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V From the lender¶s point of view, project finance can be a risky proposition,
since the projects are usually of long-term nature, the debt maturities can
stretch out to number of years, increasing the riskiness of the credit.
V Therefore, it is the central task of financial institutions involved in project
finance is to identify and quantify the risks and then to allocate them
acceptably among the various participants in the project.
 !

 
V =olitical risk is defined as "the possibility of a multinational company being
significantly affected by political events in a host country or a change in the
political relationships between a host country and one or more other
countries".
V =olitical risk is the unwanted consequences of political activities that will
have effect on the value of the firm.
V The multinational companies which are making foreign direct investment
must assess the political risk, before any such investments are made.

|




V The political component in country risk can be subdivided into two
categories, internal political risk and external political risk.
V Internal political risk arises due to internal conflicts such as racial/religious
riots, rebellions, rural/separatist insurgency or political turmoil.
V Such activities tend to destabilize the state, which will in turn result in
delays or defaults in the repayment of loans.
V External political risk is exposure to loss as a result of acts such as war or
occupation by foreign powers, while a war may cause a delay in the
repayment of debts.

|




V ¢ccupation of foreign power may result in default, as the new power may
not reorganize the debt obligations of the former Government.
V The possibility of such political upheaval needs to be carefully evaluated by
the lender before releasing funds to a foreign state.
V High political risk does not necessarily mean that a company should not
invest in a particular country, if the level of returns available may be large
enough to justify the taking of the risk.


 
"|
 
# $ |


V ˜estriction on access to local funding agencies.

V Increase in tax rates unfavourable to foreign companies.
V ˜egulatory constraints in price setting and transfer pricing.
V Foreign exchange controls exercised to protect the home currency rates
against other currencies.
V ˜ules restricting the use of local labour and materials.

|




V :uotas, tariffs and other trade barriers imposed on foreign companies.
V Grants and subsidies available to indigenous industries.
V Delicencing and encouragement to competition.
V Expropriation or nationalization of foreign owned business.
V Discrimination against foreign businesses.
V Environmental, health and safety measures may make unit unviable due
exorbitant costs of complying due to subsequently introduced legislation.
 |
% 
V The country risk is defined as exposure to a loss in offshore lending, caused
by events in a particular country, events which are, at least to some extent,
under control of the Government but definitely not under the control of a
private enterprise or individual.
V Country risk is a broad concept encompassing sovereign, political as well as
other forms of risks like economic, social and external risks.
V Since country risk is the sum total of a number of different types or risk,
assessing country risk would mean the evaluation of each of these risks
that contribute towards it.

|




V The country risk is an all embracing term incorporating all types of risks a
lender encounters in offshore lending.
V Country risk means with reference foreign funding the possibility that a
borrower will be unwilling or unable to service its debt in a timely
fashion - the risk from cross-border lending that arises from events to some
degree under the control of the government of the borrowing country.
V Country risk is inherent with dealing of state (sovereign risk) or any
overseas business.
V The assessment of country risk, involves both qualitative and quantitative
analysis of political, social, economic and natural conditions in the country
in which the borrower operates.
 &

 
"
 |
% 




% 
- Depth and experience of government bureaucrats
- =olitical intervention on economic management
- =olitical links with foreign partners
- =ast behaviour under stress
- =olitical stability
- Ethnic tensions
- Corruption
- =olitical turmoil

|




(


% 
- Monetary and fiscal policy
- Global economic environment
- Natural resources
- Export diversification
- Stability of banking industry
- GD= growth and inflation rates

|







% 
- Foreign indebtedness, both in absolute terms and relative to GD=
- Debt service payments relative to exports
- Current account
- Capital inflows and outflows
- Exchange rate stability
- Foreign exchange reserves
The above analysis is equally applicable to cross-border investment decisions.
 '(

 
V Economic risk is concerned with the general economic climate within the
country.
V Some of the factors which reflect the economic climate of a country are:
- level of affluence enjoyed by the country.
- the growth rate of income.
- the nations's propensity to save/invest.
- the stability of prices (inflation).
- characteristics of the labour force.

|




- level of sophistication of the financial system.
- level of foreign debt outstanding.
- major income earners (exports) and their sensitivity to overall
global economic changes.
- extent of dependence on major export items.
- trends in balance of payments.
- level of imports
- level of reserve and credit standing, and
- fluctuations of exchange rate and controls on foreign exchange.
 )

 
V Social risk refers to the possibilities of loss due to factors such as religious
fanaticism, ethnic polarization, dissatisfaction among the people as a result
of wide disparity in income distribution, or regionalism.
V These sociological problems eventually lead to riot and revaluations
resulting in loss of lives and property.
V An economy plagued by riots and revolutions will undoubtedly face
problems in repaying its debts. Thus, social factors too need to be carefully
evaluated by lenders.
 *(+
 
V The external risk component of country risk arises due to situations outside
the country.
V For instance, if the borrower nation is situated beside a country which is at
war, the country risk ratios of the prospective borrower will be higher than
what will be the case if its neighbour is at peace.
V This difference in the risk rating is attributable to external risk.
V Although the borrower nation may not be directly involved in the conflict,
the chance of spillover may exist.

|




V Additionally, the borrower of refugees fleeing the war may upset the
economic conditions in the borrower nation.
V Hence, the lender has also to consider the external environment of the
prospective borrower before sanctioning the loan.
 ,(+
 
V Since the liability of the borrower of the foreign currency financing remains
in the currency in which the borrower obtains loan, so at the time of
repayment the rupee liability is determined on the basis of the exchange
rate prevailing on the date of repayment.
V The exchange rate fluctuates widely with the passage of time, so the
borrower is subject to exposure to exchange rate fluctuations on the
outstanding principal of the foreign currency financing.

|




V Further if the borrowing is made at a floating rate of interest, there can be
substantial variations in the rate of interest with the passage of time,
depends on the variations in the LIB¢˜.
V Therefore, the borrower should keep in mind the following exposure to
exchange risks:
- Exchange risk due to fluctuations in the currency of borrowing
ð
 ð
the currency in which the payments are to be effected to
the overseas suppliers.
- Exchange risk due to fluctuations in the currency borrowing
ð
 ð
the rupee over the entire tenure of the foreign currency
financing.
 -$   

 


V 
  - The possibility that raw materials, power, labour, water,
gas, oil, minerals . required for the project may not be in sufficient
quantities to service the debt.
V   - The chance that the basic viability of project will be
threatened by the unavailability or high prices of key inputs such as energy
or raw materials.
V |

  - The risk may arise due to delay in completion of
project, resulting in substantial overruns.

|




V 4
  - Due to changes in technology and tastes and habits, the
future demand for the product may decline.
V $
  - This risk may arise at the stage when the project
becomes operational, due to disruption of labour, transport 
V 

- The possibility of acts of God like earthquake, war,
climatic changes, unfavourable weather conditions will make the projects to
fail.
V 2 


  - The risk may arise due to invention of new ways of
doing things will reduce or destroy the existing products, even the project
under implementation.
V (#

  - The need to comply with environmental or safety
legislation, the costs which can be considerable, it may not even be
economically viable to continue the operations.
  
. /0.
V Depository ˜eceipts (D˜s) are a type of negotiable (transferrable) financial
security that can be traded on a local stock exchange, representing
ownership of shares in companies of other countries.
V As a part of globalizing the economy, the government undertook two major
steps - that of allowing Foreign Institutional Investors (FIIs) to invest in the
Indian capital market and permitting Indian companies to float their stock
in foreign markets.

|




V An Indian company can raise finances from other countries investors by
issue of any of the instruments like American Depository ˜eceipts (AD˜s)
and Global Depository ˜eceipts (GD˜s).
V An AD˜ is a stock which can be traded in the United States, representing a
specified number of shares of a foreign company.
V AD˜s are bought and sold on the American stock exchanges. A foreign
company might make an issue in U.S. by issuing securities through
appointment of U.S. bank as depository.
V By keeping the securities issued by a foreign company, the U.S. bank will
issue receipts called American Depository ˜eceipts (AD˜s) to the investors.

|




V It is a negotiable instrument recognizing a claim on foreign security.
V Depository receipts that are traded on the stock exchanges in other parts of
the globe are called Ë


  
Ë(GD˜s).
V These are commonly listed on European stock exchanges, such as the
Luxembourg and London stock exchanges or on the Asian stock exchanges
such as the Dubai and Singapore stock exchanges.
V The issue of AD˜s/GD˜s are governed by the provisions of the Issue of
Foreign Currency Convertible Bonds and ¢rdinary Shares (Through
Depository ˜eceipt Mechanism) Scheme, 1993.
 ! 
 . 
0.
V Both AD˜s and GD˜s are usually denominated in US dollars.
V Though the AD˜/GD˜ is quoted and traded in dollar terms, the underlying
equity shares are denominated in rupees only.
V Instead of issuing in the names of individual shareholders, the shares are
issued by the company to an intermediary called the Ë
 Ë usually in
overseas depository bank, in whose name the shares are registered.
V It is the depository, which subsequently issues AD˜s/GD˜s to the
subscribing public.

|




V The physical possession of the equity shares will be with another
intermediary called the Ë
 
Ë
V The custodian will act as an agent of the depository.
V Though AD˜s/GD˜s represents the company's shares, it has a distinct
identity and does not figure in the books of the company.
V The shares usually correspond to the AD˜/GD˜ in a fixed ratio.
V The AD˜s/GD˜s could be issued in a negotiable form.

|




V The AD˜s/GD˜s can be redeemed at the price of the corresponding shares
of the issuing company ruling on the date of redemption.
V The holder of AD˜/GD˜ can transfer the instrument as in case of domestic
instrument and also entitled for dividends as and when declared.
V The AD˜/GD˜ holder can ask the bank for the original foreign security by
exchanging the AD˜/GD˜.
 

