Month: May 2020

Strategic Business Unit (SBU) implies an independently managed division of a large company, having its own vision, mission and objectives, whose planning is done separately from other businesses of the company. The vision, mission and objectives of the division are both distinct from the parent enterprise and elemental to the long-term performance of the enterprise.

Simply put, an SBU is a cluster of associated businesses which are responsible for its combined planning treatment, i.e. the company engaged in a diversified range of businesses, categorises its multitude of businesses into a few separate divisions, in a scientific way. The task may include analysis and bifurcation of a variety of businesses.

It can be a business division, a product line of the division or even a specific product/brand, targeting a particular group of customers or a geographical location.

Characteristics of Strategic Business Unit

• Separate business or a grouping of similar businesses, offering scope for autonomous planning.
• Own set of competitors.
• A manager who is accountable for strategic planning, profitability and performance of the division.

A strategic business unit is specially formed to target a particular market segment, which requires expertise in production or management, not present in the parent company.

Strategic Business Unit Structure

The structure of SBU consist of operating units; wherein the units serve as an autonomous business. The top corporate officer assigns the responsibility of the business to the managers, for the regular operations and business unit strategy. So, the corporate officer is accountable for the formulation and implementation of the comprehensive strategy and administers the SBU by way of strategic and financial controls.

In this way, the structure combines related divisions of business into the strategic business unit and the senior executive is empowered for taking decisions for each unit. The senior executive works under the supervision of a chief executive officer.

There are three levels in a strategic business unit, wherein the corporate headquarters remain at the top, SBU’s in the middle and divisions clustered by similarity, within each SBU, remain at the bottom. Hence, the divisions within the SBU are associated with each other, and the SBU groups are independent of each other. From the strategic viewpoint, each SBU is an independent business.

A single strategic business unit is considered as a profit centre and governed by the corporate officers. It stresses over strategic planning instead of operational control so that the separate divisions of the SBU can respond as fast as they can, to the changing business environment.

Importance of Strategic Business Unit

1. Responsibility

One of the first role of strategic business units is to assign responsibility and more importantly outsource responsibility to others. With this, the top management has an overview of work being done in each individual unit and they do not have to get involved in day to day activities for these strategic business units.

2. Accountability

When handling multiple brands or products, it is easier if there are separate business units which are accountable for the success or failure of the business or product. By making these business units accountable, the company can directly take a call when hard decisions are to be taken.

3. Accountancy

Profit and loss and balance sheets will look more prettier and more manageable if the statements are prepared separately for separate strategic business units. This makes the accountancy more transparent and at the same time, when companies have to make investment decision than this accountancy will come in use for the company.

4. Strategy

Companies like Nestle have 4 different strategic units. One SBU like Maggi deals in Food products, another deals in Dairy products like Nestle milkmaid, the third SBU deals in Chocolate products like Kitkat so on and so forth. Thus, in the above example, it is very simple to change strategy for each business unit because the strategy for each is independent of the other.

5. Independence

The managers of the strategic business units get more independence to manage their own unit which gives them the opportunity to be more creative and innovative and empowers them for making decisions. The best thing that can happen for SBU’s are fast decision making which is possible only when these SBU’s are given independence to work by themselves.

6. Funds allocation

The last but not the least advantage of strategic business units are that funds allocation becomes simpler for the parent company. Depending on the performance of the SBU, funds allocation can be done on priority.

Thus, there are many advantages of having strategic business units and it is highly recommended that any firm which has multiple products adopt strategic business units in its organization structure.

Strategic Intent can be understood as the philosophical base of strategic management process. It implies the purpose, which an organization endeavors of achieving. It is a statement that provides a perspective of the means, which will lead the organization, reach the vision in the long run.

Strategic intent gives an idea of what the organization desires to attain in future. It indicates the long-term market position, which the organization desires to create or occupy and the opportunity for exploring new possibilities.

1. Vision

Vision implies the blueprint of the company’s future position. It describes where the organization wants to land. It is the dream of the business and an inspiration, base for the planning process. It depicts the company’s aspirations for the business and provides a peep of what the organization would like to become in future. Every single component of the organization is required to follow its vision.

2. Mission

Mission delineates the firm’s business, its goals and ways to reach the goals. It explains the reason for the existence of business. It is designed to help potential shareholders and investors understand the purpose of the company. A mission statement helps to identify, ‘what business the company undertakes.’ It defines the present capabilities, activities, customer focus and business makeup.

3. Business Definition

It seeks to explain the business undertaken by the firm, with respect to the customer needs, target audience, and alternative technologies. With the help of business definition, one can ascertain the strategic business choices. The corporate restructuring also depends upon the business definition.

4. Business Model

Business model, as the name implies is a strategy for the effective operation of the business, ascertaining sources of income, desired customer base, and financing details. Rival firms, operating in the same industry relies on the different business model due to their strategic choice.

