CU-MBA-SEM-I-Business, Society and Law

10. Liquidity:- Easy liquidity is possible in the Capital market as the investors can easily sell off their holdings with the help of secondary market and Commercial banks also allow investors to withdraw their deposits, as and when they require. 11. Helps in the Revival of Sick Units:- The Commercial and Financial Institutions provide timely financial assistance or may write off a part of their loan to viable sick units and help in the revival of such units. 8.5.3 Structure of Indian Capital Market: CAPITAL MARKET IN INDIA Government Indian Development Financial Securities (Gilt- Securities Financial Institutions Intermediaries edged Market) Market (DFIs) New Issue Stock Exchange Market IFCI ICICI SFCs IDBI IIBI UTI Merchant Mutual Leasing Venture Capital Others Banks Funds Companies Companies Fig 8.3: Structure of Capital Market [Source: Business Environment Text and Cases- Francis Cherunilam]  GILD-EDGED MARKET: RBI plays a very important role in this market which deals in government and semi government securities and so it is also called as ‘Government securities market. It consists of bonds issued by Central / State Government with fixed interest rates. The investors in gild- 201 CU IDOL SELF LEARNING MATERIAL (SLM)

edged market are mainly financial institutions like commercial banks, SFC, IFCI, SIDC, LIC, GIC, Provident funds, RBI and individuals, where they are restricted by the law to invest a certain percentage of their funds in this instrument.  CORPORATE/INDUSTRIAL SECURITIES MARKET: The Corporate Security Market deals with shares and debentures of old and new companies and also provides long – term funds to the companies. It is further categorized into primary and secondary market. Primary Market: It is a market for new issues i.e. the securities which are issued to the public for the first time and includes all institutions dealing in the issue of fresh claims and so, it is also known as New Issues Market. It deals with the raising of fresh capital in the form of equity shares, preference shares, bonus, deposits, debentures, right issues, etc. In equity market, resources can be raised / mobilised through: Equity Issues (domestic and external), Debt issues (domestic and external), Domestic debt issues include fixed deposits, bonds, debentures (convertible and non- convertible). External debt issues are funds mobilised in the form of debt from overseas Domestic equity issues include equity shares, preference shares, right issues and units of mutual funds in the country. External equity issues include equity shares through the issue of Global Depository Receipts (GDR) and American Depository Receipts (ADR). Secondary Market: The secondary market facilitates trading in securities that are already issued by companies and operates through stock exchanges. It helps to provide liquidity and marketability to the debt instruments and outstanding equity. It induces company to perform efficiently by providing immediate valuation of securities. It has three types of stock exchanges viz. Regional Stock Exchange, National Stock Exchange and Over the Counter Exchange of India which provides liquidity to the investors through trading mechanism (buying and selling of securities) with the help of brokers and other financial intermediaries. In India, out of 23 recognised stock exchanges, there are two premier stock exchanges i.e. The National Stock Exchange (NSE) and The Bombay Stock Exchange (BSE). Government of India and SEBI controls the operations of stock exchanges. This market provides a world class trading experience due to wide range of product availability with a fast growing derivatives market.  LONG TERM LOANS MARKET / DEVELOPMENT FINANCIAL INSTITUTIONS (DFI): The main purpose to establish development financial institution is to provide medium term / long term loans to the industrial sector for expansion and modernisation. It includes Industrial 202 CU IDOL SELF LEARNING MATERIAL (SLM)

Finance Corporation of India (IFCI), Industrial Development Bank of India (ICICI), Industrial Development Bank of India (IDBI), Industrial Investment Bank of India (IIBI), The Export and Import Bank of India (EXIM BANK), State Finance Corporations (SFCs), state Industrial Corporations (SIDCs), etc. These institutions underwrite new issues, subscribe to shares and debentures of new /old companies and raise funds by way of term deposits, Certificates of deposits and borrowings. Long term loans can be further divided into: Term Loans Market: Mortgages Market: Financial Guarantees Market. Term loans market: DFIs provide term loans for a period of one year which is beneficial for new entrepreneurs as it encourages them to identify an investment opportunities and support modernisation efforts. Mortgages market: DFIs provides loans against security of immovable assets such as land and building. Financial guarantee market: DFIs provides financial guarantee on behalf of their clients. In case the client does not perform the contract appropriately; a penalty is imposed on the client and if the client is defaulter then the financial institution issuing the guarantee is held liable.  FINANCIAL INTERMEDIARIES: They comprises of merchant banks, mutual funds, leasing companies, venture capital companies, etc. Merchant banks manage and underwrite new issues, and advise corporate on various financial aspects. Leasing companies provide funds for purchasing plant and machinery. Mutual funds mobilise savings of the people and invest them in stock markets. Venture capital companies provide financial support to new ideas and technology. 8.6 COMMERCIAL BANKS 8.6.1 Concept and Types Commercial banks are the most important components of the whole banking system. A commercial bank is a profit-based financial institution that grants loans, accepts deposits, and offers other financial services, such as overdraft facilities and electronic transfer of funds. According to Culbertson, “Commercial Banks are the institutions that make short make short term bans to business and in the process create money.” In other words, commercial banks are financial institutions that accept demand deposits from the general public, transfer funds from the bank to another, and earn profit. Commercial banks play a significant role in fulfilling the short-term and medium- term financial requirements of industries. They do not provide, long-term credit, so that liquidity of assets should be maintained. The funds of commercial banks belong to the general public and are withdrawn at a short notice; therefore, commercial banks prefers to provide credit for a short period of time backed by tangible and easily marketable securities. Commercial 203 CU IDOL SELF LEARNING MATERIAL (SLM)

banks, while providing loans to businesses, consider various factors, such as nature and size of business, financial status and profitability of the business, and its ability to repay loans. Commercial banks are of three types, which are as follows: (a) Public Sector Banks: Refer to a type of commercial banks that are nationalized by the government of a country. In public sector banks, the major stake is held by the government. In India, public sector banks operate under the guidelines of Reserve Bank of India (RBI), which is the central bank. Some of the Indian public sector banks are State Bank of India (SBI), Corporation Bank, Bank of Baroda, Dena Bank, and Punjab National Bank. (b) Private Sector Banks: Refer to a kind of commercial banks in which major part of share capital is held by private businesses and individuals. These banks are registered as companies with limited liability. Some of the Indian private sector banks are Vysya Bank, Industrial Credit and Investment Corporation of India (ICICI) Bank, and Housing Development Finance Corporation (HDFC) Bank. (c) Foreign Banks: Refer to commercial banks that are headquartered in a foreign country, but operate branches in different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, and Grindlay’s Bank. In India, since financial reforms of 1991, there is a rapid increase in the number of foreign banks. Commercial banks mark significant importance in the economic development of a country as well as serving the financial requirements of the general public. 8.6.2 Functions of Commercial Banks Commercial banks are institutions that conduct business for profit motive by accepting public deposits for various investment purposes. The functions of commercial banks are broadly classified into primary functions and secondary functions, which are shown 204 CU IDOL SELF LEARNING MATERIAL (SLM)

Functions of Commercial Bank Primary Secondary Fig 8.4: Functions of Commercial Bank The functions of commercial banks (as shown in Figure-8.6.1) are discussed as follows: (a) Primary Functions: Refer to the basic functions of commercial banks that include the following: (i) Accepting Deposits: Implies that commercial banks are mainly dependent on public deposits. There are two types of deposits, which are discussed as follows: (1) Demand Deposits: Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to the bank. In other words, the owners of these deposits are allowed to withdraw money anytime by simply writing a check. These deposits are the part of money supply as they are used as a means for the payment of goods and services as well as debts. Receiving these deposits is the main function of commercial banks. (2) Time Deposits: Refer to deposits that are for certain period of time. Banks pay higher interest on time deposits. These deposits can be withdrawn only after a specific time period is completed by providing a written notice to the bank. (3) Advancing Loans: Refers to one of the important functions of commercial banks. The public deposits are used by commercial banks for the purpose of granting loans to individuals 205 CU IDOL SELF LEARNING MATERIAL (SLM)

and businesses. Commercial banks grant loans in the form of overdraft, cash credit, and discounting bills of exchange. (b) Secondary Functions: Refer to crucial functions of commercial banks. The secondary functions can be classified under three heads, namely, agency functions, general utility functions, and other functions. These functions are explained as follows: (1) Agency Functions: Implies that commercial banks act as agents of customers by performing various functions, which are as follows: (i) Collecting Checks: Refer to one of the important functions of commercial banks. The banks collect checks and bills of exchange on the behalf of their customers through clearing house facilities provided by the central bank. (ii) Collecting Income: Constitute another major function of commercial banks. Commercial banks collect dividends, pension, salaries, rents, and interests on investments on behalf of their customers. A credit voucher is sent to customers for information when any income is collected by the bank. (iii) Paying Expenses: Implies that commercial banks make the payments of various obligations of customers, such as telephone bills, insurance premium, school fees, and rents. Similar to credit voucher, a debit voucher is sent to customers for information when expenses are paid by the bank. (2) General Utility Functions: Include the following functions: (i) Providing Locker Facilities: Implies that commercial banks provide locker facilities to its customers for safe keeping of jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due to theft at homes. (ii) Issuing Traveller’s Checks: Implies that banks issue traveller’s checks to individuals for traveling outside the country. Traveller’s checks are the safe and easy way to protect money while traveling iii) Dealing in Foreign Exchange: Implies that commercial banks help in providing foreign exchange to businessmen dealing in exports and imports. However, commercial banks need to take the permission of the central bank for dealing in foreign exchange. (iv) Transferring Funds: Refers to transferring of funds from one bank to another. Funds are transferred by means of draft, telephonic transfer, and electronic transfer. 206 CU IDOL SELF LEARNING MATERIAL (SLM)

