Definition of Equity Market

Equity Market

Investors in many countries have been exhibiting interest in acquiring equity investments outside their countries. Investment in foreign equity is of two types- direct investment (DI) and portfolio investment. Individuals and multinational corporations make investment in listed equities of foreign firms. While individual investors acquire shares as investment, multinational corporations invest in shares of a company of a foreign country so as to acquire a controlling interest over management. They may even start subsidiaries in foreign countries with 100 percent equity ownership. These are all called direct foreign investments.

Institutional investors like pension’s funds, mutual funds, investment companies etc., and share like listed in stock exchanges to derive benefits from international portfolio diversification.

The existence of a well-developed secondary market is a pre-requisite for investing in equities of companies by foreign investors. Organized exchanges are found in Australia, Belgium, Canada, France, Germany, the Netherlands, Hong Kong, Italy, Japan, Singapore, South Africa, Sweden, Switzerland and United Kingdom, beside USA. But trading in many exchanges is often restricted to a handful of companies, which dominate the market. A company can raise equity capital in international market in two ways:

By issuing shares in Euro market which are listed on the foreign stock exchange.

Through the issue of America Depository Receipt (ADRs) or European Depository Receipt EDRs or Global Depository Receipts (GDRs).

Major companies today do not ignore equity markets outside their countries while embarking on a substantial issue of shares. Particularly non- US multinationals have found that the domestic markets cannot cater to their financial needs; hence they are searching for equity funds from foreign investors. Moreover they have found that from domestic equity markets. This tendency is strengthened by the fact that institutional investors have been paying attention to international diversification of portfolio investments.

Notable example of internationalization of the equity base is that of Philips, a Dutch Electrical company. With the starting of new subsidiaries in foreign countries, it had to raise resources through equity issue to match its multinational operations. It started the process in early 1980s.

The expansion of the Euro-equity market has been facilitated by a number of factors and innovations. They are:

International syndicates of banks to act as lead managers and brokerage firms that are capable of handling Euro-issues within short period of time have emerged.

Syndication and distribution fees for euro equities are much lower compared to domestic issues.

Innovative approached to investment in foreign equities have been made to overcome stringent regulations in the U.S. firms and U.S. MNCs desiring to avoid lengthy and costly registration requirement for domestic equity issues started issuing new instruments.

The new innovations are American Depository Receipt (ADR) and American Depository Shares (ADSs).

American Depository Receipts (ADRs)

These are the certificates denominated in dollars issued by a US. Bank on the basis of a foreign equity it holds in custody in one of the branches abroad, usually in the home country of the issuer. This system was developed abroad, usually in the home country of the issuer. This system was developed by Morgan Guaranty Trust Company of New York on 1981 to facilitate the trading of foreign securities in the U.S. The ADR represents a convenient way for a US investor to buy foreign equity shares that were not listed in US Exchanges. The investor can receive dividends in dollars without bearing foreign taxes or being subject to exchange regulations. The system also permits transfer of ownership of this receipt in the US without the physical transfer of ownership of this receipt in the US without the physical transfer of the underlying shares. Because the underlying shares are not subject to US Securities and Exchange Commission (SEC) registration procedure, they have become more attractive. Issues traded outside the US were called International Depositary Receipt (IDR) issues.

The American depository shares (ADS) are similar to ADRs. They are also the stock ownership certificated issued in the US by a transfer agent or a trustee acting on behalf of the foreign issuer.