Its about the factors which influence in rising funds in the international market. Example include ECB, ADR, GDR AND Repatriation policies.

1. INTERNATIONAL
FINANCIAL
MANAGEMENT

2. INTRODUCTION
International Finance is an area of financial
economics that deals with monetary
interactions between two or more
countries, concerning itself with topics
such as currency exchange rates,
international monetary systems, foreign
direct investment, and issues of
international financial management
including political risk and foreign
exchange risk inherent in managing
multinational corporations.

3. Risk Feature involved in IFM
Foreign exchange risk
 financial risk that exists when a financial transaction is denominated in a currency other
than that of the base currency of the company.
Political risk
 The risk that an investment's returns could suffer as a result of political changes or
instability in a country. Instability affecting investment returns could stem from a
change in government, legislative bodies, other foreign policy makers, or military
control.
Market imperfections
 An imperfect market is a market where information is not quickly disclosed to all
participants in it and where the matching of buyers and sellers isn't immediate.
Generally speaking, it is any market that does not adhere rigidly to perfect information
flow and provide instantly available buyers and sellers.

4. What is a company’s motivation to
invest capital abroad?
 Fill product gaps in foreign markets where excess
returns can be earned.
 To produce products in foreign markets more
efficiently than domestically.
 To secure the necessary raw materials required for
product production.

5. How does a firm make an international
capital budgeting decision?
 Estimate expected cash flows in the foreign
currency.
 Compute their INR equivalents at the expected
exchange rate.
 Determine the NPV of the project using the Indian
required rate of return, with the rate adjusted
upward or downward for any risk premium effect
associated with the foreign investment.

6. Cont-Capital budgeting
decision
 Only consider those cash flows that can be
“repatriated” (returned) to the home-country parent.
 The exchange rate is the number of units of one
currency that may be purchased with one unit of
another currency.
 For example, the current exchange rate might be 69
rupee per one U.S. dollar.

7. Cost of Capital
 The cost of capital for foreign investment
projects should be based on the weighted
average cost of long term sources of
finance.
 While computing the cost of capital, cash
flows warrant adjustment not only for
corporate taxes but also for foreign
exchange risk, withholding taxes on
repatriations made and so on.

8. Cost of Debt
CI0 = ∑ (COI/{1+kd})+(COP/{1+kd})
 CI0 – effective cash inflows/ proceeds duly adjusted for
floatation cost and tax shield on it
 COI – cash outflow of interest duly adjusted for tax
advantage
 COP – principal repayment in the year of maturity.
Kd = ki (1-t)(1-d)(1+f) -d
 Ki - coupon rate of interest
 t - corporate tax rate
 f – floatation cost
 d – depreciation/ devaluation rate of currency

9. Cost of preference shares
P0(1-f) = ∑ (DP/{1+kp}t) + (Pn/{1+kp}n)
 P0 – expected sale price of preference shares
 F – floatation cost as percentage of P0
 DP – dividend paid on preference shares
 Pn - repayment of preference capital amount in the
year of maturity
Kp = DP (1+r) (1+f) + r

10. Cost of equity
Dividend Approach:
Ke = (D1/P0) + g
 D1 - expected dividend payment
 P0 - current market price of equity share
 g – growth in expected dividends
CAPM Approach:
Ke = Rf + b (Rm- Rf)
 Rf - risk free rate
 b – beta coefficient
 Rm- market return

11. Cost of retained earnings
Kr = ke (1-wt)(1-f)(1-c)
 wt – withholding taxes on earnings repatriated to the
parent company
 f – floatation cost
 c – cost of transfer

12. Multinational Working
Capital Management
Cash management
Credit management
Inventory management

13. Cash management
 To have sufficient cash to meet the cash disbursement
needs of the firm.
 Strategies to minimize operating cash balance
requirements:
 Speedy collection of accounts receivable
 Stretching accounts payable
 Shift cash as fast as possible from those parts of the
business where it is not needed to those parts where it is
needed.
 The temporary idle cash balances need deployment in
appropriate marketable securities to yield extra income by
various foreign exchange hedging technique like forward,
future, option, currency swaps.

