In International Financial market, Foreign operations are nothing without Financing. In this Presentation I have tried to provide all the information regards Financing for foreign operations unit in Multinational financial management with the help of some references

1. Unit-IV: Financing for
Foreign Operations
Prepared by
Mr. Basavaraj M Naik
Assistant Professor
P.G. Department of Commerce
KLE’s SCPArts, Science and
DDS Commerce College, Mahalingpura

2. International Financing:
• When LPG (Liberalisation, Privatisation And Globalisation) was
accepted by the country in 1991, the aspect of Globalisation broadened
the avenues with which businesses can arrange funds. Prior to this
policy, firms were constrained only to the four walls of the country.
But after Globalisation came into the picture, the scope for raising
money expanded widely.

3. • International Financing:(also referred to as International
macroeconomics) is the branch of financial economics broadly
concerned with monetary relationships at a global level. It examines
the dynamics of foreign direct investment, exchange rates, balance of
payments, allocation of funds at the global level and other aspects of
financial management.
• International financing encourages monetary transactions between two
or more countries.

4. Sources of International Financing

5. • A. Commercial Banks: Commercial banks not only fund businesses
and firms in the home country rather it extends to the global level.
Commercial banks provide foreign currency loans and advances all
over the world. Loans are generally provided for business purposes.
Different banks across countries offer a different and wide range of
loans/advances and services to firms. The market of international
finances and the export-import industry is incomplete without
commercial banks. Commercial banks have a lot to offer in
international financing. Public, private and foreign banks are the types
of commercial banks.

6. • B. International Agencies and Developmental Banks: These are
named Developmental banks because these were introduced by the
government for developmental purposes only. International Agencies
and Developmental banks have emerged throughout the years with the
goal to fund finance internationally. These institutions were set up by
governments of developed countries to uplift and develop the weaker
section of the economy by making loans easily available. These loans
are usually advanced for a medium and long period of time. These
financial institutions are developed at local, regional and global levels.
Very common examples are EXIM Bank, European Investment Bank
(EIB), European Bank for Reconstruction and Development (EBRD),
Asian Developmental Banks (ADB), etc.

7. • C. International Capital Market: International Capital
Market exists with the aim of enhancing efficiencies in
economies and generating economies of scale. It is the most
consumed source of financing. Organisations in current times,
including global corporations, are dependent on a large
amount of funds in rupees in addition to foreign currency.
Under this source of international financing, there are several
financial avenues available which are as follows:

8. What Is Depository Receipt?
• When any foreign company or any foreign individual with the help of
Domestic Bank or Depository invests in the Domestic Companies
listed in the local stock exchange of that particular country’s currency,
the receipt offered to that individual is known as Depository Receipt.

9. 1. Global Depository Receipts (GDRs): GDR also known as International Depositary
Receipt(IDR). DR (Global Depository Receipt) is a negotiable financial instrument that is
issued by a foreign bank other than the US representing securities of a foreign company listed
in any country’s stock market other than the US. It is a certificate issued by a depositary bank,
which purchases shares of foreign companies and deposits it on the account. This can happen
by issuing securities and shares in foreign countries. The shares are first issued in the
currency of the domestic country. These shares are forwarded to a depository bank, and this
depository bank is then responsible for issuing depository receipts in exchange of these
shares.
• The denomination for these depository receipts or GDR is US Dollars. When it comes to
India, GDR is considered to be a financial instrument issued to raise foreign exchange, i.e.,
in foreign denominations than in Rupees. It is a negotiable instrument that can be traded
like any other instrument freely. Just like any other security, GDR can exchange hands very
easily.

11. • 2. American Depository Receipts (ADRs) : The American Depository Receipts
are quite similar to the Global Depository Receipts.
• The process of issuing shares in local currency and then sending the shares to the
depository bank to convert them into depository receipts remains as it is.
• The prime difference between both of the depository lies in the fact that ADRs can
only be issued in the USA.
• The sale and purchase of ADRs can only happen in the capital market of America.
These depository receipts are listed only on the stock exchange of the USA and
nowhere else. American Depository Receipts like GDRs are negotiable
certificates issued by a U.S. depository bank.
• With the issuance of ADRs, US investors get an opportunity to invest in overseas
companies, which would otherwise be not available to them. So this widens the
horizons of investing opportunities.

12. • ADR (American Depository Receipt) is a negotiable financial
instrument which is issued by a US bank representing securities of a
foreign company listed on the US stock market. The domestic
investors invest in the companies outside their country where the
dividend is paid to the ADR holders in US Dollars.

