MBA605_Business Environment and Regulatory Framework (1)

Financial Environment - II 195 Responding to the expanding business opportunities unfolded by the economic reforms, growth and diversification of the economy and the varying needs and aspirations of industry and commerce, these institutions have reoriented their vision and mission, business strategies and diversified the portfolio of their business and customer service. Government established new institutions at different points of time but wound up some of them later. For example, the Industrial Reconstruction Corporation of India (IRCI) established in 1971 with the main objective of revival and rehabilitation of viable sick units was converted into the Industrial Reconstruction Bank of India (IRBI) in 1985 with more powers and this was transformed to a new full-fledged development financial institution called Industrial Investment Bank of India (IIBI) in 1997 but because of serious problems, which could not be resolved, Government announced its closure in 2012. As a part of the diversification strategies, several of the financial institutions established a number subsidiaries but have later done substantial restructuring in several cases. Two cases are particularly noteworthy. The ICICI and IDBI established commercial banking subsidiaries but later resorted to reverse mergers characterised by the parent institution merging into the subsidiary. This Unit also discusses the role of Non-Banking Financial Institutions (NBFIs), the capital market regulator Securities and Exchange Board of India (SEBI) and the salient features of the capital market reforms. 8.2 Types of Institutions and Assistances Types of Institutions The most important all-India Development Financial Institutions (DFIs) are Industrial Finance Corporation of India (IFCI), erstwhile Industrial Development Bank of India (IDBI), which was restructured into IDBI Bank, and Industrial Credit and Investment Corporation of India (ICICI) which was restructured into ICICI Bank. There are some specialised institutions for the MSME sector like the Small Industries Development Bank of India (SIDBI). Financial assistance is provided, directly or indirectly, to the small-scale sector also by National Small Industries Corporation (NSIC), State Small Industries Development Corporations (SSIDCs) and CU IDOL SELF LEARNING MATERIAL (SLM)

196 Business Environment and Regulatory Framework Khadi and Village Industries Commission (KVIC), although financing is only an ancillary function of these organisations. Besides, specialised financial institutions are also operating in the areas of foreign trade (EXIM Bank), infrastructure (IDFC), tourism (TFCI) and venture capital (IVCF, ICICI Venture etc.). Investment institutions in the business of mutual fund (UTI) and insurance activity (LIC and GIC) have also been playing significant roles in the mobilisation of household sector savings and their deployment in the credit and the capital markets. (These institutions are termed as investment institutions here exclusively from the point of view of their industrial finance function). In the agriculture and rural sector and the housing sector, the NABARD and NHB respectively, are the major financial institutions. Development banks have been established at the State level too. There is a State Financial Corporations (SFCs) and State Industrial Investment/Development Corporations (SIICs/SIDCs) in most of the States. Non-banking financial companies/institutions (NBFCs/NBFIs), which are financial intermediaries engaged primarily in the business of accepting deposits and making loans and advances, investments, leasing, hire purchase etc. also play a very important role in business financing. A very important source of industrial finance is commercial banks, particularly for MSMEs and working capital for large enterprises. Co-operative banks are also helpful to the small and tiny sector. Types of Assistance Provision of rupee and foreign currency loans, subscription to shares and debentures, underwriting of shares and debentures, guaranteeing of deferred payments and loans are the important types of financial assistance provided by these institutions (some of the institutions do not provide some of these assistances). CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 197 Development activities of the DFIs include identifying industrial potentials of different areas; development of entrepreneurship through training and motivation; assistance in project identification, feasibility studies and preparation of project reports; technical and managerial consultancy; seed/risk capital assistance etc. Direct assistance from the all-India development banks is normally confined to large projects. Various State level institutions and certain specialised institutions like the National Small Industries Corporation (NSIC), State Small Industries Development Corporations (SSIDCs), Khadi and Village Industries Commission (KVIC), SIDBI and banks assist small-scale (including khadi and village) units and medium-scale units. Projects involving very large investment are assisted by the all-India financial institutions through consortium financing (i.e., the project is jointly financed by a group of financial institutions). In consortium financing, one of the institutions play the lead role. The DFIs have sponsored a number of technical consultancy organisations (TCs) and some institutes for entrepreneurial/management development and imparting education/research in capital market. 8.3 National Level Development Finance Institutions Industrial Finance Corporation of India (IFCI) Industrial Finance Corporation of India (IFCI) set up on July 1, 1948 as Statutory Corporation under the Industrial Finance Corporation of India Act, 1948 was the first Development Financial Institution of India designed to propel economic growth through development of infrastructure and industry by providing medium- and long-term finance and other development assistance. The organisational status and scope of objectives and activities of IFCI have undergone significant changes over the years, reflecting its response to the varying requirements of the dynamic business environment and supportive government policy. The IFCI Act was repealed in 1993 to facilitate the conversion of IFCI into a Public Limited Company registered under the erstwhile Companies Act, 1956 (now the Companies Act, 2013). IFCI became a Government CU IDOL SELF LEARNING MATERIAL (SLM)

198 Business Environment and Regulatory Framework controlled company subsequent to enhancement of equity shareholding to 55.53 per cent by Government of India on December 21, 2012. IFCI is also a systemically important non-deposit taking non-banking finance company (NBFC-ND-SI), registered with the Reserve Bank of India. Objectives/Scope The primary business of IFCI is to provide medium- to long-term financial assistance to the manufacturing, services and infrastructure sectors. Through its subsidiaries and associate organisations, IFCI has diversified into a range of other businesses including broking, venture capital, financial advisory, depository services, factoring etc. Over the years, IFCI played a pivotal role in establishment of various institutes (including some of its subsidiaries and associates) – that are respected in their fields today, namely Stock Holding Corporation of India Ltd. (SHCIL), National Stock Exchange Ltd. (NSE), LIC Housing Finance Ltd., Tourism Finance Corporation of India Ltd. (TFCI), Management Development Institute (MDI), ICRA Ltd., among many others. With the changes in the markets over a period of time, a few of the subsidiaries were divested and currently IFCI Group has the following subsidiaries – Stock Holding Corporation of India Ltd., IFCI Venture Capital Fund Ltd,. IFCI Factors Ltd., IFCI Infrastructure Development Ltd., IFCI Financial Services Ltd., MPCON, Management Development Institute and Institute of Leadership Development. The Government of India, as per the Budget for FY 2014-15, has mandated IFCI for setting up of a Venture Capital Fund under Social Sector initiatives with an aim to promote entrepreneurship among the Scheduled Castes (SC) and to provide concessional finance to them. Corporate Strategy The main planks of IFCI’s strategy are:  To provide solutions to various financial needs of the industry.  To remain competitive, competent and sensitive in the economic development of the country. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 199  To design customer-centric solutions.  To enhance the reputation and image of IFCI. Performance Over the seven decades since its inception, IFCI has witnessed and sustained all business economic cycles. IFCI has been able to maintain the financial sustainability with the consistent support and co-operation of all its stakeholders and particularly the Government of India. In addition to its core competence in long-term lending to industrial and infrastructure sectors, IFCI is also enhancing its organisational value through optimising value of core and non-core assets and investments IFCI, since its inception, has cumulatively sanctioned more than ` 1 lakh crore to more than 5200 projects and disbursed more than ` 91,500 crore. IDBI Bank The IDBI bank has evolved from the erstwhile Industrial Development Bank of India (IDBI). The Industrial Development Bank of India (IDBI), constituted under Industrial Development Bank of India Act, 1964, as a Development Financial Institution (DFI), came into being on July 1, 1964. It continued to serve as a DFI for 40 years till the year 2004 when it was transformed into a universal bank – IDBI Ltd. – in response to the felt need and on commercial prudence. This transformation was prompted by the fact that, as a DFI, the IDBI had stretched its canvas beyond mere project financing to cover an array of services that contributed towards balanced geographical spread of industries, development of identified backward areas, emergence of a new spirit of enterprise, and evolution of a deep and vibrant capital market. Desirous of fuelling its business growth, IDBI Ltd. merged its subsidiaries – the erstwhile IDBI Bank, IDBI Home Finance Ltd., IDBI Gilts and the erstwhile United Western Bank Ltd. with itself over a period of time. The IDBI Ltd. changed its name to IDBI Bank Ltd. to reflect its widened business functions. CU IDOL SELF LEARNING MATERIAL (SLM)