5. Goals and Objectives

These are the base of measurement. Goals are the end results, that the organization attempts to achieve. On the other hand, objectives are time-based measurable actions, which help in the accomplishment of goals. These are the end results which are to be attained with the help of an overall plan, over the particular period.

The vision, mission, business definition, and business model explains the philosophy of business but the goals and objectives are established with the purpose of achieving them.

Strategic Intent is extremely important for the future growth and success of the enterprise, irrespective of its size and nature.

Capital inflows from Multi-National Companies (MNCs) refer to inward investment from MNC into European economies.

Capital flows can also involve the purchase of assets, such as property, assets and government bonds.

The effect of these capital inflows involves increased levels of Investment. MNCs inject investment into the economy. This causes several benefits for the economy.

1. Increased Aggregate Demand As a component of AD, higher Investment will boost AD, causing improved economic growth. This should lead to lower levels of unemployment.
2. 

• However, as a percentage of total Aggregate Demand, inward investment from MNCs are quite small. Therefore, the impact on AD may be quite limited.

• The effect of increased AD depends on the situation of the economy. For example, when Ireland had low growth and high unemployment, inward investment helped to boost the economy. However, if the economy is close to full capacity, increased AD may cause inflation.

2. Increased productive capacity. Inward investment will not only increase AD but also increase Aggregate Supply. Investment in new factories increases productive capacity, and AS should shift to the right. This enables an increase in economic growth without inflation.
3. Technological improvements. MNCs may not only invest in new capacity. They may also introduce new working practices that help increase labour productivity. For example, when Japanese firms invested in the UK, it was said that they helped to improve labour relations and get more out of the workforce. Japanese firms introduced new practices such as ‘Just in time management’ and a less confrontational attitude between workers and managers. Therefore, it can contribute to increased labour productivity.
4. Surplus on the Financial Account of the Balance of Payments

Capital inflows from abroad can help to finance a current account deficit. Through attracting capital flows, it enables UK households to effectively import more goods and services. Without these capital inflows, a current account deficit would lead to a devaluation in the exchange rate to restore equilibrium in the balance of payments.

5. Lower Prices for Consumers

Investment from foreign firms offers the chance for goods to be produced more efficiently and could lead to lower prices for domestic firms.

6. Finance public sector debt

Capital flows which involve foreigners buying UK government bonds means it is easier and cheaper for UK to finance its government borrowing.

Potential disadvantages of capital inflows

Potential Capital outflows. If foreign firms increase their capital holdings in the UK, it means that the UK becomes more dependent on the health of other economies. For example, a severe recession in Japan, may cause Japanese firms to withdraw from the UK economy, leading to job losses.

• However, in an era of globalisation, it is not really possible to insulate the UK economy from global effects. Also, despite the slowdown in the Japanese economy, most Japanese investment continued in the UK.

Domestic firms may lose out to the new multinational firms. For example, local coffee shops may lose out to bigger chains, such as Starbucks. We can get increase homogonesiation of products

Tax avoidance. An issue is that large multinationals like Facebook, Apple and Google have moved to countries with the lowest corporate tax rates. For example; Amazon Luxumberg, Google in Ireland. This power of multinational companies to choose the lowest corporate tax rates means it encourages tax competition with countries feeling they have to cut corporate tax to remain competitive. As a result, global corporate tax rates have fallen in recent decades putting a bigger burden on consumers and workers.

Distorted asset markets. Capital inflows can also include the purchase of property and assets. Foreign firms and individuals have played a considerable role in buying UK property and investing in new property development – especially in London. On the positive side, we could see this as investment in the UK economy and providing funds for building new property. But, in an overheated property market, it has had the effect of pushing property prices above long-term price to income ratios making them less affordable for average workers. Some have called for limits on the foreign ownership of UK property.

Money laundering. Another concern is that foreign money gained by illegal or semi-illegal ways is effectively laundered by investing in UK property.

Section 2 (31) of Companies Act and Rule 2(1)(v) DEFINITION OF DEPOSIT ‘Deposit’ includes any receipt of money by way of deposit or loan or in any other form, by a company But does not include;

• Any amount received from the CG or a SG, or any amount received from any other source whose repayment is guaranteed by the CG or a SG, or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature;
• Any amount received from Foreign Governments, foreign or international banks,multilateral financial institutions, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under;
• Any amount received as a loan or facility from any Bank or FI;
• Any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934
• Any amount received against issue of commercial paper or any other instruments issued under guidelines or notification issued by RBI;

• Any amount received by a company from any other company (Inter-corporate Deposits);
• Any amount received towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, provided that securities are allotted within 60 days from the date of receipt of money failing which, money should be refunded within 15 days after the expiry of 60 days, otherwise it shall be treated as deposit;
• Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company, provided it is not being given out of borrowed funds;
• Any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years, provided the amount of borrowing is not more than the market value of such assets assessed by a registered value;
• Any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India
• Any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit;
• Any non-interest bearing amount received or held in trust;
• Any amount received in the course of, or for the purposes of the business of the company, such as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance:

Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty five days shall not apply;

• Any amount received in the course of, or for the purposes of the business of the company which are as follows:

1. as a advance, accounted for in any manner whatsoever, received in connection with consideration for an immovable property
2. as a security deposit for the performance of the contract for supply of goods or provision of services for supply of capital goods
3. as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;
4. as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;
5. as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications

Provided that if the aforesaid amount becomes refundable on account of not getting the requisite approval/permission, then the money should be refunded within 15 days from the date it becomes due for refund, otherwise it shall be treated as deposit;

• Any amount brought in by the promoters of the company by way of unsecured loan subject to fulfilment of the following conditions, namely:-

a)The loan is brought in pursuance of the stipulation imposed by the lending FI or bank on the promoters to contribute such finance;

b) The loan is provided by the promoters themselves or by their relatives or by both and not by their friends and business associates; and

c) The exemption shall be available only till the loans of financial institution or bank are repaid and not thereafter.

DEPOSITOR RULE 2 (1) (d):

-Any member of the company who has made a deposit with the company u/s 73 of the Companies Act; or

-Any person who has made a deposit with an eligible company u/s 76 of the Companies Act.

ELIGIBLE COMPANY: RULE 2(1)(e)

-A Public company having a net worth of not less than Rs. 100 Cr. or a turnover of not less than Rs. 500 Cr. and which has obtained the prior consent of the company in General Meeting  by means of a Sepcial Resolution and filed the said resolution with the ROC and where applicable, with the RBI before making any invitation to the public for acceptance of Deposits;

Provided that an eligible company, which is accepting deposits within the limits specified u/s 180(1)(c), may accept deposits by means of an ordinary resolution.

KINDS OF DEPOSITS:

1. Acceptance of deposit from Members: Any company (whether private or public) can accept deposits from its members, subject to the passing of a resolution in general meeting and the commencement of this Act or payment of interest on such deposits. [Section 73].
2. Acceptance of deposits from the Public: Only a public company, having a net worth of not less than Rs. 100 Cr. OR a turnover of not less than Rs. 500 Cr., can accept deposits from the Public. Such kind of public company, shall be referred to as ‘Eligible Company.

SECTION 73 PROHIBITION ON ACCEPTANCE OF DEPOSIT FROM PUBLIC:

(1) No company shall invite, accept or renew deposits under this Act from the public except in a manner provided under Chapter V. Exceptions:

-A banking company

-Non-banking financial company as defined in RBI Act, 1934 and

-To such other company as the CG may, after consultation with the Reserve Bank of India, specify in this behalf.

(2) Section 73(2) states that a company may, subject to

-The passing of a resolution in General Meeting and

-Subject to such rules as may be prescribed in consultation with the RBI, accept the deposits from its members on such terms and conditions, including the provisions of security, if any, on such repayment of such deposits with interest , as may be agreed upon between the company and its members, Subject to the fulfilment of the following conditions, namely

 a)Issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such manner as may be prescribed.

1. b) Filing a copy of the circular along with such statement with the ROC 30 days before the date of issue of the circular;
2. c) Depositing sum not less than 20% of the amount of its deposits maturing during a FY and the FY next following, and kept in a scheduled bank in a separate bank account to be called as Deposit Repayment Reserve Account;
3. d) Certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this act or payment of interest on such deposits and where such default has occurred, the company made good the default and a period of 5 years had lapsed since the date of making good the default.
4. e) Providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation if such charge on the property or assets of the company. In case when a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as “unsecured Deposits” and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

(3) Section 73(3) states that every deposit accepted by a company shall be repaid with interest as per terms and conditions of the agreement.

(4) Section 73(4) If a company fails to repay the deposit or part thereof or any interest thereon, the depositor concerned may apply to NCLT for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as NCLT may deem fit.

(5) Section 73(5) The deposit repayment reserve account shall not be used by the company for any purpose other than repayment of deposits.

Debt to equity ratio (also termed as debt equity ratio) is a long term solvency ratio that indicates the soundness of long-term financial policies of a company. It shows the relation between the portion of assets financed by creditors and the portion of assets financed by stockholders. As the debt to equity ratio expresses the relationship between external equity (liabilities) and internal equity (stockholder’s equity), it is also known as “external-internal equity ratio”.

Formula:

Debt to equity ratio is calculated by dividing total liabilities by stockholder’s equity.

The numerator consists of the total of current and long term liabilities and the denominator consists of the total stockholders’ equity including preferred stock. Both the elements of the formula are obtained from company’s balance sheet.

Significance and interpretation:

A ratio of 1 (or 1 : 1) means that creditors and stockholders equally contribute to the assets of the business.

A less than 1 ratio indicates that the portion of assets provided by stockholders is greater than the portion of assets provided by creditors and a greater than 1 ratio indicates that the portion of assets provided by creditors is greater than the portion of assets provided by stockholders.

Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of greater protection to their money. But stockholders like to get benefit from the funds provided by the creditors therefore they would like a high debt to equity ratio.