(3) Other Functions: Include the following: (i) Creating Money: Refers to one of the important functions of commercial banks that help in increasing money supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in the name of that individual. Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand deposits in that account. The point to be noted here is that there is no payment in cash. Thus, without printing additional money, the supply of money is increased. (ii) Electronic Banking: Include services, such as debit cards, credit cards, and Internet banking. (www.economicdiscussion.com) 8.7 FINANCIAL INSTITUTIONS: A financial institution is an establishment that conducts financial transactions such as investments, loans and deposits. Almost everyone deals with financial institutions on a regular basis. Everything from depositing money to taking out loans and exchanging currencies must be done through financial institutions. Important types of financial institutions are as follows: 8.7.1 Banking Institutions The entire organised banking system comprises of scheduled and non-scheduled banks. Largely, this segment comprises of the scheduled banks, with the unscheduled ones forming a very small component. Banking needs of the financially excluded population is catered to by other unorganised entities distinct from banks, such as, moneylenders, pawnbrokers and indigenous bankers. 207 CU IDOL SELF LEARNING MATERIAL (SLM)

Source: www.allbankingsolution.com Fig 8.5Structure of Indian Banking Industry Scheduled Banks: A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In order to be included under this schedule of the RBI Act, banks have to fulfil certain conditions such as having a paid-up capital and reserves of at least 0.5 million and satisfying the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the interests of its depositors. Scheduled banks are further classified into commercial and cooperative banks. The basic difference between scheduled commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled Commercial Banks (SCBs): Scheduled commercial banks (SCBs) account for a major proportion of the business of the scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India are categorized into the five groups based on their ownership and/or their nature of operations. State Bank of India and its six associates (excluding State Bank of Saurashtra, which has been merged with the SBI with effect from August 13, 2008) are recognised as a separate category of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalised banks (10) and SBI and associates (7), together form the public sector banks group and 208 CU IDOL SELF LEARNING MATERIAL (SLM)

control around 70% of the total credit and deposits businesses in India. IDBI ltd. has been included in the nationalised banks group since December 2004. Private sector banks include the old private sector banks and the new generation private sector banks- which were incorporated according to the revised guidelines issued by the RBI regarding the entry of private sector banks in 1993. As at end-March 2009, there were 15 old and 7 new generation private sector banks operating in India. Currently, there are 13 old private sector bank and 8 new private sector bank. Foreign banks are present in the country either through complete branch/subsidiary route presence or through their representative offices. At end-June 2009, 32 foreign banks were operating in India with 293 branches. Besides, 43 foreign banks were also operating in India through representative offices. Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural economy by providing banking services in such areas by combining the cooperative specialty of local orientation and the sound resource base which is the characteristic of commercial banks. RRBs have a unique structure, in the sense that their equity holding is jointly held by the central government, the concerned state government and the sponsor bank (in the ratio 50:15:35), which is responsible for assisting the RRB by providing financial, managerial and training aid and also subscribing to its share capital. Between 1975 and 1987, 196 RRBs were established. RRBs have grown in geographical coverage, reaching out to increasing number of rural clientele. At the end of June 2008, they covered 585 out of the 622 districts of the country. Despite growing in geographical coverage, the number of RRBs operational in the country has been declining over the past five years due to rapid consolidation among them. As a result of state wise amalgamation of RRBs sponsored by the same sponsor bank, the number of RRBs fell to 86 by end March 2009. Scheduled Cooperative Banks: Scheduled cooperative banks in India can be broadly classified into urban credit cooperative institutions and rural cooperative credit institutions. Rural cooperative banks undertake long term as well as short term lending. Credit cooperatives in most states have a three tier structure (primary, district and state level). Non-Scheduled Banks: Non-scheduled banks also function in the Indian banking space, in the form of Local Area Banks (LAB). Towards the end of March 2009 there were only 4 LABs operating in India. Local area banks are banks that are set up under the scheme announced by the government of India in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a maximum of three contiguous districts. LABs aid 209 CU IDOL SELF LEARNING MATERIAL (SLM)

in the mobilisation of funds of rural and semi urban districts. Six LABs were originally licensed, but the license of one of them was cancelled due to irregularities in operations, and the other was amalgamated with Bank of Baroda in 2004 due to its weak financial position. 8.7.2 Non-Banking Institution: The Non-Banking Financial Companies (NBFCs) which are heterogeneous in nature in terms of activity and size are important financial intermediaries and an integral part of the Indian Financial system. They help to fulfil the credit needs of both wholesale and retail customers. Definition: According to the Reserve Bank of India (Amendment Act) 1997, A Non-Banking Finance Company means: (i) A Financial Institution which is a company; (ii) A non-banking institution which is a company and which has as its principal business of receiving the deposits under any scheme or arrangement or in any other manner or lending in any manner; (iii) Such other non-banking institution or class of such institutions as the bank may with the previous approval of the Central Government specify. The definition excludes financial institutions besides institutions which carry on agricultural operations as their principal business. Non-banking finance companies consist mainly of finance companies which carry on hire purchase finance, housing finance, investment, loan, equipment leasing or mutual benefit financial companies but do not include insurance companies or stock exchanges or stock-broking companies. Types of NBFCs: The Non-Banking Finance Companies operating in India fall in the following broad categories. (1) Equipment Leasing Company is a company which carries the business of leasing of equipment’s or the financing of such activity. Apart from their Net Owned Funds (NOF), the leasing companies raise funds in the form of deposits from other companies, banks and the financial institutions. Public deposits and inter-corporate deposits account for 74 percent of their total funds. Leasing is a form of rental system. A lease is a contractual arrangement whereby the lessor grants the lessee the right to use an asset in return for periodical lease-rent payments. There are two types of leases (i) operating lease, and (ii) financial or capital lease. The operating lease is a short-term lease which can be cancelled. Financial lease is a non- concealable contractual commitment. 210 CU IDOL SELF LEARNING MATERIAL (SLM)

(2) Hire Purchase Finance Company is a company which carries on as its principle business, hire purchase transactions or the financing of such transactions. The sources of hire- purchase finance are (i) Hire purchase Finance Companies. (ii) Retails and Wholesale Traders. (iii) Bank and Financial Institutions. Hire-purchase finance or credit is a system under which term loans for purchase of goods, producer goods or consumer goods and services are advanced which have to be liquidated under an instalment plan. The period of credit is generally one to three years. This type of credit is available for a wide range of products and services. Hire-purchase finance companies are the public or private limited companies or partnership firms engaged in giving credit for acquiring durable goods. (3) Housing Finance Company is a company which carries on as its principle business, the financing of the acquisition or construction of houses including the acquisition or development of plots of lands for construction of houses. These companies are supervised by National Housing Bank, which refinances housing loans by scheduled commercial banks, co- operative banks, housing finance companies and the apex co-operative housing finance societies. (4) Investment Company means any company which carries on as its principle business the acquisition of securities. These types of companies are investment holding companies formed by business houses. They provide finance mainly to companies associated with these business houses. As compare to open-end investment companies or mutual funds/units trust, these investment companies are close end companies having a fixed amount of share capital. Almost all prominent industrial groups have their own investment companies. (5) Loan Company is a company that provides finance whether by making loans or advances or otherwise for any activity other than its own. (This category excludes No.1 to No. 3 above categories).These types of companies are generally small partnership concerns which obtain funds in the form of deposits from the public and give loans to wholesale and retail traders, small scale industries and self-employed persons. These companies collect fixed deposits from the public by offering higher rates of interest and give loans to others at relatively higher rates of interest. (6) Mutual Benefit Finance Company (i.e. Nidhi Company) means any company which is notified by the Central Government under section 620A of the Companies Act, 1956. The main sources of funds for Nidhi’s are share capital, deposits from their members and deposits from the public. Nidhi’s give loans to their members-for several purposes like marriages, redemption of old debts, construction and etc. The Nidhi’s normally follow the easy 211 CU IDOL SELF LEARNING MATERIAL (SLM)

procedures and offer saving schemes and make credits available to those whose credit needs remain unmet by his commercial banks. (7) Chit Fund Company is a company which collects subscriptions from specified number of subscribers periodically and in turn distributes the same as prizes amongst them. Any other form of chit or kuri is also included in this category. The chit fund companies operations are governed by the Chit Fund Act, 1982, which is administered by State Governments. Their deposit taking activities are regulated by the Reserve Bank. The chit fund companies enter into an agreement with the subscribers that every one of them shall subscribe a certain amount in instalments over a definite period and that every one of such subscribers shall in his turn, as determined by lot or by auction or by tender, be entitled to a prize amount. (8) Residuary Non-Banking Company is a company which receives deposits under any scheme by way of subscriptions/contributions and does not fall in any of the above categories. There are few unhealthy features of the operations of these companies; (i) Negative NOF (Net Owned Fund), (ii) Understatement of their deposit liability, (iii) Forfeiture of deposits, (iv) Levy of service charges on the depositors (v) Payment of high rates of commission, etc. To remove these features, RBI has extended prudential norms to these companies, introduced compulsory registration requirement, specified minimum rates of interest payable on their deposits under different schemes. Under the RBI (Amendment) Act, 1997, the RBI directly inspects and monitoring the activities of these companies. 8.8 SUMMARY Finance is the access with which the financial system performs its functions that sets the pace for the achievement of broader national objectives. The financial system consists of four segments or components. These are: financial institutions, financial markets, financial instruments and financial services. A financial market is a market in which people and entities can trade financial securities, commodities and other fungible items at low transaction costs and at prices that reflect supply and demand. A money market is a market for borrowing and lending of short-term funds. It deals in funds and financial instruments having a maturity period of one day to one year.It refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. A capital market is one in which individuals and institutions trade financial securities i.e. i.e. long term debt instruments. 212 CU IDOL SELF LEARNING MATERIAL (SLM)

