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University of Mumbai BMS Notes

Management Lessons from Quran

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The primary reason a Muslim must manage his time is because he wants success in the Hereafter. One who truly believes knows that what’s at stake isn’t just career or money.

The purpose of time management is to effectively channel time into doing things that take us closer to our goals.

For a believer, the ultimate goal is to become the inheritors of Jannatul Firdaus, the highest level of Paradise. All subsequent goals are means that take us closer to that ultimate goal.

Principles of Islamic Management:

  • Honesty
  • Efficiency
  • Patriotism
  • Right man in the right place
  • Discipline
  • Division of labour
  • Unity of command and unity of direction
  • Centralization and decentralization
  • Preference to the organizational interest
  • Remuneration
  • Economy
  • Justice for all
  • United efforts
  • Dignity of labour
  • Exemption
  • Accountability
  • Tawakkul: The act of relying upon something or someone to place faith or confidence in Allah (usually).

Characteristics of Islamic Management

  • Basic foundation of Islamic Management is the Quran and Sunnah.
  • Original model of IM is Prophet Muhammad (SAW) and his companions.
  • Only economic development is not the final target of IM.
  • Activities aimed at welfare in the life hereafter.
  • Employees should maintain cordial relationship and team spirit.
  • Accountability is twofold: i) to immediate boss and ii) Almighty Allah
  • Manager considers himself as a vicegerent of Allah.
  • Property is thought to be trusted by Allah to the users and the managers.
  • Decisions are made through consultation ( Mashwara).
  • The manager does not have any greed to misuse the power of the post.
  • There must be prevailing peace, development and other benefits.
  • IM is applicable to personal, familial and social, economic and political organizations.
  • Here hypocrisy, forgery, activities adverse to religion and morality are not tolerated.
  • Management is thought to be a universal concept.
  • There is freedom of thinking and expression.
  • Competition is a common strategy in good deeds.

Goal Setting:

Success and failure are measured by the scale that will weigh our deeds on the Day of Judgment. That measurement will decide whether we reach Paradise or not.

Time Management

Chapter Al-Mu’minun begins by listing the qualities of a true believer. Interestingly, the list begins and ends with salah, with the remaining qualities sandwiched in between. Verse 2 mentions the quality of having khushu’ (humility and submissiveness) in prayer. Verse 9 talks about being “hafidh” of your prayers, which means performing the prayers within their set time limits.

A true believer prays five times every day, no matter where he is or in what condition. Even if he is lying semi-paralyzed in the ICU or is being chased by a bloodthirsty hyena, if he is sane and able to move his head, he has to perform all five prayers within their fixed time limits. They are like pillars around which he should arrange the rest of his life.

Sense of Urgency

We only have a limited amount of time in this world, and, compared to the grand scale of things, this time is really very short.

Allah gives us examples in this chapter of people and even entire nations that were destroyed for their disbelief, arrogance and denial of resurrection.

Avoiding Time-Wasters

Continuing from point 3 above, the believers’ sense of urgency compels them to avoid things that waste time. They are portrayed in this chapter as spending time in things that matter, such as praying and giving charity.

They are also described as staying away from things that take them farther away from their goals, such as committing fornication and engaging in laghw. Laghw refers to acts of shirk, sins, and any action or speech that doesn’t bring any benefit. (Ibn Kathir)

University of Mumbai BMS Notes

Management Lessons from Mahabharata

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Management Lessons from Mahabharata

If you want to be the best leader, Mahabharata should be your guide. You may think that the Indian epic is obsolete and archaic, but you’d be surprised to know how much relevance it holds in today’s world, especially when it comes to your work life. Here are 7 management lessons you must learn from Mahabharata.

  1. Seize Every Opportunity

Look out for opportunities outside your scope of work. Never hassle yourself too much with the motive of defeating your competitor. Rather, invest all energies on a bigger goal – to add strength and power to your business.

  1. Win Allies

Five brothers won against a hundred. How do you think Pandavas did that? The relationships they established over the years paid off. You may be busy focussing on your own growth at the present, but you must start reaching out to more people and making allies. They will push you forward when the time comes.

  1. Distribute Work

The more people you have, working towards different goals, the more efficient the output is going to be. One man leadership strategy didn’t work for Kauravas and there is no way it’s going to work for you.

  1. Know How to Build Team Spirit

Kauravas were plenty in number but null in strength. Make your team work towards a single goal instead of personal ones. Take contributions from everyone. Hear everyone out; make them learn how to work with each other.

  1. Give Your Team Individual Goals

Allot individual goals to each team. This will help build up enthusiasm and in turn, help you in the longer run. Even though Pandavas were working towards the same ultimate goal, they had individual roles in the battle too.

  1. Commitment; Keep It Strong

Once you’re up for a challenge, do not back out. Had Pandavas fretted about being negligible in number in comparison to the Kauravas, they would’ve never even tried. Determination and commitment will surely take you a long way.