Debt equity ratio vary from industry to industry. Different norms have been developed for different industries. A ratio that is ideal for one industry may be worrisome for another industry. A ratio of 1 : 1 is normally considered satisfactory for most of the companies.

Foreign direct investment in India is the most influential financial resource, especially for the emerging sectors. Foreign direct investment helps in exploiting a wide range of opportunities and utilizing the same to attain the desired level of development in the nation (Gola, Dharwal, & Agarwal, 2013). The world economy including both the developed countries and other emerging countries are facing some varying trends of foreign direct investment in recent years.

The major player that is coming into view of late in India. Analyzing the trend of foreign direct investment in India shows that it is rising and the main reasons for such an increase are due to new government policies and various initiatives such as Make in India. The country has faced elevated trends of the foreign direct investment due to building investor-friendly climate in the country, thereby enabling the ease of doing business. India has been able to climb up to 10^th position in 2015 from 15^th position in 2014 as a trusted nation for Foreign direct investment. As a result, India has attracted foreign direct investments worth of $40 billion for the financial year 2015- 16, which was  29.2% higher than the last year (UNCTAD, 2016).

Sources of foreign direct investment in India

By catching the attention of the economies worldwide, India has been able to gain a huge sum by the way of equity inflows. Singapore has become the largest investor with a total investment of $13.69 billion during the financial year 2015-16. Followed by Singapore are the economies including Mauritius and USA investing $8.35 and $4.19 billion respectively. The aggregate Merger and Acquisition (M&A) deals as well as the private equity deals, which are the methods of foreign direct investment inflow, have grown up 2 times from the last year of 2015 (IBEF, 2016a).

Foreign direct investment in India has shot up 318.2 times starting from the year 1991 to 2005, from $129 million in 1991-92 to $41050 million (Dutta & Sarma, 2008). Before the year 2015-16, Mauritius was the topmost investor in the country as succeeded by Singapore. Still, the country is the major investor with its cumulative percentage share to total inflows being 34% more than double the percentage of Singapore.

The report of the department of industrial policy and promotion has shown that India has been able to gain value in various sectors including the service sector, information technology (IT) sector, automobile industry, pharmaceutical sector, power industry and construction business from the period of 2000 until 2015.

Trends of foreign direct investment in the service sector

The service sector has been able to draw the highest amount of foreign direct investment equity in the country, totalling up to $240.57 billion during 2000-2015. In 2015 the total amount of foreign direct investment in this sector amounted to $27.63 billion (DIPP, 2015). From 1991-2000, the share of service sector in the foreign direct investment in India was 15.2% as compared to the share in 2000-2011 is 19.9%.

The notable increase in the foreign investments in the service sector from the year 2014 was due to the current government coming in power and introducing a more investor-friendly climate. The major reason for such a rise in foreign direct investment in this respective sector includes the various initiatives taken by the government. The investment cap has risen in various sectors including the insurance sector from 26% to 49% and others including defence and railways. Changes in the timelines of the approval of foreign direct investment projects have also contributed to such growth of investment in this sector (IBEF, 2016).

Trends of foreign direct investment in the information technology sector

The information technology sector is the second most attractive industry for foreign investments in India. The total inflows in this sector have reached the mark of $108.13 billion in 2015 since 2000 and in the year 2015, it amounted to $34.3 billion (DIPP, 2015). Some notable motivation in this regard is that the IT industry in the country is rapidly growing and the availability of cheap labour that is highly attracting the companies from the overseas market. Again the turning year in this regard is the year 2014.

Trends of foreign direct investment in the construction industry

The construction business is again a major sector attracting foreign direct investment in the country from the past 15 years. The industries draw $113.8 billion foreign direct investment starting from the year 2000 till 2015. Various initiatives introduced by the Indian government such as Make in India helps to attract a large amount of foreign direct investment in this sector. However, the influx of foreign direct investment in the year 2015 dipped to $0.67 billion (DIPP, 2015). It is observed that even though the amount of investment is decreasing from the year 2011 itself, but its cumulative inflows from the year 2000 have been the second highest, only after service sector. The rise of foreign direct investment in such sector owes it to the rising opportunities in the power sector including power generation, distribution, transmission and equipment. Besides, the infrastructure sector has also gained momentum on an average from the year 2000. Foreign direct investment in the construction sector contributes 9% to the total foreign direct investment inflows in the country (IBEF, 2016b).

Government’s Policy in Regard to Foreign Capital:

After India became independent in August 1947, Jawaharlal Nehru, the then Prime Minister of India, made a statement in April 1949 giving the following assurances to foreign capital:

1. There would be no discrimination between foreign companies and purely Indian companies which meant that foreign capital would get the same treatment as indigenous capital.
2. Foreign investors would be permitted to remit profits and repatriate capital, taking into consideration India’s position in regard to availability of foreign exchange.
3. In case a foreign company was nationalised, fair and equitable compensation will be given to foreign investors.