 
. /0.
V 2

 - The issuer company seeking permission for raising foreign
funds by issue of AD˜s/GD˜s would be required to have a consistent track
record of good performance (financial or otherwise) for a period of at least
three years. However, issuer companies making AD˜/GD˜ issues to fund
export projects or infrastructure projects (in sectors such as power, oil
exploration, telecommunication, railways .) need not have a past track
record of financial performance.

|




V 

#
 - Indian companies raising funds by issue of AD˜s/GD˜s
through recognized stock exchanges is allowed under Ë     Ë and
prior approval of Ministry of Finance, Department of Company Affairs is not
required.
V #

 - The private placement of AD˜s/GD˜s would also be
eligible for an automatic approval provided the issue is lead managed by an
investment banker.
V 


 - The automatic route for AD˜s/GD˜s issue would also
cover issue of Employee Stock ¢ptions by Indian software/IT companies.
Issue of AD˜s/GD˜s arising out of business reorganization/
merger/demerger would also be governed by automatic route.

|




V 
#
 .
% - In all cases of automatic approval, the
companies are required to obtain approvals under FDI policy, Companies
Act, and approvals for overseas investment/business acquisition  before
AD˜/GD˜ issue.
V 1
#
 - The issuer company would need to obtain ˜BI approval
under the provisions of FEMA prior to the overseas issue.
V 

 "

 - The companies may retain the
proceeds abroad or may remit funds into India in anticipation of the use of
funds for approved end-users. The retention and deployment of funds
abroad would be as prescribed by ˜BI.

|




V |
 (+  - The issue expenses, covering both fixed
expenses like underwriting commissions, lead managers charges, legal
expenses and other reimbursable expenses shall be subject to a ceiling of
4% in case of GD˜s and 7% in case of listing in US stock exchanges. Issue
expenses beyond the ceiling would need the approval of ˜BI.
V |
# 


- The AD˜s/GD˜s can be issued on the basis of the ratio
worked out by the Indian company in consultation with the lead manager of
the issue.
V 
.#  - Foreign investment through AD˜s/GD˜s is
treated as FDI. Indian companies are allowed to raise equity capital in the
international market through issue of AD˜s/GD˜s. These are not subject to
any ceiling on investment.

|




V 5

  - There is no restriction on the number of AD˜s/GD˜s to be
floated by a company or group of companies in a financial year.
V (3  
 - There is no end use restrictions on AD˜s/GD˜s
issue proceeds, except for an express ban on investment in real estate and
capital markets.
V 5

%
"% - AD˜s/GD˜s are equity instruments and there is
no repayment liability on the issuing company and these receipts are full
risk equity. Therefore, end use restrictions on AD˜s/GD˜s issue proceeds
are removed.
V  
( - If an ordinary shareholder of the issuing company
acquires a right or entitlement by virtue of ownership of ordinary shares,
AD˜/GD˜ holder also acquires the same rights or entitlements like bonus
shares, rights shares 

|




V 2

%"% - A limited two-way fungibility scheme has been put
in place by the Government of India for AD˜s/GD˜s. Under this scheme, a
stock broker in India, registered with SEBI, can purchase the shares from
the market for conversion into AD˜s/GD˜s. ˜e-issuance of AD˜s/GD˜s
would be permitted to the extent of AD˜s/GD˜s which have been redeemed
into underlying shares and sold in the domestic market.
V M
 - AD˜/GD˜ holders are not entitled to any voting rights. Therefore,
the issuer company need not fear about losing management control. Till
redemption, AD˜s/GD˜s don't carry any voting rights. Since the underlying
shares are held by the depository, the depository is entitled to vote at the
general meetings of the issuer company.

|




V 2
  - AD˜s/GD˜s may be purchased, possessed and freely
transferable by the non-resident subject to the provisions of FEMA.
AD˜s/GD˜s are freely tradable in the overseas market like any other dollar
denominated security. The record of ownership in India doesn't change with
every transfer of AD˜s/GD˜s and as such, the issuer company is in no
position to control the registration of transfers.
V .# - The dividend will be paid by the issuer company in rupees only,
but the depository converts these rupees and pays the dividend (after
withholding tax) to the ultimate investor, in US dollars. Thus, there will be
no exchange rate rate risk for the issuer company.

|




V (

 - When AD˜/GD˜ holders acquire an entitlement
to shares in a company, the company would need to issue and place
ordinary shares with the domestic custodian against which the overseas
Depository would issue corresponding AD˜s/GD˜s.
V  - AD˜s/GD˜s are usually settled on a book entry basis through
the system of Euroclear or Cedel in Europe and the Depository Trust
Company in US.
V 
 - There is no lock-in period for the AD˜s/GD˜s issued.
V  
3%
 - ¢nce redemption takes place, the
underlying shares are listed and traded on a domestic stock exchange. The
underlying shares are denominated in Indian currency only.

|




V 

4
  - An Indian company can also sponsor an issue of
AD˜/GD˜. Under this mechanism, the company offers its resident
shareholders a choice to submit their shares back to the company so that
on the basis of such shares, AD˜s/GD˜s can be issued abroad. The
proceeds of the AD˜/GD˜ issue is remitted back to India and distributed
among the resident investors who had offered their rupee denominated
shares for conversion. These proceeds can be kept in foreign currency
accounts in India by the shareholders who have tendered such shares for
conversion into AD˜/GD˜.
V $# 
#  - =roceeds of AD˜/GD˜ can be used for overseas
investment. Indian company can acquire shares of foreign company
engaged in same core activity upto US $100 million by way of swap of fresh
issues of AD˜s/GD˜s.
 1 
./0. 

|

%
V Better corporate image both in India and abroad which is useful for
strengthening the business operations in the overseas market.
V Exposure to international markets and hence stock prices in line with
international trends.
V Means of raising capital abroad in foreign exchange.
V Use of the foreign exchange proceeds for activities like overseas
acquisitions, setting up offices abroad and other capital expenditure.

|




V Increased recognition internationally by bankers, customers, suppliers .
V No risk of foreign exchange fluctuations as the company will be paying the
interest and dividends in Indian rupees to the domestic depository bank.
V The issuer company collects the issue proceeds in foreign currency and
thus able to utilize the same for meeting the foreign exchange component
of project cost, repayment of foreign currency loans 
V Large amount can be raised in the global market without much of a
problem.
V The issue proceeds may be retained outside India and used for approved
end uses like import of capital goods, repayment of ECBs, purchase of plant
and equipment 
 &1 
./0. 
$# 
# 

V Assured liquidity due to presence of market makers.
V Convenience to investors as AD˜s are quoted and pay dividends in U.S.
dollars, and they trade exactly like other U.S. securities.
V Cost-effectiveness due to elimination of the need to custodize underlying
securities in India.
V ¢verseas investors will not be taxed in India in respect of capital gains on
transfer of AD˜s to another nonresident outside India.

|




V The identity of AD˜/GD˜ holders is kept confidential since they are freely
transferable.
V :uick settlement of AD˜s/GD˜s due to the existence of international
systems like Euroclear and Cedel in Europe and the Depository Trust
Company in the U.S.
V AD˜s/GD˜s are designated in foreign currency, which is acceptable to
global investors.
V Global investors/holders of AD˜s/GD˜s don't need to be registered with
SEBI.
 '|



. 
0.
V Both are negotiable instruments, their holders are entitled to corporate
benefits such as dividend, bonus shares and rights issues.
V The holders of both the instruments may exercise their vote through the
¢verseas Depository Bank (¢DB).
V Both can be sold outside India in their existing form. The underlying shares
arising after redemption can be sold in India.
V Sale of both outside India to nonresidents is not taxable in India.
V ˜edemption of both into underlying shares is tax-exempt in India.