  1. Know Every Member’s Potential

If you’re going to manage a team, you better know what role they suit the best. Pandavas knew how to harnesses energies from each man in their army. You should be smart enough to use your team’s ability and potential to the maximum.

University of Mumbai BMS Notes

Management Lessons from Vedas

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According to Chanakya there are 6 basic principle Management lesson from vedas

  1. Vasudha-Eva-Kutumbakam (Accepting the whole world as one and one’s family)

Yes, he did support the idea of nation-states, yet he strongly upheld the Vedic belief that the nation-state exists “not just for the welfare of its citizen” but also for “the whole world.” This is evident from the very first stanza of Arthashastra “I, therefore, write this book for the greater good and uplifting of the world…”.

  1. Samarpan Bhaav (Dedication)

When he saw the sad state of his nation Chanakya was depressed and sought revocation; but then realized, contemplating on Vedic literature, that vengeance is a dangerous and that it can harm even the one who is holding on to it. He then decided to work to establish a single empire for the greater good. He certainly dedicated many years of his life to it. Legend has it that he found Chandragupta when was a teenager, then educated, nurtured and mentored him to be King. It was at least over a span of two decades. This is a testimony of Samarpan Bhaav (Dedication),

  1. Lokasangraha (Welfare of all beings)

According to Chanakya, this was the supreme duty of everyone, including the King. This is evident in Book I of the Arthashastra which reads “… King… shall maintain his subjects in the observance of their respective duties by exercising authority; keep up his personal discipline by receiving lessons in wisdom, and endear himself to the people by bringing them wealth and doing good to them.” Also, “… The King shall keep away from hurting the innocent and their property; avoid not only lust, even in a dream, but also falsehood, haughtiness, and evil proclivities; and keep away from unrighteousness and uneconomical transactions.”

  1. Shubh Laabh (Ethical Profits)

This was the key economic objective which the King had to observe not just among his subjects but also for himself. In Chapter 7 of Arthashastra he notes “Not violating righteousness and economy, he shall enjoy his desires. Then he shall never be devoid of happiness. He may enjoy in an equal degree the three pursuits of life, charity, wealth and desire, which are interdependent on each other. Anyone of these three, when enjoyed in excess, hurts not only the other two but also itself.” Chanakya held that wealth is as important as desire and charity; but that this is possible only by “wealth of their knowledge”.

  1. Nishkaama Karma (Deeds without greed)

Apart from other altruist attitudes, Chanakya upheld the idea of deeds without greed. While mentioning the “Duties of the King” he writes, “A King by overthrowing the aggregate of the six internal enemies, namely lust, anger, greed, vanity, haughtiness and overjoy, shall restrain the sense organs…” Also, in the same chapter, “The King may enjoy his desires but only by ensuring non-violation of righteousness and no harm to the economy. “

  1. Ati-Hyaastha-Varjayet (Shunning extremes)

Balance is a key ingredient according to teachings of Kautilya in Arthashastra. While he clearly shunned negative qualities, he also mentioned that people should shun extreme and senseless goodness for the sake of unworthy people. “In the woods”, he says “that tree is chopped first which is straight.” The essence of life, according to him was ” finding the balance between good and bad actions, happiness, and unhappiness, pain and pleasure, cries and laughter.”

University of Mumbai BMS Notes

Ethics vs. Ethos

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The main difference between ethics and ethos is that ethics refer to a set of moral principles while ethos refers to the character or customs or a set of attitudes and values. Ethics is derived from the word ethos.

The two words ethos and ethics are linguistically linked as they share the same etymology. However, in the present world, these two words are used distinctly.

Ethics

The word “ethics” comes from the Greek word “ethos” which means “character” or “custom.” Therefore, ethics combines the meaning of the word ethos with the wider meaning of the word ethics. Ethics refers to the set of moral principles or a system of moral values for a particular society or an institution. Merriam Webster defines ethics as “the discipline dealing with what is good and bad and with moral duty and obligation.”

Hence, ethics differ according to the individual, his social background, etc. However, ethics defines what are morally good and acceptable from a majority of society.

For instance, the ethics in a certain society is originated with an alliance to their customs, traditions and religious beliefs as well. Hence, in this instance, ethos directly influences the formation of ethics. However, ethics in a general sense are those that are accepted universally; moral ethics, etc.

Ethos

Ethos is a Greek word that has meaning such as “Character” or “Custom”. Originally, this word was used by Aristotle to describe a man’s character or personality; a combination of passion and caution. However, at present, ethos refers to the guiding beliefs and values that distinguish a person, society or institution from others. According to Merriam Webster, ethos refers to the ‘the distinguishing character, sentiment, moral nature, or guiding beliefs of a person, group, or institution’.

Thus, ethos mainly refers to the core set of attitudes, beliefs, and values that gives an identity to a person, community, institution, etc. For instance, the character identity of a certain individual in a society is a manifestation of that person’s outlook in life developed through his social traditions, customs, and religious beliefs as well.

