuing such IDRs. Purchase/Sale of IDRs An FPI or an NRI or an OCI may purchase, hold or sell IDRs NRIs or OCIs may invest in the IDRs out of funds held in their NRE/ FCNR(B) account, maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. There would be an overall cap of USD 5 billion for raising of capital by issuance of IDRs by eligible foreign companies in Indian markets. This limit would be monitored by SEBI

Purchase/Sale of IDRs

An FPI or an NRI or an OCI may purchase, hold or sell IDRs NRIs or OCIs may invest in the IDRs out of funds held in their NRE/ FCNR(B) account, maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. There would be an overall cap of USD 5 billion for raising of capital by issuance of IDRs by eligible foreign companies in Indian markets. This limit would be monitored by SEBI

Transfer, Redemption and Two-Way Fungibility of IDRs

Redemption/ conversion of IDRs into underlying equity shares of the issuing company shall comply with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. IDRs shall not be redeemable into underlying equity shares before the expiry of one year from the date of issue.

Limited two way fungibility of IDRs is permissible.

Listed Indian companies may either sell or continue to hold the underlying shares subject to compliance with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
Indian Mutual Funds, registered with SEBI may either sell or continue to hold the underlying shares subject to compliance with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
Other persons resident in India including resident individuals are allowed to hold the underlying shares only for the purpose of sale within a period of 30 days from the date of conversion of the IDRs into underlying shares. The FEMA provisions shall not apply to the holding of the underlying shares, on redemption of IDRs by the FPIs.

External Commercial Borrowings

External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and nonpermitted end-uses, maximum all-in-cost ceiling, etc. The comprehensive guidelines are collectively referred to as ECB Framework, as detailed in Master Direction RBI/FED/2018-19/67 dated 26th March 2019, updated up to 12th April 2021.

Limit and leverage:

Under the aforesaid framework, all eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route.
Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1.
However, this ratio will not be applicable if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent. Further, the borrowing entities will also be governed by the guidelines on debt equity ratio, issued, if any, by the sectoral or prudential regulator concerned.
The automatic route limit stands increased from USD 750 million or equivalent to USD 1.5 billion or equivalent. This relaxation is available for ECBs to be raised till December 31, 2022.

Issuance of Guarantee, etc. by Indian banks and Financial Institutions:

Issuance of any type of guarantee by Indian banks, All India Financial Institutions and NBFCs relating to ECB is not permitted. Further, financial intermediaries (viz., Indian banks, All India Financial Institutions, or NBFCs) shall not invest in FCCBs/ FCEBs in any manner whatsoever.

Trade Credits

Trade Credits (TC) refer to the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for maturity, as prescribed in this framework, for imports of capital/ non-capital goods permissible under the Foreign Trade Policy of the Government of India. Depending on the source of finance, such TCs include suppliers’ credit and buyers’ credit from recognised lenders. TC for imports into India can be raised in any freely convertible foreign currency (FCY denominated TC) or Indian Rupee (INR denominated TC), as per the framework given in the table ahead:

Rupee Denominated Bonds

RBI, vide circular dated November 3, 2016, permitted banks to issue Rupee Denominated Bonds overseas for the following purposes. These shall be subject to all applicable prudential norms and FEMA guidelines.

Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital under the extant Basel III Capital Regulations
Debt capital instruments qualifying for inclusion as Tier 2 capital under the extant Basel III Capital Regulations
Financing of infrastructure and affordable housing

The “eligible amount” for purpose of issue of PDIs in foreign currency shall be, as on March 31 of the previous financial year, the higher of:

5% of Risk Weighted Assets (RWAs) and
Total Additional Tier 1 capital Not more than 49% of the “eligible amount” can be issued in foreign currency and/or in rupee denominated bonds overseas. However, RDBs issued have to be excluded from the limit for investments by FPIs in corporate bonds.

Download PDF

CAIIB Paper 2 (BFM) Module C Unit 3- International Equity and Debt Products ( Ambitious Baba )