200 Business Environment and Regulatory Framework Consequent upon Life Insurance Corporation of India acquiring 51 per cent of the total paid- up equity share capital, IDBI Bank Limited has been categorised as a ‘Private Sector Bank’ for regulatory purposes by Reserve Bank of India with effect from January 21, 2019. The IDBI Bank Ltd. is a full service universal bank, which in addition to playing its secular DFI role, provides a wide gamut of financial products and services encompassing deposits, loans, payment services and investment solutions. To cater to its ever-expanding needs of the Indian economy and customers, IDBI Bank has formed subsidiaries and joint ventures across diverse areas of banking and financial system. Vision The vision of IDBI Bank ‘to be the most preferred and trusted bank enhancing value for all stakeholders’ defines and shapes its day-to-day business, helping us to build long-lasting relationships. Mission The mission of the Bank is stated as follows: 1. Delighting customers with our excellent service and comprehensive suite of best-in-class financial solutions; 2. Touching more people’s lives with our expanding retail footprint while maintaining our excellence on corporate and infrastructure financing; 3. Continuing to act in an ethical, transparent and responsible manner, becoming the role model for corporate governance; 4. Deploying world-class technology, systems and processes to improve business efficiency and exceed customer’s expectations; 5. Encouraging a positive, dynamic and performance-driven work culture to nurture employees grow them and build a passionate and committed workforce; 6. Expanding our global presence; 7. Relentlessly striving to become a greener bank. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 201 ICICI Bank The ICICI Bank of today is an entity formed by the reverse merger of the erstwhile Industrial Credit and Investment Corporation of India (ICICI) into its subsidiary ICICI Bank. The Industrial Credit and Investment Corporation of India Limited (ICICI) was founded by the World Bank, the Government of India and representatives of private industry on January 5, 1955 to encourage and assist industrial development and investment in India. The main objectives of ICICI were the following. Objectives and Functions 1. Providing assistance in the creation, expansion and modernisation of industrial enterprises; 2. Encouraging and promoting the participation of private capital, both internal and external in such enterprises; and 3. Encouraging and promoting industrial investment and the expansion of investment markets. Over the years, ICICI evolved into a diversified financial institution. ICICI’s principal business activities include: 1. Medium- and long-term project financing for the infrastructure and manufacturing sectors. 2. Corporate finance to meet the treasury requirements of Indian companies. 3. Lease finance. 4. A comprehensive range of financial and advisory services. Diversifications The liberalisation of the Indian economy in the 1990s offered ICICI an opportunity to provide a wider range of financial services. For regulatory and strategic reasons, ICICI set up specialised subsidiaries in the areas of commercial banking, investment banking, non-banking finance, investor servicing, broking, venture capital financing and State level infrastructure financing. CU IDOL SELF LEARNING MATERIAL (SLM)

202 Business Environment and Regulatory Framework In 1994, the Industrial Credit and Investment Corporation of India established ICICI Bank as its wholly owned subsidiary. However, subsequently, ICICI’s shareholding in ICICI Bank was reduced to 46 per cent through a public offering of shares in India, ADR issues, secondary market sales to institutional investors etc. After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI Group’s universal banking strategy. The merger became effective in April 2002. And consequent to the merger, the ICICI Group’s financing and banking operations, both wholesale and retail, were integrated in a single entity. The merger was expected to enhance value for ICICI shareholders through the merged entity’s access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. It was also expected to enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI’s strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries. ICICI Bank is a leading private sector bank in India. The Bank’s consolidated total assets stood at ` 12.50 trillion at June 30, 2019. It currently has a network of 4,882 branches and 15,101 ATMs across India. Investment Institutions (The institutions mentioned here are termed as investment institutions exclusively from the point of view of their industrial finance function which is just one of their roles.) Unit Trust of India The Unit Trust of India (UTI), a public sector mutual fund was established in 1964. The share capital of the UTI was subscribed by the IDBI, LIC, SBI and its subsidiaries, and other scheduled banks and financial institutions. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 203 Sale of units and other savings schemes are the main sources of funds for the Trust. The main objective of the UTI is to mobilise the savings of the community and channelise them into productive corporate investments so as to provide for growth and diversification of the economy. It is at the same time intended to provide the facility for an equity type of investment to the large and growing number of investors in the small and medium income groups. The UTI mobilises funds from the public through a number of schemes. The savings thus mobilised is channelled into productive activities by the Trust by investing them in the shares and debentures of industrial concerns. It is one of the main intentions of the UTI to provide opportunity to investors belonging to small and medium income groups to indirectly participate in the ownership of shares and debentures of joint stock companies. For small investors, the UTI has been expected to offer the advantages of: (i) considerably reduced risk since funds are invested in a balanced and well distributed portfolio, (ii) the benefit of expert management, (iii) a steady income and (iv) liquidity. The management and performance of the UTI for some time has been so bad that by mid- 2001, the financial crisis of the Trust became public and it has virtually betrayed the trust of millions of investors. Insurance Companies Life Insurance Corporation of India also participate in financing the industrial sector in different ways. Consequent to the decision to nationalise the life insurance business, the Life Insurance Corporation of India was established in 1956 as a wholly owned corporation of Government of India in order to carry on the business of life insurance and deploy the savings to the best advantage of the policy holders and the community as a whole. A large part of the funds of LIC is deployed as loans to assist the development of social overheads like housing, rural electrification, water supply and sewerage schemes. LIC provides substantial assistance to the industrial sector. CU IDOL SELF LEARNING MATERIAL (SLM)

204 Business Environment and Regulatory Framework Besides normal investment operations by way of sale and purchase of securities in stock markets and investment in government securities, the Corporation has been anticipating with other all-India institutions in extending direct assistance to industries in the form of loans and direct subscription to shares and debentures of industrial concerns. LIC extends resource support to the term lending institutions by way of subscription to their bonds and thus contributes to industrial financing in an indirect manner. The Corporation has also helped small and medium industries by granting loans for setting up of industrial estates. As a member of the consortium of all-India Financial Institutions, the General Insurance Corporation of provides assistance to industries in the form of loans, underwriting and direct subscriptions to shares and debentures, placement of short-term deposits with companies etc. Besides taking right entitlement and underwriting of debenture issues, GIC, along with LIC and UTI, buys back debentures tendered by individual holders back to companies for encashment after a stipulated period and thus provides liquidity to such long-term financial assets. 8.4 State Financial Institutions There are State level institutions to provide financial assistance to medium and small enterprises. State Financial Corporations (SFCs) The State Financial Corporations Act, 1951, has enabled the State Governments to set up State Financial Corporations (SFCs) to function as regional development banks, making a significant contribution to the industrial advancement of their respective States. The SFCs are meant to finance small- and medium-scale industries. Apart from their share capital, the SFCs depend for financial resources on repayment of loans and income from investments, issue of bonds, refinancing of loans from the IDBI and to a limited extent on borrowings from the RBI, deposits from the public and occasionally loans from the State. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 205 Figure 8.1 gives a bird’s eyeview of the important institutions. All India Institutions State Level Institutions for Institution for Other Important (for Large and Institutions MSME Sector Foreign Trade Institutions (for Medium and Medium Industries) Small Industries)  Small Industries Sector Benefitting Various Development Bank Sectors  Industrial Finance  State Finance of India (SIDBI)  Export-Import Corporation of Corporations Bank of India  Non-Bank India (IFCI) (SFCs)  National Small (Exim) Financial Industries Intermediaries  Industrial  State Industrial Corporation (NSIC) (NBFIs) Development Development/ Bank of India Investment  State Small Industries  Commercial (IDBI) Corporations Development Banks (SIDCs/SIICs) Corporations  Industrial Credit (SSIDCs)  Co-operative and Investment Banks Corporation of  Khadi and Village India (ICICI) Industries Commission (KVIC)  Investment Institutions (UTI, LIC, GIC etc.) Fig. 8.1: Financial Institutions for Industry and Commerce Types of Assistance Financial assistance from State Financial Corporations takes the following forms: 1. Granting of loans or advances and subscribing to the debentures of industrial concerns. 2. Guaranteeing loans raised by industrial concerns in the capital market or from scheduled banks or state co-operative banks. 3. Guaranteeing deferred payments due from any industrial concern in connection with its purchase of capital goods within India. 4. Underwriting the issues of stocks, shares, bonds or debentures by industrial concerns. 5. Subscribing to the stocks, bonds or debentures of an industrial concern out of the funds representing the special class of share capital subscribed by the State Government and the IDBI in accordance with the provisions of Section 4A of the SFCs Act, 1951. The SFCs grant loans mainly for the acquisition of fixed assets like land, buildings and plant and machinery. CU IDOL SELF LEARNING MATERIAL (SLM)

206 Business Environment and Regulatory Framework Sometimes, they also provide loans for working capital margin in combination with loans for acquisition of fixed assets. SFCs are also providing foreign currency loans to small- and medium-scale industrial units for import of plant and machinery and/or technical know-how under IDA-World Bank credits to IDBI. These institutions have expanded the scope of their operations. Besides providing financial assistance, SFC do certain development activities, including consultancy and management development. State Industrial Development/Investment Corporations Since 1960, many States and Union Territories have set up State Industrial Development Corporations (SIDCs)/State Industrial Investment Corporations (SIICs), with the main object of accelerating the industrial development of the respective States and Union Territories. The SIDCs/SIICs have been promoted as promotional bodies entrusted with the major task of promoting industries and ensuring balanced regional growth within each State/UT. For efficiently carrying out the functions of promotion, improvement and development of industries, these Corporations are empowered to plan, formulate and execute industrial undertaking, project or enterprise which is likely to accelerate industrial development. Further, they promote medium/large industrial ventures as joint sector units in collaboration with private entrepreneurs, or as wholly owned subsidiaries and provide risk capital to new generation entrepreneurs. Various incentive schemes of Central/State Governments are also administered through them. Functions These Corporations undertake a wide range of functions. The important functions are: 1. Grant of financial assistance to industrial concerns in the form of: (a) Direct investment (b) Loans CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 207 (c) Extension of guarantee for loans and deferred payments (d) Underwriting and subscriptions to the issue of shares, bonds and debentures 2. Promotion and management of industrial concerns 3. Provision of industrial sheds/plots 4. Promotional activities such as identification of project ideas, selection and training of entrepreneurs, provision of technical assistance during project implementation etc. The Corporations in some States are empowered to undertake special activities like establishing and managing industrial estates, development of industrial areas, generation, transmission and sale of electricity etc. 8.5 Institutions for MSME Sector There are several institutions to assist specifically the development of the small and village industries. Small Industries Development Bank of India (SIDBI) The Small Industries Development Bank of India (SIDBI) was established on April 2 through an act of the Parliament. It was incorporated initially as a wholly owned subsidiary of Industrial Development Bank of India. Current shareholding is widely spread among various State owned banks, insurance companies etc. Role: SIDBI is “the principal financial institution for the promotion, financing and development of industry in the small-scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small-scale sector and for matters connected therewith or incidental thereto”. Beginning as a refinancing agency to banks and State level financing bodies for their credit to small industries, it has diversified into many activities, including direct credit to the SMEs through a large number of branches in all major clusters of SMEs in India. Besides, it has been playing the development role in several ways such as support to microfinance institutions for capacity building and on lending. CU IDOL SELF LEARNING MATERIAL (SLM)