14. Credit management
The MNC’s should ensure that
 The risk/cost of default is lower than
the incremental profits expected from
granting credit
 The risk from exchange rate
fluctuations is hedged in particular for
export credit sales to developing
countries
 The FERM technique (leads and lags)
are used as per the need

15. Inventory management
 Cost-benefit analysis should be done
before taking the decision of carrying more
stocks.
 The MNC’s should maintain both working
stocks and safety stocks at each user
location as well as at the strategic storage
centers.
 To ensure minimum payment of property
taxes on assets, it should safety stocks in
different countries/ locations at different
times during the year.

16. Strategies involved in
Working capital Management
by MNC
 Cash management is highly control oriented.
 Cash management is for transaction purpose.
 Use past records and calculate the cash budgeting for
liquidity purpose
 Prefer taking overdraft rather than short term or long
term loans.
 Retained earnings and trade creditors are sources for
short term financing
 Reduces holding cost but they do maintain safety stock
 Uses average costing method

17.  Maintain
Cash sales – smaller private firms
Credit sales- larger or Govt. firm (revise credit policy
and standards to reduce the level of receivables)
 Reduce the holding costs for finished goods
 Routine contract agreements with their term of sales
 Routine control agreements with control terms
 Liquidity- CR (1.3) & QR (0.6)
 Profitability- Observation of gross profit margin & ROI

18. Repatriation and Remittance
Repatriation by a company
Foreign capital invested in India is generally allowed to be repatriated along with capital appreciation, if any,
after payment of taxes due on these, provided the investment was made on a repatriable basis. Repatriation is,
however, subject to any lock-in conditions that may be applicable on the industry sector under FDI-control
regulation.
Profits and dividends earned from an Indian company can be repatriated after the payment of DDT due on
them. RBI’s permission is not required to make remittances, subject to compliance with certain specified
conditions.
Repatriation of funds by an LLP
Partners of an LLP can freely draw capital according to LLP laws, but this is subject to the terms of the FIPB’s
approval in the case of FDI. This is not subject to distribution tax and is also exempt in the hands of partners of
LLPs.
Other remittances
No prior approval is required to remit profits earned by the Indian branches of companies (other than banks)
incorporated outside India to their head offices (also outside the country). Remittances are permitted from the
winding-up proceeds of a branch of a foreign company in India, subject to the RBI’s approval. In addition,
sundry remittances are allowed for certain items, including gifts, repair charges for imported machinery,
maintenance and legal expenses, subject to prescribed limits.
“Repatriation is subject to any lock-in conditions that may be applicable on the industry sector under the
foreign direct investment control regulations”.

19. The US soft-drink giant, Coca-Cola, re-entered India in the
1990s after abandoning its businesses in the late 1970s in
the wake of Foreign Exchange Regulation Act of 1973. The
Act, meant to 'Indianize' foreign companies, made it
mandatory for foreign companies to dilute their
shareholdings to 40 per cent. Instead of diluting its
shareholdings to the required limit prescribed by the Act,
Coca-Cola opted to discontinue its operations in India.

20. Entry Options in India

21. Transfer Pricing
Transfer pricing is the price paid by a firm for a
good or service while purchasing it from a related
entity. It refers to the setting, analysis,
documentation, and adjustment of charges made
between related parties for goods, services, or use
of property.
Challenges in TP
 Documentation in alignment with global
jurisdictions.
 Planning and documentation of transfer
pricing policy and procedures.
 Manage transfer pricing and customs risk
concurrently.
 Defend transfer prices before the tax
authorities.
TAX Authorities Vs MNC’s
 Shell said its India unit issued 870 million
shares to parent Shell Gas BV at 10 rupees
apiece in 2009 but that tax authorities
valued them at 183 rupees each.
 LG Electronics unit was deemed to be
promoting the LG brand owned by its
parent, which should have compensated the
local unit, thereby generating taxable
income. Authorities claim the excess
expenditure amounted to a transfer pricing
adjustment of 1.61 billion rupees.
 Vodafone Group entered India in 2007
through a subsidiary based in the
Netherlands, which acquired Hutchison
Telecommunications International Ltd’s
(HTIL) stake in Hutchison Essar Ltd (HEL)—
the joint venture that held and operated
telecom licences in India. This agreement
gave Vodafone control over 67% of HEL and
extinguished Hong Kong-based Hutchison’s
rights of control in India, a deal that cost the
world’s largest telco $11.2 billion at the time.
 In May 2012, IT department fined Vodafone
20k crore fine and taxes.