13. • 3. Indian Depository Receipts (IDRs): As the name implies, Indian
Depository Receipts are exclusively available in the Indian markets.
• IDR (Indian Depository Receipt) is a negotiable financial instrument
which is issued by the Indian bank representing the securities of a
foreign company listed in the Indian stock market. The US investors
invest in the companies outside their country that are in India, where
the dividend is paid to the IDR holders in Indian Rupees (INR).An
Indian Depository Receipt is a negotiable financial instrument. IDRs
are nothing, but an Indian version of Global Depository Receipts.
•

14. • The company need not necessarily follow the listing and regulatory
requirements of every country where it is willing to sell shares.

15. • 4. Foreign Currency Convertible Bonds (FCCBs): Foreign Currency
Convertible Bonds are a combination of debt and equity instruments.
• Foreign Currency Convertible Bonds (FCCBs) mean a bond issued
by an Indian company expressed in foreign currency, and the principal
and interest in respect of which n FCCB is a bond with a dual character
of debt and equity instrument. It acts like a bond making regular coupon
and principal payments and provides investors with an option to
convert them into equity. Therefore, upon maturity, the holders can
convert the equivalent value of equity at a set conversion rate. is
payable in foreign currency.

16. • Its functioning is quite similar to the Indian convertible financial
avenues.
• Issuance of Foreign Currency Convertible Bonds dilutes the
ownership, and earnings per share decrease for other shareholders.
• Here, holders cannot control the conversion rate.

17. Euro Markets
• It refers to the single market of the European Union (EU) in which
goods and services are freely traded between member countries, and
which have a common trade policy with non-EU countries.
• Euromarkets (occasionally called 'xenomarkets') are markets on
which banks deal in a currency other than their own. For example,
eurodollars are dollars held by banks outside the United States . The
prefix 'euro' refers to the fact that such deposits first appeared in
Europe in around 1955.

30. Special Financial Vehicles
• A Special Purpose Vehicle (SPV) is a legal object formed for a
specifically-defined single purpose. Its formation is done usually to
fulfil aims as stated by its creators such as isolating a companies assets
and/or projects.
• SPV is a separate legal entity created by an organisation
• SPV is a distinct company with its own assets and liabilities
• SPV has its own legal status
• SPV is created for specific purpose- is to isolate financial risk
• If the parent company goes bankrupt, the SPV can carry on.

31. How do special purpose vehicles work?
• A Special Purpose Vehicle (SPV) is a legal entity created for a specific
purpose. In the context of raising capital, an SPV (usually structured
as LLC) can be used as a funding structure, by which all investors (or
investors under a given investment threshold) are pooled together into
a single entity.

32. Example :
• Company ABC is a leading manufacturer of industrial equipment that uses
SPVs to reduce financial risk.
• One of the company’s SPVs has an independent board that consists of the
government that provides subsidies and permits for the operation of the SPV
contract, commercial banks that provide loans and credit facility, sponsor who
protect the parent. company’s minority investors and provide contracted
coverage of technical risk.
• The SPV company acts as a solution provider for equipment, technical
consulting, and IP licensing issues. Furthermore, it offers maintenance and
construction engineering contracts, and it serves as an operations and
commodity provider, offering continuing operations contracts and commodity
supply agreements.

33. • The advantages for the parent company ABC from operating the SPV
subsidiary involve high-level project management and risk
management that allows the company to efficiently collaborate with its
stakeholders and chain operators. In addition, the parent company can
finance its operations through long-term debt, government funding or
high net worth equity investors, without compromising its core
operations.

34. Interest Rate Swap
It is a financial contract between two parties to exchange of interest
payments on principal amount( Notional principal amounts are the
theoretical value that each party pays interest to the other at specified
intervals.) on multiple occasions during specific period.
Example: Ram and Sham are good friends. Ram is having Diesel car
and Sham has Petrol car. Both are not happy with their car due to some
unavoidable causes. Ram is thinking to get Petrol car while sham is
thinking to purchase Diesel car. They met one day and discussed
regards this subject.

35. They decided to swap their car not exactly but something like this
happens in interest rate swap.
The notional value/ principal value does not get swap but interest
rate get swap. A party is having loan with Fixed Interest rate while
B is having loan with floating interest rate. Both are not happy with
their interest rate payments.
These parties are entered into interest rate swap.
Party A is paying floating int rate while party B is paying fixed int
rate over specified period time.
Therefore here only only int rate is going swap not the principal
value.

36. Actual cash flow under Interest rate swap
agreement
• Let’s say Mr. X owns a $1,000,000 investment that pays him
LIBOR + 1% monthly. LIBOR stands for London interbank
offered rate and is one of the most used reference rates in the
case of floating securities. The payment for Mr. X keeps
changing as the LIBOR keeps changing in the market. Now
assume there is another guy Mr. Y who owns a $1,000,000
investment that pays him 1.5% every month. His payment
never changes as the interest rate assumed in the transaction
is fixed in nature.