The Corporate Security Market deals with shares and debentures of old and new companies and also provides long – term funds to the companies. Commercial banks are institutions that conduct business for profit motive by accepting public deposits for various investment purposes. The functions of commercial banks are broadly classified into primary functions and secondary functions The Non-Banking Finance Companies operating in India fall in the following broad categories. (1) Equipment Leasing Company is a company which carries the business of leasing of equipment’s or the financing of such activity. (2) Hire Purchase Finance Company is a company which carries on as its principle business, hire purchase transactions or the financing of such transactions (3) Housing Finance Company is a company which carries on as its principle business, the financing of the acquisition or construction of houses including the acquisition or development of plots of lands for construction of houses. (4) Investment Company means any company which carries on as its principle business the acquisition of securities. (5) Loan Company is a company that provides finance whether by making loans or advances or otherwise for any activity other than its own. (6) Mutual Benefit Finance Company (i.e. Nidhi Company) means any company which is notified by the Central Government under section 620A of the Companies Act, 1956. (7) Chit Fund Company is a company which collects subscriptions from specified number of subscribers periodically and in turn distributes the same as prizes amongst them. (8) Residuary Non-Banking Company is a company which receives deposits under any scheme by way of subscriptions/contributions and does not fall in any of the above categories. 8.9 KEYWORDS  A financial market is a market in which people and entities can trade financial securities, commodities and other fungible items at low transaction costs and at prices that reflect supply and demand.  Secondary/Stock Market is a market for sale of secondary securities which facilitates buying and selling of securities. 213 CU IDOL SELF LEARNING MATERIAL (SLM)

 Term Loans Market: Banks and Financial Institutions provide term loans to companies for a period of one year.  Mortgages Market- It provides loans against securities of immovable assets like land and buildings.  Financial Guarantees Market: Financial institutions and banks provide financial guarantees on behalf of their clients to the third parties. 8.10 LEARNING ACTIVITY 1. Explain the relation between lenders and borrowers with respect to Financial Markets. ______________________________________________________________________ _______________________________________________________________________ 2. How the functions of Commercial Bank attract consumers? ______________________________________________________________________ _______________________________________________________________________ 8.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain Financial System with its important features. 2. What are the Constituents of Financial System? 3. Write a note on Foreign Exchange Market. 4. Explain the characteristics of the Money Market 5. State the importance of Capital Market. Long Questions: 1. Discuss the classification of Financial Market and state its relevant functions. 2. What are the important instruments of the Money Market? Explain it. 3. Elaborate the Structure of Indian Capital Market. 4. Describe the Structure of Indian Banking Industry. 5. Discuss -The Non-Banking Financial Companies (NBFCs) which are heterogeneous in nature in terms of activity and size are important financial intermediaries and an integral part of the Indian Financial system. B. Multiple Choice Questions 214 CU IDOL SELF LEARNING MATERIAL (SLM)

1. The role of _________________within the system is primarily to intermediate between those that provide funds and those that need funds, and typically involves transforming and managing risk. a. RBI b. Banks c. Financial institutions d. Central Government 2. What refer to the documents which represents financial claims on assets? a. Stock Market b. Financial Instruments c. IPO d. Options 3. Financial services rendered by the financial intermediaries’ bridge the gap between lack of knowledge on the part of ______________and increasing sophistication of financial instruments and markets. a. Agents b. Business Owners c. State Government d. Investors 4. The intermediary functions of a financial markets include a. Repayment of certain sum of money at the end of specified period b. Sale Mechanism c. Mobilize savings & facilitate the allocation of funds d. To provide reassurance 5. Which is a market for new issue of securities, which are issued to the public for the first time? a. Primary/New Issue Market b. Secondary/Stock Market c. Long Term Market d. Unorganized Market: Answers 215 1 - c; 2 - a; 3 – d; 4 – b; 5 – a. CU IDOL SELF LEARNING MATERIAL (SLM)

8.12SUGGESTED READING Text Books:  Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House],  C. Fernando, Business Environment Kindle Edition, Pearson  K.Aswathappa, Essentials Of Business Environment, Himalaya Publishing House  SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson  Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice Hall. Reference Books:  MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi  Business Environment Raj Aggarwal Excel Books, Delhi  Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi  Bhole, Financial Institutions and Markets: Structure, Growth & Innovation, McGraw Hill Education Open Text Source:  Dhamija, Dr. Ashok (2009). Prevention of Corruption Act. LexisNexis India. p. 2049. ISBN 9788180385926.  Subrata K. Mitra and V.B. Singh. 1999. Democracy and Social Change in India: A Cross-Sectional Analysis of the National Electorate. New Delhi: Sage Publications. ISBN 81-7036-809-X (India HB) ISBN 0-7619-9344-4 (U.S. HB).  Bakshi; P M (2010). Constitution of India, 10/e. Universal Law Publishing Company Limited. pp. 48–.ISBN 978-81-7534-840-0. 216 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 9: FINANCIAL ENVIRONMENT-II 217 Structure 9.0 Learning Objective 9.1 Introduction 9.2 Capital Market 9.3 Capital Reform 9.4 SEBI 9.4.1 Functions 9.4.2 Powers 9.4.3 Regulations 9.4.4Structure 9.5 FDI 9.5.1Types 9.5.2Benefits 9.5.3 FDI Investment Routes 9.5.4 Market Size and Development: 9.6 Summary 9.7 Keywords 9.8 Learning Activity 9.9 Unit End Questions 9.10 Suggested Readings 9.0 LEARNING OBJECTIVE After studying this unit, you will be able to  Analyze the importance of Capital Reforms  Explain the role of SEBI  Compare FDI advantage for starting or expanding the business. 9.1 INTRODUCTION CU IDOL SELF LEARNING MATERIAL (SLM)

The main objective of the capital market is to ensure the economic development by deactivating saving and channel is in them into productive investments. Capital market acts as a bridge between investor- who are borrowers of funds and savers - lenders of funds. Also, savers who saves the part from their income are termed as “Surplus units” and the borrowers who need funds are termed as a “deficit units”. Capital market directs the use of funds into more productive means like Funds from individuals and financial intermediaries are utilized by business and government that helps them to realize the expansion and growth plan, thus increasing the contribution in economic development. The capital market consists banking and non-banking intermediaries that stabilizes the value of stocks and securities. It maintains the reasonable interest rates and helps in minimising speculative activities. Securities and exchange board of India (SEBI) is an apex body that monitors and controls the capital market. It was established in 1988 by Indian government but got the statutory powers in 1992.Administer the working of mutual funds and stock markets, restricts illegal practices, safeguard investor interest, conducts audits and inspections and prohibits insider trading. FDI brings in technology with necessary funds that can be productively utilized for developing infrastructure, expanding the capability and competence of the business, it contributes in the economic development of the developing economies by raising the standard of living of the people by encouraging stable long-term lending. Foreign investors are attracted and ready to invest in India because of availability and affordable labour market diversification, subsidies, and preferential tariffs. 9.2 CAPITAL MARKET A Capital Market is a place where buyers and sellers can interact and transact financial securities like shares, debentures, debt instruments, bonds, derivative instruments like the futures, options, swaps, ETFs.  The securities referred to here would normally mean long-term investments, i.e., investments that have a lock-in period greater than one year.  The trading of short-term investments is done through the money-market. Functions of Capital Market:  It makes trading of securities easier for investors and companies.  It assists the transaction settlement in time.  It helps minimize transaction costs and information costs.  It mobilizes the savings of parties from cash and other forms to financial markets.  It offers insurance against market risk. 218 CU IDOL SELF LEARNING MATERIAL (SLM)

Types of Capital market Primary Secondary Fig 9.1: Types of Capital Market #1 – Primary Market The primary market is a market where freshly issued securities are traded, i.e., for the first time. It is also known as the new issues market. This market enables both initial public offering and a further public offering. In this market, the funds will be deployed with the help of offering through a prospectus, preferential issue, rights issue, e-IPO, and private placement of securities. #2 – Secondary Market It is a type, old securities are traded, i.e., trading done after transacting first in the primary market. We also call this market as the stock market or aftermarket. Both stock markets and over-the-counter trades come under the secondary market. Examples of secondary markets are the London Stock Exchange, the New York Stock Exchange, NASDAQ, etc  It improves the efficiency of transactions.  They move money between the investors, i.e., people who supply capital and people in need of capital.  Secondary markets create liquidity in the market.  Securities like bonds pay interest to the investors, and most of the time, the interest so paid is higher than the bank interest rates.  Securities like shares pay dividend income.  There is greater scope for growth of the value of investments as time passes. 219 CU IDOL SELF LEARNING MATERIAL (SLM)

 Instruments of capital market possess liquidity, i.e., we can convert them into cash and cash equivalents when there is a need for funds immediately with lower transactional costs.  Investment in shares provides investors with ownership rights, which allows them to have a say in the company’s management decision.  It promotes diversification by offering a wide range of investment types.  Usually, the securities of the capital market can be used as collateral for getting loans from banks and financial institutions.  There would be a few tax benefits that accrue whilst investing in the stock market.  Holding on to a few securities may ensure superior long-term performance. Disadvantages  Investing in the capital market is deemed to be very risky as the investment is highly volatile when it comes to the value, i.e., these securities are subject to the market ups and downs.  Such fluctuations make these kinds of investments unsuitable for providing a fixed income, especially retired employees who would usually prefer regular income.  With the wide range of investment alternatives present in the capital market, an investor may not be able to decide what kind of investments to pursue, thus making it difficult for an investor to invest without a piece of professional advice.  If an investor invests in shares of a company, he would be considered having ownership rights. This may, prima facie, sound like an advantage but, this means that the investor being the owner of the company, would be the last party to receive any proceeds in case the company goes into liquidation or becomes bankrupt.  Buying and selling of securities may involve a brokerage fee, commission, etc. increasing the cost of transactions (Reference: https://www.wallstreetmojo.com/capital-market/) 9.3 CAPITAL REFORMS The major Capital reforms are as follows: 1. Establishment of SEBI: An important measure regarding capital market reforms is the setting up of Securities and Exchange Board of India (SEBI) as the regulator of equity market in India. SEBI has introduced various guidelines and regulations for the functioning of capital markets and assuming and selling of shares in the primary market. 220 CU IDOL SELF LEARNING MATERIAL (SLM)