22. ECB
An external commercial borrowing is an
instrument used in India to facilitate the access to
foreign money by Indian corporations and PSUs.
ECBs provide an additional source of funds to the
companies allowing them to supplement
domestically available resources and take
advantage of lower rates of interest prevailing in
the international financial markets. ECBs have
become very popular amongst the Indian
companies, during the past few years due to the
limitations in the Indian debt market in the form
of short maturity period and high rate of interest.

23. ADVANTAGES OF ECB
 Government permits the ECBs as an additional source
of financing for expanding the existing capacity as well
as for the fresh investments.
 ECB policy of the government, seeks to emphasize the
priority of investing in the infrastructure and core
sectors such as power, telecom, railway, roads, urban
infra etc.
 There is also emphasis on the need of capital for small
and medium scale enterprises.

24. CURRENT LIMITS
 For infrastructure sector companies, there is an overall
ceiling of $20 billion
 For repayment of outstanding rupee loans towards
capital expenditure or fresh rupee capital expenditure,
the overall ceiling of $10 billion.

25. End – Use Restrictions on ECB in
India
DOMESTIC INVESTMENT
Import of capital goods, new projects, modernization/expansion of existing production units in real sector- industrial
sector including SME and infrastructure sector- in India. Infrastructure sector is defined as (i) power, (ii)
telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport (vi) industrial parks and (vii) urban
infrastructure(water supply, & sewage projects).
FOREIGN CURRENCY EXPENDITURE
ECB above US $ 50 million per borrower company per financial year is permitted only for foreign currency expenditure for
permissible end-uses of ECB.
LOCAL RUPEE EXPENDITURE
Borrowers proposing to avail ECB up to US $ 50 million for rupee expenditure for permissible end uses would require prior approval
of the Reserve Bank under the Approval Route. However, borrowers in infrastructure sector may avail ECB up to US $ 100 million for
Rupee expenditure for permissible end-uses under the approval route .
OVERSEAS INVESTMENT
ECB proceeds can be utilized for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the
existing guidelines on Indian Direct Investment in JV/WOS abroad
MICRO FINANCE
NGOs engaged in micro finance activities may utilize ECB proceeds for lending to self-help groups or for micro-credit or
for bon a fide micro finance activity including capacity building.
.

26. Foreign Currency
Exchangeable Bonds
 Bond expressed in foreign currency, the principal and
interest in respect of which is payable in foreign currency,
issued by an Indian (issuing) company and subscribed to
by a person who is a resident outside India in foreign
currency and exchangeable into equity shares of another
company.
 The interest and the issue expenses should be within the
all-in-cost ceiling specified by the RBI under the ECB’s
policy.
 The exchange price of the offered listed equity shares
should not be less than the higher of the average of the
weekly high and low of the closing prices quoted on the
stock exchange during 6 months and two weeks
preceding the relevant date.
 Maturity – 5 years

27. TATA AND JLR
Jaguar Landrover
 TATA acquired JLR to obtain
intellectual property rights, currency
exposure and increase its public
reputation.
 TATA motors created a subsidiary in
Singapore as TML Holding Pte.Ltd.
TML raised a 15 months bridge loan
of $3 billion dollars to finance the
acquisition.
 The Company is an indirect, wholly-
owned subsidiary of Tata Motors
Limited through TML Holdings Pte.
Ltd. (Singapore) and accordingly is
under the ultimate control and
influence of its parent.
 Paid a £150 million dividend to Tata
Motors Limited through TML
Holdings Pte.Ltd. (Singapore).
TATA Motors
 As securing cheap term loans from banks
has become difficult amid tightening
regulations, Indian companies are turning
aggressive in foreign bond market.(Year
2008)
 India have signed double taxation pact with
Singapore and United Kingdom.
 Its easier to find and raise foreign funds in
Singapore then India.
 Credit rating companies had a negative
about the JLR deal, because debt
requirement.(Moody's rated the deal as
BBB+)
 TATA turned the table for JLR by introducing
effective cash management system, cost
management and workforce cut by 11,000
from 27,000.
 By 2011 JLR sales increased a mammoth
30%, only in China.