Another situation is when the business values of a certain institution can be distinguished from another; here, it is their attitudes and aspirations that contribute to formulating their business ethos. Hence, ethos can be explained as the characteristic spirit of a culture, era, or community as manifested by the attitudes and aspirations of its members.

Difference

Ethics

Ethos
Denotes a system of values on which an institution is based.
It is a constituent of moral philosophy.		 Ethos is a quality that brings harmony to a group.
It helps in distinguishing one character or sentiment from the other.
Originating Word Derived from the word Ethikos, which has a Greek origin. Ethos itself forms the root word of Ethikos.
Nature Has a universal outlook. More customized nature as it can show the identity of people.
Use It provides a general guideline for a society or person. It sets principles. The beliefs and attitudes of a person or institution or society are depicted.
Type Ethics are moral principles that can be used as guidelines for a Person, Society or an institution. ethos describes the character of the attitudes and beliefs of a certain person, Society or an Institution.

Ethics and ethos are etymologically linked words. Moreover, ethics can be identified as being derived from the Greek word ethos. Nevertheless, the difference between ethics and ethos is that ethics refer to a set of moral principles while ethos refers to the character or customs or a set of attitudes and values.

University of Mumbai BMS Notes

Indian Vs Western Management

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Western Managers Eastern Managers
Is more open, direct and confrontational Puts greater value on seniority, relationships and family ties
Is more flexible and creative Is likely to be paternalistic
Encourages empowerment of line workers Supports lifetime employment and opposes hire-and-fire
Favors databases and statistics and resists intuition Places more emphasis on corporate loyalty
Is characterized more by individual initiative than by group consensus, Puts greater importance on short-term profits Is more likely to stress quantity than quality
Is more productivity-oriented than people-oriented Is more resistant to women assuming positions of management

There are also some similarities in the way that managers perceived the importance of connections, like in business relationships and personal friendships but also some marked differences, with local Asian managers and expatriate Western managers regarding government connections, family connections, gifts and favors, and bribes as much more important that Western managers did.

Against the background of differences in management style, the achievement of a consistent corporate culture throughout the MNE is considered in general. It must reflect the differences in the local country and business culture but also maintain the firm’s standards and values.

A number of writers have considered the differences between the International and domestic planning and explained that the very nature of international markets, which are geographically dispersed and culturally difference means that whilst there may be greater opportunities for the company there are also greater risks and uncertainties.

It is worth emphasizing at this point, however, that because domestic markets are becoming more segmented and more culturally fragmented the differences between International marketers and domestic marketers are becoming less clear especially as few domestic markets are not unaffected by international competition.

Most companies, as they grow, move gradually into international markets and the major evolutionary stages of planning; the unplanned stage, the budgeting stage, the annual business planning and the strategic planning stage, which equate closely to the evolution of the business.

Individual managers adopt different attitudes to International business planning, ranging from enthusiasm to reluctance. The three most common reasons for resistance to the planning process are,

  1. Planning is time consuming when the time could be better spent on managing the business,
  2. Setting goals and objectives in a volatile environment remote from the HQ is irrelevant, divisive and applies unnecessary constraints and
  3. Planning is purely a process by which senior managers at the domestic HQ can inform themselves and control the international business and is of no benefit for other managers.

The three most common reasons for supporting the International business planning process given by managers are that it

  1. Encourages everyone wherever they might be in the organization to pull in the same direction,
  2. Avoids waste of time and resources through duplication of work and
  3. Ensures that the company is better prepared for coping with unexpected events and international competition.
University of Mumbai BMS Notes

Cash Flows at Subsidiary and Parent Company

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FASB Statement No. 95, “Statement of Cash Flows,” mandates that companies include a state­ment of cash flows among their financial statements. The consolidated statement of cash flows is not prepared from the individual cash flow statements of the separate companies. Instead, the income statements and balance sheets are first brought together on the worksheet. The cash flows statement is then based on the resulting consolidated figures.

Thus, this statement is not actually produced by consolidation but is created from numbers generated by that process. However, preparing a consolidated statement of cash flows does introduce several accounting issues. Its preparation involves properly handling of any excess amortizations, intercompany transactions, subsidiary dividends, and several other acquisition-year cash flows.

Amortizations:

A worksheet adjustment (Entry E) includes in the consolidation process the amortizations of acquisition-date excess fair-value allocations. These expenses do not appear on either set of individual records but in the consolidated income statement. As a noncash decrease in income, this expense, under the indirect approach, is added back to consolidated net income to arrive at cash flows from operations. If the business combination uses the direct approach, it omits the balance because this expense does not affect the amount of cash.

Intercompany Transactions:

As this text previously discussed, a significant volume of transfers between the related compa­nies composing a business combination often occurs. The resulting effects of this intercompany activity is eliminated on the worksheet so that the consolidated statements reflect only transac­tions with outside parties. Likewise, the consolidated statement of cash flows does not include the impact of these transfers.

