Question

importance of Depository Receipts in Mobilization of International Capital

Answer 1

Funds can be raised in the primary market from the domestic market as well as from international markets. After the reforms were initiated in 1991, one of the major policy changes was allowing Indian companies to raise resources by way of equity issues in the international markets. Earlier, only debt was allowed to be raised from international markets. In the early 1990s foreign exchange reserves had depleted and the country’s rating had been downgraded. This resulted in a foreign exchange crunch and the government was unable to meet the import requirement of Indian companies. Hence allowing companies to tap the equity and bond market In Europe seemed a more sensible option. This permission encourages Indian companies to become global.

India companies have raised resources from international capital markets through Global depository receipts (GDRs) / American Depository Receipts (ADRs), Foreign Currency Convertible Bonds (PCCBs) and External Commercial Borrowings (ECBs). The last are used as a residual source after exhausting external equity as a main source of finance for large value projects.

Answer 2

Answer:

For investors, depository receipt is a way of diversifying the risk, by getting exposure to a foreign market, but without the exchange rate risk as they are foreign currency denominated. Further, they feel more safe to invest from their home location