Tag: University of Mumbai BMS Notes

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).

Bank overdraft

Bank overdraft is a temporary arrangement with the bank that allows the organization to overdraw from its current deposit account with the bank up to a certain limit. The overdraft facility is granted against securities, such as promissory notes, goods in stock, or marketable securities. The rate of interest charged on overdraft and cash credit is comparatively much higher than the rate of interest on bank deposits.

Commercial Paper:

Commercial paper is a form of financing which consists of short-term promissory notes which are unsecured and are sold in the money market. They are issued by large companies and pri­marily sold to other business firms, insurance companies, pension funds, and banks. Because they are unsecured and are sold in the money market, they are restricted in use to the most credit-worthy of the large companies.

Though the commercial paper market has a long history, much of its tremendous growth has occurred in recent years with increases in the installment financing of automo­biles and other consumer durable goods.

As credit tightens in terms of the banks’ ability to make loans, the commercial paper market increases. Many of the companies that issue these notes now look at this market as an alternative source of financing.

The Commercial Paper Market:

The commercial paper market includes a dealer distribution system and a system of direct placement. Most industrial firms, utilities, and medium-size finance companies utilize the dealer market to place their commercial paper.

Five major dealers com­prise the market, which purchases the paper from firms and then sells it to investors. Denominations of commercial paper range from Rs.25,000 to several rupees, and maturity runs from about two to six months, with an average of five months.

The cost of this paper is from 0.5 to 1 per cent below the prime lending rate. Considering that there are no compensating balance require­ments, the rate differential is still more significant. The commis­sion on the sale of paper runs from 0.125 of 1 per cent. Many firms are looking at this source of financing more in terms of a perma­nent source than as the traditional seasonal instrument.

Appraisal of the Commercial Paper Market:

Commercial paper is a much cheaper source of financing than short-term bank financing, as we have noted. Many companies are considering commercial paper as a supplement to bank credit. A company could make use of the paper market when the interest rate differential was large and borrow from the bank when the gap narrowed. This would result in the lowest borrowing cost to the firm in the short term.

Evidence has indicated that it is imperative for a firm not to impair its relations with a bank by using its services only during periods of extremely tight money, however. It is often suggested that a firm should have a backup line of credit with a bank to cover its borrowing position in the commercial paper market.

One factor which has helped the growth of the commercial paper market is a regulation that the maximum loan a national bank can make to a single borrower is 10 per cent of the bank’s capital and surplus. It is the perpetual need of short-term capital that has helped the commercial paper market to boom.

Factoring Accounts Receivable:

When a firm factors its account receivable, it actually sells them to a factor who actually buys the receivables. This may be done with or without recourse. With recourse, the factor can look to the seller of receivables for payment if there is a default on the pay­ment of the receivable. Without recourse, the factor cannot look to the seller of the receivables for collection in case of default.

The factor maintains a credit department which can undertake a credit check of a customer. If a firm sells without recourse, utilization of this service can allow it to forego the cost of main­taining a credit department of its own.

In this case, the factor assumes risk and bad-debt losses and all expenses associated with collecting slow accounts. The customer of the firm who is factor­ing the receivables may or may not be told of the factor agreement; this decision is made between the lender and the seller of the receivables.

Associated with the assumption of risk and servicing of the receivables is an added cost to the seller. Usually a fee is attached which runs from 1 to 3 per cent of the face value of the receivables. In addition, there will be interest charges for funds that are advanced before collection by the factor.

The cost of using a factor can be illustrated with the following example. A firm factors on the average Rs.100,000 per month for a year. The factor will lend 80 per cent of the face value of the receivables and will charge a factoring fee of 1 per cent of that face value.

In addition, the factor charges 1 per cent interest per month on the amount borrowed. The interest cost and the factoring fee are taken out in advance of all funds given to the firm. Assume that the firm borrows the full amount each month.