Intercompany sales and purchases do not change the amount of cash held by the business combination when viewed as a whole. Because the statement of cash flows is derived from the consolidated balance sheet and income statement, the impact of all transfers is already removed. Therefore, no special adjustments are needed to properly present cash flows. The worksheet entries produce correct balances for the consolidated statement of cash flows.

Subsidiary Dividends Paid:

The cash outflow from dividends paid by a subsidiary only leaves the consolidated entity when paid to the non-controlling interest. Thus dividends paid by a subsidiary to its parent do not appear as financing outflows. However, subsidiary dividends paid to the non-controlling inter­est are a component of cash outflows from financing activities.

Acquisition Year Cash Flow Adjustments:

In the year of a business acquisition, the consolidated cash flow statement must properly reflect several additional considerations.

For many business combinations, the following issues frequently are present:

  1. Cash purchases of businesses are an investing activity. The net cash outflow (cash paid less subsidiary cash acquired) is reported as the amount paid in a business acquisition.
  2. For intraperiod acquisitions, SFAS No. 95 requires that any adjustments from changes in oper­ating balance sheet accounts (Accounts Receivable, Inventory, Accounts Payable, etc.) reflect the amounts acquired in the combination. Therefore, any changes in operating assets and lia­bilities are reported net of effects of acquired businesses in computing the adjustments to con­vert consolidated net income to operating cash flows. Use of the direct approach of presenting operating cash flows also reports the separate computations of cash collected from customers and cash paid for inventory net of effects of any acquired businesses.
  • Any adjustments arising from the subsidiary’s revenues or expenses (e.g., depreciation, amortization) must reflect only post-acquisition amounts. Closing the subsidiary’s books at the date of acquisition facilitates the determination of the appropriate post-acquisition sub­sidiary effects on the consolidated entity’s cash flows.

Depreciation and Amortization:

These expenses do not represent current operating cash out­flows and thus are added back to convert accrual basis income to cash provided by operating activities.

Increase in Accounts Receivable, Inventory, and Accounts Payable (Net of Acquisition):

SFAS No. 95 requires that changes in balance sheet accounts affecting operating cash flows reflect amounts acquired in business acquisitions.

Acquisition of Salida Company:

The Investing Activities section of the cash flow statement shows increases and decreases in assets purchased or sold involving cash.

Consolidation Includes

Adjustments to offset the net effect of intercompany sales and transfers are required, because consolidation rolls all results into one and no accounting rule allows a company to sell or transfer goods or services to itself. For consolidation rules to apply, your company must own the majority of the outstanding stock, membership interests or limited partner interests in a business. If your company has voting control but not ownership control, meaning your company directs what another business does but does not own 50.1 percent or more, then you exclude that business from the consolidation.

Management Notes

Control & Regulation of Euro Bond Market

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The European Securities and Markets Authority (ESMA) is an independent European Union (EU) Authority that contributes to safeguarding the stability of the EU’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets.

ESMA achieves its objectives by:

  • Assessing risks to investors, markets and financial stability;
  • Completing a single rulebook for eu financial markets;
  • Promoting supervisory convergence; and
  • Directly supervising credit rating agencies, trade repositories and securitisation repositories.

Activities

ESMA achieves its mission and objectives through four activities:

  • Assessing risks to investors, markets and financial stability;
  • Completing a single rulebook for EU financial markets;
  • Promoting supervisory convergence; and
  • Directly supervising specific financial entities.

Assessing risks to investors, markets and financial stability

The purpose of assessing risks to investors, markets and financial stability is to spot emerging trends, risks and vulnerabilities, and where possible opportunities, in a timely fashion so that they can be acted upon. ESMA uses its unique position to identify market developments that threaten financial stability, investor protection or the orderly functioning of financial markets.

ESMA’s risk assessments build on and complement risk assessments made by other European Supervisory Authorities (ESAs) and NCAs and contribute to the systemic work undertaken by the European Systemic Risk Board (ESRB), which focuses on stability risks in financial markets.

Internally, the output of the risk assessment function feeds into ESMA’s work on the single rulebook, supervisory convergence and the direct supervision of specific financial entities.

Externally, it promotes transparency and investor protection by making information available to investors via our public registries and databases and, where needed, by issuing warnings to investors. The risk analysis function closely monitors the benefits and risks of financial innovation in the EU.

Completing a single rulebook for EU financial markets

The purpose of completing a single rulebook for EU financial markets is to enhance the EU Single Market by creating a level playing field for investors and issuers across the EU. ESMA contributes to strengthening the quality of the single rulebook for EU financial markets by developing Technical Standards and by providing advice to EU Institutions on legislative projects. This standard setting role was ESMA’s primary task in its development phase.