The following important regulatory measures have been introduced by SEBI: (a) SEBI has introduced a code of advertisement for public issues by companies for making fair and truthful disclosures. The companies are now required to disclose all material facts and specific risk factors associated with their projects while making public issues. (b) It has required the stock exchanges to amend their listing agreements to ensure that a listed company furnishes annual statements to them showing variations between financial projections and project utilisation of funds made in the offer documents and actual. This will enable shareholders to make comparisons between performance and promises made by of company. (c) An important reform SEBI has introduced is that it has brought merchant banking also under its regulatory framework. The merchant bankers are required to follow the code of conduct issued by SEBI in respect of pricing and premium fixation of issues of shares a company. (d) The practice of making preferential allotment of shares at prices unrelated to the prevailing price has been stopped by SEBI. Besides, to ensure transparency insider trading has also been banned. (e) As a part of the process of establishing transparent rules for trading in stock exchanges, a notorious BADLA system has been banned and in its place Rolling Settlement System has been introduced. 2. Setting up of Private Mutual Funds: Another important reform is the permission granted to the private sector firms to start Mutual Funds. Many private sector companies such as Tata, Reliance, Birla have set up their mutual funds through which they raise money from the public. In this way monopoly position of UTI in Mutual Fund business has come to end. Mutual Funds raise money by selling units to the public and the funds so raised are invested in a number of equities and debentures of companies. A mutual fund may be entirely equity-based or debt-based or a balanced one having a particular combination of investment in equities and debentures of a number of companies. Investment in mutual funds enables the investors to reduce risk. Mutual funds have also been allowed to open offshore funds to invest in equities abroad. UTI has also been brought within the regulatory framework of SEBI. 3. Opening up to Foreign Capital: A significant reform has been that Indian capital market has been opened up for foreign institutional institutions (FII). That is, FII can now buy shares and debentures of private Indian companies in the Indian stock market and can also invest in government securities. This has been done to attract foreign capital. Foreign Institutional Investors (FII) have been permitted full capital convertibility. 4. Access to International Capital Markets: 221 CU IDOL SELF LEARNING MATERIAL (SLM)

The Indian corporate sector has been allowed to raise funds in the international capital markets through American Depository Receipts (ADRs), Global Depository Receipts (GDR), Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Similarly, Overseas Corporate Bodies (OCBs) and Non-resident Indians have been allowed to invest in the equity capital of the Indian companies. FIIs have been allowed to invest in equities of private corporate Indian companies as well as in Government securities. 5. Banks and Capital Markets: Another important step to strengthen the Indian capital market is that banks have been allowed to lend against various capital market instruments such as corporate shares and debentures to individuals, investment companies, trusts and endowment share and stock brokers, industrial and corporate buyers and SEBI-approved market makers. Lending by banks against various capital market instruments to individuals, share and stock brokers, market makers is made in accordance with certain norms regarding purpose, capital adequacy, transparent transactions, maximum possible amount or ceiling, or duration of the loan. Bank lending against shares and debentures, according to C. Rangarajan, will “enable partial liquidity to scrip’s, to help reduce volatility in price movement, encourage the presence of market makers so as to reduce market concentration and help in widening and deepening of trading in the secondary market.” Regulation of stock markets is important to ensure: (a) That the equity markets operate in a fair and orderly manner, (b) That the brokers and other professionals of the stock markets deal justly with their customers, (c) That the corporate firms who raise funds through the market provide all information about themselves which the investors need to make intelligent investment decisions. Since its inception SEBI has been addressing itself to these tasks. [Reference: https://www.economicsdiscussion.net/] 9.4 SEBI What is SEBI? SEBI is a regulatory body of Indian Stock Market, that drafts a precise set of rules and regulations, and should be followed when a securities trade is undertaken. Definite rules and regulations were created, which would bind the intermediaries, creating a frame of boundaries they need to adhere to, mostly in favour of individual investors. The brief SEBI meaning stands to be, Securities and exchange board of India safeguards the interest of the investors, invading the superiority and dominance of intermediaries, to create an environment free of malpractices. 222 CU IDOL SELF LEARNING MATERIAL (SLM)

Apart from safeguarding the interest of investors, SEBI as well promotes development and uplifting of the securities market. Establishment of SEBI was dated back to the year 1988, when it was a non-statutory body, and it wasn’t until 1992 when the entire framework was redefined and an autonomous statutory body was created. Being the controller and regulator of the securities market, Indian Capital market participant’s fulfilment of needs attained a definite shape. SEBI is headquartered at business district at the Bandra Kurla Complex in Mumbai. The body has also established regional branches in the Northern, Eastern, Southern and Western regions, and precisely in the cities New Delhi, Kolkata, Chennai, and Ahmedabad. Sub branches have establishment in Bangalore, Jaipur, Guwahati, Bhubaneshwar, Patna, Kochi, and Chandigarh. 9.4.1 What Are the Functions of SEBI? SEBI act 1992, briefly drafts the SEBI Functions, which are equally mended to suit and in favour of all the parties involved in a securities trade. The functions are briefly listed below.  SEBI provides a well framed infrastructure, a place the issuers of securities may find appropriate to make their set of offering to the public, in a rather routine and uniform fashion.  The traders, who opt to invest in the securities offers, shall be safeguarded, protecting their interest in investment and keeping them protected from the possible malpractices which target the investors and their money.  The entire framework of Indian Securities market is promoted and regulated by SEBI, encourage ever fair aspect which may lead to the development of the market.  It also has a set of prohibition list, where the insider trades is restricted, cutting off the chance of fraudulent and unfair trade practices arising.  Investor awareness and education is highly promoted by the board, where education mediums are provided to the investors, and insights on the intermediaries of trade are laid upon.  Among the various happenings, such as acquisition of shares and take-over of companies, are all monitored by the SEBI.  Among all the other functions of SEBI, it also undertake the research activities, where the present and future possible market situations are closely monitored and take into account, to ensure the securities market is efficient, and functioning well enough. 223 CU IDOL SELF LEARNING MATERIAL (SLM)

9.4.2 What Are the Powers of SEBI? Powers vested upon SEBI are in consideration of a vast number of aspects. SEBI Powers are reportedly grouped into three categories and the same are as below: Quasi Executive Quasi Judicial Quasi Legislative Fig: 9.2 Powers of SEBI Quasi legislative This segment streamlines the protection of investors, and their interest, by formulation rules and regulations in favour of the investors. There are a number of rules, issued by the board, such as Listing obligation and Disclosure Requirements, insider trading, listing obligations etc. They collectively cater to invading even the slight possibility of malpractices. Quasi-Judicial: This power incorporated upon the idea of a transparent and fair trade. It lies upon the belief that any unfair trade practices should be accounted for. It is SEBI that conducts the hearing and proceeding, if any malpractices are found to exist. Quasi Executive: This segment gives SEBI the right to investigate. If any issues or practices are found existent judgments would be passed by SEBI to deal with the same. It has its share of rights to undertake inspection of books, document or records, if any breach arises. With the power to investigate, it also has its share of power to cease and desist proceedings. 224 CU IDOL SELF LEARNING MATERIAL (SLM)

9.4.3 What Are theSEBI Regulations? Of all the diverse regulations, we have listed 4 of SEBI Regulations below:  2009 regulation – This is the Issue of Capital and Disclosure Requirements, where the board directs the issuers of the securities to disclose everything in brief in order to have the transparency in capital matters as well.  2011 regulation – This consists of the Substantial Acquisition of Shares and Takeover, where the takeover activities are directed to be undertake in a fair way, pointing out the unfair ways, which need to be avoided.  2015 regulation – This regulation is of Prohibition of Insider Trading, where insiders of the listed company are not to trade the securities. 9.4.4 What Is the Structure Of SEBI? SEBI Structure is of a corporate framework, which has its own sections of department. Each of such departments is supervised by a head. The departments being precisely listed are more than 20 in number. From all the vast number of departments some are corporation finance, economic and policy analysis, debt and hybrid securities, enforcement, human resources, investment management, commodity derivatives market regulation, legal affairs, and more. Head of the department being equally responsible have a different set of member, precisely the board of directors. The definite structure is as follows, and how each of the members is elected.  Union Government of India is responsible to elect the Chairman of SEBI  Reserve Bank of India then elects one member to the board of directors.  Structure also has a place for 2 officers, who shall be the electing responsibility of Union Government of India.  The remaining 5 members will as well be contributed to the board by the Union Government of India.  [Reference: https://top10stockbroker.com/] 9.5 FOREIGN DIRECT INVESTMENT (FDI) About FDI in India Introduction Apart from being a critical driver of economic growth, Foreign Direct Investment (FDI) has been a major non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment 225 CU IDOL SELF LEARNING MATERIAL (SLM)

privileges like tax exemptions, etc. For a country where foreign investment is being made, it also means achieving technical know-how and generating employment. The Indian Government’s favourable policy regime and robust business environment has ensured that foreign capital keeps flowing into the country. The Government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others. 9.5.1 Types of FDI Horizontal Vertical Types of FDI Platform Conglomerate FDI Fig: 9.5.1 Types of FDI 1. Horizontal FDI The most common type of FDI is Horizontal FDI, which primarily revolves around investing funds in a foreign company belonging to the same industry as that owned or operated by the FDI investor. Here, a company invests in another company located in a different country, wherein both the companies are producing similar goods. For example, the Spain-based company Zara may invest in or purchase the Indian company Fab India, which also produces similar products as Zara does. Since both the companies belong to the same industry of merchandise and apparel, the FDI is classified as horizontal FDI. 2. Vertical FDI Vertical FDI is another type of foreign investment. A vertical FDI occurs when an investment is made within a typical supply chain in a company, which may or may not necessarily belong to the same industry. As such, when vertical FDI happens, a business invests in an overseas firm which may supply or sell products. Vertical FDIs are further categorised as 226 CU IDOL SELF LEARNING MATERIAL (SLM)