|




V Dividend income received by AD˜ holder or the holder of underlying shares
is not taxed in their hands.
V After the transfer of shares, where consideration is in terms of rupee
payment, the normal tax rates would apply to the income arising or
accruing on these shares.
V AD˜s are listed on an American Stock Exchange, where as all GD˜s are
listed in a stock exchange other than American Stock Exchange, say London
or Luxemburg.
V The disclosure requirements for GD˜ issues are less stringent.

|




V GD˜ market is mainly an institutional market, with lower liquidity, where as
an AD˜ listing allows US retail investors to participate in the offering, which
in turn leads to wider interest and better valuations of a company¶s stock.
V The period of holding of the equity shares is to be computed from the date
on which the ¢verseas Depository Bank advised the Domestic Custodian
Bank to redeem the GD˜s/AD˜s into ordinary equity shares in issuing
company and not the date of purchase of the GD˜s/AD˜s.
V For Indian tax purposes, the cost of acquisition of the ordinary equity
shares earlier held as GD˜s/AD˜s, it is the market price of the equity
shares on the date of conversion of the GD˜s/AD˜s to ordinary shares will
be taken into consideration and not the price at which the GD˜s/AD˜s were
originally purchased.
 )0 
./0. 
V With a view to liberalizing the operational guidelines of AD˜/GD˜ issues,
given the fact that investments through GD˜/AD˜ being risk capital,
tract-record scrutiny process for AD˜/GD˜ dispensed with.
V Indian companies raising funds by issue of AD˜s/GD˜s through registered
stock exchanges is allowed under Automatic ˜oute, and the prior approval
of Ministry of Finance, Department of Company Affairs is not required.
V =rivate placement of AD˜s/GD˜s would also be eligible for automatic
approval provided the issue is lead managed by an Investment Banker.

|




V Automatic ˜oute for AD˜/GD˜ issue would also cover issue of Employee
stock options by Indian Software/IT companies.
V Issue of AD˜s/GD˜s arising out of business
reorganization/merger/demerger would also be governed by Automatic
˜oute.
V In all cases of Automatic Approval, the companies are required to obtain
other approvals under FDI policy, Companies Act, and approvals for
overseas investment/business acquisition before AD˜/GD˜ issue.
V The issuer company would need to obtain ˜BI approval under the
provisions of FEMA prior to the overseas issue. ˜BI will be issuing
necessary guidelines.

|




V The companies may retain the proceeds abroad or may remit funds into
India in anticipation of the use of funds for approved end-uses.
V The retention and deployment of funds abroad would be as prescribed by
˜BI.
V The issue expenses, covering both fixed expenses like underwriting
commissions, lead managers charges, legal expenses and other
reimbursable expenses shall be subject to a ceiling of 4% in case of GD˜s
and 7% in case of listing on US Stock Exchanges.
V Issue expenses beyond the ceiling would need the approval of ˜BI.
V The FCCBs means bonds subscribed by nonresident in foreign currency and
convertible into equity shares of the issuing company, either in part or
whole, on the basis of equity related warrants attached to debt instrument.
=repayment of FCCB is permitted as per ˜BI guidelines.

|




V The AD˜/GD˜ can be issued on the basis of the ratio worked out by the
Indian company in consultation with the Lead Manager of the issue. The
Indian company will issue its rupee denominated shares in the name of the
¢verseas Depository and will keep in the custody of the Domestic Custodian
in India. ¢n the basis of the ratio worked out and the rupee shares kept
with the Domestic Custodian, the overseas Depository will issue AD˜s/GD˜s
abroad.
V Foreign investment through AD˜s/GD˜s is treated as Foreign Direct
Investment. Indian companies are allowed to raise equity capital in the
international market through issue of AD˜s/GD˜s. These are not subject to
any ceiling on investment.

|




V There is no restriction on the number of AD˜s/GD˜s/FCCBs to be floated by
a company or a group of companies in a financial year. There is no such
restriction because a company engaged in the manufacture of items
covered under Automatic ˜oute is likely to exceed the percentage limits
under Automatic ˜oute, whose foreign direct investment after a proposed
AD˜s/GD˜s/FCCBs is likely to exceed 50 per cent/51 per cent/74 per cent
as the case may be.
V There is no end use restrictions on AD˜s/GD˜s issue proceeds, except for
an express ban on investment in real estate and stock markets. The FCCB
issue proceeds need to conform to external commercial borrowing and use
requirements. In addition, 25 per cent of the FCCB proceeds can be used
for general corporate restructuring.

|




V AD˜s/GD˜s are equity instruments and there is no repayment liability on
the issuing company. Unlike a commercial borrowing or a Foreign currency
convertible bond which carries a repayment liability on the company.
AD˜s/GD˜s are full risk equity. Therefore, end-use restrictions on AD˜/GD˜
issue proceeds are removed.
V If an ordinary shareholder of the issuing company acquires a right or
entitlement by virtue of ownership of ordinary shares, the AD˜/GD˜ holder
also acquires the same rights or entitlements owing to his rights over
underlying ordinary shares. AD˜/GD˜ holders, therefore, are entitled to
same bonus or rights issue of shares, as any ordinary shareholders of the
company.

|




V When AD˜/GD˜ holders acquire an entitlement to shares in a company, the
company would need to issue and place ordinary shares with the Domestic
Custodian against which the ¢verseas Depository would issue
corresponding AD˜s/GD˜s to the AD˜/GD˜ holders.
V A listed company may transfer an issue of AD˜s/GD˜s with an ¢verseas
Depository against shares held by its shareholders. Such a facility would be
available   

to all categories of shareholders of the company whose
shares are being sold in the AD˜/GD˜ market overseas.
V A limited Two-way Fungibility scheme has been put in place by the
Government of India for AD˜s/GD˜s. Under this scheme, a stock broker in
India, registered with SEBI, can purchase the shares from the market for
conversion into AD˜/GD˜. ˜e-issuance of AD˜s/GD˜ would be permitted to
the extent of AD˜s/GD˜s which have been redeemed into underlying shares
and sold in the domestic market.

|




V An Indian company can also sponsor an issue of AD˜/GD˜. Under this
mechanism, the company offers its resident shareholders a choice to
submit their shares back to the company so that on the basis of such
shares, AD˜s/GD˜s can be issued abroad. The proceeds of the AD˜/GD˜
issue is remitted back to India and distributed among the resident investors
who had offered their rupee denominated shares for conversion. These
proceeds can be kept in foreign currency accounts in India by the
shareholders who have tendered such shares for conversion into AD˜/GD˜.
 *"%
V Fungibility means division or conversion into smaller parts. Two-way
fungibility means conversion into smaller parts and ð ð

V The term is used by ˜BI in announcing its guidelines on issue of
AD˜s/GD˜s with facility of two-way fungibility.
V In the sense of AD˜s/GD˜s, fungibility means division of depository
receipts into local shares and two-way fungibility includes conversion of
depository receipts into local shares and ð ð

V Two-way fungibility of depository receipts is crucial for providing a boost to
foreign investment in Indian capital market.
V The idea of fungibility removed the controls maintained with distinctive
numbers by the companies.
 ,
|%|
#"1

V A foreign currency convertible bond (FCCB), issued as a bond by an Indian
company is expressed in foreign currency and the principal and interest too
are payable in foreign currency.
V The maximum tenure of the bond is 5 years. FCCB is a quasi-debt
investment, which can be converted into equity shares at the choice of
investors either immediately after issue, or upon maturity or during a set
period, at a predetermined strike rate or a conversion price.

|




V It acts like a bond by making regular interest and principal payments, but
these bonds also give the bond holder an option to convert the bond into
shares.
V The investor benefits if the conversion price is higher than the traded price
and ð ð
.
V The conversion price is set at a premium over the current stock price, or is
set by a formula based on the price at the time of redemption.
V The issuer may some times have a call option, generally with a call hurdle.
 subject to a minimum stock price at the time of call, which means that
invariably at the exercise of a call, the investor would opt for conversion
into equity.

|




V The convertibility of the bond is akin to a put option to the bond holder, as
he can redeem the bond while opting for conversion.
V As an investor in the equity, the bond holder has a call option, in the sense
that he has the right to buy equity at the set price.
V This hybrid product offers many of the advantages of both equity and debt.
It gives the investor much of the upside of investment in equity and the
debt element protects the downside.
V The denomination of FCCB in foreign currency makes it more acceptable in
the international market and allows buyers of the bond to take advantage
of the difference in international rates.

|




V The FCCB is a quasi equity instrument which accords the benefit of debt
market.
V The FCCB may carry a coupon rate or can be zero coupon.
V In case the bond is not a zero coupon, the issuer would be under obligation
to pay the coupon rate at agreed intervals.
V If the holder of the bond does not exercise conversion option, the issuer
would redeem the bonds at on agreed redemption price.
V In a rising stock market, FCCB is preferred means of raising medium to
long-term sources.
V The investors who generally in FCCBs like arbitrage funds, overseas banks,
global fixed income funds & super nationals, private banking accounts/high
networth individuals.
 !-#