We can calcu­late the annual cost to the firm of utilizing the factoring service as shown in following equation:

Inventory Financing:

Inventory is another asset that has considerable merit as collat­eral for short-term financing. The lender usually will advance only a specified percentage against the face value of the inventory. This loanable value is based on the type of inventory being consid­ered and the ability of the lender to dispose of it in case of default.

The more specialized the inventory and the market for the prod­uct, the more unwilling is the lender to advance a large percentage of the face value.

The more standard and salable the inventory, the higher the loan percentage. Frequently lenders will loan 90 per cent of the face value when they feel the inventory is standard and has a ready market, apart from the marketing organization of the borrower.

Lenders usually consider such items as marketability, perish­ability, market price stability, and difficulty in liquidating the inventory in determining the percentage value that they are will­ing to advance on an inventory loan.

The most important aspect of a lender’s analysis is to substantiate that there is enough liquidat­ing value in the inventory to cover the loan and accrued interest in case of default on the part of the borrower.

In addition, the lender must determine the ability of the borrower to service the debt by examining the cash flow structure of the firm. There are several ways in which inventory can be collateralized.

These methods are discussed below:

1. Floating Lien:

A feature of the Uniform Commercial Code permits a borrower to pledge inventory “in general” as collateral against a loan, with­out specifying the inventory involved. This allows the lender to obtain a floating lien or claim against all of the borrower’s inven­tory. This type of arrangement is very difficult to police, and in general it is made only to provide extra security for a loan.

A floating lien can cover both receivables and inventory; thus it allows a lender to obtain a lien on the major part of the current assets of a firm. The floating lien also can cover both present and future inventory.

2. Chattel Mortgage:

A chattel mortgage provides for the borrower’s inventory to be identified specifically by a serial number or some other means. The borrower still holds title to the goods, but the lender has a lien or claim on the inventory. Under this arrangement, the lender has to give his consent before the inventory can be sold.

Any inven­tory that has a rapid turnover or is not readily identifiable would not be suited for this type of lien arrangement. Capital asset items such as machine tools and other heavy equipment are well suited for a chattel mortgage.

3. Trust Receptions:

With a trust receipt loan, the borrower holds both the inventory and the proceeds from the sale of inventory in trust for the lender. Consumer durable goods, automobiles, and equipment are good examples of the types of inventory that are well suited to serve as this form of collateral.

The automobile dealership system is an excellent example of how a trust receipt collateral system works. When automobiles are shipped to the dealer from the manufacturer, the lending institu­tion will pay the manufacturer under an arrangement made with the dealer. The dealer in turn signs a trust receipt agreement which specifies the handling of the inventory.

The dealer is allowed to sell the cars and must turn the proceeds over to the lender. Under the trust receipt arrangement, the inventory is serialized and is periodically audited by the lender. The purpose of the audit is to determine if any cars have been sold without the proceeds of the sale being remitted to the lender.

Each time a new batch of cars is acquired from the manufac­turer, a new trust receipt agreement is signed to take account of the new inventory. Though this method provides a wider margin of safety than a floating lien arrangement, there is always the possibility that a dealer will sell cars and not remit the proceeds to the lender in payment of the funds advanced.

4. Terminal Warehouse Receipt Loans:

Under another arrangement for using inventory as collateral for a loan, the borrower’s inventory is housed in a public, or terminal, Warehouse Company. A warehouse receipt which speci­fies the inventory located there provides the lender with a security interest in the inventory.

Because the goods in inventory can only be released on authorization by the lender, it can maintain strict control over the inflow and outflow of inventory. In addition, an insurance policy is usually issued which contains a loss-payable clause for the benefit of the lender.

The warehouse receipt can be in a negotiable or nonnegotiable form. If it is negotiable, the receipt can be transferred from one party to another by endorsement, but before the goods can be released the receipt must be presented to the warehouse man.

A nonnegotiable warehouse receipt is issued in favour of the lender, which has title to the goods and is the only one that can release them. The nonnegotiable receipt arrangement provides that the release of goods must be authorized in writing. Most arrange­ments are of the nonnegotiable form.