backward vertical integrations and forward vertical integrations. For instance, the Swiss Coffee producer Nescafe may invest in coffee plantations in countries such as Brazil, Columbia, Vietnam, etc. Since the investing firm purchases, a supplier in the supply chain, this type of FDI is known as backward vertical integration. Conversely, forward vertical integration is said to occur when a company invests in another foreign company which is ranked higher in the supply chain, for instance, a coffee company in India may wish to invest in a French grocery brand. 3. Conglomerate FDI When investments are made in two completely different companies of entirely different industries, the transaction is known as conglomerate FDI. As such, the FDI is not linked directly to the investors business. For instance, the US retailer Walmart may invest in TATA Motors, the Indian automobile manufacturer. 4. Platform FDI The last types of foreign direct investment are platform FDI. In the case of platform FDI, a business expands into a foreign country, but the products manufactured are exported to another, third country. For instance, the French perfume brand Chanel set up a manufacturing plant in the USA and export products to other countries in America, Asia, and other parts of Europe. If you intend to invest via FDI, you must know about the different types of FDI with examples. With FDI, the money invested can be used to start a new business in a foreign country or to invest in an already existing business in a foreign country. For more information on FDIs, consult Angel Broking advisors. Foreign direct investment has three basic components: 1. EQUITY CAPITAL: it is the overseas investor’s purchase of shares of a business located in another country rather than its own. An equity capital stake of 10 percent or more, is normally considered as a threshold for the control of assets. 2. REINVESTED EARNINGS: it is the oversea investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates, and earnings of branches not remitted to the direct investor. 3. Other direct investment capital or inter-company debt transactions: this refers to short- or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises. The borrowing and lending of funds including debt securities and supplier’s credits between direct investors and subsidiaries, branches and associates. 227 CU IDOL SELF LEARNING MATERIAL (SLM)

9.5.2 Benefits of Foreign Direct Investment 1. Boost to International Trade Foreign direct investment promotes international trade as it allows production to flow to parts of the world which are more cost effective. For instance, Apple was able to conduct FDI into China to assist with the manufacturing of its products. However, many of the components are also shipped in from elsewhere, generally from the region of Asia. For instance, the camera is made by Sony, which sources its manufacturing in Taiwan. There is also the case of the flash memory, which is sourced by Toshiba in Japan. We also have the touch ID sensor which is made in Taiwan, and the chipsets and processors, which are made by Samsung in South Korea and Taiwan. These are but a small handful of the components, but demonstrate how inter-connected the supply chain has become between countries. Both Samsung And Song have conducted investment in the likes of Taiwan, China, and Japan. As a result, it has created new jobs in the region and boosted trade between the nations. 2. Reduced Regional and Global Tensions As we have seen with the Apple example, a supply chain is created between countries. In part, this is created by the division of labour. For instance, South Korea may make the batteries, Taiwan the ID sensors, and Japan the cameras. As a result, they are all dependent on each other. If there is a revolt in Taiwan, the whole process could fall apart. Without the ID sensors, the final product cannot be made, so the need for other components is also reduced. This means workers in Japan and South Korea are also affected. As a result of this interconnected supply chain, it is in the interest of all parties to ensure the stability of its trading partners. So FDI can create a level of dependency between countries, which in turn can create a level of peace. To use a famous metaphor, you don’t bite the hand that feeds you. In other words, if nations are reliant on each other for their income, then the likelihood of war is also reduced. 3. Sharing of Technology, Knowledge, and Culture Foreign direct investment allows the transfer of technology, knowledge, and culture. For instance, when a firm from the US invests in another from India, it has a say in how the firm is run. It is in its interest to ensure the most efficient use of its resources. What happens as a result is that useful techniques or ways of conducting business are transferred. The members of the US company may say, have you tried doing A, B, and C? By coming in from a different cultural background and perspective, often, efficiencies can be achieved. Furthermore, there is the case of technology. It can transfer over in a number of ways. First of all, employees benefit from having first-hand access to the new technology. They may then be able to use this to start their own ventures. 228 CU IDOL SELF LEARNING MATERIAL (SLM)

Second of all, the technology could be outright purchased from a foreign nation. For instance, copyright technology could be sold from Company A in the US to Company B in India. Finally, the technology could be reverse-engineered or provide inspiration for domestic development. 4. Diversification From the businesses perspective, foreign direct investment reduces risk through diversification. By investing in other nations, it spreads the company’s exposure. In other words, it is not so reliant on Country A. For instance, Target derives its entire revenues from the US. Should an economic recession hit Stateside, it’s almost guaranteed to harm its profits. By diversifying and investing in foreign markets, it allows businesses to reduce domestic exposure. So if a US firm invests in new stores in Germany, the level of risk is reduced. This is because it is not reliant on one market. Whilst there may be a decline in demand for one, there may be growth in another. To use an analogy, it’s similar to placing a bet in roulette on both red and black. 5. Lower Costs and Increased Efficiency Foreign direct investments can benefit from lower labour costs. Often, businesses will off- shore production to nations abroad that offer cheaper labour. Now there is an ethical element to this than is often debated, but we will leave that aside for now. Whether it is ethical or not is irrelevant as it is a benefit to the business. Although labour costs are lower, we must also consider productivity. For instance, one person in China may produce one unit for $1 an hour. However, an employee in the US may be able to produce 20 units for $10 an hour. So whilst a Chinese employee is cheaper, they only make 1 unit per $1, compared to 2 units per $1 in the US. With that said, foreign direct investors will take such factors into account. And in most cases, the labour is so much cheaper than most of the productivity differentials are eliminated. This means the investment is cost-effective. In other words, more employees will be needed to make the same number of goods, but the total cost to produce is lower. On most occasions, foreign direct investment will result in a net gain for the company. After all, it is in their interest to ensure the investment pays off. However, there are exceptions, where FDI can in fact go the other way. Nevertheless, on the whole, FDI is generally associated with lower costs and increased cost- effectiveness. 6. Tax Incentives Reduced levels of corporation tax can save big businesses billions each and every year. This is why big firms such as Apple use sophisticated techniques to off-shore money in international subsidiaries. Countries with lower tax regimes are usually those that are favoured. Examples include Switzerland, Monaco, and Ireland, among others. 229 CU IDOL SELF LEARNING MATERIAL (SLM)

Furthermore, there are also tax incentives by which the foreign government offers tax breaks to investors in a bid to encourage FDI. 7. Employment and Economic Boost When money is invested in another country, it creates jobs, new companies, and new factories/buildings. This brings about new opportunities for local residents and can stimulate further growth. With greater levels of employment being made available, it creates a greater level of purchasing power in the wider economy. If we couple this with the fact that big corporations often pay above the average to attract the best workers, we can see a spill-over effect. With employees earning more money, they also create demand for other goods in the economy. In turn, this stimulates employment in other markets and industries. 9.5.3 FDI Investment Routes Foreign Direct Investment (FDI) can be made through two routes that are: Automatic Route: Indian companies engaged in various industries can issue shares to foreign investors up to 100% of their paid up capital in Indian companies Government Approval Route: Certain activities that are not covered under the automatic route require prior Government approval for FDIs. *Investors are advised to check for government approval and other related sector condition in latest FDI Circular Section 5.  Category 1- Sectors in which FDI is permitted up to 100% under automatic route  Category 2- Sectors in which FDI is permitted up to 100% under Government Route  Category 3- Sectors in which FDI is permitted beyond certain limit with Government  Category 4- Sectors wherein FDI is permitted up to certain limit under both Government and Automatic routes subject to applicable laws/ regulations security and other conditionalities Foreign investors can invest directly in India, either on their own or through joint ventures in virtually all the sectors except in a very small list of activities where foreign investment is prohibited. FDI in the majority of the sectors is under the automatic route, i.e., allowed without any requirement of seeking regulatory approval prior to such investment. Thus, the process to get FDI in most sectors don't require prior approval from the GOI. Eligible investors can invest in most of the sectors of Indian Economy on an automatic basis.  Any Non-resident individual (NRI)/Entity can invest subject to FDI policy (except in prohibited sectors). NRI resident in and Citizens of Nepal & Bhutan are permitted to invest on repatriation basis (amount of consideration for such investment shall be paid only by way of inward remittances through normal banking channels).  Company, trust or partnership firm incorporated outside India and owned and controlled by NRIs  Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI) 230 CU IDOL SELF LEARNING MATERIAL (SLM)

 Registered FIIs/ FPIs/ NRIs as per Schedules 2, 2A and 3 respectively of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 can invest or trade through a registered broker of Indian Companies on recognized stock exchanges.  SEBI registered Foreign Venture Capital Investor (FVCI) in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000. 9.5.4 Market Size and Development: According to Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflow in India stood at US$ 500.12 billion between April 2000 and September 2020, indicating that Government's effort to improve ease of doing business and relaxing FDI norms has yield results. FDI equity inflows in India stood at US$ 30.0 billion in 2020-21 (between April 2020 and September 2020). Data for 2020-21 indicates that computer software and hardware sector attracted the highest FDI equity inflows of US$ 17.55 billion, followed by the service sector at US$ 2.25 billion, trading at US$ 949 million and chemicals (other than fertilisers) at US$ 437 million. In 2020-21 (between April 2020 and September 2020), India received the maximum FDI equity inflows from Singapore (US$ 8.30 billion), followed by the US (US$ 7.12 billion), Cayman Islands (US$ 2.10 billion), Mauritius (US$ 2.0 billion), the Netherlands (US$ 1.49 billion) and the UK (US$ 1.35 billion). In 2020-21 (between April 2020 and September 2020), Gujarat received the maximum FDI equity inflows of US$ 16.0 billion, followed by Maharashtra at US$ 3.61 billion, Karnataka at US$ 3.66 billion and Delhi at US$ 2.66 billion. Investments/ Developments Some of the significant FDI announcements made recently are as follows:  In the second quarter of FY21, total FDI inflows amounted to US$ 28.10 billion, of which equity inflows were US$ 23.44 billion. This boosted FDI equity inflows to US$ 30 billion between April 2020 and September 2020, a 15% increase on y-o-y basis compared with the same period in FY20.  In November 2020, Rs. 2,480 crore (US$ 337.53 million) foreign direct investment (FDI) in ATC Telecom Infra Pvt Ltd. was approved by the Union Cabinet.  In November 2020, Amazon Web Services (AWS) announced to invest US$ 2.77 billion (Rs. 20,761 crore) in Telangana to set up multiple data centres; this is the largest FDI in the history of the state. 231 CU IDOL SELF LEARNING MATERIAL (SLM)