The above policy was based on several considerations. There was a shortage of indigenous capital and that needed supplementing by foreign capital, if rapid industrial and economic development were to be brought about. Also, there was need of capital goods and equipment and technical know-how from abroad as India then lacked these essential requisites of growth and development.

Tax Concessions:

In the initial stages, with a view to attract foreign capital (that is, foreign companies) to India, Government offered various tax concessions and to avoid delays in finalising foreign collaboration agreements, streamlined its licensing policy of procedures to quickly approve foreign collaboration agreements.

In 1961 the Indian Investment Centre was opened, the objective being to bring together Indian and foreign businessmen and appraise foreign investors of the vast business opportunities in India.

In 1972 the Government of India took another major step to attract foreign capital into the country. It permitted wholly-owned subsidiaries in India of foreign companies, provided they undertook to export 100 per cent of their production.

Export Liability:

If the export liability was less than 100 per cent of its output, the extent of permissible foreign capital was to be decided by negotiations between the foreign companies and the Government of India.

Thus, the Government of India had to choose between the Indianisation of foreign subsidiary companies in India or boosting up export through their help. Government preferred the second of the above two possible courses. But Government’s choice of the second policy was beset with many difficulties.

A country needs natural resources, adequate levels of savings, latest technical know how, skilled human resources etc. for economic development.  Compared to developed countries, developing countries are deficit of  these resources. Lack of resources and skilled labor forces may prompt them to seek assistance from economically well developed countries. Assistance may be in the form of either technical knowledge or investments and very often, both. It may be through collaborations with foreign countries or private companies.  In India, such collaborations have always been predominant from the time of independence itself. Government has always welcomed such foreign investments with some restrictions giving new paths of co-operation. Also, its policy has undergone several changes since independence. Foreign investment policy has a direct impact on inflow of foreign money, skills and knowledge.

What are the merits of foreign capital?

No doubt, a developing country like India has many reasons to welcome fund inflows that can play an important role in the economic development of our nation.

1. Some natural resources may go unnoticed or unexploited in the absence of technology. So, welcoming new ideas can help in the effective use of resources and prevent them from going to the waste.
2. Also, new technologies can help in upgrading present techniques giving more result thus saving man power, money and time.
3. When new technologies are welcomed, employment opportunities also are created. So, it gives many employment opportunities, particularly to new professionals with new ideas. So, skilled labor force can be used in a better way.
4. They can supply domestic savings and capital formation thereby accelerating the investment rate for the economic development of the country.
5. New technologies can bring new markets and marketing experts too, thus helping to sell Indian goods in international markets for good prices.
6. Backbone of development of a country, of course, is agriculture and industry. Foreign capital can provide infrastructure for both. 

Foreign investment policy in India

Investment policy of India can be broadly classified into two periods – 1948-1990 and 1991 onward. Till 1990, there were only restricted policies and regulated inflows. But from 1991 onward, India witnessed liberalization of foreign investment laws.

The restrictive period – 1948-1990

At First, the policy of independent India was reflected in Industrial Policy Resolution (IPR) which fully accepted the participation of foreign capital, particularly with new technology ideas to promote industrialization in our country. But certain regulations were also attached which required ownership and control in Indian hands. In 1949, the then Prime Minister of India, Pt. Jawahar Lal Nehru made a statement in constituent assembly bringing three major issues namely, no discrimination between foreign and Indian enterprises, fair compensation to foreign investors if need arises for the nationalization of a foreign enterprise and also allowed them to remit profits if foreign exchange position allowed. Also, foreign collaborations were encouraged in those industries which required large capital investments, production skills and processes, export industries and those which were needed for country’s development as a whole. Also, foreign collaborations with equity participation were appreciated which led to the sharp increase in its number. Thus, country witnessed outflow of profits, dividends, and royalties which led to foreign exchange crisis in the late sixties.

Foreign Exchange Regulation Act (FERA) of 1973 is an act to consolidate and amend laws regulating transactions indirectly affecting foreign exchange payments, currency exchange and conservation and utilization of foreign exchange resources of the country. It included all non-banking companies and branches with more than 40% foreign participation. During late seventies, India realized its poor technology and products as compared with other nations. This was partially due to a highly protected local markets and MNCs. However, Industrial Policy Statements of 1980 and 1982 gave a liberalization of licensing rules and some exemptions under FERA.

Liberalization period- 1991 onwards

Introduction of new industrial policy in 1991 led to many radical changes in foreign investment policy. To promote foreign funds and investments, many restrictions were removed and encouragement like tax exemptions also given. It virtually welcomed foreign investors to almost every sector of India, even renting foreign participation with advanced technologies and adding new skills. Unlike in the past, our country is promoting international business and investments even through Government delegations visiting other countries. They are trying to attract foreign investors to invest, seeing it as a part of industrialization and exchange of new ideas, skills and better use of resources, both human and non-human.