208 Business Environment and Regulatory Framework Business Domain: The business domain of SIDBI consists of small-scale industrial units, which contribute significantly to the national economy in terms of production, employment and exports. In addition, SIDBI’s assistance flows to the transport, health care and tourism sectors and also to the professional and self-employed persons setting up small-sized professional ventures. Vision 2.0: SIDBI Vision 2.0 is to transform as an All India Financial Institution to create an integrated credit and development support role for the bank by being a Thought Leader, adopting a credit-plus approach, creating a multiplier effect and serving as an aggregator, in the MSME space. The Vision 2.0 is a strategic initiative by SIDBI aimed at further accelerating this effort by transforming its current role to that of an All-India Financial Institution that can create an integrated credit and development support ecosystem for Indian MSEs, thus promoting their inclusive growth. The initiative is dedicated to meet both, credit and non-credit needs of MSEs, enabling them to be globally competitive businesses. The SIDBI 2.0 is designed to bring about sustainable development of MSE sector in India, based on the Triple Ps front, namely – Profit (Economic), People (Social) and Planet (Environment). Objectives: Four basic objectives are set out in the SIDBI Charter. They are financing, promotion, development and co-ordination. 1. Financing Role: The financing role are the following:  Direct Lending: Aims to fill the existing credit gaps in the MSME sector through demonstrative and innovative lending products, which can further be scaled up by banking system.  Institutional Finance: Based on the rationale of multiplier effect/larger reach in financing the MSME sector, which is undertaken through banks, SFBs, NBFCs and MFIs.  Micro Lending: Through partnership models to effectively and impact fully serve the entrepreneurs, especially women at the bottom of the pyramid. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 209 Fund of Funds: boosts entrepreneurship culture by supporting emerging Start ups through the Fund of Funds channel. Promotional and Developmental Role: The promotional and developmental role are: Promoting entrepreneurship and handholding MSMEs, holistic development of MSME sector through a range of credit-plus activities, imparting financial literacy and promoting women livelihood activities. Co-ordination Role: The bank co-ordinates activities of the ecosystem players such as government, regulators, financial institutions, rating agencies, research agencies, EDP agencies etc. for overall MSME development. Achievements: Since its formation in 1990, SIDBI has been impacting the lives of citizens across various strata of society through its integrated, innovative and inclusive approach. Be it traditional domestic industry, small, bottom-of-the-pyramid entrepreneurs, medium enterprises to high-end knowledge-based industries and export promotions, SIDBI has directly or indirectly touched the lives of more than 360 lakh people in the MSE sector, through various credit and developmental measures. National Small Industries Corporation (NSIC) The National Small Industries Corporation Limited (NSIC), which is wholly owned by the Government of India and meant exclusively for the development of small-scale industries, was established in 1956. The NSCI, with its head office at Delhi, has been working to promote, aid and foster the growth of micro, small and medium enterprises in the country. NSIC operates through countrywide network of offices and technical centres in the country. In addition, NSIC has set up Training-cum-Incubation Centre managed by professional manpower. Mission: “To promote and support micro, small and medium enterprises (MSMEs) sector” by providing integrated support services encompassing marketing, technology, finance and other services. Vision: “To be a premier organisation fostering the growth of micro, small and medium enterprises (MSMEs) sector”. CU IDOL SELF LEARNING MATERIAL (SLM)

210 Business Environment and Regulatory Framework Functions/Schemes of NSIC: The main functions of the Corporation are the following: NSIC facilitates Micro, Small and Medium Enterprises with a set of specially tailored scheme to enhance their competitiveness. NSIC provides integrated support services under marketing, technology, finance and other support service. Marketing Support: Marketing has been identified as one of the most important tool for business development. It is critical for the growth and survival of MSMEs in today’s intensely competitive market. NSIC acts as a facilitator and has devised a number of schemes to support enterprises in their marketing efforts, both domestic and foreign markets. These schemes are briefly described as under: 1. Consortia and tender marketing: Small Enterprises in their individual capacity face problems to procure and execute large orders, which deny them a level playing field vis- a-vis large enterprises. NSIC forms consortia of micro and small units manufacturing the same product, thereby pooling in their capacity. NSIC applies the tenders on behalf of single MSE/Consortia of MSEs for securing orders for them. These orders are then distributed amongst MSEs in tune with their production capacity. 2. Single point registration for government purchase: The units registered under Single Point Registration Scheme of NSIC are eligible to get the benefits under “Public Procurement Policy for Micro and Small Enterprises (MSEs) Order 2012” as notified by the Government of India, Ministry of Micro, Small and Medium Enterprises. 3. MSME global mart B2B web portal for MSMEs: With increase in competition and melting away of international boundaries, the demand for information is reaching new heights. NSIC, realising the needs of MSMEs, is offering Infomediary Services which is a one-stop, one-window bouquet of aids that will provide information on business and technology, and also exhibit the core competence of Indian MSMEs. B2B Webportal is offering a number of benefits to the members of Infomediary Services. 4. Marketing intelligence: Collect and disseminate both domestic as well as international marketing intelligence for the benefit of MSMEs. This cell, in addition to spreading CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 211 awareness about various programmes/schemes for MSMEs, will specifically maintain database and disseminate information. 5. Exhibitions and technology fairs: To showcase the competencies of Indian SSIs and to capture market opportunities, NSIC participates in select international and national exhibitions and trade fairs every year. NSIC facilitates the participation of the small enterprises by providing concessions in rental etc. Participation in these events exposes SSI units to international practices and enhances their business prowess. 6. Buyer-seller meets: Bulk and departmental buyers such as the railways, defence, communication departments and large companies are invited to participate in buyer- seller meets to enrich small enterprises knowledge regarding terms and conditions, quality standards etc. required by the buyer. These programmes are aimed at vendor development from MSMEs for the bulk manufacturers. Financial Support Financial support include the following: Credit Support: NSIC facilitates credit requirements of small enterprises in the following areas: 1. Financing for procurement of raw material (Short term): NSIC’s Raw Material Assistance Scheme aims at helping small enterprises by way of financing the purchase of raw material (both indigenous and imported). The salient features are: (i) Financial assistance for procurement of raw materials up to 90 days. (ii) Bulk purchase of basic raw materials at competitive rates. (iii) NSIC facilitates import of scarce raw materials. (iv) NSIC takes care of all the procedures, documentation and issue of letter of credit in case of imports. 2. Finance through syndication with banks: In order to ensure smooth credit flow to small enterprises, NSIC is entering into strategic alliances with commercial banks to facilitate long-term/working capital financing of the small enterprises across the country. CU IDOL SELF LEARNING MATERIAL (SLM)

212 Business Environment and Regulatory Framework The arrangement envisages forwarding of loan applications of the interested small enterprises by NSIC to the banks and sharing the processing fee. Technology Support: Technology is the key to enhancing a company’s competitive advantage in today’s dynamic information age. Small enterprises need to develop and implement a technology strategy in addition to financial, marketing and operational strategies and adopt the one that helps integrate their operations with their environment, customers and suppliers. NSIC offers small enterprises the following support services through its technical services centres and extension centres: 1. Advise on application of new techniques 2. Material testing facilities through accredited laboratories 3. Product design including CAD 4. Common facility support in machining, EDM, CNC etc. 5. Energy and environment services at selected centres 6. Classroom and practical training for skill upgradation Small Industries Development Corporation (SIDCO) In many States, a separate corporation has been set up which is known as Small Industries Development Corporation by the States Government for the promotion of small-scale industries. They undertake all kinds of activities for the promotion of small-scale industries. Right from the stage of installation to the stage of commencing production, these Corporations help small-scale industries in many ways. Functions: The specific activities undertaken by the SSIDCs include: 1. Procurement and distribution of raw materials, 2. Supply of machinery to small entrepreneurs on hire purchase basis, 3. Management assistance to production units, 4. Operation of seed capital scheme on behalf of the State Governments, 5. Construction and management of industrial estates, CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 213 6. Participating with other institutions in setting up of technical consultancy organisations, and 7. Undertaking marketing activities. In addition to the above, SSIDCs have been providing infrastructural facilities like sheds, godowns and common production facilities, technical and consultancy services, particularly to the unemployed, like preparation of feasibility reports, formulation of project reports and planning for modernisation/diversification of existing product range and implementation of projects. Some SSIDCs have also sponsored industrial potential surveys in some districts to identify viable small- scale projects to be based mainly on locally available raw materials and local demand conditions. SSIDCs also arrange for marketing of finished products of small industrial units both in domestic as well as international markets under their Marketing Assistance Scheme. In short, they provide infrastructure facilities to small-scale industries. It is claimed that due to the assistance provided by SIDCO, many backward areas in most of the States have been developed and, thus, they have been spreading the industrial activity throughout several states. Khadi and Village Industries Commission (KVIC) The Khadi and Village Industries Commission, established as a statutory organisation under the Khadi and Village Industries Commission Act, 1956, provides various schemes of assistance which cover extension of finance right from the stage of procurement of raw materials, tools and implements to the production of goods and their marketing. Objectives The broad objectives that the KVIC has set before it are:  The social objective of providing employment.  The economic objective of producing saleable articles.  The wider objective of creating self-reliance amongst the poor and building up of a strong rural community spirit. CU IDOL SELF LEARNING MATERIAL (SLM)