 
 
||1 
 |

%
V The company gains high leverage as debt is reduced and equity capital is
enhanced upon conversion.
V The impact on cash flow is positive as most companies issue FCCB with a
redemption premium, which is payable on maturity, only if the stock price
is less than the conversion price.
V FCCB do not dilute ownership immediately, as the holder of AD˜/GD˜ do
not have voting rights.

|




V The conversion premium adds to the capital reserve of the company.
V The coupon rate is lower than the traditional bank finance, there by
reducing the debt financing costs.
V The issue of FCCBs do not receive credit rating.
 !#

 
 
||1 
 
# 


FCCB offers dural advantage of debt and equity to the investors. Thus,
guaranteed returns in the form of coupon or YTM, and at the same time, an
option to take advantage of upside in the price of the stock.
 !!.
#

 
 
||1 
V FCCB when converted into equity brings down the earnings per share, and
will also dilute the ownership.
V In a falling stock market, there will be no demand for FCCB.
V FCCB may remain as debt and not get converted at all.
V FCCB is shown as debt on balance sheet until conversion.
V In case of redemption, cash outflow is heavy in one financial year, unlike
traditional debt which has regular repayment.

|




V Any depreciation in rupee against the designated foreign currency may
make the interest and principal repayment costly.
V The end use of proceeds is restricted.
V The issuer does not control conversion.
V the book value of converted shares depends on prevailing exchange rates.
V The cost ultimately dependent on share price development.
 !2
+

  
||1
V The conversion of FCCBs into shares is not subject to Income-tax.
V Capital gains arising on the transfer of FCCBs made outside India between
nonresidents shall not be subject to Income-tax in India. Any other
transfers are liable to tax withholding.
V =ayment of interest on FCCBs to nonresident holders of the FCCBs will be
subject to withholding tax.
V Company is liable to pay a Õ ð 
 
  at the rate of 12.5%
(

applicable surcharge and education cess) on the total amount
distributed as divided.

|




V Dividends are not taxable in India in the hands of the recipient or after the
conversion of bonds to shares.
V Long-term capital gain arising out of transfer of shares acquired from the
conversion of the FCCBs shall not be liable to long-term capital gains tax
provided the securities transaction tax has been paid.
V Short-term capital gain arising out of transfer of shares acquired from the
conversion of FCCBs where the shares are subject to the securities
transaction tax are taxable and also subject to withholding tax.
 !(3  

||1

V FCCB proceeds should not be used for lending or investment in capital
market or acquiring a company (or a part thereof) in India by a corporate.
V FCCBs can be raised for investment (such as import of capital goods, new
projects modernization/expansion of existing production units) in real
sector - industrial sector including small and medium enterprises (SME) and
infrastructure sector - in India;
V Subject to the existing guidelines, FCCB proceeds can be utilized for
overseas direct investment in Joint Ventures (JV)/Wholly ¢wned
subsidiaries abroad;

|




V FCCB proceeds can be utilized for the first stage acquisition of shares in the
disinvestment process and also in the mandatory second stage offer to the
public under the Government¶s disinvestment program of =SU shares.
V FCCB proceeds can be utilized by NG¢s engaged in micro finance activities
for lending to self-help groups or for micro credit or for
  micro
finance activity including capacity building.
V Utilization of FCCB proceeds is not permitted in real estate; and
V End-uses of FCCBs for working capital, general corporate purpose and
repayment of existing rupee loans are not permitted.
 !&|

 
 
||1
V The Indian company which is not eligible to raise funds from the domestic
security market shall not be eligible to issue FCCBs.
V The overseas issue of FCCBs have to be priced at the average six monthly
prices or the average price of the last fortnight before the Õ  which
is a month before the AGM approving the overseas issue.
V The overseas corporate bodies (¢CBs) who are not eligible to invest in
India are not eligible to subscribe FCCBs.
V The issue of FCCBs shall be subject to the foreign direct investment (FDI)
sectorial caps prescribed by the Government of India regulations and
directions of ˜BI from time to time.

|




V The maximum amount of FCCBs that may be raised by an eligible borrower
under the automatic route is US $500 million or its equivalent during a
financial year and any issue in excess of US $500 million requires ˜BI
approval.
V FCCBs upto US $20 million must have a minimum average maturity period
of 3 years.
V FCCBs above US $20 million and upto US $500 million must have a
minimum average maturity of five year.
V The public issue of FCCBs are to be made through reputable lead managers
in international capital market.

|




V The private issue of FCCBs shall be with Banks, or with multilateral and
bilateral financial institutions or foreign collaborators or with foreign equity
holders having a minimum paid-up capital of the issuing company.
V The Õ



ceiling for the issue of FCCBs having a minimum average
maturity period of three years upto five years must not exceed six month
LIB¢˜ 

2%.
V In case of FCCBs having a minimum average maturity period of more than
five years, the Õ



 ceiling should not exceed six month LIB¢˜ 


3.5%.
V Issue of FCCBs with attached warrants is not permitted.

|




V The issue related expenses may not exceed 4% of the total issue size and
in case of a private placement, cannot exceed 2% of the issue size.
V Net proceeds from one FCCBs issue must remain overseas until they are
actually required in India. =roceeds parked overseas can be invested in the
prescribed liquid assets.
V Issuance of guarantee, stand by letter of credit, letter of undertaking or
letter of comfort by banks, financial institutions and NBFCs is not permitted.
V The borrower shall be at liberty to provide security to the lender in the form
of immovable property in India or shares of a company in India.
V Loan agreement entered into shall confirm to existing guidelines.
V Drawal of loan shall be made in accordance with the terms of loan
agreement after obtaining loan registration number from ˜BI.
 !'
|%(+

"1

V The Foreign Currency Exchangeable Bonds (FCEBs) are financial
instruments similar to FCCBs in nature. FCEBs will allow corporate to raise
money from overseas markets by issuing bonds.
V In case of FCCBs, bonds can be converted into equity shares of the issuing
company.
V But in case FCEBs, the bonds can be converted into shares of a group
company of the issuer.

|




V The issue of FCEBs in India is procedurally governed by the companies Act,
1956; FEMA, 1999; SEBI (Disclosure and Investor protection) Guidelines,
2000; Issue of Foreign Currency Exchangeable Bonds Scheme, 2008.
V The issuing company shall be part of the promotor group of the offered
company.
V The offered company mean an Indian company whose equity shares shall
be offered in exchange of FCCB.
V The issuing company mean an Indian company whose equity shares shall
be offered in exchange of FCCB.

|




V The offered company shall be a listed company which is engaged in a sector
eligible to receive Foreign Direct Investment (FDI) and eligible to issue or
avail of FCCB or External Commercial Borrowing (ECBs).
V Wherever needed prior approval of Foreign Investment =romotion Board
(FI=B) shall be obtained under Foreign Direct Investment =olicy.
 !)|

 
 
|(1
V The minimum maturity of FCEB shall be five years for the purpose of
redemption.
V The exchange option can be exercised at any time before redemption.
V The rate of interest payable on FCCB and the issue expenses shall be within
the cost ceiling as specified by ˜BI under ECB policy.
V =rior approval of ˜BI shall be required for issuance of FCEB.
V FCEB may be denominated in any freely convertible foreign currency.

|




V The Indian company which is not eligible to raise funds from the domestic
security market shall not be eligible to issue FCEBs.
V The overseas issue of FCEBs have to be priced at the average six monthly
prices or the average price of the last fortnight before the Õ  which
is a month before the AGM approving the overseas issue.
V The proceeds of FCEBs shall be retained and/or deployed overseas in
accordance with the policy for proceeds FCEBs.
V The encourage of FCEBs into shall not give rise to any capital gains liable to
income-tax in India.

|




V The interest on the bond or dividend on exchanged portion shall be subject
to deduction of tax at source.
V The issuing company shall not transfer, mortgage or offer as collateral and
to keep the offered shares under FCEBs free from all encumbrances from
the date of issue of FCEBs till the date of exchange or reduction
V While exercising exchange option, the holder of FCEBs shall take delivery of
offered wages. Cash settlement is not permitted.
V An Indian company which is not eligible to raise funds from the Indian
securities market, shall not be eligible to issue FCEBs.
V The proceeds of FCEBs may be invested by the issuing company in the
promoter group companies.
 !*(  
 
|(1

V The amount raised from the issue of FCEBs may be invested by the issuing
company in the promotor group companies.
V The promotor group company receiving such investments shall be required
to use the proceeds in accordance with the uses prescribed under FCB
=olicy.