Promoting supervisory convergence

Supervisory convergence is the consistent implementation and application of the same rules using similar approaches across the 27 Member States. The purpose of promoting supervisory convergence is to ensure a level playing field of high-quality regulation and supervision without regulatory arbitrage or a race to the bottom between Member States. The consistent implementation and application of rules ensures the safety of the financial system, protects investors and ensures orderly markets.  Supervisory convergence implies sharing best practices and realising efficiency gains for both the NCAs and the financial industry. This activity is performed in close cooperation with NCAs. ESMA’s position in the ESFS makes it qualified to conduct peer reviews, set up EU data reporting requirements, thematic studies and common work programs, draft opinions, guidelines and Q&As; but also build a close network that can share best practices and train supervisors. Following the ESA’s Review, ESMA will also identify two EU-wide strategic supervisory priorities that NCAs shall consider in their annual work programmes. ESMA actively supports international supervisory coordination.

Directly supervising specific financial entities

ESMA is the direct supervisor of specific financial entities:

  • Credit Rating Agencies (CRAs)
  • Securitisation repositories (SRs)
  • Trade Repositories (TRs)

Eurobonds or stability bonds were proposed government bonds to be issued in euros jointly by the European Union’s 19 eurozone states. The idea was first raised by the Barroso European Commission in 2011 during the 2009–2012 European sovereign debt crisis. Eurobonds would be debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to the eurozone bloc altogether, which then forwards the money to individual governments. The proposal was floated again in 2020 as a potential response to the impacts of the COVID-19 pandemic in Europe, leading such debt issue to be dubbed “corona bonds”.

According to the European Commission proposal the introduction of eurobonds would create new means through which governments finance their debt, by offering safe and liquid investment opportunities. This “could potentially quickly alleviate the current sovereign debt crisis, as the high-yield Member States could benefit from the stronger creditworthiness of the low-yield Member States.” The effect would be immediate even if the introduction of eurobonds takes some time, since changed market expectations adapt instantly, resulting in lower average and marginal funding costs, particularly to those EU member states most hit by the financial crisis. The commission also believes that eurobonds could make the eurozone financial system more resilient to future adverse shocks and reinforce financial stability. Furthermore, they could reduce the vulnerability of banks in the eurozone to deteriorating credit ratings of individual member states by providing them with a source of more robust collateral. Setting a euro-area wide integrated bond market would offer a safe and liquid investment opportunity for savers and financial institutions that matches its US$ counterpart in terms of size and liquidity, which would also strengthen the position of the euro as an international reserve currency and foster a more balanced global financial system.

The governments of those states that most people would like to take over those debt risks do not think that this is a good idea and see other effects. They do not understand why they should help a group of states that have excessively borrowed and circumvented the EU contracts for many years should by making it easier for them to borrow more via Eurobonds. Germany is one of those sceptical states, together with Austria, Finland and the Netherlands.

Eurobonds have been suggested as a way to tackle the 2009–2012 European debt crisis as the indebted states could borrow new funds at better conditions as they are supported by the rating of the non-crisis states. Because Eurobonds would allow already highly indebted states access to cheaper credit thanks to the strength of other eurozone economies, they are controversial, and may suffer from the free rider problem. The proposal was generally favored by indebted governments such as Portugal, Greece, and Ireland, but encountered strong opposition, notably from Germany, the eurozone’s strongest economy. The plan ultimately never moved forward in face of German and Dutch opposition; the crisis was ultimately resolved by the ECB’s declaration in 2012 that it would do “whatever it takes” to stabilise the currency, rendering the Eurobond proposal moot.

European Commission proposal

On 21 November 2011 the European Commission suggested European bonds issued jointly by the 17 eurozone states as an effective way to tackle the financial crisis. On 23 November 2011 the Commission presented a Green Paper assessing the feasibility of common issuance of sovereign bonds among the EU member states of the eurozone. Sovereign issuance in the eurozone is currently conducted individually by each EU member states. The introduction of commonly issued eurobonds would mean a pooling of sovereign issuance among the member states and the sharing of associated revenue flows and debt-servicing costs.

On 29 November 2012, European Commission president Jose Manuel Barroso suggested to introduce Eurobonds step by step, first applying to short-term bonds, then two-year bonds, and later Eurobonds, based on a deeply integrated economic and fiscal governance framework.

Three approaches to eurobonds

The green paper lists three broad approaches for common issuance of eurobonds based on the degree of substitution of national issuance (full or partial) and the nature of the underlying guarantee (joint and several or several).

Full eurobonds with joint liability: This option suggests to fully replace the entire national issuance by eurobonds, each EU member being fully liable for the entire issuance. According to the European Commission “this would have strong potential positive effects on stability and integration. But at the same time, it would, by abolishing all market or interest rate pressure on Member States, pose a relatively high risk of moral hazard and it might need significant treaty changes.”

