Question

Discuss the financial instruments used in international financing.

Answer 1

Answer:

The financial instruments used in international financing are : Global Depository Receipts(GDRs) , American Depositary Receipts (ADRs) and Foreign Direct Investment (FDI )  

1. Global Depository Receipts(GDRs) :  

Global Depository Receipts(GDRs) are listed in London stock exchange and traded on foreign Stock exchange. GDR is generally denominated in US dollars, so foreign exchange risk is reduced.  

GDRs issue has merits like less formalities, less administrative formalities as regards  dividend payment, information dissemination, and annual general meetings.  GDRs holders enjoys all the economic benefits of the shares but have none of the corporate rights like right to vote.  

2. American Depositary Receipts (ADRs) :  

American Depositary Receipts (ADRs) are listed  and traded ( bought and sold) in American stock exchange and American markets.  The issue price is governed by security and exchange commission(USA).

A major portion of public offerings by non US companies in the US are in the form of a ADRs  also called American depositary shares. ADRs can be listed and traded in US based stock exchange and help the Indian company to be known in the highly liquid US stock exchanges.

3. Foreign Direct Investment (FDI ) :

It was felt that our economic growth and development is not taking place due to the shortage of funds. In order to make sufficient funds available Foreign Direct Investment (FDI) was opened to foreign institutions. These institutions were allowed to participate in both the portfolio investment and direct investment.  

Upto 51% FDI was permitted in high priority industries.Foreign Direct Investment is freely allowed in all sectors including the service sectors except where the existing and notified sectoral policy does not permit FDI beyond the ceiling.  

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