214 Business Environment and Regulatory Framework Functions 1. The KVIC is charged with the planning, promotion, organisation and implementation of programmes for the development of khadi and other village industries in the rural areas in co-ordination with other agencies engaged in rural development wherever necessary. 2. Its functions also comprise building up of a reserve of raw materials and implements for supply to producers, creation of common service facilities for processing of raw materials as semi-finished goods and provisions of facilities for marketing of KVI products apart from organisation of training of artisans engaged in these industries and encouragement of co-operative efforts amongst them. 3. Another important function of the Commission is to promote the sale and marketing of khadi and/or products of village industries or handicrafts. The KVIC may forge linkages with established marketing agencies wherever feasible and necessary. 4. The KVIC is also charged with the responsibility of encouraging and promoting research in the production techniques and equipment employed in the Khadi and Village Industries sector and providing facilities for the study of the problems relating to it, including the use of non-conventional energy and electric power with a view to increasing productivity, eliminating drudgery and otherwise enhancing their competitive capacity and arranging for dissemination of salient results obtained from such research. 5. Further, the KVIC is entrusted with the task of providing financial assistance to institutions and individuals for development and operation of Khadi and Village Industries and guiding them through supply of designs, prototypes and other technical information. In implementing KVI activities, the KVIC may take such steps as to ensure genuineness of the products and to set standards of quality and ensure that the products of Khadi and Village Industries do conform to the standards. 6. The KVIC may also undertake directly or through other agencies studies concerning the problems of Khadi and/or Village Industries besides research or establishing pilot projects for the development of Khadi and Village Industries. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 215 7. The KVIC is authorised to establish and maintain separate organisations for the purpose of carrying out any or all of the above matters besides carrying out any other matters incidental to its activities. 8.6 Institutions for Foreign Trade Financing The major role in the short-term financing of foreign trade financing is played by commercial banks. The pre-shipment credit is provided by Indian and foreign commercial banks which are members of the Foreign Exchange Dealers’ Association. The packing credit advances by commercial banks in India are governed by the Packing Credit Scheme of the Reserve Bank. [Pre- shipment finance, also known as packing credit, refers to the credit extended to the exporter prior to the shipment of goods.] Pre-shipment credit enables exporters to meet the working capital requirements for the purchase of raw materials and components, processing, packing, transportation, warehousing etc. Packing credit is short-term finance. It is also advanced against export incentives. Under the buyer’s credit system, credit is extended to the overseas buyer by either a financial institution or a consortium of financial institutions. This credit enables the buyer to pay for the goods he imports if the financial institution that provides the buyer’s credit is located in the exporter’s country. The loan does not involve transfer of funds from the supplier’s country to the buyer’s country; the exporter may obtain the payment directly from the financial institution on presentation of the relevant export documents. Buyer’s credit is generally advanced for capital goods. The premier institution in foreign trade financing is the Exim Bank. Export-Import Bank of India (Exim) The Export-Import Bank of India, set up in 1982 by an Act of Parliament for the purpose of financing, facilitating and promoting foreign trade of India, is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports. The bank has a global and national network of institutional and professional linkages. The Exim CU IDOL SELF LEARNING MATERIAL (SLM)

216 Business Environment and Regulatory Framework Bank is fully owned by the Government of India and is managed by a Board of Directors which has representatives from the Government, Reserve Bank of India, Export Credit Guarantee Corporation of India, a financial institution, public sector banks and the business community. Objectives The objectives of the Exim Bank are: 1. To translate national foreign trade policies into concrete action points. 2. To provide alternate financing solutions to the Indian exporter, aiding him in his efforts to be internationally competitive. 3. To develop mutually beneficial relationships with the international financial community. 4. To initiate and participate in debates on issues central to India’s international trade. 5. To forge close working relationships with other export development and financing agencies, multilateral funding agencies, and national trade and investment promotion agencies. 6. To anticipate and absorb new developments in banking, export financing and information technology. 7. To be responsive to export problems of Indian exporters and pursue policy resolutions. Evolving Goals Exim Bank’s vision has evolved from a product-centric approach with export credits and export capability creation, to a more customer-centric approach by offering a comprehensive range of products and services to empower businesses at all stages of a company’s business cycle. Today, the bank develops commercially viable relationships with a target set of externally oriented companies through a comprehensive range of products and services, aimed at enhancing their internationalisation efforts. The bank’s mission is to facilitate globalisation of Indian business. Assistances Exim Bank operates a wide range of financing and promotional programmes. It plays a four- pronged role with regard to India’s foreign trade: those of a co-ordinator, a source of finance, consultant and promoter. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 217 The bank finances exports of Indian machinery, manufactured goods, consultancy and technology services on deferred payment terms. It also seeks to co-finance projects with global and regional development agencies to assist Indian exporters in their efforts to participate in such overseas projects. The bank is involved in promotion of two-way technology transfer through the outward flow of investment in Indian joint ventures overseas and foreign direct investment flow into India. The bank is also a partner institution with European Union and operates for facilitating promotion of joint ventures in India through technical and financial collaboration with medium sized firms of the European Union. The Exim Bank, thus, extends both funded and non-funded assistance for promotion of foreign trade. The funded assistance programme of the Bank includes direct financial assistance to exporters, rediscounting of export bills, technology and consultancy services financing, refinancing of export credit and re-lending facility to banks abroad. The non-funded assistance is in the form of guarantees which are in the form of bid bonds, advance payment and performance guarantees, retention money guarantees, and guarantees for raising finance abroad. The Exim Bank provides a wide array of funded and non-funded assistances. A summary view of various assistances is depicted in Figure 8.2. Fig. 8.2: Scope of Exim Bank’s Financing Programmes CU IDOL SELF LEARNING MATERIAL (SLM)

218 Business Environment and Regulatory Framework 8.7 Non-Banking Financial Institutions (NBFIs) Non-banking financial institutions/companies (NBFIs/NBFCs) are financial intermediaries engaged primarily in the business of accepting deposits and making loans and advances, investments, leasing, hire purchase etc. NBFCs are a heterogeneous lot. NBFC sector is characterised by a large number of privately owned, decentralised and relatively small-sized financial intermediaries. NBFCs are of various types such as loan companies (LCs), investment companies (ICs), hire purchase finance companies (HPFCs), equipment leasing companies (ELCs), mutual benefit financial companies (MBFCs) also known as Nidhis, miscellaneous non-banking companies (MNBCs) also known as Chit Funds and residuary non-banking companies (RNBCs). Loan companies, investment companies, hire purchase finance companies and equipment leasing companies are defined on the basis of the principal activity of their business. Although NBFCs in India have existed for a long time, they shot into prominence in the second half of the eighties and in the first-half of the nineties, as deposits raised by them grew rapidly. Customer orientation, concentration in the main financial centres and attractive rates of return offered by them are some of the reasons for their rapid growth. Primarily engaged in the area of retail banking, they face competition from banks and financial institutions. Profile of Non-banking Finance Companies As indicated above, the term non-banking financial companies covers investment companies, finance corporations, chit funds, nidhis and mutual benefit funds, hire-purchase finance companies, loan companies and leasing companies. A brief description of some of these are provided below. Investment Companies: The main function of investment companies, which are also known as investment trust companies and investment trusts, is to mobilise savings and invest them in industrial securities with the object of providing remunerative yield to savers and reducing the risk of capital depreciation by diversifying investments. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 219 Finance Corporations: These are set up for making profit from the business of lending resources mainly raised by way of deposits or borrowings. It may be run as a proprietary concern, a partnership firm or a private limited or a public limited company.. Higher levels of interest rates and the practice of monthly payment of interest which raises the effective rate of return induce the savers to deposit money with these corporations even at great risk. Finance corporations have come into existence because credit is not available from the lending agencies in the organised sector for certain business activities or against certain types of securities. These corporations provide credit facilities on security of demand promissory note or tangible assets such as land, building, insurance policy, gold, jewellery, silverware, motor vehicles and cash crops like spices, raw rubber, etc. In the case of unsecured or clean loans, the period of credit is no more than 90 days, the interest is collected in advance and the borrower is under obligation to repay the loan as the lender demands. There is no such stipulation in the case of a loan secured by assets, and no advance interest is collected on such loans. Chit funds: Under the chit fund schemes, the promoter of the chitty or kuri collects subscriptions at specified periods from each enrolled member of the chit fund. The amount so collected called the capital of the chitty is given out as the prize amount to one of the members selected either by lot or auction. All members must contribute the periodical subscriptions till the end of the chitty. The promoter, also called the foreman, takes a certain percentage of the capital as his commission. Under the scheme when a subscriber borrows from the chit fund, he essentially discounts the future value of chit amount (capital minus the foreman’s commission), in order to meet his current needs. The discounted value is the prize amount. The difference between the chit amount and the prize amount is the price the borrower pays for the immediate realisation of what would have been due at the expiry of the chit period. Loan companies: A company, which lends money to any one for purposes other than its own, is classified as a loan company. Hire purchase companies and housing finance companies are not considered as loan companies. Loan companies can be grouped into public limited and private limited companies. Leasing companies: In recent years, leasing companies have increased in number and the leasing business is expected to grow considerably over the years. The diversity of equipment CU IDOL SELF LEARNING MATERIAL (SLM)