37. • Now Mr. X decides he doesn’t like this volatility and would
rather have fixed interest payments, while Mr. Y explores a
floating rate to have a chance of higher payments. This is when
both of them enter into an interest rate swap contract. The terms
of the contract state that Mr. X agrees to pay Mr. Y LIBOR + 1%
every month for the notional principal amount of $1,000,000.
Instead of this payment, Mr. Y agrees to pay Mr. X a 1.5%
interest rate on the same principal notional amount. Now let us
see how the transactions unfold under different scenarios.

38. • Scenario 1: LIBOR standing at 0.25%
• Mr. X receives $12,500 from his investment at 1.25% (LIBOR standing at 0.25%
and 1%). Mr. Y receives a fixed monthly payment of $15,000 at a 1.5% fixed
interest rate. Under the swap agreement, Mr. X owes $12,500 to Mr. Y, and Mr. Y
owes $15,000 to Mr. X. The two transactions partially offset each other. The net
transaction would lead Mr. Y to pay $2500 to Mr. X.
• Scenario 2: LIBOR standing at 1.00%
• Mr. X receives $20,000 from his investment at 2.00% (LIBOR standing at 1.00%
and 1%). Mr. Y receives a fixed monthly payment of $15,000 at a 1.5% fixed
interest rate. Under the swap agreement, Mr. X owes $20,000 to Mr. Y, and Mr. Y
owes $15,000 to Mr. X. The two transactions partially offset each other. The net
transaction would lead Mr. X to pay $5000 to Mr. Y.

39. Currency rate swap:
• A currency swap is an agreement in which two parties
exchange the principal amount of a loan and the interest in
one currency for the principal and interest in another
currency.
• Interest rate swap- Only interest payments get swaped/
exchanged
• Currency swap- Generally principal amount is exchanged

41. Both company got the loan at competitive rate. Had this currency swap
been not there, then these both the company would borrow at high
interest rate, which will be again affecting their profitability.
Currency swap is very favorable for the companies who are dealing
internationally, get loan at competitively. It also helps the reduce the
risk.

42. Debt - Equity swap
• Debt/Equity Swap is an arrangement relating to financial restructuring
in which the debts of the company are converted into stock. Such an
arrangement is sought for when the company is into financial crisis
and the existing lenders are given an option to get the debt given by
them converted into equity at a pre-decided swap ratio.
• In the debt/equity swap, debt will be exchanged for equity. Thus, the
company will offer the lenders to get the outstanding amount
converted into the equivalent amount of equity shares of the company.

44. • Let us say, a company ABC Ltd was facing a financial crisis, and it
owes to its lender a total amount of $2,00,000. ABC Ltd offers to its
lender 25% shareholding in the company in exchange for the existing
amount of outstanding debt.
• This is a situation of debt/equity swap wherein the borrower asks its
lender to exchange the existing debt for equity.

45. International leasing
• Cross-border or international leasing can be used to both defer(
postpone) and avoid tax. It can also be used to safeguard the
assets of a multinational firm’s foreign affiliates and avoid
currency controls.
• A form of international financing assuming acquisition of
foreign property for a fee in temporary ownership and use.
• The international lease refers to the type of lease agreement
where one or more parties to the lease agreement reside or are
domiciled in different countries.

46. • Where firm known as lessor leases its equipment or machines to foreign
firm known as leases for a specific period of time.
Benefits of International leasing to the lessor:
• Revenue through leasing fees
• Fully utilisation of equipment or machines
• Business expansion
Benefits of International leasing to the lessee:
• Reduce financial burden
• Less hassle and no maintenance cost
• Easier way to access to foreign technologies and facilities.

47. Designing global financing strategy
• In selecting an appropriate strategy for financing its worldwide
operations, the MNCs must consider the availability of different
sources of funds and the relative cost and effects of these sources on
the firm’s operating risks.

48. Some of the key variables in the evaluation include:
• The firm’s capital structure ( Debt-Equity mix)
• Taxes
• Exchange risk
• Diversification of funds sources etc.

49. References:
• https://www.slideshare.net/Jasirgemz/euro-market
• https://byjus.com/free-ias-prep/special-purpose-vehicles-
spv/#:~:text=A%20special%20purpose%20vehicle%2C%20also,the%2
0parent%20company%20goes%20bankrupt.
• https://www.wallstreetmojo.com/interest-rate-swap-curve/
• https://www.google.com/search?q=debt+equity+swap&oq=debt+&a
qs=chrome.0.69i59j69i57j69i59j0i271l3.1868j0j4&sourceid=chrome&
ie=UTF-8