5. Field Warehouse Receipt Loans:

With the form of collateralization known as the field warehouse receipt loan, the inventory remains on the property of the bor­rower. A field warehouse company sets off a specific part of the borrower’s storage area in which to locate the inventory being used as collateral. Often this area is physically fenced off and only the field warehouse company has access to it.

Once the collateral value of the inventory is verified by the field warehouse company, the lender advances the funds. This arrangement is desirable when there is great expense involved in locating the inventory elsewhere, especially true when the borrower has a high inventory turnover ratio.

There is no question that the cost of this form of collateral financing is very high. This is primarily due to the cost of the warehouse company which acts as a third party in this arrange­ment.

The evidence of collateral is only as good as the warehouse company issuing the receipt. Historically there has been evidence indicating fraud in terms of the validity of the inventory actually being stored in a particular spot.

Concept of Risk

A person making an investment expects to get some returns from the investment in the future. However, as future is uncertain, the future expected returns too are uncertain. It is the uncertainty associated with the returns from an investment that introduces a risk into a project. The expected return is the uncertain future return that a firm expects to get from its project. The realized return, on the contrary, is the certain return that a firm has actually earned.

The realized return from the project may not correspond to the expected return. This possibility of variation of the actual return from the expected return is termed as risk. Risk is the variability in the expected return from a project. In other words, it is the degree of deviation from expected return. Risk is associated with the possibility that realized returns will be less than the returns that were expected. So, when realizations correspond to expectations exactly, there would be no risk.

Elements of Risk

Various components cause the variability in expected returns, which are known as elements of risk. There are broadly two groups of elements classified as systematic risk and unsystematic risk.

(i) Systematic Risk

Business organizations are part of society that is dynamic. Various changes occur in a society like economic, political and social systems that have influence on the performance of companies and thereby on their expected returns. These changes affect all organizations to varying degrees. Hence the impact of these changes is system-wide and the portion of total variability in returns caused by such across the board factors is referred to as systematic risk. These risks are further subdivided into interest rate risk, market risk, and purchasing power risk.

(ii) Unsystematic Risk

The returns of a company may vary due to certain factors that affect only that company. Examples of such factors are raw material scarcity, labour strike, management ineffi­ciency, etc. When the variability in returns occurs due to such firm-specific factors it is known as unsystematic risk. This risk is unique or peculiar to a specific organization and affects it in addition to the systematic risk. These risks are subdivided into business risk and financial risk.

Measurement of Risk

Quantification of risk is known as measurement of risk.

Two approaches are followed in measurement of risk:

(i) Mean-variance approach, and

(ii) Correlation or regression approach.

Concept of Return

Return can be defined as the actual income from a project as well as appreciation in the value of capital. Thus there are two components in return the basic component or the periodic cash flows from the investment, either in the form of interest or dividends; and the change in the price of the asset, com­monly called as the capital gain or loss.

The term yield is often used in connection to return, which refers to the income component in relation to some price for the asset. The total return of an asset for the holding period relates to all the cash flows received by an investor during any designated time period to the amount of money invested in the asset.

It is measured as:

Total Return = Cash payments received + Price change in assets over the period /Purchase price of the asset.

In connection with return we use two terms realized return and expected or predicted return. Realized return is the return that was earned by the firm, so it is historic. Expected or predicted return is the return the firm anticipates to earn from an asset over some future period.

Social marketing is the systematic application of marketing along with other concepts and techniques to achieve specific behavioural goals for a social good. For example, this may include asking people not to smoke in public areas, asking them to use seat belts or prompting to make them follow speed limits.

Social marketing is marketing designed to create social change, not to directly benefit a brand. Using traditional marketing techniques, it raises awareness of a given problem or cause, and aims to convince an audience to change their behaviors.