220 Business Environment and Regulatory Framework currently manufactured in the country and the large number of manufacturing units, particularly in the small-scale sector which do not have resources to buy new equipment or which wish to replace existing equipment with more modern equipment provide a good scope for the operation of leasing companies. The advantages of leasing for the lessee are well known but the success of leasing depends crucially on the sound financial structure of the leasing companies and their ability to withstand the impact of fluctuations in the business fortunes of their clients. Regulatory and Supervisory Framework The RBI has taken some steps to regulate the NBFIs. It has established a department called Department of Non-Banking Supervision (DNBS) with the objective of developing NBFCs sector as an integrated and healthy part of the financial system; and thereby affording indirect protection to the interests of their depositors. The RBI Act as amended in January 1997 provides for, among other things: 1. Entry norms for Non-Banking Financial Companies (NBFCs) and prohibition of deposit acceptance by unincorporated bodies with some exceptions. 2. Powers of the bank to issue asset side regulations. 3. Compulsory registration, maintenance of liquid assets and reserve fund. 4. Directions on acceptance of deposits and prudential regulation. 5. Comprehensive regulation of deposit taking NBFCs. 6. Punitive action like cancellation of Certificate of Registration, prohibition from acceptance of deposits and alienation of assets, filing criminal complaints and winding up petitions in extreme cases, appointment of RBI observers in certain cases. Under this basic legal framework, the RBI has evolved a supervisory framework for NBFCs comprising: (a) on-site inspection (CAMELS pattern), (b) off-site monitoring through returns, (c) market intelligence and (d) auditors’ exception reports. Developmental activities of the DNBS include: 1. Co-ordination with State Governments for State Legislations to curb unauthorised and fraudulent activities in this sector. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 221 2. Publicity for depositors’ education and awareness, workshops/seminars of trade and industry organisations and depositors’ associations. 3. Informal Advisory Group as an aid to decision making. 4. Promotion of Self-Regulatory Organisation (SRO) of NBFCs. 5. Training programmes for personnel of NBFCs, State Governments and Police Officials. (The material about the NBFIs is drawn directly from various RBI publications.) 8.8 Securities and Exchange Board of India (SEBI) The establishment of the Securities and Exchange Board of India (SEBI) was a landmark government measure to monitor and regulate capital market activities and to promote healthy development of the market. The SEBI was constituted in 1988 by a resolution of Government of India and it was made a statutory body by the Securities and Exchange Board of India Act, 1992. Management Section 4 of the Act lays down the constitution of the management of SEBI. The Board of members of SEBI shall consist of a Chairman, two members from amongst the officials of the Ministries of the Central Government dealing with Finance and Law, one member from amongst the officials of the Reserve Bank of India, two other members to be appointed by the Central Government, who shall be professionals and inter alia have experience or special knowledge relating to securities market. The Act empowers the Central Government to supersede SEBI, if on account of grave emergency, SEBI is unable to discharge the functions and duties under any provisions of the Act, or SEBI persistently defaults in complying with any direction issued by the Central Government under the Act, or in the discharge of its functions and duties under the Act, and as a result of such default, the financial position of SEBI or its administration has deteriorated, or in public interest. CU IDOL SELF LEARNING MATERIAL (SLM)

222 Business Environment and Regulatory Framework Objectives According to the Act, the objectives of SEBI are “to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto.” Powers and Functions The SEBI Act casts upon SEBI the duty to protect the interests of investors in securities and to promote the development of and to regulate the securities market through appropriate measures. These measures provide for: 1. Regulating the business in stock exchanges and any other securities market. 2. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities market in any manner. 3. Registering and regulating the working of collective investment schemes, including mutual funds. 4. Promoting and regulating self-regulatory organisations. 5. Prohibiting fraudulent and unfair trade practices in securities market. 6. Promoting investor education and training of intermediaries in securities market. 7. Prohibiting insider trading in securities. 8. Regulating substantial acquisition of shares and takeover of companies. 9. Calling for information from, undertaking inspection, conducting enquiries and audits of the stock exchanges and intermediaries and self-regulatory organisations in the securities market. 10. Performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 (subsequently repealed) and the Securities Contracts (Regulations) Act, 1956, as may be delegated to it by the Central Government. 11. Levying fees or other charges for carrying out the purposes of Section 11 of the Act. CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 223 12. Conducting research for the above purpose. 13. Performing such other functions as may be prescribed by the government. The Board may, for the protection of investors, specify, by regulations, the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters, shall be disclosed by the companies. The SEBI is also empowered to issue such directions as may be appropriate to certain person or class of persons or company, intermediary or other persons referred to in Section 12 (stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, merchant banker, underwriter, registrar to an issue, investment adviser, portfolio manager etc.) — (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in Section 12, being conducted in a manner detrimental to the interests of investors or securities market; or (iii) to secure the proper management of any such intermediary or person. 8.9 Capital Market Reforms and Developments The number of Stock Exchanges has increased and the capital market has expanded substantially. However, the functioning of the stock exchanges were characterised by many shortcomings with long delays, lack of transparency in procedures and vulnerability to price rigging and insider trading. A number of measures have been taken to overcome these problems. The objectives of these measures, broadly, have been to: 1. Provide for effective control of the stock exchange operations. 2. Increase the information flow and disclosures so as to enhance the transparency. 3. Protect the interests of investors. 4. Check insider trading. 5. Improve the operational efficiency of the stock exchanges. 6. Promote healthy development of the capital market. Important measures of reform and development include the following:1 CU IDOL SELF LEARNING MATERIAL (SLM)

224 Business Environment and Regulatory Framework Free Pricing Raising of capital from the securities market before 1992 was regulated under the Capital Issues (Control) Act, 1947, which required companies to obtain approval from the Controller of Capital Issues (CCI) for raising resources in the market. New companies were allowed to issue shares only at par. Only the existing companies with substantial reserves could issue shares at a premium, which was based on some prescribed formula. In 1992, the Capital Issues (Control) Act, 1947 was repealed, and with this, ended all controls relating to raising of resources from the market. Since then, the issuers of securities could raise the capital from the market without requiring any consent from any authority either for making the issue or for pricing it. Restrictions on rights and bonus issues have also been removed. New as well as established companies are now able to price their issues according to their assessment of market conditions. However, issuers of capital are required to meet the guidelines of SEBI on disclosure and investor protection. Companies issuing capital are required to make sufficient disclosures, including justification of the issue price and also material disclosure about the ‘risk factors’ in their offering prospectus. These guidelines have served as an important measure for protecting investor interest and promoting the development of the primary market along sound lines. Introduction of Book Building To help overcome the problem of determining the right price at which the market would clear an issue, the book building mechanism was introduced in 1995. The book building mechanism is a method through which an offer price of an Initial Public Offering (IPO) is based on investors’ demand. The introduction of book building mechanism gave the issuer the choice to raise resources either through this or the fixed price mechanism. The book building mechanism of floating new capital issues has been devised in such a way that small investors are also able to subscribe to securities at a price arrived at through a transparent process. As the book building process is both time- and cost-effective, it is becoming quite popular. Electronic Trading Till recently, trading on the Indian stock exchanges took place through open outcry system barring NSE and Over the Counter Exchange of India (OTCEI), which adopted screen-based CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 225 trading system from the beginning (i.e., 1994 and 1992, respectively). At present, all other stock exchanges have adopted online screen-based electronic trading, replacing the open outcry system. There are three main advantages of electronic trading over floor-based trading as observed in India, viz., transparency, more efficient price discovery, and reduction in transaction costs. Transparency ensures that stock prices fully reflect available information and lowers the trading costs by enabling the investor to assess overall supply and demand. Owing to computer-based trading, the speed with which new information gets reflected in prices has increased tremendously. The quantity and quality of information provided to market participants during the trading process (pre-trading and post-trading) having significant bearing on the price formation has also improved. Besides, the screen-based trading has the advantage of integrating different trading centres all over the country into a single trading platform. It may be noted that prior to screen-based trading, the very presence of stock markets in different regions implied segmentation of markets affecting the price discovery process. Investors in other locations were, under such conditions, unable to participate in the price formation process at the major stock exchange, namely the BSE. However, with screen-based trading spread across various locations, the process of price discovery has improved in the Indian stock markets. Screen-based trading has also led to significant reduction in the transaction cost since it enabled the elimination of a chain of brokers for execution of orders from various locations at BSE and NSE. Instruments and Market Participants The capital market has widened and deepened considerably in the recent years with enlargement of participants and emergence of new instruments. In the Indian capital market, traditionally mainly two instruments were traded, i.e., debt and equity. However, starting from the mid-eighties and especially during the first-half of the nineties, a wide range of innovative/hybrid instruments combining both the features of debt and equity were introduced to suit varied needs of investors and issuers/borrowers. Besides DFIs, PSUs also issued many debt instruments with innovative features. Markets have also widened with the increase in the number of players such as mutual funds and foreign institutional investors. CU IDOL SELF LEARNING MATERIAL (SLM)