28. JLR SNAPSHOT

29. ADR
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank
representing a specified number of shares (or one share) in a foreign stock that is traded
on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security
held by a U.S. financial institution overseas.
Advantage
 ADRs help to reduce administration and duty costs that would otherwise be levied on
each transaction.
 Arbitrage opportunity for investors.
Disadvantage
 ADRs do not eliminate the currency and economic risks for the underlying shares in
another country.
 Issue cannot exceed 51% of the subscribed capital.

31. Satyam Computers
ADR ISSUE
 Satyam had floated its ADR
issue in May '01 on the
New York Stock Exchange,
raising $140.8m.
 Stock listed at a price of
$28.
 Strategies to float on the
NYSE or Nasdaq could also
help companies acquire
foreign firms by offering
stock.
ADR DELISTING
 After the scandal,
Mahindra Satyam delisted
Satyam Computers from
NYSE from March 31,2009.
 ADR lost almost 95% of its
value.

32. HDFC Bank
 HDFC bank raised about Rs 7,800 crore through an American depositary
receipt (ADR).
 Bank of America Merrill Lynch was the lead manager to the offering.
 HDFC Bank, however, is comfortably placed with its capital base under the
Basel-III norms.

33. GDR
A global depositary receipt (GDR) is a bank certificate issued in more than one
country for shares in a foreign company. The shares are held by a foreign branch of
an international bank. The shares trade as domestic shares, but are offered for sale
globally through the various bank branches.
Advantage
 Company can raise fund in multiple currency denomination. (Example:
USD,EURO and Other Currencies)
Disadvantage
 GDR’s do not eliminate the currency and economic risks for the underlying
shares in another country.

35. HERO-HONDA
 Joint merger – 1984
 Terms:
 Honda
 provide technical know how
 Set up manufacturing facilities
 Carry out R&D
 Hero had to pay a royalty of 4% on the ex-factory price
of each vehicle for their services and paid a lump sum of
$500000.
 26%- Hero 26%- Honda 26%- Public

36. Why Honda demerge from
Hero?
 Relaxed govt. norms since 1997.
 No restriction in doing individual business
 A minority stake in Hero Honda also yields limited
profits for Honda compared with a fully consolidated
100 percent unit.
 Enough knowledge of Indian market for Honda.
 Indian 2 wheeler market soon to grow in double digits
and carrying a partner could be a burden

37.  In 2004- Honda announced of HMSI and after that
Honda was reportedly reluctant to share its technology
with Hero Honda though it had an agreement to do
so.
 2010- Honda sold 26% of stake to Munjal Family
 2011- Hero - 50.81
Honda – 13.29
 2015- Hero – 40%
Honda- 27%

38. Macro Factors Governing
Exchange-Rate Behavior
Purchasing-Power Parity (PPP)
 The idea that a basket of goods should sell for
the same price in two countries, after exchange
rates are taken into account.
 For example, the price of rice in India and
China. markets should trade at the same price
(after adjusting for the exchange rate). If the
price of rice is lower in India, then purchasers
will buy rice in India as long as the price is
cheaper (after accounting for transportation
costs).

41. Forefaiting
• Method of export trade financing, especially when dealing in capital
goods (which have long payment periods) or with high risk
countries. In forfeiting, a bank advances cash to an exporter against
invoices or promissory notes guaranteed by the importer's bank.
The amount advanced is always 'without recourse' to the exporter,
and is less than the invoice or note amount as it is discounted by the
bank. The discount rates depends on the terms of the invoice/note
and the level of the associated risk.
• Forfaiting is a flexible discounting technique that can be tailored to
the needs of a wide range of counterparties and domestic and
international transactions.

43. Thank you