So, instead of selling a product, social marketing “sells” a behavior or lifestyle that benefits society, in order to create the desired change. This benefit to the public good is always the primary focus. And instead of showing how a product is better than competing products, social marketing “competes” against undesirable thoughts, behaviors, or actions.

Social marketing is commonly used for causes like

Health and safety, including:

• Anti-smoking
• Anti-drug
• Promoting exercise and healthy eating
• Safe driving
• Railroad station safety

Environmental causes, including:

• Anti-deforestation
• Anti-littering
• Endangered species awareness

Social activism, including:

• Illuminating struggles that people of color, people with disabilities, etc. face, then inspiring people to fight against mechanisms that create inequality
• Anti-bullying
• Fighting gender stereotypes

Who initiates these social marketing campaigns? Nonprofit organizations and charities run the majority of social marketing campaigns. Government organizations, highway safety coalitions, and emergency services (police, fire, ambulance) run them as well. But social marketing is not out of the question if you’re a commercial business. Commercial brands will sometimes run social marketing campaigns for causes they are passionate about.

The primary aim of social marketing is ‘social good’, whereas in commercial marketing the aim is primarily ‘financial’. This does not mean that commercial marketers cannot contribute to achievement of social good.

Applications of Social Marketing

1. Health promotion campaigns in India, especially in Kerala and AIDS awareness programmes are largely using social marketing, and social workers are largely working for it. Most of the social workers are professionally trained for this particular task.
2. Anti-tobacco campaigns
3. Anti-drug campaigns
4. Anti-pollution campaigns
5. Road safety campaigns
6. Anti-dowry campaigns
7. Protection of girl child campaign
8. Campaign against the use of plastic bags
9. Green marketing campaign

Social marketing applies a customer-oriented approach, and uses the concepts and tools used by com­mercial marketers in pursuit of social goals such as anti-smoking campaigns or fund raising for NGOs.

Advantages of Social Marketing

Social marketing a new marketing tool can be a great asset if used properly. The beneficial effects of social marketing for a business can be tremendous, but one must remember that it must be used in the most efficient possible way.

Social marketing allows businesses and web sites to gain popularity over the Internet by using different types of social media available, such as blogs, video and photo sharing sites, social networking sites and social bookmarking web sites.

There are six distinct advantages of social marketing that make it a vital tool to any marketing campaign:

1. Promotes consumption of socially desirable products.
2. Promotes health consciousness in people and helps them adopt a healthier lifestyle.
3. It helps in green marketing initiatives.
4. It helps to eradicate social evils that affect the society and quality of life.
5. Social marketing is one of the cheapest ways of marketing.
6. One of the best advantages of social marketing is that anyone can take advantage of it, even from their own home.

What is NOT social marketing?

Often, people get confused about what social marketing is and isn’t. So, before we keep going, let’s break down 3 types of marketing that do NOT count as social marketing.

1. Social Media Marketing

Many people think social marketing is the same thing as social media marketing: marketing on social networks like Facebook, Twitter, Instagram, and YouTube. Well, that’s not true. Sometimes, social media will be used to spread, and generate buzz around, social marketing campaigns. However, most marketing on social media is oriented towards promoting a product or service. Those viral tweets by Wendy’s, and that influencer’s promotion of Fashion Nova on Instagram, are definitely not social marketing!

2. Self-Serving Donations

If a company publicizes a donation they make to a charity or cause, that isn’t social marketing, because their aim is partially to boost their own reputation.

3. Marketing “green” or “charity tie-in” products

If a company is marketing its own line of eco-friendly water bottles, hybrid cars, reusable lunch containers, or other “green” products, this doesn’t count as social marketing. The marketing of products with a charitable donation tie-in (such as TOMS) doesn’t count either. In both of these examples, the primary focus is on selling a product. Meanwhile, with social marketing, the focus is solely on changing behaviors for the public good.