Partial eurobonds with joint liability: The second option would pool only a portion of borrowings, again guaranteed by all. This means EU member states would still partly issue national bonds to cover the share of their debts beyond a certain percentage of GDP not covered by eurobonds. The Commission does not state a specific volume or share of financing needs that would be covered by national bonds at the one hand and eurobonds on the other. However, the proposal is similar to that of the German Council of Economic Experts that proposed a European collective redemption fund, which would mutualise the debt in the eurozone above 60%, combined with a bold debt reduction scheme for those countries, which are not on life support from the European Financial Stability Facility. This option is expected to require an amendment of the TFEU treaty.

Partial eurobonds without joint guarantees: According to the third option that is similar to the blue bond proposal, eurobonds would again cover only parts of the debt (like option 2) but without joint guarantees. This could impose strict entry conditions for a smaller group of countries to pool some debt and allow for the removal of countries that do not meet their fiscal obligations. Due to “a mechanism to redistribute some of the funding advantages. between the higher- and lower-rated” governments, this option aims to minimise the risk of moral hazard for the conduct of economic and fiscal policies. Unlike the first two approaches, this would involve “several but not joint” government guarantees and could therefore be implemented relatively quickly without having to change EU treaties.

University of Mumbai BMS Notes

Equity Financing in the International Markets, Depository Receipts; ADR, GDR, IDR

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Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills or have a long-term goal and require funds to invest in their growth. By selling shares, a company is effectively selling ownership in their company in return for cash.

Equity financing comes from many sources: for example, an entrepreneur’s friends and family, investors, or an initial public offering (IPO). An IPO is a process that private companies undergo to offer shares of their business to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. Industry giants, such as Google and Meta (formerly Facebook), raised billions in capital through IPOs.

While the term equity financing refers to the financing of public companies listed on an exchange, the term also applies to private company financing.

International finance analyzes the following specific areas of study:

  • International Fisher Effect is an international finance theory that assumes nominal interest rates mirror fluctuations in the spot exchange rate between nations.
  • The Mundell-Fleming Model, which studies the interaction between the goods market and the money market, is based on the assumption that price levels of said goods are fixed.
  • The optimum currency area theory states that certain geographical regions would maximize economic efficiency if the entire area adopted a single currency.
  • Interest rate parity describes an equilibrium state in which investors are indifferent to interest rates attached to bank deposits in two separate countries.
  • Purchasing power parity is the measurement of prices in different areas using a specific good or a specific set of goods to compare the absolute purchasing power between different currencies.

Sources of International Finance

The sources of international finance can be excavated deep in the international economy and international market. The various sources for International Finance are as follows:

Commercial Banks

Global Commercial Banks all over the international market provide loans in the foreign currency to the companies. These banks are very crucial in financing the non-trade international operations. They facilitate international trading to occur smoothly.

International Agencies and Development Banks

The developmental banks and other international agencies have come forth over the years for the purpose of financing in the international sector. The agencies are set up by the government of the developed countries of the world. The highly industrious agencies among this sector are – International Finance Corporation, EXIM Bank and Asian Development Bank. 

International Capital Markets

The budding organizations which include the multinational companies depend upon the fairly large amount of loans known as the foreign currency. The financial instruments which are used by these organizations include; American Depository Receipts, Global Depository Receipts, and Foreign Currency Convertible Bonds.

Depository Receipts; ADR, GDR, IDR

A depositary receipt (DR) is a negotiable financial instrument issued by a bank to represent a foreign company’s publicly traded securities. The depositary receipt trades on a local stock exchange. Depositary receipts facilitates buying shares in foreign companies, because the shares do not have to leave the home country.

Depositary receipts that are listed and traded in the United States are American depositary receipts (ADRs). European banks issue European depositary receipts (EDRs), and other banks issue global depository receipts (GDRs).

An investor needs to contact a broker in a local bank if he/she is interested in purchasing depositary receipts. The local bank in the investor’s home country, which is called the depositary bank, will assess the foreign security before making a decision to purchase shares.

The broker in the depositary bank will purchase the shares either on the local stock exchange that it trades in or purchase the shares in the foreign stock exchange by using another broker in a foreign bank, which is also known as the custodian bank.

After purchasing the shares, the depositary bank will request the shares to be delivered to the custodian bank.

After the custodian bank receives the shares, they will group the shares into packets, each consisting of 10 shares. Each packet will be issued to the depositary bank as a depositary receipt that is traded on the bank’s local stock exchange.

When the depositary bank receives the depositary receipts from the custodian bank, it notifies the broker, who will deliver it to the investor and debits fees from the investor’s account.

Types of Depositary Receipts

  1. American Depositary Receipt (ADR)

It is listed only on American stock exchanges (i.e., NYSE, AMEX, NASDAQ) and can only be traded in the U.S. They pay investors dividends in U.S. dollars and are issued by a bank in the U.S.

ADRs are categorized into sponsored and unsponsored, which are then grouped into one of three levels.