India’s foreign investment policy has come a long way since 1947. Though they were warmly welcomed at first to promote rapid industrialization and foreign fund, certain restrictions and selections were made later. But, since India’s technology did not improve as years passed by and conditions only worsened more, further liberalization of foreign policy became necessary to attract more investors to India. But often a question is raised as to whether foreign technology and investments help India in long run or adversely affect our economy.  But everyone agrees that India is far behind in the proper utilization of resources and skilled people purely depending on foreign technology a lot. While many developing countries like Japan and China are coming forward with many innovative ideas, we are just depending on them, thinking how can we import their commodities at cheap rates and market it here, fooling ordinary man. Disputes won’t send by adding a single point or two. 

Need for Foreign Collaboration:

Lack of capital is a serious handicap in the way of economic development of underdeveloped countries. The internal resources are not sufficient, so they have to rely on foreign capital in the initial stages of their development. The pace of economic development primarily depends upon the rate of capital formation. But in the underdeveloped countries the per capita real income being very low, the rate of saving investment is very low.

Therefore, these countries are obliged to depend upon external sources of capital for initiating them process of economic development.

External capital cards in the form of (i) direct business investment commonly called, private foreign capital and (ii) international loans and grants more commonly known as foreign aid or external assistance.

Contribution of Foreign Capital:

The underdeveloped countries are always capital scarce countries and that is a perpetual need of capital for economic development projects. The degree of dependence on foreign capital depends on the extent to which domestic resources could be mentioned. India has required foreign capital to speed up economic growth.

There was considerable opposition to the use of foreign capital in India. This was mainly due to the political role it played in the past. The colonial empires of the 19th and 20th centuries were built by European countries on the basis of trade and identity. The Government of India at one time was subjected to the pressure of foreign companies and foreign government.

Arguments in Favour of Foreign Capital:

India is a developing country, and has adopted the path of economic planning for growth. Her natural resources and labour force are in abundance but there is lack of capital. Our technological knowledge is outdated and industrial productivity is very low under these circumstances, the importance of foreign capital increases.

This can be explained as under:

1. Encouragement to Domestic Savings:

In a developing country like India the level of domestic savings is low because of low income of the people. Naturally it suffers from scarcity of investment and in this way is caught in the vicious circle of poverty. With the help of foreign capital, the savings and investments can be pushed up.

2. Proper Exploitation of Natural Resources:

India possesses abundant natural resources but due to lack of technological knowhow and capital, the natural resources cannot be properly exploited. Thus it is necessary that the help of foreign capital is sought in order to accelerate the pace of economic development.

3. Availability of Foreign Technology and Managerial Techniques:

Developing countries also lack new technology and modern scientific managerial techniques. With the help of foreign capital these can also be gained. This process is essential for the economic development of the country.

Establishment of Basic and Key Industries:

Basic and capital intensive industries cannot be set up for want of sufficient capital. The domestic capital is shy and does not come forward. Thus foreign capital can easily contribute to the development of such industries. Economic history of India is an evidence that foreign capital has played a vital role in the establishment of basic and key industries.

Helpful in Accelerating the Pace of Economic Development:

To accelerate the pace of economic development the policy of comprehensive economic planning has to be followed. Its need cannot be met with domestic reasons. Thus foreign capital becomes essential in boosting the level of capital formation.

Arguments against Foreign Capital:

1. Obsolete Machines of Technology:

Foreign capital is responsible for obsolete machines and technology being passed on to Indian partners by the foreign collaborations.

2. Dependence on Foreign Countries:

Foreign collaboration has made Indian industries dependent to a considerable extent on imports and intermediate goods and parts of machinery. It has destroyed self-reliance.

3. Foreign capital offer Prize Posts and superior jobs to their own nationals. They disregard the claims of highly qualified Indians and thus follow the policy of discrimination.
4. Foreign capital derives the industrial profits out of the country. This may lead to the exhaustion of country’s valuable resources and the progressive impoverishment of the country.
5. Foreign capital and enterprise brings about economic development by the foreigners. Economic domination may entail political domination in some form. Foreign capital may thus give rise to vested interests which may oppose the political and economic advancement of the country.
6. Foreign capital bound to beat to great dependence on foreign countries. This may, it is apprehended, impede the attainment of socialist pattern of society.
7. Foreign capital can prove highly prejudicial to national defence if have and key industries are monopolized by the foreigners.

These are the disadvantages that accrue to the country from the use of foreign capital. But in spite of strong reaction in the country against the import of foreign capital we have to consider our need to foreign capital in the light of requirements of a backward country like India.