Here’s an example:

• An ad with alarming stats on the number of disposable water bottles thrown out per year, which promotes Hydro Flask reusable bottles as environmentally friendly, and that is made by Hydro Flask to sell its own bottles, is not social marketing.
• Meanwhile, a general campaign to promote reusable water bottles, made by an environmental organization, that does not promote a specific brand of reusable bottle, is social marketing.

Social media networks are mode of social interaction. It is a platform of sharing and discussing information among human beings. Social media can include text, audio, video, images, podcasts and other multimedia communication elements. Social media sites are nothing but a group of special and user friendly websites.

Social marketing is a very broad term. Social marketing is a technique of building a business using various social media networks. For instance, videos and blogs that gives exposure to your company.

When someone talks about social media marketing people often think that they may be talking about Facebook and Twitter. But social media networks also offer effective marketing tools that can bring more traffic to your website and improve your online popularity. Social media marketing has many characteristics. To attain a good marketing strategy, you need to have a look at the following SMM characteristics.

1. Participation

Social marketing encourages contributions and feedback from everyone. Social marketing includes delivery of ideas at the time of online conversation. It tries to bridge the gap between companies and audience. With all the new channels of social media, people are enjoying this process of participation.

2. Openness

Social marketing success requires honesty, transparency and authenticity. You should maintain a trust worthy relationship with your customers in your SMM (social marketing) strategy. One fake or negative comment can destroy your online reputation.

3. Build relationships

Social marketing is a two-way communication channel. It requires participation from both companies and customers. As a business owner, it is very important to make good connections with your target audience. Online conversation through various social media tools happen in real time with real people. You get a chance to interact with your target audience and you can answer to their queries. Answering to their queries is a good way to build relationship with customers.

4. Reliability

To make your profile reliable, you need to consistently show your online presence. Effective social media marketer visits their targeted sites regularly. They also get involved with new users and promote their products. They talk to their target audience on a regular basis.

5. Build communities

Social marketing sites allow you to build communities quickly, this helps you communicate more effectively. Communities share common interests, such as a love of photography, a political issue or a favorite TV show. These communities help you to know about your target audience. You can also support other communities which you think are good for your business.

6. Customer service

It is very essential to take care of your customers. Social media networks are all about helping each others. It’s about providing value to your customers, not just promotion.

7. Avoid spamming

Don’t give importance only to promoting your links. Also share insightful content about your company. Do not send the same message to your community again and again, it works as a spam and it may irritate your customers.

Social marketing is the most powerful platform for small businesses. An effective social media marketing campaign grows your business and brings more traffic to your website. Social media marketing is the best marketing strategy allows you to promote your company at the same time build relationships.

Social Marketing is quickly becoming one of the most important aspects of digital marketing, which provides incredible benefits that help reach millions of customers worldwide. And if you are not applying this profitable source, you are missing out an incredible marketing opportunity, as it makes it easy to spread the word about your product and mission.

1. Improved brand awareness

Social Marketing is one of the most stress-free and profitable digital marketing platforms that can be used to increase your business visibility. To get started, create social media profiles for your business and start networking with others. By applying a social media strategy, it will help you significantly increase your brand recognition. By spending only a few hours per week, over 91% marketers claimed that their social marketing efforts greatly increased their brand visibility and heightened user experience. Undoubtedly, having a social media page for your brand will benefit your business and with a regular use, it can also produce a wide audience for your business in no time.

2. Cost-effective

For an advertising strategy, social marketing is possibly the most cost-effective way. Creating an account and signing up is free for almost all social networking platforms. But if you decide to use paid advertising on social media, always start small to see what you should expect. Being cost-effective is important as it helps you attain a greater return on investment and hold a bigger budget for other marketing and business payments. Just by investing a little money and time, you can significantly increase your conversion rates and ultimately get a return on investment on the money that you primarily invested.

3. Engage with your customers

Social Marketing is a good way for engaging and interacting customers. The more you communicate with the audience, the more chances you have of conversion. Set up a two-way communication with your target audience so that their wishes are known and their interest is catered with ease. Moreover, communication and engagement with customers is one the ways to win their attention and convey them your brand message. Thus, your brand will reach more audience in real terms and gets itself established without any hassle.

