36  International financial markets and instruments: Euro currency; GDRs; ADRs

36.1 Concept

International financial markets are markets in which financial instruments are traded across national borders — either denominated in a foreign currency, issued by a foreign borrower, or sold to foreign investors. They emerged in the 1950s with the rise of the Eurodollar market and have since expanded into a vast ecosystem of Eurocurrency, Eurobonds, GDRs, ADRs, FCCBs, Foreign Currency Bonds, and more. They allow firms to raise capital globally, investors to diversify internationally, and central banks to manage reserves.

36.2 Eurocurrency Market

Eurocurrency is any currency deposited in a bank outside its country of origin — not limited to Europe. Examples: - Eurodollar — USD deposit in a non-US bank. - Euroyen — JPY deposit outside Japan. - Eurosterling — GBP outside the UK.

36.2.1 Origin

The Eurodollar market grew in the late 1950s when Soviet and East European countries, fearing US seizure during the Cold War, parked USD deposits in London banks rather than New York. Regulation Q in the US (limiting deposit interest) further encouraged offshore dollar deposits.

36.2.2 Features

TipFeatures of the Eurocurrency Market
  • Free from domestic regulations — no reserve requirements, deposit insurance, interest-rate ceilings.
  • Wholesale — large deposit sizes.
  • Short-term — typically up to one year.
  • Major centres: London (largest), Singapore, Hong Kong, Cayman Islands, Luxembourg.
  • Benchmark rate: historically LIBOR (London Interbank Offered Rate) — being replaced by alternative reference rates after end-2021 (SOFR for USD, SONIA for GBP, etc.).

36.2.3 Eurocredits and Syndicated Loans

A Eurocredit is a medium-to-long-term loan in Eurocurrency, typically syndicated among many banks for large borrowers (governments, MNCs, project finance).

36.3 Eurobond Market

A Eurobond is a bond denominated in a currency other than that of the country where it is issued. Examples: - USD bond issued in London — Eurodollar bond. - JPY bond issued in Frankfurt — Euroyen bond. - Issued by Indian corporates in EUR — Indian Euro bond.

36.3.1 Eurobond vs Foreign Bond

TipEurobond vs Foreign Bond
Feature Eurobond Foreign Bond
Currency Different from country of issue Same as country of issue
Issuer Often non-resident Non-resident
Examples Eurodollar, Eurobond Yankee (USD in USA, foreign issuer), Samurai (JPY in Japan), Bulldog (GBP in UK), Masala (INR rupee bond outside India)
Regulation Lighter Local
Common centre London NYC, Tokyo, London

36.4 GDRs and ADRs — Depositary Receipts

A Depositary Receipt is a negotiable certificate issued by a depositary bank representing ownership of shares of a foreign company. It allows investors in one country to invest in shares of a company listed in another country without dealing with cross-border issues.

36.4.1 American Depositary Receipts (ADRs)

TipADR — Key Facts
  • Created in 1927 by J.P. Morgan to enable American investors to buy shares of Selfridges (UK).
  • Issued by a US depositary bank against shares of a foreign company held in custody.
  • Listed on US exchanges (NYSE, NASDAQ) or traded OTC.
  • Denominated in USD.
  • Categorised into Levels: Level I (OTC, minimal disclosure), Level II (listed, full SEC reporting), Level III (raise new capital via public offering), Rule 144A (private placement to QIBs).
  • Indian companies — Infosys, Wipro, HDFC Bank, ICICI Bank — have ADRs.

36.4.2 Global Depositary Receipts (GDRs)

TipGDR — Key Facts
  • Created in 1990 — first issued by Samsung.
  • Issued by a depositary bank against shares of a foreign company.
  • Listed on non-US exchanges — typically London (LSE), Luxembourg.
  • Denominated in USD or EUR typically.
  • Allows simultaneous public offering in multiple markets.
  • Indian companies such as Reliance, Tata Motors, ICICI, ITC have used GDRs.

36.4.3 ADR vs GDR

TipADR vs GDR
Feature ADR GDR
Year first 1927 (J.P. Morgan) 1990 (Samsung)
Listed on US exchanges Non-US exchanges (LSE, Luxembourg)
Currency USD USD or EUR
Regulator SEC Host-country regulator
Number of markets Single (US) Multiple

36.5 FCCB — Foreign Currency Convertible Bond

A FCCB is a debt instrument issued in a foreign currency by an Indian corporate, which the holder can convert into the issuer’s equity shares at a pre-determined conversion price. Key features:

TipFCCB Features
  • Hybrid — debt + equity option.
  • Lower coupon than pure debt, due to the conversion option’s value.
  • Currency risk on principal and interest until conversion.
  • Equity dilution if converted.
  • Regulated by RBI (FEMA) and SEBI; governed by FCCB Scheme 1993 and External Commercial Borrowings policy.