|




V The promotor group company receiving such investments will not be
permitted to utilize the proceeds for investments in the capital market or in
real estate in India.
V The proceeds of FCEBs may be invested by the issuing company overseas
by way of direct investment including in joint ventures or wholly owned
subsidiaries subject to the existing guidelines on Indian Direct Investment
in joint ventures or wholly owned subsidiaries abroad.
 !,(+
|

1


V External Commercial Borrowings (ECBs) is a borrowing of over 180 days.
ECB is the borrowing by corporate and financial institutions from
international markets.
V ECBs include commercial bank loans, buyers credit, suppliers credit,
security instruments such as floating rate notes and fixed rate bonds, credit
from export-credit agencies, borrowings from international financial
institutions such as IFC etc.

|




V The incentive available for such loans is the relative lower financing cost.
ECB¶s can be taken in any major currency and for various maturities.
V ECBs are being permitted by the government for providing an additional
source of funds to Indian corporate and =SU¶s for financing expansion of
existing capacity as well as for fresh investment to augment the resources
available domestically.
V ECBs are approved with an overall annual ceiling. Consistent with prudent
debt-management keeping in view the balance of payments position and
level of foreign exchange reserves.
 -10 
(|1
V ECBs refer to commercial loans availed from nonresident lenders with
minimum average maturity of 3 years.
V ECBs may be raised in the form of bank loans, buyers¶ credit, suppliers¶
credit, securitized instruments like floating rate notes, fixed rate bonds.
V ECBs can be accessed under two routes ð  (i) Automatic route, and (ii)
Approval route.
V The latest guidelines prevailing, on ECBs are under      are
summarized as follows:

|




V 5

#
 - ECBs for Investment in ˜eal Sector - industrial sector,
especially infrastructure sector will come under Automatic ˜oute and it will
not require ˜BI/Government Approval. In case of doubt as regards
eligibility to access Automatic ˜oute, applicants may take recourse to the
Approval ˜oute.
V ("1

 - All companies incorporated under the Companies
Act, except financial intermediaries, are eligible for access to ECBs.
V 
: - The ECBs can be raised from internationally
recognized sources such as:

|




 - International Banks
- International Capital Markets
- Multilateral financial institutions such as IFC, ADB, CDC 
- Export Credit Agencies
- Suppliers of Equipment
- Foreign Collaborators
- Foreign Equity holders
V ("



4
% - The ECBs can be raised to the
extent of specified amounts and maturity periods as given below:

|




 - ECB upto US $20 million or equivalent with minimum average
maturity of 3 years.
- ECB above US $20 million and upto US $500 million or equivalent
with minimum average maturity of 5 years.
- ECB upto US $20 million can have call/put option provided the
minimum average maturity of 3 years is completed before
exercising call/put option.
V |
| - The all-in-cost includes rate of interest, other fees
and expenses in foreign currency except commitment fee, prepayment and
fees payable in Indian ˜upees shall not exceed ceilings based on minimum
average maturity period as given below:

|




 3 years and upto 5 year 6 month LIB¢˜ + 200 basis points
More than 5 years 6 month LIB¢˜ + 350 basis points
V ( 
(|1
 - ECBs can be raised only for investment in real
sector such as:
- Import of capital goods
- New projects
- Modernization/expansion of existing production units.
˜eal sector means industrial sector (including small and medium
enterprises) and infrastructure sector, ECB proceeds are not
permitted for on-lending or investment in capital market by
corporate. ECB proceeds should not be used in real estate.

|




V 0

 - Guarantees and standby letter of credit or letter of comfort
by banks, financial institutions and NBFCs relating to ECB is not permitted.
V % - The choice of security to be provided to the lender/supplier is
left to the borrower. But, creation of charge over immovable assets and
financial securities is subject to approval from ˜BI.
V 

 - ECB proceeds should be parked overseas until actual
requirement in India.
V 
% - =repayment of ECB upto US $100 million is permitted
without prior approval of ˜BI, subject to the condition of minimum average
maturity period.

|




V ." # - The remittance of interest, installments and other
charges is permitted through Authorized Dealer.
V $ $"


- The banks, financial institutions and other financial intermediaries
are allowed to access ECB funds through automatic route.
- Under Approval ˜oute, the applicants are required to submit an
application in Form ECB to ˜BI, ECB Division, Mumbai. The
liberalizations made for ECB is also extended to FCCB in all
respects.

|




- The Indian corporate are permitted use ECB funds to make
overseas direct investment in joint ventures/wholly owned
subsidiaries. This facilitate corporate to undertake fresh investment
or expansion of existing joint ventures/wholly owned subsidiaries
including mergers and acquisitions abroad by harnessing resources
at globally competitive rates.
- Under latest ECB guidelines, end-user of ECB for working capital,
general corporate purpose and repayment of existing rupee loans
are not permitted.
- The maximum amount of ECB which can be raised by an eligible
borrower under the Automatic ˜oute is US $500 million or
equivalent during a financial year.
 
.# 
V In a globalized and liberalized economy, Foreign Direct Investment (FDI) is
an important driving force for the development of a nation.
V Now the countries are competing each other to attract FDIs by way of
liberalizing the policy and simplifying the procedures relating to FDI.
V FDI involves the engagement of considerable assets and resources and
satisfies the requirements of investment in the host country.
V It provides the much needed foreign exchange to help bridge the balance of
trade deficits.

|




V It raises the technology standards, level of efficiency and competitiveness
of the host country.
V It helps to improve its export performance by providing the host country
better access to foreign markets.
V The International Monetary Fund (IMF) in its Balance of =ayments Manual
defines FDI as ³the category of international investment that reflects the
objective of obtaining a lasting interest by a resident entity in one economy
in an enterprise resident in another economy.´
V The lasting interest implies the existence of a long-term relationship
between the direct investor and the enterprise and a significant degree of
influence by the investor on the management of the enterprise.

|




V As per IMF definition, FDI inflows also include the following:
- ˜einvested earnings by foreign companies (which are part of
foreign investor profits that are not distributed to shareholders as
dividends and are reinvested in the affiliates in the country).
- =rocess of foreign equity lasting and foreign subordinated loans to
domestic subsidiaries as part of intercompany (short and
long-term) debt transactions.
- ¢verseas commercial borrowings (financial leasing, trade credits,
grants, bonds) by foreign direct investors in foreign invested firms.
- Noncash acquisitions of equity investment made by foreign venture
capital investors.

|




V The administration policy governing Foreign Direct Investment (FDI) by the
Government of India opened up in India can be divided into two major
areas - the first between 1991 and 1999, when activities in which FDI was
permitted were specifically spelt out.
V Unless specifically permitted, FDI was prohibited. Where permitted, one
needed government¶s approval in most cases.
V Gradually more and more activities moved into the Õ      ð

list. However, in early 1999, a fundamental shift occurred.
V FDI in specific areas became prohibited or regulated. Except for such areas,
FDI in any activity become freely permitted.

|




V Foreign investors are investing through Foreign Direct Investment (FDI)
and =ortfolio Investment (=I).
V FDI are involved in capital investment per project and longer locking period
compared to the =ortfolio Investment (=I) route.
V The recent trend in foreign funds inflow shows, the capital inflow through =I
was much higher than FDI.
V FDI is more crucial for the country¶s economic development. It contributes
to employment generation and industry modernization.
V Due to long lock-in period, FDIs influence in foreign exchange rate is less
due to less volatility.
V Both FDIs and =Is will improve the country¶s foreign exchange reserves
position.
 !(
|%4

V The Euro currency market refers to funds channelled ð financial
intermediaries from international lenders to international borrowers.
V The Euro currency markets provide the short to medium term debt required
by banks, corporate and government borrowers.
V The source of these funds is domestic bank deposits whose ownership is
transferred to bank outside the controlled domestic monetary systems.
V The deposits are in large denominations, frequently $ 100,000 or more, and
the banks use them to make Euro currency loans to quality borrowers.
V The Euro currency deposit rate is usually slightly higher than the rate paid
by the domestic banks.

|




V The Euro currency loans in a particular currency are priced according to a
µLIB¢˜ 

basis¶, with the margin over LIB¢˜ depending on market
conditions and the credit quality standing or riskiness of the borrower.
V The banks generally arrange syndicated loans in this market. Thus the risk
of a particular borrower are distributed across several banks.
V The Euro currency market is not regulated by any government and,
therefore, is an international currency.
V The Õ   prefix refers to the high volume of these funds circulating in
Europe, mainly through London.
V However, this market is world wide, and sectors of the market exist in the
Middle East and Far East (Asia dollar market).
 