4. Improved brand loyalty

When you have a social Marketing presence, you make it easier for your customers to find you and connect with you. By connecting with your customers through social media, you are more probable to upsurge customer retention and customer loyalty. Since developing a loyal customer base is one of the main goals of almost any business. Customer satisfaction and brand loyalty typically go hand in hand. It is essential to often engage with your customers and start developing a bond with them. Social media is not just limited to introducing your product, it is also a leading platform for promotional campaigns. A customer sees these platforms as service channels where they can directly communicate with the business.

5. Healthier customer satisfaction

Social Marketing plays a vital role in networking and communication platform. With the help of these platforms, creating a voice for your company is important in improving the overall brand image. Customers appreciate the fact that when they post comments on your page, they receive a modified reply rather than a computerized message. A brand that values its customers, takes the time to compose a personal message, which is perceived naturally in a positive light.

6. Marketplace awareness

One of the best ways to find the needs and wants of your customers instead of directly communicating with them is Marketplace awareness. It is also considered as the most valuable advantage of social media. By observing the activities on your profile, you can see customers’ interest and opinions that you might not know otherwise if you didn’t have a social media presence. As a complementary research tool, social media can help you get information and a better understanding of your industry. Once you get a large following, you can then use additional tools to examine other demographics of your consumers.

7. More brand authority

For making your business more powerful, brand loyalty and customer satisfaction both play a major role, but it all comes down to communication. When customers see your company posting on social media, especially replying to their queries and posting original content, it helps them build a positive image in their minds. Regularly interacting with your customers proves that you and your business care about them. Once you get a few satisfied customers, who are vocal about their positive purchase experience, you can let the advertising be done for you by genuine customers who appreciated your product or service.

8. Increased traffic

One of the other benefits of Social Media is that it also helps increase your website traffic. By sharing your content on social media, you are giving users a reason to click-through to your website. On your social account, the more quality content you share, the more inbound traffic you will generate while making conversion opportunities.

9. Enhanced SEO rankings

Social Marketing presence is becoming a vital factor in calculating rankings. These days, to secure a successful ranking, SEO requirements are continuously varying. Therefore, it is no longer enough to simply optimize your website and regularly update your blog. Businesses sharing their content on social media are sending out a brand signal to search engine that speaks to your brand validity, integrity, and constancy.

There is no denying that Social media marketing has many advantages for startups and established brands. By regular updating the right social media marketing strategy, it will lead to increased traffic, better SEO, improved brand loyalty, healthier customer satisfaction and much more. Your competition is already increasing on social media day by day, so don’t let your competitors take your probable customers. The earlier you start, the faster you see the growth in your business.

Social marketing has the primary goal of achieving “social good”. Traditional commercial marketing aims are primarily financial, though they can have positive social effects as well. In the context of public health, social marketing would promote general health, raise awareness and induce changes in behaviour. Social marketing has been a large industry for some time now and was originally done with newspapers and billboards, but similar to commercial marketing has adapted to the modern world. The most common use of social marketing in today’s society is through social media. However, to see social marketing as only the use of standard commercial marketing practices to achieve non-commercial goals is an oversimplified view.

Evolution of Social Marketing

Many scholars ascribe the beginning of the field of social marketing to an article published by G.D. Wiebe in the Winter 1951-1952 edition of Public Opinion Quarterly. In it, Wiebe posed a rhetorical question: “Why can’t you sell brotherhood and rational thinking like you can sell soap?” He then went on to discuss what he saw as the challenges of attempting to sell a social good as if it were a commodity, thus identifying social marketing (though he did not label it as such) as a discipline unique from c mmodity marketing. Yet, Wilkie & Moore (2003) note that the marketing discipline has been involved with questions about the intersection of marketing and society since its earliest days as a discipline.