226 Business Environment and Regulatory Framework Improvements in Trading, Clearing and Settlement Systems The trading, clearing and settlement systems, which had suffered from several bottlenecks, have been considerably improved with measures taken to shorten the settlement cycle through the introduction of rolling settlement system and acceleration of the process of electronic book entry transfer through depository. Increased Dematerialisation Safe and quick transfer of securities is an important element for smooth and efficient functioning of the securities market. Apart from the problems involved in the movement of physical security certificates, bad deliveries due to faulty paperwork, theft, forgery etc. added to the transaction cost and restricted liquidity. To overcome these difficulties, legislative changes were carried out for maintaining ownership records in an electronic book-entry form. Under this mode, securities are transferred in a speedy and safe manner without interposition of issuers in the process, except in few circumstances. In order to catalyse the process of dematerialisation of securities and dematerialised trading, an element of compulsion was introduced by requiring the individual and institutional investors to settle trades compulsorily in dematerialised form in shares of select companies. Near Elimination of Counterparty Risk One of the shortcomings of the clearing and settlement process of the Indian stock markets was the absence of a system to reduce counterparty risk. Managing this risk is essential for promoting a safe and efficient market. To provide the necessary funds and ensure timely completion of settlements in cases of failure of member brokers to fulfill their settlement obligations, major stock exchanges have set up Settlement Guarantee Funds. The aggregate corpus of the Fund at the stock exchanges is presently over ` 1,000 crore. The NSE has set up a Clearing Corporation which guarantees settlement of all trades. The clearing corporation, thus, assumes the counterparty risk involved in all the transactions. All stock exchanges in the country have established clearing houses. Consequently, all transactions are settled through the clearing houses. In the past, while some transactions were settled through the clearing houses, others were settled directly between the members. Routing of CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 227 transactions through clearing houses has substantially reduced the credit risk in the settlement system. Circuit Breakers/Price Bands Circuit breakers were first introduced in 1987 in the US in the wake of sharp fall in the share prices. To contain abnormal price variations, scrip-wise specific daily price bands or circuit breakers in India were introduced in 1995 whereby the trading automatically got suspended if the prices varied either side beyond 8 per cent; further trading was allowed only up to the price band. Price bands, which were originally fixed at 8 per cent, were relaxed in January 2000, whereby a further variation of 4 per cent in the scrip beyond 8 per cent, after a cooling off period of 30 minutes, was allowed. This was made applicable in the case of 100 scrips. In June 2000, for all scrips under compulsory rolling settlement, the price band was relaxed by 8 per cent (from 4 per cent earlier) with half an hour cooling period after the scrip had hit the initial price band of 8 per cent. While recent experiences in some countries such as Brazil, Taiwan and Thailand showed that circuit filters were successful in slowing down the market momentum, there has been some controversy over the effectiveness of circuit filters over the medium to long term. Although the circuit filters could have their adverse effects on the process of price formation, they are favoured mainly on the ground that they are the best available tool for containing volatility. This is based on the belief that containing of excess volatility helps to maintain investor confidence in the market. Structure of Informational Flows Several measures have been taken to enhance the transparency of the companies. A company offering securities in the Indian capital market is required to make a public disclosure of all relevant information through its offer documents, as indicated earlier. After a security is issued to the public and subsequently listed on a stock exchange, the stock exchange requires the issuing company to make continuing disclosures under the listing agreement. In India, all listed companies are now required to furnish to the stock exchanges and also publish mandated unaudited financial results on a quarterly basis. India is one of the few countries in the world to CU IDOL SELF LEARNING MATERIAL (SLM)

228 Business Environment and Regulatory Framework have a system of quarterly disclosures, and it has served a useful purpose in that price-sensitive information on earnings and revenues is now available at greater frequency. The publication of half-yearly corporate results on the basis of limited review by its auditors has also been made mandatory for listed companies. The disclosures of material information, which would have a bearing on the performance/operations of the company, are now required to be made available to the public immediately. Recently, a decision has been taken that the companies would be required to make decisions regarding dividend, bonus and rights announcements or any material event within 15 minutes of the conclusion of the board meeting where the decisions are taken. Following the international practices, companies in India are also required to provide shareholders with cash flow statements in the prescribed format along with the complete balance sheet and profit and loss statement. Companies are also required to furnish to the stock exchanges on a quarterly basis, a statement on the actual utilisation of funds and actual profitability, as against projected utilisation of funds and projected profitability. As part of better corporate governance practices, disclosures about segment reporting, related party transactions and consolidated balance sheet are also expected to be introduced. Emphasis on Fair Trading Practices Insider trading has been made a criminal offence punishable in accordance with the provisions under the SEBI Act, 1992. The Regulations define an insider as a person who has access to price-sensitive non-public information with regard to a company. Such a person is prohibited from trading in the securities of such a company under the regulations. There are now separate regulations in place governing substantial acquisition of shares and takeovers of companies. The regulations are aimed at making the takeover process more transparent and to protect the interests of minority shareholders. Increasing Integration of Various Segments of Securities Markets In India, different stock exchanges have so far followed their own practices relating to settlement procedures creating segmentation of the market. While stock exchanges continue to follow different systems, certain developments have resulted in better integration of the various segments of the Indian securities market. The two major stock exchanges, viz., Bombay Stock CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 229 Exchange (BSE) and National Stock Exchange (NSE), have expanded their operations in different locations, thus, providing investors across the country with the facility to trade in the stocks listed/permitted in these stock exchanges. The Interconnected Stock Exchange of India Ltd. (ICSI) has been set up as an interconnected market system and provides its trading members a facility to trade on the national market in addition to the trading facility at the regional stock exchanges. This has integrated the various regional stock exchanges, although the trading activity in the ICSI has not been very significant. Many regional stock exchanges have also become members of BSE and NSE, which further strengthened the integration process of various stock exchanges in the country. Equity market is also increasingly integrating with the Government securities and private corporate sector debt market. The interest rate structure of Government securities and securities issued by the corporate entities is better aligned at present than in the past. The changing structure of capital market has had some positive impact on the volatility, liquidity and transaction cost. 8.10 Summary There is a wide spectrum of financial institutions assisting the industry and commerce. The functioning of the stock exchanges were characterised by many shortcomings with long delays, lack of transparency in procedures and vulnerability to price rigging and insider trading. A number of measures have been taken to overcome these problems. The objectives of these measures, broadly, have been to provide for effective control of the stock exchange operations, increase the information flow and disclosures so as to enhance the transparency, protect the interests of investors, check insider trading, improve the operational efficiency of the stock exchanges and, in general, to promote healthy development of the capital market. Important measures of reform and development include the introduction of free pricing of capital issues; introduction of book building mechanism; introduction of electronic trading, measures to widen and deepen the capital market; improvement in the trading, clearing and settlement systems; promotion of dematerialisation; measures to reduce counterparty risk, introduction of circuit breakers/price bands; measures to increase information flow and to enhance the transparency of the companies; and, ushering in of fair trading practices, including CU IDOL SELF LEARNING MATERIAL (SLM)

230 Business Environment and Regulatory Framework prohibition of insider trading. These measures have had some positive impact on the volatility, liquidity and transaction cost. The Securities and Exchange Board of India (SEBI) has been playing a very important role to protect the interests of investors in securities, to regulate the activities of the securities market and to promote healthy development of the capital market. 8.11 Key Words/Abbreviations 1. MSMEs: Medium, Small and Micro Enterprises 2. SEBI: Securities and Exchange Board of India 3. NBFIs: Non-Banking Financial Institutions 4. NBFCs/NBFIs: Non-banking Financial Companies/Institutions. 5. SSIDCs: State Small Industries Development Corporations. 6. KVIC: Khadi and Village Industries Commission. 7. IFCI: Industrial Finance Corporation of India. 8. SHCIL: Stock Holding Corporation of India Ltd. 9. TFCI: Tourism Finance Corporation of India Ltd. 10. MDI: Management Development Institute. 8.12 Learning Activity 1. Read the Annual Report of SEBI. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. Read the Annual Reports of some industrial financial institutions. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 231 8.13 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions (i) Long Answer Questions 1. Discuss the role of IFCI Bank, IDBI Bank and ICICI Bank to develop the industrial and infrastructural sectors. 2. “Non-banking financial institutions are a heterogeneous lot.” Elucidate with special reference to their varied role and functions. 3. Give brief description of the important measures taken for the reform and healthy development of the Indian capital market. 4. Give a brief description of the institutions for the development of the MSME sector. 5. Give a brief description of the different types of institution supporting the development of the industrial and infrastructural sectors. Explain the types of assistance rendered by them with reference to any institution for the large industries sector and an institution for the small and tiny industries sector. (ii) Short Answer Questions 1. Describe the role of SEBI to regulate and develop the capital market. 2. Write a note on the institutional finance environment for foreign trade. 3. Briefly describe the role and functions of State Financial Corporations and State Industrial Development Corporations. 4. Elucidate the role of SIDBI to develop the MSME sector. 5. Explain how the Small Industries Development Corporations and Khadi and Village Industries Commission promote small, khadi and village enterprise? B. Multiple Choice/Objective Type Questions 1. SEBI stands for: (a) Securities Exchange Board of India (b) Securities and Exchange Board of India (c) Stock Exchange Board of India (d) Stock Exchange Board for Inspection CU IDOL SELF LEARNING MATERIAL (SLM)