 
(
|%4
 
V They are extensively used for foreign exchange hedging purposes as the
banks seek to balance out their foreign assets and liabilities. The banks,
therefore, take positions in the Euro currency markets to cover the forward
commitments they have made with their customers.
V Euro currency markets can at times bypass domestic channels of Ë




 
especially when governments impose tight credit policies.
For example, US Corporation can acquire Eurodollars in London. These
deposits may be US domestic dollar deposits that have been transferred
abroad during a US domestic credit squeeze.

|




V Function of the markets is the full international intermediation role of
channelling surplus liquid resources from, say, ¢=EC countries or
corporations who need to borrow.
 2% 
(
|%


V Fixed interest loans are usually over a medium term of up to five years,
and the borrower knows in advance what the interest payments will be.
V Standby credits are overdraft facilities offered by banks to customers in
Euro currency.
V Most Euro currency loans are roll-over loans, where the bank agrees to
make funds available over a given period of time, say five years, but the
interest rate is open to renegotiation every three or six months.
V A number of banks may form themselves into a syndicate in order to
provide a large loan to a single customer over a period that is longer than
usual. Such loans are called Õ

  



 &
.
 |

4

V The third major sector of the international capital market consists of the set
of domestic equity, bond and credit markets within which the international
investor can operate.
V These markets differ from the Euro currency and Eurobond markets in that
they are subject to the laws of the sovereign state which they reside.
V The domestic markets of US, UK, France, Germany, Switzerland and the
Netherlands have considerable international importance because they are
relatively open to international investors and borrowers.

|




V The regulatory climate in these markets is liberal and this makes them
attractive to international capital.
V As a result, the same investors and borrowers are likely to be active in both
domestic and offshore markets.
 ' %
|
V Syndicated credits have emerged as one of the important sources of
finance in the international market. In this type of credits, lenders usually
form as a syndicate and will pool their funds.
V They provide medium-term financing ranging from 3 to 7 years out of the
pooled funds.
V The rates of interest would be generally fixed on LIB¢˜ plus basis.
V The big companies might avail these credit at cheaper rates than the rates
prevailing in the domestic rates for financing project proposals and working
capital finance.
V Some companies borrow these funds for takeover activities.
 )(
"

V Euro bond refers to the bonds issued and sold outside the home country of
the currency of issue. For example, dollar bond issued in Europe is called
Ë  
Ë.
V Euro bonds are simultaneously sold in many countries other than the
country of currency in which the issue is denominated.
V These bonds are issued in international market and denominated in hard
currency  dollar., yen, pound, euro.

|




V Euro bonds in particular are bearer securities, the names of the bearer are
not registered anywhere.
V Euro bonds generally unsecured debt securities maturing at least a year
after launch.
V Euro bonds are long-term loans usually having a maturity period between 5
years to 30 years.
V Nowadays euro bonds have a maximum maturity period of 10 years. The
euro bonds may be fixed or floating rate bonds.
V Eurobonds are suitable sources of finance for operations, which require:
- Large capital sums of money for long period.
- Borrowing not subject to domestic regulations especially exchange
controls, which may limit their ability to export capital gains.
 *4|%1

V Certain bonds give the option to the holder of the bond to claim payment of
coupon or principal in currencies of his option, the bond holder may insist
for payment of coupon in DM and principal portion in US$.
V The exchange rate is fixed at the time of issue.
V Another feature of this bond is conversion option might be given which
permits as instrument denominated in one currency to be converted into an
instrument denominated in another.
V For example, UK based company might issue a US dollar bond which is
convertible into shares of stock quoted in pound sterling. These bonds are
also called Ë
 


Ë
 ,
1

V A bond issued in a particular country by a foreign borrower (or) a bond sold
by a foreign borrower, denominated in the currency of country in which it is
sold and is underwritten and syndicated by national underwriting syndicate
in the lending country.
V Foreign bonds are floated in the domestic capital markets (and are in the
domestic currency of those markets) by non-resident entities.
V These bonds are different from Euro bonds in the sense that they are
governed by the regulations of the country in which they are issued
whereas Euro bonds are not.

|




V The bonds are generally named on the basis of the capital markets in which
they are floated.
V Some of the well-known foreign bonds are as follows:
V §
1
 - These bonds are dollar denominated and issued in U.S.
by a non-U.S. borrower in the U.S. market. The advantages of Yankee
bonds are that the longer maturities of bonds place them outside the ECB
ceiling. Yankee bond markets are extremely deep and liquid market and
funds are available at low interest rates for long maturity periods. The U.S.
markets are not bound by rigid syndicates and fee structures.
V

1
 - These bonds are issued Yen denominated bonds issued
in Japan by a non-Japanese borrower.
V 1
1
 - These bonds are pound denominated bonds issued in
U.K. domestic market by a non-U.K. borrower.
 -|
#"
V Alpine convertibles is a new alternative for the companies who are scouting
for overseas funds.
V Alpines are making an entry into the country through the three major Swiss
banks, Union Bank of Switzerland (UBS), Credit Suisse and Swiss Banking
Corporation.
V Alpines are convertible bonds sold to the Swiss investors through Swiss
banking syndicates.
V They are issued in dollars and sold only through the Swiss retail investors
network.

|




V The offer for an issue comes from the Swiss market and if the company
qualifies for the issue, it is subsequently placed by the investment banker.
V A clean and strong balance sheet is the only qualification which the
arranger ask for.
V An Alpine could be unlisted and thus free from post market pressures.
V The issue costs are lower (only 1.75%) since the concerned Swiss bank
pays a single cheque to the corporate and places out the convertible to its
retail clients.

|




V The companies going in for Alpines will be forced to operate in a closed
market and to that extent the size of the issue will be limited.
V When the amount is small and is needed at a short notice Alpines are a
good option.
V In addition, companies are not protected against the currency fluctuation as
far as interest payments in Swiss Franc is concerned. Alpines have been a
major source of funds for companies in Asia.
 (
425

V The Europe Medium Term Notes (EMTNs) first appeared in the international
capital markets in mid eighties in USA.
V The increase in the issue of EMTNs resulted because of the following
reasons:
V EMTNs provide an extremely important vehicle to help further each one
major objectives for issuers.
V The EMTNs are omnibus financial deal to facilitate access to a broad
international investor base.

|




V For investors it is an investment deal that can be designed to meet their
special needs for currency, structure or maturity.
V For the dealers this provides a greater flow of business.
V EMTNs are flexible as they can be structured to facilitate issuance in
multiple currency ð in Yen, Sterling, Francs, Dollars and other European
currencies.
V Maturity could also be in a definitive bearers global bearers or registered
for and can be listed or unlisted, and
V EMTNs could also be programmed keeping in view the needs of the
investors.

|




V The medium term notes are continuously issued notes, which are usually
unsecured, with maturities ranging from nine months to ten years.
V They allow the borrower flexibility with respect to maturity profiles and
timing of issues. These MTNs are useful tool for treasury management.
V The borrowers  the issuers of MTNs include sovereign governments as
well as large companies and financial institutions.
 !6
 



V The SEBI has now permitted listed companies to raise funds from the
domestic market by making private placement of securities with :ualified
Institutional Buyers (:IBs).
V The process will be called :ualified Institutional =lacement (:I=) and the
securities so issued would constitute the fully paid-up capital of the
company.

|




V SEBI has introduced :I=s with an object that Indian companies to use the
:I= route to raise capital rather than raising funds through AD˜s/GD˜s/
FCCBs route.
V The Indian listed companies can now place Ë
  
  
Ë with :IBs.
V The specified securities include equity shares, fully convertible debentures
or any securities other than warrants, which are convertible into or
exchangeable with equity shares at a later date.
V :I= can be made by a listed company, which fulfils the following conditions:
- Its equity shares of the same class are listed on a stock exchange
having nationwide trading terminals, and
- It is in compliance with the prescribed minimum public
shareholding requirements of the listing agreement.
 
 

# 

V Globalization and liberalization policies implemented by the Government of
India have led to large inflows of foreign capital in different channels, which
has led to increased capital formation and improving domestic investment
in the economy in general and capital market in particular.
V After the opening-up of the Indian economy, the foreign investors have
been encouraged to invest in India.
V The foreign investors - individuals as well as institutions have invested in
India through different routes.

|




V Foreign Institutional Investors (FIIs) including institutions such as =ension
funds, Mutual funds, Investment Trusts, Asset Management Companies,
Nominee Companies and incorporated/institutional portfolio managers or
their power of attorney holders are permitted to make investments under
the guidelines issued by Government of India, Ministry of Finance on
September 14, 1992.
V FIIs can invest in all the securities traded on the primary and secondary
markets including the equity and other securities/instruments of companies
which are listed or to be listed on the stock exchanges in India.
V These include shares, debentures, warrants and the schemes floated by
domestic mutual funds.

|




V Government may even like to add further categories of securities later from
time to time.
V The Government has allowed FIIs to invest in all types of securities in
primary and secondary capital markets since September, 1992.
V As a precondition the FIIs, have been required to obtain registration from
the SEBI and approval from ˜BI.
V SEBI shall take into account the track record of the FII, its professional
competence, financial soundness, experience and such other criteria that
may be considered by SEBI to be relevant.
V There is no restriction on the value of investment for the purpose of entry
of FIIs in the capital market.

|




V Investment in debt instrument has been permitted including gilt-edged
instruments.
V The new scheme has made the Indian rupee fully convertible in current
account for FIIs, since their entry and exit has been permitted at market
determined foreign exchange rates, without any limits and lock-in period
conditions.
V By the above policy liberalizations for FIIs, the Government is encouraging
foreign investments in India to boost the capital market activities.
V The rationale behind this policy is to make the Indian economy strong with
injection of more foreign funds.
 