 Since April 2020, the government has received over 120 foreign direct investment (FDI) proposals worth ~Rs. 12,000 crore (US$ 1.63 billion) from China. Between April 2000 and September 2020, India received US$ 2.43 billion FDI from China.  According to data provided by Reserve Bank of India (RBI), India’s Outward Foreign Direct Investment (OFDI) in equity, loan and guaranteed issue stood at ~US$ 1.06 billion in November 2020 vs. US$ 3.51 billion in October 2020. Government Initiatives In December 2020, the government of Uttar Pradesh agreed to provide Samsung Display Noida Private Limited with special incentives to set up a mobile and IT display product manufacturing unit. Under the Central Government's scheme for promotion of manufacturing electronic components and semiconductors (SPECS), Samsung will also receive a financial incentive of Rs. 460 crore (US$ 62.61 million). This project will develop a global export hub in Uttar Pradesh and will help the state attract more foreign direct investments (FDI). In December 2020, changes in the guidelines for the provision of Direct-to-Home (DTH) services have been approved by the Union Cabinet, enabling 100% FDI in the DTH broadcasting services market. In October 2020, 16 qualifying applicants under the PLI scheme were approved by the Ministry of Electronics and Information Technology (MeitY). For five years, subsequent to the base year (FY2019-20), the PLI for large-scale electronics production will extend an incentive of 4-6% on the incremental sales of products manufactured in India to the qualifying firms. Samsung, Foxconn, Rising Star, Wistron and Pegatron are the foreign mobile phone manufacturing companies that have been approved in the mobile phone market. Under Magnetic Maharashtra 2.0, the state implemented core investment promotion recovery initiatives such as Plug & Play Infrastructure, Maha Jobs, Maha Parwana, Investor First Programme, Capacity Augmentation of MIDC Land Banks and Dedicated Country Desks. This accelerated the economic growth and improved consumer trust, placing the state as one of the country's most preferred investment destinations, flourishing the state's industrial sector. Road ahead India is expected to attract foreign direct investments (FDI) of US$ 120-160 billion per year by 2025, according to CII and EY report. Over the past 10 years, the country witnessed a 6.8% rise in GDP with FDI increasing to GDP at 1.8%. In terms of attractiveness, investors ranked India #3; ~80% investors have plans to invest in India in the next 2-3 years, while ~25% reported investments worth >US$ 500 million, the Economic Times reported 232 CU IDOL SELF LEARNING MATERIAL (SLM)

[Reference: https://www.ibef.org/] Case Analysis: Hindustan Lever Limited v. SEBI The facts of the case concerned the purchase by HLL of 8 lakh shares of BBLIL from the Unit Trust of India (UTI) on March 25, 1996. This purchase was made barely two weeks prior to a public announcement for a proposed merger of HLL with BBLIL. Upon investigation, SEBI by its Order dated March 11, 1998 (Order) found that, at the time of the purchase of shares of BBLIL from UTI, HLL was an “insider” as under Section 2(e) of the 1992 Regulations, the relevant extract of which describes an insider as any person who: “(i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access by virtue of such connection to unpublished price sensitive information in respect of securities of the company, or (ii) has received or has had access to such unpublished price sensitive information.” SEBI held that, since, HLL and BBLIL were subsidiaries of the same London based Unilever, and were effectively under the same management, HLL and its directors had prior knowledge of the merger. Thus, HLL was covered under the definition of an insider as above defined. SEBI also held that HLL was in possession of UPSI as defined under Section 2(k) of the 1992 Regulations which includes any information in relation to amalgamation, merges and takeovers that “is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securities of that company in the market”. As per SEBI, the fact that the information about the merger was available with HLL was enough to satisfy the requirement of Section 2(k) above. An appeal was filed by HLL against the said SEBI Order before the Securities Appellate Authority. On the question of whether HLL could be termed as an insider, the Appellate Authority agreed with the SEBI Order to hold that, the information available with HLL in relation to the merger was beyond merely self-generated information, i.e., information arising out of its own decision making. Further, with respect to the merger, the Appellate Authority noted that the existence of directors common to both HLL and BBLIL, and a common parent company in Unilever meant that they (i.e., HLL and BBLIL) were in effect under the same management. Consequently, HLL could be termed as an insider under the 1992 Regulations and it could reasonably be presumed that HLL was privy to decision making on the merger issue in the BBLIL board. 233 CU IDOL SELF LEARNING MATERIAL (SLM)

On the question of whether the information available with HLL constituted UPSI, the Appellate Authority agreed with the contentions of HLL that, for information to be considered as UPSI, it must meet the dual requirements envisaged under Section 2(k) of the 1992 Regulations, i.e.: 1. The information must not be generally known or published by the company; and 2. If published or known, is likely to materially affect the prices of securities of that company in the market. […Emphasis supplied] The Appellate Authority held that for information to be generally known, it is not required to be confirmed or authenticated by the company as it would otherwise fall under the category of information “published by the company”. The Appellate Authority appreciated the evidence produced by HLL, including various news articles covering the merger, and concluded that the information of the merger was generally widely known to the public, and thus failed the first test to qualify as UPSI as per the abovementioned Section 2(k) of the 1992 Regulations. HLL also argued that, the information of the merger of two healthy, profit – making companies is per se not price sensitive, as price sensitivity would arise in case of merger between a strong company and a weak company, which impacts the share price of the companies. The Appellate Authority however noted that even in the merger of two healthy companies there are synergistic possibilities which could lead to price sensitivity for either company. Thus, the Appellate Authority agreed with SEBI’s conclusion that information of the merger was price sensitive (though not ‘unpublished’). The matter is currently pending before the Supreme Court. Aftermath and consequences of the decision of the Appellate Authority Subsequently, SEBI by the SEBI (Insider Trading) Amendment Regulations, 2002 amended the definition under Section 2(k) to the following: ““unpublished” means information which is not published by the company or its agents and is not specific in nature. Explanation. —Speculative reports in print or electronic media shall not be considered as published information.” Consequently, under the revised definition speculative reports in print media, as was the case in relation to the HLL and BBLIL merger, would not be considered as published information, and HLL’s knowledge in relation to the merger would be considered as unpublished information. By the same Amendment Act, SEBI also introduced a new provision, Section 2(ha) which defined “price sensitive information” to include any information relating to an amalgamation, merger or takeover as deemed price sensitive information, regardless of whether such information actually has any affect the price of the securities in the market. [Source:https://corporate.cyrilamarchandblogs.com/] 234 CU IDOL SELF LEARNING MATERIAL (SLM)

9.6 SUMMARY  Capital markets deal with long-term loans and debts, shares, debentures, bonds, government securities, etc.  It operates with the help of stock exchanges predominantly.  They encourage investors to invest in their instruments by offering incentives like divided interest, which leads to capital formation.  They are known for mobilizing savings from banks, financial institutions, real estate, and gold, thus diverting savings from unproductive channels to productive areas.  The investors in the capital markets having funds are called the surplus units, and the ones borrowing the funds are called deficit units.  The funds move from the surplus units to the deficit units.  They help in proper regulation of funds and liquidity creation.  Commercial Bank, financial institutions, insurance companies, business corporations, and retirement funds are the major suppliers of funds in the capital markets. The major Capital reforms are as follows: - Establishment of SEBI: - Setting up of Private Mutual Funds: - Opening up to Foreign Capital: - Access to International Capital Markets: - Banks and Capital Markets: SEBI is a regulatory body of Indian Stock Market, that drafts a precise set of rules and regulations, and should be followed when a securities trade is undertaken. Definite rules and regulations were created, which would bind the intermediaries, creating a frame of boundaries they need to adhere to, mostly in favour of individual investors. Apart from being a critical driver of economic growth, Foreign Direct Investment (FDI) has been a major non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges like tax exemptions, etc. 1. Horizontal FDI: The most common type of FDI is Horizontal FDI, which primarily revolves around investing funds in a foreign company belonging to the same industry as that owned or operated by the FDI investor. 2. Vertical FDI: A vertical FDI occurs when an investment is made within a typical supply chain in a company, which may or may not necessarily belong to the same industry. 235 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Conglomerate FDI: When investments are made in two completely different companies of entirely different industries, the transaction is known as conglomerate FDI. 4. Platform FDI: a business expands into a foreign country, but the products manufactured are exported to another, third country. 9.7 KEYWORDS  “Preferential Allotment” includes issue of shares on preferential basis and/or through private placement made by a company in pursuance of a resolution passed under sub- section (1A) of section 81 of the Companies Act, 1956 and issue of shares to the promoters and their relatives either in public issue or otherwise  \"Badla\" - in share trading means something in return. It is a system to carry- forward. Badla is the charge, which the investor pays to carry forward his position.  Conglomerate FDI- When investments are made in two completely different companies of entirely different industries, the transaction is known as conglomerate FDI  EQUITY CAPITAL: it is the overseas investor’s purchase of shares of a business located in another country rather than its own.  REINVESTED EARNINGS: it is the oversea investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates, and earnings of branches not remitted to the direct investor. 9.8 LEARNING ACTIVITY 1. Explain the functions of SEBI. ___________________________________________________________________________ ___________________________________________________________________________ 2. Why the Regulation of stock markets is important? ___________________________________________________________________________ ___________________________________________________________________________ 9.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Capital Market? 2. Why the capital reforms were introduced? 3. State the powers of SEBI 4. Compare Advantages and Disadvantages of Capital Market. 236 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Explain the Market Size for FDI. Long Questions 1. Validate the statement - Securities and exchange board of India safeguards the interest of the investors, invading the superiority and dominance of intermediaries, to create an environment free of malpractices 2. What is FDI? State the benefits of FDI for business. 3. Explain the routes of FDI and government initiatives. 4. Discuss the importance of SEBI Regulation and the structure. 5. Explain the importance of FDI policy and enlist the components of FDI. B. Multiple Choice Questions 1. Which step will help in widening and deepening of trading in the secondary market.? a. Bank lending against shares and debentures b. Opening up to Foreign Capital: c. Setting up of Private Mutual Funds: d. Access to International Capital Markets: 2. Listed company furnishes annual statements showing variations between financial projections and project utilization of funds made in the offer documents and actual. This helps a. Process of establishing transparent rules for trading in stock exchanges b. Enable shareholders to make comparisons between performance and promises made by of company. c. BADLA system was stopped. d. Rolling Settlement System has been introduced. c. IPO d. Options 3. Buying and selling of securities may involve a brokerage fee, commission, etc. increasing the cost of _____________ a. Transfer b. Enlisting c. Transactions d. Registering 4. Both stock markets and over-the-counter trades come under the _____________ 237 CU IDOL SELF LEARNING MATERIAL (SLM)