Dangers of Private Foreign Capital:

From the Indian experience since her independence, the following dangers of private foreign capital operating in India (through their Indian collaborators) have come to be noticed:

1. Foreign companies from the West European countries and from the United States are generally reluctant to enter into collaboration with public sector companies (i.e. Government companies) in India, mostly on ideological grounds. If insisted to do so, they would rather not come to India than offer their participation with the Public Sector Indian companies.
2. In certain areas of industrial production, Indian technology is fairly well developed. Collaboration with foreign companies in low priority areas like cosmetics and luxury goods has only meant duplication of technology which is unnecessary and often costly. Indian companies or entrepreneurs have the necessary technology in such low priority industries which means any collaboration in such areas is superfluous.
3. The rate of return on initial foreign investments in India is very high, making it possible to return the entire amount of foreign investment within 2 to 4 years. It is, therefore, argued that unless foreign collaboration agreements help to increase India’s exports and result in decrease in dependence on foreign countries for imports, outflow of foreign exchange might far outweigh initial gain from foreign collaboration agreements.
4. Often technology that is passed on by private foreign collaborators of Indian partners is obsolete on not appropriate to Indian conditions; often import of capital equipment was far in excess of India’s requirements. Thus, technology appropriate to Indian conditions or development of such technology in Indian itself through collaboration with foreign companies has not become possible to any very great extent.
5. It is noted that royalty payments and fees for technical services rendered by foreigners all result in increasing claims on India’s foreign exchange earnings and reserves which are relatively small in relation to the country’s requirements. One estimate is that total outgoings due to private foreign collaboration agreements were more than the inflow of foreign capital. For example, Coca Cola with a small investment of foreign currency used to send abroad many times that amount annually by way of profit until permission to continue its activities was refused to the country.

The same is true of the US oil companies like of ESSO and Caltex. For example, the ESSO with an investment of Rs. 30 crore (with Indian holdings of only Rs. 57 lakh) took away from India profit (in foreign currency) of Rs. 83 crore during 1968 to 1970 only.

6. On the whole, the impact of foreign private collaboration on India’s balance of payments has not been favourable. The main reason for his has been the substantially high level of imports consequent on foreign collaboration agreements as compared to the low level of exports, such foreign collaborations hardly adding to India’s export earnings.

For long under the private foreign collaboration agreements, as excessive number of technicians, often not suitable to Indian conditions were sent to India and designs and machines were not suitable to Indian conditions; but under the agreements, they were imposed on India.

7. There is also the myth of the policy of Indianisation. Under Section 29(1) of the Foreign Exchange Regulation Act, all foreign companies are required to dilute their ownership to 74 per cent and under Section 29(2) of the FERA, the Indian branches of foreign companies are to be converted into Indian companies with non­resident share in equity capital not exceeding 40 per cent.

It is observed that the dilution of equity form 100 per cent to 74 per cent (or from 100 per cent to 40 per cent) has hardly made any difference to the drain of foreign exchange from India to foreign countries in which the head offices of foreign collaborations are situated.

It is observed, for example, that Ponds and Warren Tea were able to send home net worth of their company’s investment every two years. In the case of Colgate-Palmolive, the highest limit of profit was 89 per cent which meant that the entire net worth of assets invested in India was repatriated within less than 14 months.

The new issues of such companies are excessively oversubscribed on the pretext of broadening the Indian of these companies are able to raise plenty of local capital and the Indian Shareholders with their personal interest only in view and in dividend, provided support to the functioning of multinational companies whenever the bogey of expropriation was raised in Indian Parliament.

It was not the existing equity capital that was shared with India national, but the new equity that was issued to Indians. The Indian shareholders were scattered all over India and even if they wanted, they could not take any concerted action against the policies of the company. In fact, Indian shareholders were only interested in dividend and hardly took any interest in the functioning of the company. Thus, the domination of foreign collaborators continued unabated in India.

The myth of Indianisation can be exposed by the fact that foreign partners or the parent companies in their collaboration agreement retained the absolute power of appointing chairman and managing directors of their Indian subsidiaries even when the dilution of shareholdings was brought down to 25 per cent.

It is also observed that by adopting the practice of wide dispersal of equity holdings and ownership rights, the foreign collaborators have also significantly blunted Indian people’s opposition to multinational foreign companies with subsidiaries in India while repaying very high returns on their investments.

It may be said that garb or covering of Indianisation is being cleverly exploited by many foreign multinational companies to convert the business environment in India in their favour and thus continue to make and transfer home enormous profits made in India annually.

Michael Kidron has estimated that during 1948 to 1961, foreign companies as a whole had taken out of India total funds worth three times their investments in India. It may be said that the situation did not change much during the 1970s.

8. Instead of allowing foreign private capital and its participation on a selective basis and only in the case of essential capital equipment and other essential inputs, foreign collaboration agreements were permitted out of overenthusiasm to bring foreign capital into India into lines of production of commodities such as chewing gum, cosmetics, boot-polish, cigarettes, hotels and so on.

Though government assumed powers under the FERA, no concrete results have followed and foreign companies continue to make enormous profit in India and remit them to their mother countries as before.

Global Depository Receipt (GDR) is an instrument in which a company located in domestic country issues one or more of its shares or convertibles bonds outside the domestic country. In GDR, an overseas depository bank i.e. bank outside the domestic territory of a company, issues shares of the company to residents outside the domestic territory. Such shares are in the form of depository receipt or certificate created by overseas the depository bank.