%5

V =articipatory Notes (=Ns) are an indirect way through which unregistered
overseas investors - who cannot directly play in the stock market in
India - invest in Indian stocks.
V =Ns are derivative products with securities as under lying. FIIs and their
agents issue =Ns to overseas clients investing in India.
V =Ns are offshore financial instruments which are mostly used by foreign
found investors who are not registered with the SEBI or those who do not
want to register themselves with SEBI.

|




V =N is a derivative instrument issued against an underlying security, which
permits the holder to share in the capital appreciation/income from the
underlying security.
V The foreign fund investors who are interested in investing indirectly in the
Indian capital market use the =N route.
V =Ns are generally issued overseas by the FII sub-accounts or India based
foreign brokers to get an exposure in the Indian capital market.
V Brokers issue =Ns based on Indian underlying securities in favor of foreign
investors and then brokers buy and sell securities on behalf of their clients.

|




V Investors place their orders through brokerage houses and these houses
repatriate the dividend and capital gain to their clients. However, the
houses do not disclose the name of their clients.
V =N flow into the economy is a healthy trend only for short-term.
V But in long-term the Indian economy needs the foreign investment which
can lock-in for a reasonable period.
V The foreign investors cannot be allowed to destabilize Indian economy by
doing speculative activities in the Indian secondary stock market.
V Sudden withdrawal of investments by the foreign investors may some times
lead to crashing of the secondary market.

|




V To curb the unscrupulous practices by the foreign investors, SEBI has
widened the definition of FIIs, fixes the limit of FIIs investment in
Government securities.
V The SEBI has also made amendments on FIIs restricting the sub-accounts
for issuance of ¢ffshore Derivative Investments (¢DIs) only to persons
regulated by an appropriate foreign authority and only after compliance
with Õ

 

 norms.
V The amendments lay emphasis on establishing the identity of foreign
entities investing in India.

|




V The market regulator intends to encourage FIIs to register in India and
invest directly here, rather than coming ð the =Ns route.
V This is expected to increase transparency in their operations.
V SEBI forbid FIIs and their sub-agents, from issuing any fresh =Ns in the
derivative market and asked them to windup their positions in 18 months.
 &4


V The multilateral agencies are development financial
institutions dedicated to and engaged in promoting the
economic and social progress of its developing member
countries.
V Contrary to popular belief, all direct loans from these
agencies are not at concessional terms.
V The agencies raise resources in the world capital markets
and charge a certain percentage over their cost of
borrowing over a period of six months or one year.

|




V The rates are generally revised twice a year.
V Loans sourced from multilateral agencies are generally
for longer duration as compared to other commercial
loans.
V The loans are required to be guaranteed by the
government of the member country.
V The agencies generally fix fund quotas for the countries
and the different sectors of their economies.

|




V In case the credit has to be given, the projects have
to be approved by the concerned multilateral agency.
V ¢nly after the project is approved by the agency,
the financial institutions can lend the funds.
V The time taken for the loans to come through, on an
average ranges from 6-12 months.
 '


4

%
V The International Monetary Fund (IMF) was first mooted
in 1944 and the articles of agreement on the IMF were
formulated at the United Nations Monetary and Financial
Conference held in Bretton Woods, New Hampshire
in July, 1945 and came into force in December, 1945.
V IMF has started its financial operations in 1947.

|




V The Fund was set up with a reserve of currencies supplied
by members. Its objectives are:
- To assist in the development of international
prosperity by helping members with balance of
payments deficits.
- To implement guidelines for international
monetary stability.
- To promote cooperation on international
monetary matters.

|




V The IMF is an organization of countries that seeks to
promote international monetary cooperation and to facilitate
the expansion of trade, thus contributing to increased
employment and improved economic conditions in all member
countries.
V To achieve its purpose, the fund has a code of economic
behaviour of its members, makes financing available to
members in balance of payments difficulties and provide
them with technical assistance to improve their economic
management. As of 1992, the fund had 173 member countries,
accounting for four-fifths of total world production and
90 per cent of world trade.

|




V The IMF acts internationally in a manner similar to
that of a local commercial bank.
V The Fund provides temporary or emergency currency
reserves to countries in balance of payments difficulties
just as a bank provides overdraft facilities to a company.
V A member¶s maximum access to the fund¶s reserves is
determined by its quota, which is effectively, its subscription
to the Fund and which is subject to revision every five years
or so.

|




V A country running deficits can borrow from the IMF.
As the level of borrowings increases so to do the restrictions
imposed on the borrower.
V The objective is for the borrower to implement economic
policies which will redress the adverse balance.

|




V In the late 1960s the Fund membership agreed to the
creation of Special Drawing ˜ights (SD˜s).
V This was a major step towards the creation of a
supernational central bank. SD˜s are a form of
international credit instrument. Countries can use them
to cover deficits and/or they can be kept as reserves.
 )7
1

V The World Bank was created at Bretton Woods as a new
type of international investment institution to make or to
guarantee loans for reconstruction and development projects.
V It was conceived originally to assist in the reconstruction of
postwar Europe but soon evolved into an organization to assist
in developing third world countries, by fostering economic
development through financial, technical and advisory aid.

|




V The World Bank comprises a group of three affiliated
institutions : the International Bank for ˜econstruction and
Development (also known as the World Bank), the International
Development Association (IDA) and the International
Finance Corporation (IFC).
V The World Bank (IB˜D) and IDA make loans for high priority
projects and programs in member countries to further their
development plans.

|




V These loans are made to sovereign governments or to
entities enjoying the full faith and credit of sovereign
governments. In the case of the Bank these loans are made
on commercial terms.
V The lending terms of the IDA, on the other hand, are very
generous or Õ
 as IDA was established to assist the poorest
countries, which could not afford to borrow money from the
bank on its normal terms.
V The purpose of the IFC is to assist developing countries
in promoting private enterprise.

|




V The corporation¶s investments take the form of both
loan and equity financing of private sector projects in
developing countries.
V In the earlier years of its operations, the bank concentrated
its lending on capital infrastructure projects - primarily
transportation, electric power, telecommunications, and
irrigation and flood control.

|




V In the 1970s the development of such sectors as agriculture,
education and industry was recognized by the bank and IDA to
be crucial to social and economic progress and lending was
extended to those sectors.
V In recent years the bank has increased the amount of loan
finance which is not tied to specific projects but is conditional
on national policies being adjusted to cope with balance of
payments difficulties and to promote growth.
V This lending is known as structural adjustment lending. It
is employed widely in Africa and South America.

|




V The bank¶s finances are based on increases in capital
subscriptions made from time to time by its members.
V At the end of 1994 over 180 billion dollars had been
subscribed but of this only about 6.36% is paid in.
V The bank¶s lending program is financed in part through
the paid-in capital, but mainly through commercial
borrowing on the international capital markets.

|




V The IDA¶s resources come predominantly from grant
contributions, known as replenishments, from the richer
countries among its membership.
V From its establishment to end 1994 IDA had issued over
62 billion dollars in credits to member countries.

|




V As in the case of the World Bank, member countries
subscribe for capital in the IFC.
V =aid-in capital amounted to over 2 billion dollars at the
end of 1994. These subscriptions, in conjunction with
borrowings, are used to fund the corporations¶ investments.
 *


.#




V The International Development Association (IDA) supplements
activities of World Bank by financing those projects which are
crucial in the development of the country¶s economy.
V It provides finance to the projects which have faced
foreign exchange difficulties or where the foreign debt service
burden is very high that they cannot prudently borrow on
conventional terms all the external capital which they
require for their priority programs.

|




V The Government of India has obtained for a total value
of $20.682 billion for the year ending 31st December, 1993
from IDA.
 ,



|




V The International Finance Corporation, Washington (IFCW)
is affiliated to the World Bank and is the world¶s largest
multinational organization which extends financial assistance
to the private sector business of the developing member
countries.
V It has the main objective of promoting economic
development of the member countries through private sector.

|




V It aims to finance private sector projects helping companies
in developing world to mobilize financing in the international
financial markets and providing advice and technical assistance
to business and governments.
V IFCW extends foreign currency financial assistance
without Government guarantees in a form and combination
most suitable to the project, if sufficient funds cannot be
obtained on reasonable terms from other sources.