a.Secondary market b. Primary market c. Tertiary market d. Registered market 5. ________________regulation is of Prohibition of Insider Trading, where insiders of the listed company are not to trade the securities a. 2009 regulation b. 2011 regulation c. 2012 regulation d. 2015 regulation Answers 1 - a; 2 - b; 3 –c; 4 – a; 5 – d. 9.10 SUGGESTED READING Text Books:  Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House],  C. Fernando, Business Environment Kindle Edition, Pearson  K.Aswathappa, Essentials Of Business Environment, Himalaya Publishing House  SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson  Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice Hall. Reference Books:  MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi  Business Environment Raj Aggarwal Excel Books, Delhi  Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi  Bhole, Financial Institutions and Markets: Structure, Growth & Innovation, McGraw Hill Education Open Text Source:  Dhamija, Dr. Ashok (2009). Prevention of Corruption Act. LexisNexis India. p. 2049. ISBN 9788180385926. 238 CU IDOL SELF LEARNING MATERIAL (SLM)

 Subrata K. Mitra and V.B. Singh. 1999. Democracy and Social Change in India: A Cross-Sectional Analysis of the National Electorate. New Delhi: Sage Publications. ISBN 81-7036-809-X (India HB) ISBN 0-7619-9344-4 (U.S. HB).  Bakshi; P M (2010). Constitution of India, 10/e. Universal Law Publishing Company Limited. pp. 48–.ISBN 978-81-7534-840-0. 239 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 10: INDIAN IN WORLD ECONOMY 240 Structure 10.0 Learning Objective 10.1 Introduction 10.2 MNC- Multinational Corporation 10.2.1 Meaning 10.2.2Features 10.2.3 Advantages and Limitations of MNCs: 10.3 World Trade Organization 10.3.1 Objective and function 10.3.2 Role of WTO: 10.4 International Monetary Funds 10.4.1 Objectives 10.4.2 Functions 10.4.3 Organisation and Management of the IMF: 10.4.4 Source of Funds 10.4.5 Special Drawing Rights 10.4.6 Borrowing methods used by the Fund 10.5 World Bank 10.5.1 Functions 10.5.2 Objectives 10.6 Trading Bloc 10.6.1 Types 10.6.2 Difference between free trade area and customs union 10.7 Summary 10.8 Keywords 10.9 Learning Activity 10.10 Unit End Questions 10.11 Suggested Readings CU IDOL SELF LEARNING MATERIAL (SLM)

10.0 LEARNING OBJECTIVE After studying this, Unit you will be able to  Explain the role of World Trade Organization  Describe the benefits of MNCs  Analyze the functions and conditions of IMF  Highlight the importance of World Bank 10.1 INTRODUCTION An economic activity that is functional in more than one country is termed a multinational corporation (MNC) or transnational corporation (TNC), also called multinational enterprise (MNE).Generally large-scale organization explore different countries for the availability of resources and set up production facilities in that country to minimize the cost of production and delivers the products in different countries to expand the market share. E.g., Car manufacturing Industries like Maruti Suzuki, Tata, Nissan, Microsoft, IBM, Nestle, etc. The Dutch East India Company is considered as first modern MNC. International Business needs regulatory framework for smooth operations and that’s why the organization like WTO, IMF and World Bank are utmost important for Global Business. The function of WTO and IMF is complementary. Cross borders trade treaties and robust financial system that offers loans in the time of need is must for avoiding financial crisis and payment imbalances. The existence of such system ensures the regional development of the backward countries, accelerate the development of emerging economies and provide access to the quality offerings of developed nations. Thus, contributing in overall development of the globe. The World Bank and the IMF, are also called as Bretton Woods Institutions, that are two strong intergovernmental pillars and offers support to the global economic structure and financial order. There are many similarities in their operation but they are two different entities with different roles. 10.2 MULTINATIONAL CORPORATION -MNC The International Labour Organization (ILO) has defined an MNC as a corporation which has its management headquarters in one country known as the home country and operates in several other countries known as host countries. MNC’s have budgets that exceed some national GDPs. Multinational corporations can have a powerful influence in local economies as well as the world economy and play an important role in international relations and globalization. The presence of such powerful players in the world economy is reason for much controversy. 241 CU IDOL SELF LEARNING MATERIAL (SLM)

10.2.1 Meaning of Multinational Companies (MNCs): A multinational company is one which is incorporated in one country (called the home country); but whose operations extend beyond the home country and which carries on business in other countries (called the host countries) in addition to the home country. It must be emphasized that the headquarters of a multinational company are located in the home country. Neil H. Jacoby defines a multinational company as follows: “A multinational corporation owns and manages business in two or more countries.” Point of comment: A multinational corporation is known by various names such as: global enterprise, international Enterprise, world enterprise, transnational corporation etc. Examples of MNCs are: 10.2.2 Features: Following are the salient features of MNCs: (i) Huge Assets and Turnover: Because of operations on a global basis, MNCs have huge physical and financial assets. This also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many MNCs are bigger than national economies of several countries. (ii) International Operations Through a Network of Branches: MNCs have production and marketing operations in several countries; operating through a network of branches, subsidiaries and affiliates in host countries. 242 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) Unity of Control: MNCs are characterized by unity of control. MNCs control business activities of their branches in foreign countries through head office located in the home country. Managements of branches operate within the policy framework of the parent corporation. (iv) Mighty Economic Power: MNCs are powerful economic entities. They keep on adding to their economic power through constant mergers and acquisitions of companies, in host countries. (v) Advanced and Sophisticated Technology: Generally, a MNC has at its command advanced and sophisticated technology. It employs capital intensive technology in manufacturing and marketing. (vi) Professional Management: A MNC employs professionally trained managers to handle huge funds, advanced technology and international business operations. (vii)Aggressive Advertising and Marketing: MNCs spend huge sums of money on advertising and marketing to secure international business. This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy, they are able to sell whatever products/services, they produce/generate. (viii) Better Quality of Products: A MNC has to compete on the world level. It, therefore, has to pay special attention to the quality of its products. 10.2.3 Advantages and limitations of MNCs: Advantages of MNCs from the Viewpoint of Host Country: We propose to examine the advantages and limitations of MNCs from the viewpoint of the host country. In fact, advantages of MNCs make for the case in favour of MNCs; while limitations of MNCs become the case against MNCs. (i) Employment Generation: MNCs create large scale employment opportunities in host countries. This is a big advantage of MNCs for countries; where there is a lot of unemployment. (ii) Automatic Inflow of Foreign Capital: 243 CU IDOL SELF LEARNING MATERIAL (SLM)

MNCs bring in much needed capital for the rapid development of developing countries. In fact, with the entry of MNCs, inflow of foreign capital is automatic. As a result of the entry of MNCs, India e.g. has attracted foreign investment with several million dollars. (iii) Proper Use of Idle Resources: Because of their advanced technical knowledge, MNCs are in a position to properly utilise idle physical and human resources of the host country. This results in an increase in the National Income of the host country. (iv) Improvement in Balance of Payment Position: MNCs help the host countries to increase their exports. As such, they help the host country to improve upon its Balance of Payment position. (vi) Technical Development: MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a vehicle for transference of technical development from one country to another. Because of MNCs poor host countries also begin to develop technically. (vii) Managerial Development: MNCs employ latest management techniques. People employed by MNCs do a lot of research in management. In a way, they help to professionalize management along latest lines of management theory and practice. This leads to managerial development in host countries. (viii) End of Local Monopolies: The entry of MNCs leads to competition in the host countries. Local monopolies of host countries either start improving their products or reduce their prices. Thus, MNCs put an end to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic companies to improve their efficiency and quality.In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of competition posed by MNCs. (ix) Improvement in Standard of Living: By providing super quality products and services, MNCs help to improve the standard of living of people of host countries. (x) Promotion of international brotherhood and culture: MNCs integrate economies of various nations with the world economy. Through their international dealings, MNCs promote international brotherhood and culture; and pave way for world peace and prosperity. Limitations of MNCs from the Viewpoint of Host Country: (i) Danger for Domestic Industries: MNCs, because of their vast economic power, pose a danger to domestic industries; which are still in the process of development. Domestic industries cannot face challenges posed by MNCs. Many domestic industries have to wind up, as a result of threat from MNCs. Thus MNCs give a setback to the economic growth of host countries. 244 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) Repatriation of Profits: (Repatriation of profits means sending profits to their country). MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign exchange reserves of the host country; which means that a large amount of foreign exchange goes out of the host country. (iii) No Benefit to Poor People: MNCs produce only those things, which are used by the rich. Therefore, poor people of host countries do not get, generally, any benefit, out of MNCs. (iv) Danger to Independence: Initially MNCs help the Government of the host country, in a number of ways; and then gradually start interfering in the political affairs of the host country. There is, then, an implicit danger to the independence of the host country, in the long-run. (v) Disregard of the National Interests of the Host Country: MNCs invest in most profitable sectors; and disregard the national goals and priorities of the host country. They do not care for the development of backward regions; and never care to solve chronic problems of the host country like unemployment and poverty. (vi) Misuse of Mighty Status: MNCs are powerful economic entities. They can afford to bear losses for a long while, in the hope of earning huge profits-once they have ended local competition and achieved monopoly. This may be the dirties strategy of MNCs to wipe off local competitors from the host country. (vii) Careless Exploitation of Natural Resources: MNCs tend to use the natural resources of the host country carelessly. They cause rapid depletion of some of the non-renewable natural resources of the host country. In this way, MNCs cause a permanent damage to the economic development of the host country. (viii) Selfish Promotion of Alien Culture: MNCs tend to promote alien culture in host country to sell their products. They make people forget about their own cultural heritage. In India, e.g. MNCs have created a taste for synthetic food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of people also. (ix) Exploitation of People, in a Systematic Manner: MNCs join hands with big business houses of host country and emerge as powerful monopolies. This leads to concentration of economic power only in a few hands. Gradually 245 CU IDOL SELF LEARNING MATERIAL (SLM)