  1. European Depositary Receipt (EDR)

It is the European equivalent of ADRs. Similarly, EDRs are only listed on European stock exchanges and can only be traded in Europe. It pays dividends in euros and can be traded like a regular stock.

  1. Global Depositary Receipt (GDR)

It is a general term for a depositary receipt that consists of shares from a foreign company. Therefore, any depositary receipt that did not originate from your home country is called a GDR.

Many other countries around the world, such as India, Russia, the Philippines, and Singapore also offer depositary receipts.

  1. Indian Depository Receipt (IDR)

Indian Depository Receipt (IDR) is a financial instrument denominated in Indian Rupees in the form of a depository receipt. The IDR is a specific Indian version of the similar global depository receipts.

It is created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to indian investors against these shares. The benefit of the underlying shares (like bonus, dividends etc.) would accrue to the depository receipt holders in India.

An international depository receipt (IDR) is a negotiable certificate issued by a bank. It represents ownership of a number of shares of stock in a foreign company that the bank holds in trust.

IDRs are purchased by investors as an alternative to the direct purchase of foreign stocks on foreign exchanges. For example, American traders can buy shares of the Swiss bank Credit Suisse Group AG or Swedish automaker Volvo AB directly from American exchanges via ADRs.

Advantages of DRs

  1. Exposure to international securities

Investors can diversify their investment portfolio by gaining exposure to international securities, in addition to stocks offered by local companies.

  1. Additional sources of capital

Depositary receipts provide international companies a way to raise more capital by tapping into the global markets and attracting foreign investors around the world.

  1. Less international regulation

Since it is traded on a local stock exchange, investors do not need to worry about international trading policies and global laws.

Although investors will be investing in a company that is in a foreign country, they can still enjoy the same corporate rights, such as being able to vote for the board of directors.

Disadvantages of DRs

  1. Higher administrative and processing fees, and taxes

There may be higher administrative and processing fees because you need to compensate for custodial services from the custodian bank. There may also be higher taxes.

For example, ADRs receive the same capital gains and dividend taxes as other stocks in the U.S. However, the investor is subject to the foreign country’s taxes and regulations aside from regular taxes in the U.S.

  1. Greater risk from forex exchange rate fluctuations

There is a higher risk due to volatility in foreign currency exchange rates. For example, if an investor purchases a depositary receipt that represents shares in a British company, its value will be affected by the exchange rate between the British pound and the currency in the buyer’s home country.

  1. Limited access for most investors

Sometimes, depositary receipts may not be listed on stock exchanges. Therefore, only institutional investors, which are companies or organizations that execute trades on behalf of clients, can invest in them.

Management Notes

Euro Bond Market (Deposit, Loan, Notes Market), Types of Euro Bonds

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The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy, sell, and transfer Eurobonds. Eurobonds are a special kind of bond issued by European governments and companies, but often denominated in non-European currencies such as dollars and yen. They are also issued by international bodies such as the World Bank. The creation of the unified European currency, the euro, has stimulated strong interest in euro-denominated bonds as well; however, some observers warn that new European Union tax harmonization policies may lessen the bonds’ appeal.

Eurobonds are unique and complex instruments of relatively recent origin. They debuted in 1963, but didn’t gain international significance until the early 1980s. Since then, they have become a large and active component of international finance. Similar to foreign bonds, but with important differences, Eurobonds became popular with issuers and investors because they could offer certain tax shelters and anonymity to their buyers. They could also offer borrowers favourable interest rates and international exchange rates.

Notes Market

The primary objective of the issuance of Euro notes is to structure a debt instrument with short term maturities, generally 3, 6 or 9 months, tenors (duration) and place it in the market. However, the borrowing programme could be for medium or long term (say), 5-7 years or more. Banks that act as financial Market intermediaries agree to underwrite the paper (instrument). In reality, a borrower is able to borrow at short-term interest rates for short periods by issuing the “notes” ‘to investors. At the same time the borrower avails of the benefits and comfort of having a committed medium to long tern borrowing facility (underwritten by banks). The funding portion is divided into two separate components. The first, is a long term committed standby lending facility provided by banks. The second is a mechanism for the distribution of short-term debt instruments (the Euro note). The former component gives the borrower the long term assurance of availability of funds. The latter is the means by which cost-competitive funding can be achieved (since at any specific time, short term funding is usually cheaper than medium-long term funding).

Types of Euro Bonds

Straight Bond: Bond is one having a specified interest coupon and a specified maturity date. Straight bonds may issue with a floating rate of interest. Such bonds may have their interest rate fixed at six-month intervals of a stated margin over the LIBOR for deposits in the currency of the bond. So, in the case of a Eurodollar bond, the interest rate may base upon LIBOR for Eurodollar deposits.

Convertible Eurobond: The Eurobond is a bond having a specified interest coupon and maturity date. But, it includes an option for the hold to convert its bonds into an equity share of the company at a conversion price set at the time of issue.