36.6 ECB — External Commercial Borrowings

TipECB
  • Long-term debt by Indian residents from foreign lenders in foreign currency.
  • Forms: loans, bonds, FCCBs, FCEBs, optionally-convertible debentures.
  • Routes: Automatic (up to specified limits, end-use, average maturity) and Approval.
  • All-in-cost ceiling over the relevant benchmark.
  • Regulated by RBI under Master Direction on ECB.
  • End-use restrictions — typically capital expenditure, refinancing, working capital (with conditions); not for real-estate, on-lending, etc.

36.7 Masala Bonds

Masala bonds are INR-denominated bonds issued outside India by Indian entities. Currency risk is borne by the investor (since principal and interest are in INR), not the issuer. First Masala bond — International Finance Corporation (IFC) in 2014; first by an Indian corporate — HDFC in 2016.

36.8 International Banking and Institutions

TipMajor International Financial Institutions
  • BIS — Bank for International Settlements (Basel, 1930) — central banks’ bank; Basel Committee.
  • IMF (Washington, 1944) — BoP support and surveillance.
  • World Bank Group (Washington, 1944+) — development finance.
  • Asian Development Bank (Manila, 1966).
  • AIIB — Asian Infrastructure Investment Bank (Beijing, 2016).
  • NDB — New Development Bank (Shanghai, 2014) — BRICS-led.
  • EBRD — European Bank for Reconstruction and Development (London, 1991).

flowchart TB
  I[International Financial Markets] --> EC[Eurocurrency]
  I --> EB[Eurobonds & Foreign Bonds]
  I --> DR[ADR / GDR / IDR]
  I --> CC[FCCBs / Masala / ECB]
  DR --> ADR[ADR<br/>1927 J.P. Morgan]
  DR --> GDR[GDR<br/>1990 Samsung]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

NoteDistractor warning

PYQs distinguish: Eurobond ≠ bond denominated in Euro; it’s a bond denominated in any currency other than the country of issue. Foreign bond is one issued in the local market of a foreign country in that country’s currency (Yankee, Samurai, Bulldog, Masala).

36.9 Practice Questions

Q 01 Eurodollar Easy

A Eurodollar is:

  • AA dollar deposited in a US bank
  • BA dollar deposited in a bank outside the US
  • CA euro deposited in a US bank
  • DA dollar held by the US Treasury
View solution
Correct Option: B
**Eurodollar = USD deposit outside the US**, anywhere in the world.
Q 02 ADR Easy

American Depositary Receipts (ADRs) are:

  • AIssued by US companies abroad
  • BNegotiable certificates representing foreign-company shares, listed in the US
  • CDebt instruments
  • DMutual fund units
View solution
Correct Option: B
ADR — listed in US, represents foreign shares.
Q 03 GDR Medium

Global Depositary Receipts (GDRs) were first issued in 1990 by:

  • AApple
  • BSamsung
  • CReliance
  • DInfosys
View solution
Correct Option: B
**Samsung** issued the first GDR in 1990.
Q 04 Eurobond Medium

A Eurobond is a bond:

  • ADenominated in Euros only
  • BDenominated in a currency other than the country of issue
  • CIssued by the European Central Bank
  • DIssued in any European country
View solution
Correct Option: B
Eurobond — currency *different* from country of issue.
Q 05 Foreign bonds Medium

Match each foreign bond with its market:

Bond Market
(i) Yankee (a) Japan (JPY)
(ii) Samurai (b) India (INR, issued abroad)
(iii) Bulldog (c) USA (USD)
(iv) Masala (d) UK (GBP)
  • A(i)-(c), (ii)-(a), (iii)-(d), (iv)-(b)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(b), (ii)-(d), (iii)-(a), (iv)-(c)
  • D(i)-(d), (ii)-(c), (iii)-(b), (iv)-(a)
View solution
Correct Option: A
Yankee — USD/USA; Samurai — JPY/Japan; Bulldog — GBP/UK; Masala — INR/abroad.
Q 06 LIBOR Medium

LIBOR — the London Interbank Offered Rate — has been replaced for new USD contracts by:

  • ASONIA
  • BSOFR
  • CEURIBOR
  • DMIBOR
View solution
Correct Option: B
USD LIBOR → **SOFR** (Secured Overnight Financing Rate); GBP LIBOR → SONIA; etc.
Q 07 Masala Medium

"Masala bonds" are:

  • AUSD bonds issued in India
  • BINR-denominated bonds issued *outside India* by Indian entities
  • CEUR bonds by RBI
  • DCommodities
View solution
Correct Option: B
**Masala bonds** — INR-denominated, sold overseas; currency risk on investor.
Q 08 FCCB Medium

A FCCB is best described as a:

  • AForeign-currency loan
  • BForeign-currency debt convertible into equity
  • CForeign equity instrument
  • DMoney-market instrument
View solution
Correct Option: B
FCCB — debt with embedded equity-conversion option.
Q 09 ADR Year Hard

The first ADR was created in:

  • A1927
  • B1955
  • C1980
  • D2000
View solution
Correct Option: A
**1927** — J.P. Morgan, for Selfridges (UK).
Q 10 ECB Medium

External Commercial Borrowings (ECBs) in India are governed by:

  • ASEBI ICDR
  • BRBI under FEMA
  • CDPIIT
  • DCBDT
View solution
Correct Option: B
RBI Master Direction under FEMA governs ECBs.
Q 11 BIS Medium

The Bank for International Settlements (BIS) is headquartered in:

  • ABasel
  • BLondon
  • CWashington
  • DTokyo
View solution
Correct Option: A
**Basel** — BIS (1930); hosts Basel Committee.
Q 12 Match Medium

Match each instrument with the holder's *currency risk*:

Instrument Currency risk on
(i) FCCB (a) Investor (because in INR)
(ii) Masala bond (b) Indian issuer (in foreign currency)
  • A(i)-(b), (ii)-(a)
  • B(i)-(a), (ii)-(b)
  • CBoth on investor
  • DBoth on issuer
View solution
Correct Option: A
FCCB → currency risk on Indian issuer (foreign currency principal); Masala → currency risk on foreign investor (INR principal).
Q 13 ADR companies Medium

Which Indian company has had ADRs listed on US exchanges?

  • AInfosys
  • BAdani Enterprises
  • CHero MotoCorp
  • DBharti Airtel
View solution
Correct Option: A
**Infosys** has had Level III ADRs on NYSE since 1999 (now delisted in 2023).
Q 14 Levels Hard

An ADR that *raises new capital* through a public offering is:

  • ALevel I
  • BLevel II
  • CLevel III
  • DRule 144A
View solution
Correct Option: C
**Level III** — raise capital via public offering; Level II — listed without capital-raise; Level I — OTC.
Q 15 London Medium

The largest Eurocurrency centre is:

  • ALondon
  • BNew York
  • CTokyo
  • DMumbai
View solution
Correct Option: A
**London** is the largest Eurocurrency / forex centre.
Q 16 AIIB Medium

The Asian Infrastructure Investment Bank (AIIB) is headquartered in:

  • AManila
  • BBeijing
  • CShanghai
  • DTokyo
View solution
Correct Option: B
**AIIB — Beijing**, 2016.
Q 17 NDB Medium

The New Development Bank (BRICS bank) is headquartered in:

  • AMumbai
  • BBeijing
  • CShanghai
  • DBrasilia
View solution
Correct Option: C
**NDB — Shanghai**, 2014.
Q 18 Currency Risk Hard

In a Masala bond, currency risk is borne by:

  • AThe Indian issuer
  • BThe foreign investor
  • CThe RBI
  • DBoth equally
View solution
Correct Option: B
Principal in INR ⇒ if INR depreciates, foreign investor loses on conversion.
Q 19 IDR Medium

An Indian Depositary Receipt (IDR) represents:

  • AShares of foreign company traded in India
  • BIndian shares traded abroad
  • CMutual fund units
  • DRBI debt instrument
View solution
Correct Option: A
**IDR** — depositary receipt issued in India representing shares of a foreign company (Standard Chartered listed via IDR in 2010).
Q 20 Eurocurrency Medium

The Eurocurrency market is **largely** free from:

  • AReserve requirements and domestic regulations
  • BInterest payments
  • CAll currencies except euro
  • DTax
View solution
Correct Option: A
Eurocurrency markets are *offshore* and avoid most domestic regulation.

36.10 Quick Recall

ImportantQuick recall
  • Eurocurrency = currency deposited outside its country of origin (Eurodollar, Euroyen). London is the largest centre. LIBOR → SOFR / SONIA post-2021.
  • Eurobond = bond in currency different from country of issue. Foreign bond = bond in local currency of foreign country (Yankee, Samurai, Bulldog, Masala).
  • Depositary Receipt — negotiable certificate representing foreign shares.
  • ADR (1927 J.P. Morgan) — listed in US exchanges; Levels I, II, III, Rule 144A; USD-denominated.
  • GDR (1990 Samsung) — listed on non-US exchanges (LSE, Luxembourg); USD or EUR.
  • FCCB — foreign-currency debt convertible into equity; currency risk on Indian issuer.
  • Masala bond — INR bond issued outside India; currency risk on foreign investor; first IFC 2014; first Indian corporate HDFC 2016.
  • ECB — long-term foreign loans; RBI under FEMA; automatic + approval routes.
  • International institutions: BIS (Basel, 1930), IMF + WB (Washington, 1944), ADB (Manila 1966), AIIB (Beijing 2016), NDB (Shanghai 2014), EBRD (London 1991).