Issue of Global Depository Receipt is one of the most popular ways to tap the global equity markets. A company can raise foreign currency funds by issuing equity shares in a foreign country.

Global Depository Receipt Example

A company based in USA, willing to get its stock listed on German stock exchange can do so with the help of GDR. The US based company shall enter into an agreement with the German depository bank, who shall issue shares to residents based in Germany after getting instructions from the domestic custodian of the company. The shares are issued after compliance of law in both the countries.

Global Depository Receipt Mechanism

• The domestic company enters into an agreement with the overseas depository bank for the purpose of issue of GDR.
• The overseas depository bank then enters into a custodian agreement with the domestic custodian of such company.
• The domestic custodian holds the equity shares of the company.
• On the instruction of domestic custodian, the overseas depository bank issues shares to foreign investors.
• The whole process is carried out under strict guidelines.
• GDRs are usually denominated in U.S. dollars

Let’s now look at the advantages and disadvantages of Global Depository Receipt.

Advantages of GDR

The following are the advantages of Global Depository Receipts:

• GDR provides access to foreign capital markets.
• A company can get itself registered on an overseas stock exchange or over the counter and its shares can be traded in more than one currency.
• GDR expands the global presence of the company which helps in getting international attention and coverage.
• GDR are liquid in nature as they are based on demand and supply which can be regulated.
• The valuation of shares in the domestic market increase, on listing in the international market.
• With GDR, the non-residents can invest in shares of the foreign company.
• GDR can be freely transferred.
• Foreign Institutional investors can buy the shares of company issuing GDR in their country even if they are restricted to buy shares of foreign company.
• GDR increases the shareholders base of the company.
• GDR saves the taxes of an investor. An investor would need to pay tax if he purchases shares in the foreign company, whereas in GDR same is not the case.

 Disadvantages

 The following are the disadvantages of Global Depository Receipts:

• Violating any regulation can lead to serious consequences against the company.
• Dividends are paid in domestic country’s currency which is subject to volatility in the forex market.
• It is mostly beneficial to High Net-Worth Individual (HNI) investors due to their capacity to invest high amount in GDR.
• GDR is one of the expensive sources of finance.

Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly owned subsidiary of Reserve Bank of India. It was established on 15 July 1978 under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 for the purpose of providing insurance of deposits and guaranteeing of credit facilities.

DICGC insures all bank deposits, such as saving, fixed, current, recurring deposit for up to the limit of Rs. 500,000 of each deposits in a bank.

Legal Framework/Objective

The functions of the subsidiary are governed by the provisions of ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’ (DICGC Act) and ‘The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961’ framed by the Reserve Bank of India in exercise of the powers conferred by sub-section (3) of Section 50 of the Act.

A maximum of ₹5,00,000 (after the budget of 2020-21) is insured for each user for both principal and interest amount. If the customer has accounts in different banks, all of those accounts are insured to a maximum of ₹5,00,000 each.

However, if there are more accounts in same bank, all of those are treated as a single account. The insurance premium is paid by the insured banks itself. This means that the benefit of deposit insurance protection is made available to the depositors or customers of banks free of cost.

The Corporation has the power to cancel the registration of an insured bank if it fails to pay the premium for three consecutive half-year periods. The Corporation may restore the registration of the bank if the bank makes a request and pays all the amounts due by way of premium from the date of default together with interest.

Reforms

The Financial Sector Legislative Reforms Commission (FSLRC) was a body set up by the Government of India, Ministry of Finance, on 24 March 2011, to review and rewrite the legal-institutional architecture of the Indian financial sector. In its report the FSLRC recommended a regulatory structure consisting of seven agencies including a deposit insurance-cum regulatory agency (which was named as Resolution Corporation). The present DICGC will be subsumed into the Resolution Corporation (RC) which will work across the financial system.

Drawing on the best international practice, the FSLRC proposal involved a unified resolution corporation that will deal with an array of financial firms such as banks and insurance companies; it will not just be a bank deposit insurance corporation. It will concern itself with all financial firms which make highly intense promises to consumers, such as banks, insurance companies, defined benefit pension funds, and payment systems.

It will also take responsibility for the graceful resolution of systemically important financial firms, even if they have no direct links to consumers.

The Government of India introduced the Financial Resolution and Deposit Insurance bill, 2017 (FRDI bill) in Lok Sabha in the Monsoon session of 2017 to bring forth these reforms. There have been many concerns with regards to the new bill such as:

1. Presently the banks have to pay a sum to the DICGC as insurance premium which insures all kinds of bank deposits up to a limit of ₹5,00,000. In case a stressed bank had to be liquidated, the depositors would be paid through DICGC. Though the bill proposes the banks to pay a sum to the Resolution Corporation, it neither specifies the insured amount nor the amount a depositor would be paid. It is thus unclear how much a depositor would be paid in case of liquidation.
2. The bail in clause which largely worked against the interests of the depositors (as in Cyprus).