Medium-term Eurobond: Medium-term Euro notes are shorter-term Eurobonds with maturities ranging from three to eight years. Their issuing procedure is less formal than for large bonds. Interest rates on Euro notes can fix or variable. Medium-term Euro-notes are similar to medium-term roll-over Eurodollar credits. The difference is that in the Eurodollar market lenders hold a claim on a bank and not directly on the borrower.

Benefits to Investors

The main benefit to local investors in purchasing a Eurobond is that it provides exposure to foreign investments staying in the home country. It also gives a sense of diversification, spreading out the risks.

As mentioned previously, Eurobonds are pretty cheap, with a small face value and are highly liquid.

If a Eurobond is denominated in a foreign currency and issued in a country with a strong economy (and currency), then the bond liquidity rises.

Benefits to Issuers

A list of benefits to Eurobond issuers consists of the following:

  • A country choice with lower interest rates.
  • Flexibility to choose a favorable country to originate bonds and currency.
  • Avoidance of currency risk or forex risk by using Eurobonds.
  • International bond trade despite being issued in a certain country that broadens potential investor base.
  • Access to a huge range of bond maturity periods that can be chosen by the issuer.
Management Notes

FERA v/s FEMA

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FERA

The Foreign Exchange Regulation Act is an act of parliament that was introduced in 1973 with the aim of controlling and managing foreign payments, purchase of fixed assets to foreigners, and the export and import of currency from and in India.

FERA aimed to ensure that the economy was competitive by conserving India’s foreign reserves, which was inadequate despite the economy recording improvements.

The act is so elaborate and exhaustive such that it covers all citizens of India who are living inside or outside India.

FEMA

Foreign Exchange Management Act (FEMA) is an expansion or improvement of the Foreign Exchange Regulation Act (FERA). The primary purpose of FEMA is to regulate and facilitate foreign exchange while at the same time encouraging the development of forex market in the country.

The act covers all India’s resident including those living inside or outside the country. Moreover, any agency that is managed by a resident of India is also subjected to requirements of FEMA.

FERA

FEMA
Provisions FERA consisted of 81 sections, and was more complex FEMA is much simple, and consist of only 49 sections.
Features Presumption of negative intention ( Mens Rea ) and joining hands in offence (abatement) existed in FEMA These presumptions of Mens Rea and abatement have been excluded in FEMA
New Terms in FEMA Terms like Capital Account Transaction, current Account Transaction, person, service etc. were not defined in FERA. Terms like Capital Account Transaction, current account Transaction person, service etc., have been defined in detail in FEMA
Enactment Old New
Number of sections 81 49
Introduced when Foreign exchange reserves were low. Foreign exchange position was satisfactory.
Authorized Person Definition of ” Authorized Person” in FERA was a narrow one (2(b) The definition of Authorized person has been widened to include banks, money changes, off shore banking Units etc. (2 (c )
Meaning Of “Resident” As Compared with Income Tax Act There was a big difference in the definition of “Resident”, under FERA, and Income Tax Act The provision of FEMA, are in consistent with income Tax Act, in respect to the definition of term ” Resident “. Now the criteria of “In India for 182 days” to make a person resident has been brought under FEMA. Therefore, a person who qualifies to be a non-resident under the income Tax Act, 1961 will also be considered a non-resident for the purposes of application of FEMA, but a person who is considered to be non-resident under FEMA may not necessarily be a non-resident under the Income Tax Act, for instance a business man going abroad and staying therefore a period of 182 days or more in a financial year will become a non-resident under FEMA.
Punishment Any offence under FERA, was a criminal offence, punishable with imprisonment as per code of criminal procedure, 1973 Here, the offence is considered to be a civil offence only punishable with some amount of money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.
Quantum of Penalty The monetary penalty payable under FERA, was nearly the five times the amount involved. Under FEMA the quantum of penalty has been considerably decreased to three times the amount involved.
Appeal An appeal against the order of “Adjudicating office”, before ” Foreign Exchange Regulation Appellate Board went before High Court The appellate authority under FEMA is the special Director ( Appeals ) Appeal against the order of Adjudicating Authorities and special Director (appeals) lies before “Appellate Tribunal for Foreign Exchange.” An appeal from an order of Appellate Tribunal would lie to the High Court. (sec 17,18,35)
Right of Assistance during Legal Proceedings. FERA did not contain any express provision on the right of on impleaded person to take legal assistance FEMA expressly recognizes the right of appellant to take assistance of legal practitioner or chartered accountant (32)
Power of Search and Seize FERA conferred wide powers on a police officer not below the rank of a Deputy Superintendent of Police to make a search The scope and power of search and seizure has been curtailed to a great extent
Basis for determining residential status Citizenship More than 6 months stay in India
Violation Criminal offence Civil offence
Punishment for contravention Imprisonment Fine or imprisonment (if fine not paid in the stipulated time)

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