232 Business Environment and Regulatory Framework 2. IDBI Bank is a/an: (a) Commercial bank (b) Universal bank (c) Industrial development bank (d) Regional bank 3. Circuit breaker refers to: (a) Breaking cartels (b) Cracking insider trading (c) Automatically suspending trading if the price varies either side beyond a specified range (d) Breaking unfair trade practices 4. The book building refers to: (a) The method through which the offer price of an IPO is based on investors’ demand (b) Manipulation of the books of accounts (c) Systematically building up the records of an organisation (d) Rigging share prices by manipulating entries in the books of account 5. NBFI refers to: (a) National Bank for Financing Industries (b) National Bank for Financing Investments (c) Non-Banking Financial Institution (d) National Bank for financing Infrastructure Development Answers: 1. (b), 2. (b), 3. (c), 4. (a), 5. (c). CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Environment - II 233 8.14 References Text Reference 1. The information on capital market reforms has been drawn mostly from various reports of Reserve Bank of India. Suggested Readings 1. IMF, Financial Access Survey (Annual) 2. Government of India, Economic Survey (Annual) 3. SEBI, Annual Reports. 4. Rakesh Mohan and Partha Ray, “Indian Financial Sector: Structure, Trends and Turns”, Working Paper No. 580, September 2016, Stanford Centre for International Development. 5. Vasant Desai, “The Indian Financial System and Development”, Himalaya Publishing House. Web Resources 1. www.idbi.co.in 2. www.ifciltd.com 3. www.bseindia.com  CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 9 GLOBAL ENVIRONMENT Structure: 9.0 Learning Objectives 9.1 Introduction 9.2 Foreign Direct Investment (FDI) 9.3 Multinational Corporations (MNCs) 9.4 World Trade Organisation (WTO) 9.5 International Monetary Fund (IMF) 9.6 World Bank 9.7 Evaluation of IMF-World Bank 9.8 Trade Blocs/RIAs 9.9 Some Important Integration Schemes 9.10 Summary 9.11 Key Words/Abbreviations 9.12 Learning Activities 9.13 Unit End Questions (MCQs and Descriptive) 9.14 References CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 235 9.0 Learning Objectives After studying this unit, you will be able to:  Explain the advantages and disadvantages of FDI, factors promoting FDI and global trends in FDI  Evaluate the role of MNCs in the emerging global economy and business  Examine the functions and roles of IMF and World Bank with special reference to developing economies  Discuss the functions and role of WTO  Get a general picture of trade blocks and their relevance 9.1 Introduction If you carefully observe, you will understand that the global environment is increasingly impacting the domestic environment of business. Consider, for example, the case of small shopkeeper individual who sells fresh fruit juice. He might be facing competition from the products multinationals – package natural juice or substitutes. Or take the case of traditional blacksmith who manufactures and sells simple tools and implements and the like. The demand for his products/service is seriously affected by the influx foreign products, particularly from China. Indian automobile firms, pharma companies, firms in the commodity business (like cement, steel etc.) and various service providers are all facing big challenges from foreign firms. In other words, growing foreign competition is a hard reality confronting giant Indian firms to tiny ones. Driven by the ubiquitous economic liberalisations, revolutionary technological advances, substantial changes in the political scenarios and developments in the socio-cultural milieu, national economies are becoming more and more interdependent and integrated and the world economy and business are becoming more and more globalised. To describe the emerging global scenario, terms such as flat world, borderless world, world without walls, global village etc. are used to connote the economic, business, political and socio-cultural environment that does not obstruct free flow of goods, services, finance, technology, ideas, philosophy etc. CU IDOL SELF LEARNING MATERIAL (SLM)

236 Business Environment and Regulatory Framework The proportion of what firms invest, produce and sell abroad increased very substantially and globalisation of supply chains advanced stupendously. A large share of national output is sold abroad and, concomitantly, a large share of domestic consumption is met by imports. The speed and capacity to transport larger and larger volumes and the safety of transporting perishables increased enormously. The fall in the cost of transport has been tremendous. The avalanche of advances in the ICT enhanced manifold its speed and breadth, and reduced the cost amazingly. These and other aspects of the transport and ICT revolutions have given a very big boost to globalisation in the emerging borderless world. The global business environment is important not only for the firms doing global business but also for purely domestic firms. Global economic conditions (like recession or boom), political conditions including war or conflicts, trends in prices of crude oil, other important commodities, policies/regulations of organisations like WTO, IMF, World Bank etc. and developments like regional economic integration schemes [such as European Union (EU)] and trade pacts, including those of which India is a party affect domestic as well as international business. In the light of facts mentioned above, in this Unit, we discuss the salient features of global FDI flows, MNCs and some international institutions (WTO, IMF, World Bank) and trade blocs. 9.2 Foreign Direct Investment (FDI) We got an idea about the different types of foreign investment in Unit 3. Of course, international investment is not a new or recent phenomenon. International capital has historically played an important role in the economic development of the developed countries. The last three decades, however, have witnessed a surge in the international capital movement, driven by the economic liberalisation across the world, particularly in the developing countries, significantly contributing to economic and business growth. Advantages of FDI Foreign investments have a number of socio-economic and political advantages and disadvantages. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 237 The important advantages of foreign investment are the following: 1. It helps increase the investment level and thereby the income and employment in the host country. 2. Foreign investment may increase the tax revenue of the government. 3. Direct foreign investment facilitates transfer of technology and thereby benefit enterprises and the recipient country. 4. It may kindle a managerial revolution in the recipient country through professional management and the employment of highly sophisticated management techniques. 5. Foreign capital may enable the country to increase its exports and reduce import requirements. 6. Foreign investments may stimulate domestic enterprise because, to support their own operations, the foreign investors may encourage and assist domestic suppliers and consuming industries. 7. Foreign investment may also help increase competition and break domestic monopolies. 8. If foreign investment improves the quality and reduces the cost of inputs, that would benefit the domestic industry. This often happens when technology transfer is involved. 9. Several FDIs have production linkages and they support the growth and upgradation of enterprises. 10. Invigoration of enterprises by foreign collaboration may help international business. 11. FDI and Production Linkages – an important element of an international production system is the organisation and distribution of production activities and other functions in what is commonly known as the global value chain. It extends from technology sourcing and development through production to distribution and marketing. (See Section 3.6, Unit 3, for some details.) The contribution of FDI to sustainable economic development of the host countries depends to a large extent on the production linkages between foreign affiliates and domestic firms. Such linkages can take the form of backward, forward or horizontal. CU IDOL SELF LEARNING MATERIAL (SLM)

238 Business Environment and Regulatory Framework 12. Foreign investment can accelerate economic and trade development. Indeed, FDI and foreign trade are mutually influential. While on the one hand, investment increases trade; on the other hand, foreign production by FDI substitutes foreign trade in many cases. Due to factors like foreign exchange problems, desire to industrialise fast etc., the policies of many developing countries prefer foreign investment (for import substitution) to imports. FDI can stimulate exports and import substitution. While the international investment replaces international trade in certain products, it may generate trade in some other products. That about one-third of the world trade in manufactures is intra-company trade is an indication of the investment-trade linkage. 13. Addressing a session on infrastructure at the seminar on ‘Moving to the Market: Sustaining Reforms in India and Asia’ organised by the Confederation of Indian Industry (CII) and Asian Society, in New Delhi on March 9, 1997, Gordon Wu has observed that foreign investment brings four ‘E’s’ — efficiency, equity, experience and expertise. In return, there is a fifth ‘E’ — expatriation of profits. 14. Apart from potential gains through technology transfer, FDI has generated large employment opportunities in a number of countries. 15. Given the limitations of domestic savings, many developing countries, including India, rely on foreign investment to accelerate economic growth. It may be noted that China has been able to maintain a high GDP growth rate for a long time because of a high savings rate and huge inflow of FDI. Disadvantages/Limitations of Foreign Investment Foreign capital, both private and official (governmental and institutional), have certain limitations. Certain additional risks are associated with the private foreign capital. 1. One of the important limitations to utilise the foreign capital is the absorptive capacity of the recipient country, i.e., the capacity of the country to utilise the foreign capital effectively. Lack of infrastructural facilities, technical know-how, personnel, inputs, CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 239 market, feasible projects, inefficiency or inadequacy of administrative machinery etc. are important factors that affect the absorptive capacity. 2. Sometime,s ‘strings’ are attached to the official assistance — the recipient country may be pressurised to fall in line with the ideology or direction of the donor. 3. Foreign invest has deleterious socio-economic and political impacts. 4. Private foreign capital tends to flow to the high profit areas rather than to the priority sectors. 5. The technologies brought in by the foreign investor may not be suitable or adapted to the consumption needs, size of the domestic market, resource availabilities, stage of development of the economy etc. 6. Through their power and flexibility, the multinational corporations can evade or undermine economic autonomy and control, and their activities may be inimical to the national interests of particular countries. 7. Foreign investment, sometimes, have unfavourable effect on the Balance of Payments of a country because the drain of foreign exchange by way of royalty, dividend etc. is more than the investment made by the foreign concern. 8. Foreign capital sometimes interferes in the national politics. 9. Foreign investors sometimes engage in unfair and unethical trade practices. 10. Sometimes foreign investment can result in the dangerous situation of minimising/ eliminating competition and the creation of monopolies or oligopolistic structures. 11. FDI can also potentially displace domestic producers by pre-empting their investment opportunities. 12. Often, several costs are associated with encouraging foreign investment, such as costs arising from special concessions offered by the host country, adverse effects on domestic saving, deterioration in the terms of trade, and problems of balance of payments adjustment. CU IDOL SELF LEARNING MATERIAL (SLM)