these monopolies make it their birth right to exploit poor people and enrich themselves at the cost of the poor working class. Advantages from the Viewpoint of the Home Country: Some of the advantages of the MNCs from the viewpoint of the home country are: (i) MNCs usually get raw-materials and labour supplies from host countries at lower prices; specially when host countries are backward or developing economies. (ii) MNCs can widen their market for goods by selling in host countries; and increase their profits. They usually have good earnings by way of dividends earned from operations in host countries. (iii) Through operating in many countries and providing quality services, MNCs add to their international goodwill on which they can capitalize, in the long-run. Limitations from the Viewpoint of the Home Country: Some of the limitations of MNCs from the viewpoint of home country may be: (i) There may be loss of employment in the home country, due to spreading manufacturing and marketing operations in other countries. (ii) MNCs face severe problems of managing cultural diversity. This might distract managements’ attention from main business issues, causing loss to the home country. (iii) MNCs may face severe competition from bigger MNCs in international markets. Their attention and finances might be more devoted to wasteful counter and competitive advertising; resulting in higher marketing costs and lesser profits for the home country. 10.3 WORLD TRADE ORGANIZATION: WTO was formed in 1995 to replace the General Agreement on Tariffs and Trade (GATT), which was started in 1948. GATT was replaced by WTO because GATT was biased in favour of developed countries. WTO was formed as a global international organization dealing with the rules of international trade among countries. The main objective of WTO is to help the global organizations to conduct their businesses. WTO, headquartered at Geneva, Switzerland, consists of 153 members and represents more than 97% of world’s trade . 10.3.1 Objective and Function The main objectives of WTO are as follows: a. Raising the standard of living of people, promoting full employment, expanding production and trade, and utilizing the world’s resources optimally 246 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Ensuring that developing and less developed countries have better share of growth in the world trade c. Introducing sustainable development in which balanced growth of trade and environment goes together The main functions of WTO are as follows: a. Setting the framework for trade policies b. Reviewing the trade policies of different countries c. Providing technical cooperation to less developed and developing countries d. Setting a forum for addressing trade-related disputes among different countries e. Reducing the barriers to international trade f. Facilitating the implementation, administration, and operation of agreements g. Setting a negotiation forum for multilateral trade agreements h. Cooperating with the international institutions, such as IMF and World Bank for making global economic policies i. Ensuring the transparency of trade policies j. Conducting economic research and analysis 10.3.2 Role of WTO: Global trade rules Global rules of trade provide assurance and stability. Consumers and producers know they can enjoy secure supplies and greater choice of the finished products, components, raw materials and services they use. Producers and exporters know foreign markets will remain open to them. This leads to a more prosperous, peaceful and accountable economic world. Decisions in the WTO are typically taken by consensus among all members and they are ratified by members’ parliaments. Trade frictions are channelled into the WTO’s dispute settlement process, where the focus is on interpreting agreements and commitments and how to ensure that members’ trade policies conform with them. That way, the risk of disputes spilling over into political or military conflict is reduced. By lowering trade barriers through negotiations among member governments, the WTO’s system also breaks down other barriers between peoples and trading economies. Trade negotiations: The system was developed through a series of trade negotiations, or rounds, held under the GATT. The first rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-dumping and non-tariff measures. The 1986-94 round – the Uruguay Round – led to the WTO’s creation. 247 CU IDOL SELF LEARNING MATERIAL (SLM)

The negotiations did not end there. In 1997, an agreement was reached on telecommunications services, with 69 governments agreeing to wide-ranging liberalization measures that went beyond those agreed in the Uruguay Round. In the same year, 40 governments successfully concluded negotiations for tariff-free trade in information technology products, and 70 members concluded a financial services deal covering more than 95% of trade in banking, insurance, securities and financial information. In 2000, new talks started on agriculture and services. These were incorporated into a broader work programme, the Doha Development Agenda, launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November 2001. The new work programme included negotiations and other work on non- agricultural tariffs, trade and the environment, WTO rules on anti-dumping and subsidies, trade facilitation, transparency in government procurement, intellectual property and a range of issues raised by developing economies as difficulties they face in implementing WTO agreements. Negotiations on these and other topics have resulted in major updates to the WTO rulebook in recent years. A revised Government Procurement Agreement – adopted at the WTO’s 8th Ministerial Conference in 2011 – expanded the coverage of the original agreement by an estimated US$ 100 billion a year. At the 9th Ministerial Conference in Bali in 2013, WTO members struck the Agreement on Trade Facilitation, which aims to reduce border delays by slashing red tape. When fully implemented, this Agreement – the first multilateral accord reached at the WTO – will cut trade costs by more than 14% and will lift global exports by as much as US$ 1 trillion per year. The expansion of the Information Technology Agreement – concluded at the 10th Ministerial Conference in Nairobi in 2015 – eliminated tariffs on an additional 200 IT products valued at over US$ 1.3 trillion per year. Another outcome of the Conference was a decision to abolish agricultural export subsidies, fulfilling one of the key targets of the UN Sustainable Development Goal on “Zero hunger”. Most recently, an amendment to the WTO’s Intellectual Property Agreement entered into force in 2017, easing poor economies’ access to affordable medicines. The same year saw the Trade Facilitation Agreement enter into force. WTO- Agreements: The WTO’s rules – the agreements – are the result of negotiations between the members. The current set is largely the outcome of the 1986- 94 Uruguay Round negotiations, which included a major revision of the original General Agreement on Tariffs and Trade (GATT). The Uruguay Round created new rules for dealing with trade in services and intellectual property and new procedures for dispute settlement. The complete set runs to some 30,000 248 CU IDOL SELF LEARNING MATERIAL (SLM)

pages consisting of about 30 agreements and separate commitments (called schedules) made by individual members in specific areas, such as lower tariffs and services market-opening. Through these agreements, WTO members operate a non- discriminatory trading system that spells out their rights and their obligations. Each member receives guarantees that its exports will be treated fairly and consistently in other members’ markets. WTO has the following advantages: (a) Promoting peace within nations: Leads to less trade disputes. WTO helps in creating international cooperation, peace, and prosperity among nations. (b) Handling the disputes constructively: Helps in lesser trade conflicts. When the international trade expands, the chances of disputes also increase. WTO helps in reducing these trade disputes and tensions among nations. (c) Helping consumers by providing choices: Implies that by promoting international trade, WTO helps consumers in gaining access to a large number of products. (d) Encouraging good governance: Accelerates the growth of a country. The rules formulated by WTO encourage good governance and discourage the unwise policies that lead to corruption in a country. (e) Stimulating economic growth: Leads to more jobs and increase in income. The policies of WTO focus on reducing trade barriers among nations to increase the quantum of import and export. 10.4 INTERNATIONAL MONETARY FUND: IMF, established in 1945, consists of 187 member countries. It works to secure financial stability, develop global monetary cooperation, facilitate international trade, and reduce poverty and maintain sustainable economic growth around the world. Its headquarters are in Washington, D.C., United States. 10.4.1 Objectives: The objectives of IMF are as follows: a. Helping in increasing employment and real income of people b. Solving the international monetary problems that distort the economic development of different nations 249 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Maintaining stability in the international exchange rates d. Strengthening the economic integrity of the nations e. Providing funds to the member nations as and when required f. Monitoring the financial and economic policies of member nations g. Assisting low developed countries in effectively managing their economies WTO and IMF have total 150 common members. Thus, they both work together where the central focus of WTO is on the international trade and of IMF is on the international monetary and financial system. These organizations together ensure a sound system of global trade and financial stability in the world. 10.4.2 Functions of IMF: The main function of the IMF is to provide temporary financial support to its members so that ‘fundamental’ BOP disequilibrium can be corrected. However, such granting of credit is subject to strict conditionality. The conditionality is a direct consequence of the IMF’s surveillance function over the exchange rate policies or adjustment process of members. Monitoring Member Country Economies The International Monetary Fund's primary job is to promote stability in the global monetary system. So, its first function is to monitor the economies of its 189 member countries. This activity, known as economic surveillance, happens at both the national and global levels. Through economic surveillance, the IMF monitors developments that affect member economies as well as the global economy as a whole. Member nations must agree to pursue economic policies that coincide with the IMF's objectives. By monitoring the macroeconomic and financial policies of its member countries, the IMF sees stability risks and advises on possible adjustments. Lending The IMF lends money to nurture the economies of member countries with balance of payments problems instead of lending to fund individual projects. This assistance can replenish international reserves, stabilize currencies, and strengthen conditions for economic growth. The IMF expects the countries to pay back the loans, and the countries must embark on structural adjustment policies monitored by the IMF. Lending through the IMF takes two forms. The first is at non-concessional interest rates, while the other comes with concessional terms. The latter is advanced to countries with low income, and bears very low or no interest rates at all. Technical Assistance 250 CU IDOL SELF LEARNING MATERIAL (SLM)