A decade later, organizations such as the KfW Entwicklungsbank in Germany, the Canadian International Development Agency, the Ministry for Foreign Affairs in The Netherlands, UK Department for International Development, US Agency for International Development, World Health Organization and the World Bank began sponsoring social marketing interventions to improve family planning and achieve other social goals in Africa, Sri Lanka, and elsewhere.

The next milestone in the evolution of social marketing was the publication of “Social Marketing: An Approach to Planned Social Change” in the Journal of Marketing by Philip Kotler and Gerald Zaltman. Kotler and Zaltman coined the term ‘social marketing’ and defined it as “the design, implementation, and control of programs calculated to influence the acceptability of social ideas and involving considerations of product planning, pricing, communication, distribution, and marketing research.” They conclude that “social marketing appears to represent a bridging mechanism which links the behavior scientist’s knowledge of human behavior with the socially useful implementation of what that knowledge allows.”

Craig Lefebvre and June Flora introduced social marketing to the public health community in 1988, where it has been most widely used and explored. They noted that there was a need for “large scale, broad-based, behavior change focused programs” to improve public health (the community wide prevention of cardiovascular diseases in their respective projects) and outlined eight essential components of social marketing that still hold today:

• A consumer orientation to realize organizational (social) goals
• An emphasis on the voluntary exchanges of goods and services between providers and consumers
• Research in audience analysis and segmentation strategies
• The use of formative research in product and message design and the pretesting of these materials
• An analysis of distribution (or communication) channels
• Use of the marketing mix—using and blending product, price, place and promotion characteristics in intervention planning and implementation
• A process tracking system with both integrative and control functions
• A management process that involves problem analysis, planning, implementation and feedback functions.

Speaking of what they termed “social change campaigns”, Kotler and Ned Roberto introduced the subject by writing, “A social change campaign is an organized effort conducted by one group (the change agent) which attempts to persuade others (the target adopters) to accept, modify, or abandon certain ideas, attitudes, practices or behavior.” Their 1989 text was updated in 2002 by Philip Kotler, Ned Roberto and Nancy Lee. In 2005, University of Stirling was the first university to open a dedicated research institute to Social Marketing, while in 2007, Middlesex University became the first university to offer a specialized postgraduate programme in Health & Social Marketing.

In recent years there has been an important development to distinguish between “strategic social marketing” and “operational social marketing”.

Much of the literature and case examples focus on operational social marketing, using it to achieve specific behavioral goals in relation to different audiences and topics. However, there has been increasing efforts to ensure social marketing goes “upstream” and is used much more strategically to inform policy formulation and strategy development. Here the focus is less on specific audience and topic work but uses strong customer understanding and insight to inform and guide effective policy and strategy development. Social marketing in most cases stands in contrast to business marketing and serves for society wellbeing. The techniques of this marketing are used for change of attitudes and behaviours of different audiences in public life.

Social marketing is also being explored as a method for social innovation, a framework to increase the adoption of evidence-based practices among professionals and organizations, and as a core skill for public sector managers and social entrepreneurs. It is being viewed as an approach to design more effective, efficient, equitable and sustainable approaches to enhance social well-being that extends beyond individual behavior change to include creating positive shifts in social networks and social norms, businesses, markets and public policy.

Many examples exist of social marketing research, with over 120 papers compiled in a six volume set.). For example, research now shows ways to reduce the intentions of people to binge drink or engage in dangerous driving. Martin, Lee, Weeks and Kaya (2013) suggests that understanding consumer personality and how people view others is important. People were shown ads talking of the harmful effects of binge drinking. People who valued close friends as a sense of who they are were less likely to want to binge drink after seeing an ad featuring them and a close friend. People who were loners or who did not see close friends important to their sense of who they were reacted better to ads featuring an individual. A similar pattern was shown for ads showing a person driving at dangerous speeds. This suggests ads showing potential harm to citizens from binge drinking or dangerous driving are less effective than ads highlighting a person’s close friends.