240 Business Environment and Regulatory Framework 13. A significant share of FDI is the result of acquisitions which, unlike greenfield investment, does not generate additional employment or growth, at least in the short run. Further, acquisitions may sometimes lead to oligopolistic situations which can be detrimental to the national interest. 14. Portfolio investments can destabilise capital markets of developing countries by sudden withdrawal when economic conditions are not good. They are capable of influencing the stock market trends to their advantage. Further, they become instruments to siphon off considerable share of the profits made by the companies – both foreign and national – in the country. Factors Promoting International Investment International investments are influenced by a number of factors. This section gives an outline picture of the factors influencing international investment in generic terms. The United Nations Economic Commission for Asia and Far East has drawn up the following list of conditions that have to be met if foreign capital is to be attracted to underdeveloped countries. 1. Political stability and freedom from external aggression. 2. Security of life and property. 3. Reasonable opportunities for earning profits. 4. Prompt payment of fair and transferable compensation in case of nationalisation of foreign owned enterprise. 5. Guarantee of the possibility of remittance of profits, dividends and interest, as well as of a reasonable depreciation allowance on the capital invested. 6. Facilities for immigration and employment of foreign technical and administrative personnel. 7. A system of taxation that does not impose a crushing burden on private enterprise. 8. Freedom from double taxation. 9. Absence of vexatious controls. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 241 10. Non-discriminatory treatment of foreigners in the administration of existing controls. 11. Absence of competition between State-owned enterprises and private foreign capital. 12. A general spirit of friendliness toward foreign investors. Trends in Foreign Investment This section provides a brief picture of the growth, geographical and sectoral trends in FDI. Volume of FDI Flows Following the sweeping changes in the economic policy, foreign investment has surged in many countries. The expansion of international investment has resulted in a substantial increase in their role in global production, employment generation and trade. Important features of the growth of FDI include the following: 1. FDI inflows and outflows surged since 1980s. However, there was a decline after 2015. During the 25 years (1990-2015), the global FDI inflows increased 8.5 times. Correspondingly, FDI outflows also increased steeply. 2. Between 1990 and 2015, FDI inflows as a percentage of the global GDP doubled from less than 1 per cent to 2.4 per cent. 3. During the 25 years (1990-2015), the global FDI inflow-GFCF (gross fixed capital) ratio registered an increase of about four-fold, from 2.5 per cent to 10 per cent. 4. The FDI outflow-GFCF ratio more than doubled. This ratio is much higher for developed countries (12 per cent in 2015 – nearly 4 times the figure for developing countries). 5. Although foreign direct investment flows had their ups and downs, the stock of FDI has increased steadily and tremendously over time. 6. Geographical pattern FDI has been influenced by historical and social factors. The US investments were largely in Latin America. Japan’s investments went mostly to the Asian neighbours. There has, however, been some significant changes in the Japanese investments recently. Much of the United Kingdom’s investment has gone to the Commonwealth Nations, and France had a favour for countries with past colonial ties, mainly Africa. CU IDOL SELF LEARNING MATERIAL (SLM)

242 Business Environment and Regulatory Framework The vast expansion of the investment opportunities across the world should be expected to encourage some changes in the directional pattern of the foreign investment flows. 7. Megablocks of FDI flows appear to be emerging with clusters of developing countries linked to a triad country. They overlap somewhat with trade blocs, each comprising a Triad member and a cluster of trading partners with strong trade links to it. 8. FDI flows to and from large economic groups such as the G20 and Asia Pacific Economic Cooperation (APEC) continue to dominate the global FDI landscape these groups accounted for more than 50 per cent of global FDI inflows and outflows in 2016 BRICS – the economic group comprising Brazil, the Russian Federation, India, China and South Africa – accounted for 22 per cent of global GDP but their share of global inward FDI stock in 2016 was only 11 per cent. Although FDI inflows to BRICS exceeded the group’s outflows, investments from BRICS are on the rise. Outflows from them amounted to over 8 per cent of the world total in 2016, up from 5 per cent in 2010. 9. One traditional attraction of foreign investment, viz., cheap labour is becoming less important. Foreign investment today is not merely for exploitation of local resources. Increasing Share of Developing Economies In the recent decades, the share of developing countries in global FDI inflows increased substantially. In some of the recent years, their share in FDI inflows was more than 50 per cent of the total. Although developed countries predominate the FDI outflows, the share of developing countries has been growing fast. 1. There were ten developing and transition economies in the top 20 FDI recipients in 2018. China was the second only to the United States. India was at 10th and 9th positions in 2018 and 2017 respectively. China and Hong Kong are the major developing country foreign investors. 2. Within the group of the developing countries, a small number of developing countries attract lion’s share of FDI. The relatively developed among them get the lion’s share of the FDI. CU IDOL SELF LEARNING MATERIAL (SLM)

Global Environment 243 3. Substantial share of the FDI flows to the developing countries has been cornered by two regions, viz., East Asia and Latin America, and the Caribbean while Sub-Saharan Africa, and Middle East and North Africa get very low shares. Fluctuations in Flows The changes in the shares between the developed and developing countries are caused by the differences in the growth rates of FDI in respect of them. For example, in 2014, the share of developing economies was more than that of the developed because of a fall in FDI inflow to developed countries while there was a moderate rise in respect of developing countries. Sectoral Trends Although FDI has grown over time in all three economic sectors – primary, manufacturing and services – the sectoral composition (i.e., the share going to each sector) has undergone significant changes with marked shift towards services. Led by industries such as finance, business activities, trade and telecommunication, services continue to make up the lion’s share of foreign investment, accounting for two-thirds of global FDI stock in 2016. The share of manufacturing in global FDI stock worldwide fell from 42 per cent in 1990 to 26 per cent in 2016; in 2016, the primary sector’s share was only 6 per cent. Trends in FDI by M&As International M&As have stupendous impact on FDI flows, the trends in FDI have been led by cross-border mergers and acquisitions (M&As), the level of FDI flow often fluctuating with the trends in M&A. Some of the important features of the cross-border M & As are: 1. The liberalisation and deregulation of several vital industries in many countries across the world have given an impetus to cross-border M&As in both developed and developing countries.. Privatisation has been a very important stimulant to M&As. Banking, finance, insurance and telecommunication industries have been witnessing a spate of M&As. CU IDOL SELF LEARNING MATERIAL (SLM)

244 Business Environment and Regulatory Framework 2. The surge in cross-border mergers and acquisitions (M&As), albeit characterised by ups and downs, has been causing substantial restructuring and transformation of the competitive environment of industries globally. 3. M&As have been found to be particularly important in the FDI flows to the developed countries. 4. A notable trend has been the increasing participation of developing country firms in the global M&A activities. They have shown great interest in the acquisition of firms in the advanced economies. Corporate India has significantly resorted to overseas acquisitions as part of the globalisation and competitive strategies. 5. The large size and number of M&As; growing interest of collective funds, particularly private equity funds and sovereign wealth funds, in acquisition. 6. Collective investment funds like private equity (PE) funds, sovereign wealth funds (SWF) and hedge funds are important part of the FDI dynamics. Growing role of special funds raises policy and strategic issues. 9.3 Multinational Corporations In the preceding section (9.2), we have seen that one of the most important dynamics of the global economy and business is the fast growth and spread of the FDI. The primary driver of FDI is MNCs. The world economy and business have been increasingly influenced by multinational corporations (MNCs), also known by such names as international corporation, transnational corporation (TNC), global corporation (or firm, company or enterprise) etc. These business corporations, many of which are gigantic in size, invest and do business in many countries, account for a significant share of the world’s industrial investment, production, employment and trade. The rapidity with which the MNCs are growing has been mind boggling. According to the data available for some past year, one may think that now there are more than one lakh MNCs with more than one million foreign affiliates (FAs). Majority of the FAs are in the developing CU IDOL SELF LEARNING MATERIAL (SLM)