|




V IFCW provides foreign currency financial assistance on the
basis of its own assessment of the project cost, irrespective
of the project cost estimated by Indian Financial Institutions.
V IFCW extends financial assistance to the private sector
in developing countries as also joint sector.
V It invests in large as well as small projects.

|




V ˜ecently, great emphasis has been given on agriculture
and agro based products, food and food processing.
V IFCW participates in projects which have the prospect of
earning profit and benefit the economy of the country in
which it is implemented.

|




V The IFCW offers an array of financial products and services
to companies in its developing member countries like:
- Long-term loans in major currencies at fixed or
variable rates.
- Equity investments.
- :uasi-equity instruments (subordinate loans,
preferred stock, income notes).
- Guarantees and standby financing.
- ˜isk management (intermediation of currency
and interest rate swaps, provision of hedging facilities).

|




V In order to receive IFC funding, a project must meet
a number of IFCW guidelines like:
- The project must be in the private sector.
- It must be technically sound.
- It must have a good prospect of being profitable.
- It must benefit the local economy.
 &- 
.#
1

V The Asian Development Bank (ADB) has started its operations
in 1966 to provide financial assistance to the member countries
in the Asia-pacific region with a view to improve the quality
of life of the people.
V It aims at not only the development of the region but also
for attaining harmonious growth of subregions.

|




V The main functions of ADB are as follows:
- To advance loans and equity investment for the
economic and social advancement of the developing
member countries.
- To provide financial assistance.
- To promote investment of public and private
capital for development purposes.
- To help in coordinating development policies and
plans of member countries.

|




V =resently about 49 countries have joined as members in
IDA in the region.
V ADB provides financial assistance to the developed member
countries from ordinary capital resources which constitutes
roughly 67% of the total financial assistance from ADB.
V The interest rate on ADB loans are of variable nature. It provides
financial assistance to its member countries on concessional
terms. India is one of the major subscribers to the capital
of ADB.
 &


 
 8 9
V The AIFIs like IDBI, IFCI and ICICI are providing foreign
currency financial assistance to Indian projects through
various lines of credit already procured by them from
international financial market.
V IDBI and IFCI have been linked with lines of credit in DM
from West Germany, =ound Sterling from U.K. and Swedish
Kroner under Indo-Swedish Development Cooperation Agreement.

|




V Sub-loans are also available from AIFIs in other currencies
like Japanese Yen and U.S. Dollars.
V AIFIs are raising funds in the international financial market
through issue of bonds to cater the needs of the domestic
projects.

|




V As foreign currency financial assistance has been excluded
from single window system, each of the term financing financial
institution issue separately the letters of intent sanctioning
foreign currency financing.
V It is important to mention that in case of foreign currency loan,
the liability of the borrower remains in the currency in which
the loan has been obtained. For instance, suppose, a borrower
obtains a loan in US Dollars, he will have to payoff the loan
in US Dollars only.

|




V The financial institutions allocate the currency to the
borrowers on the basis of the lines of credit available and the
time duration during the entire available line of credit has
to be utilized fully.
V These foreign currencies are convertible, that is, one currency
can be used in making payments in other currencies. For
instance, borrowing in Deutsche Marks can be used in making
payments in US Dollars or Swiss Francs 
 &!4


|




V The multinational corporations (MNCs) finance the indigenous
project in the form of foreign direct investment  direct
participation in the equity of domestic company.
V Before making any investment by MNCs in other countries
they will consider the factors like political stability of the country,
economic stability and growth of the country, earnings from
the proposed investment, infrastructure facilities available in
the country, availability of raw material and cheap labour,
favourable economic and tax laws of the country, potential
to widen the market for their technology, conducive business
environment, provisions allowing repatriation of investments
and earnings there on 

|




V The projects which are setting up with technical and/or
financial collaboration with the foreign firms are to be
approved by the Government of India.
V In order to attract the foreign investments into India, the
Government has released all its previous guidelines providing
a conducive environment for foreign investments in India.
 &|

1
 
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V Foreign currency financial assistance can also be procured

from commercial banks having international operations.
V But Indian financial institutions, generally do not permit
industrial undertakings to raise foreign currency financial
assistance from international banks.
V This is due to the fact that financial institutions themselves
raise foreign currency resources from international market
for on-lending to industrial undertakings.

|




V The foreign commercial banks having their operations in India
are active in loan syndication in foreign currencies and also
arrange foreign currency loans from the banks who make
finances in business sector.
 |
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V Export finance plays a significant role in the export promotion.

V An exporter may use financial assistance for export of his goods and
services to foreign importer which is available from the bankers in two
stages ð ., pre-shipment stage and post-shipment stage.
V =re-shipment finance covers the credits extended by banks to
exporters prior to the shipment of goods.
V Such credits are meant for the purchase of raw materials, processing
of the raw materials, packaging, transporting the goods meant for
export, warehousing .
V Generally, this form of credit is in the form of working capital advances,
loans, cash credit and overdraft.

|




V Any loan or advance granted or any other credit provided by an institution
to an exporter of the goods from India from the date of extending the
credit after the shipment of goods to the date of realization of the
export proceeds and includes any loan or advance granted to an
exporter in consideration of or on the security of any duty drawback or
any cash payment by way of incentive from, the marketing development
fund or any other relevant source.
V The need for post-shipment finance arises because exporters who sell
goods abroad have to wait for a long time before payment is received
from overseas buyers.
V The actual period of waiting depends on the payment terms.
V In the mean time, the exporter has to make payment to the loan
manufacturer of goods or if he is a manufacturer exporter, he has to pay
the suppliers.

|




V Under such circumstances, very few manufacturer-exporters and merchant
exporters have the means to finance the credit terms they extend to
overseas buyer.
V There are number of agencies engaged in providing export finance. Among
the various institutions which promote foreign trade, commercial banks used
to provide export finance in the country.
V Commercial banks provide both pre-shipment and post-shipment credit for
the exporters. Generally banks provide export credit against the security of
irrevocable letter of credit (LCs), confirmed order or the contract placed by
the overseas buyers.
V The post-shipment credit provided by the banks mainly helps the exporters
to face delay in receiving payments from overseas buyers.
V While extending financial assistance to the exporters, banks are governed
by the ˜BI guidelines issued from time to time, the Trade and Exchange
Control ˜egulations and the International Conventions and Codes of the
International Chamber of Commerce.
 &!
|

V =acking credit is available to all types of exporters , manufacturer

exporters, merchant exporters, export houses and even to manufacturers
of goods supplying to merchant exporters and export houses who do not
receive export order in their own name.
V =acking credit advance is generally available to the eligible exporters for
the purpose of purchasing, manufacturing, processing, transporting,
warehousing, packing and shipping . of the goods meant for export
against lodgement of documentary letter of credit established/transferred
in his favour by the overseas buyer or against confirmed order/contract
placed by the buyer for export of goods from India.
V The period of packing credit depends upon the requirements of the exporter.
V The maximum period for which the credit can be granted is 180 days from
the date of disbursement.

|




V The period can be extended by another 90 days at the discretion of the
commercial bank, subject to the additional interest for extended period.
V The packing credit finance amount is decided by the bank on the basis
of export order and the credit rating of the exporter which does not
normally exceed the F¢B value of the goods meant for export.
 &2% 

|

V |

- This is an advance made available to an exporter

only on production of a firm export order or a letter of credit without
exercising any charge or control over raw material or finished goods. It is
a clean type of export advance. Each proposal is weighed according to
particular requirements of the trade and credit worthiness of the exporter.
A suitable margin has to be maintained. Also, Export Credit Guarantee
Corporation (ECGC) cover should be obtained by the bank.

|




V 


  %
 




 - Export finance is
made available on certain terms and conditions where the exporter has
pledgeble interest and the goods are hypothecated to the bank as security
with stipulated margin. At the time of utilizing the advance, the exporter is
required to submit, along with the firm export order or letter of credit,
relative stock statements and thereafter continue submitting them every
fortnight and whenever there is any movement in stock.
V 


 


 - Export finance is made

available on certain terms and conditions where the exportable finished
goods are pledged to the banks with approved clearing agents who will
ship the same from time to time as required by the exporter. The
possession of the goods so pledged lies with the bank and are kept
under its lock and key.
 &#

 |
#

V Where the domestic cost of production of certain goods is high in relation

to international price, Government may grant some incentives to the
exporter so that he may compete effectively in the overseas market.
V Such advances are clean in nature and banks may stipulate a margin
between 20% to 40% of such claims as the percentage of incentive varies
from time to time as published in Government notifications.
V The bank may have any difficulty in assessing the quantum of cash
subsidy payable at any point of time.
V These advances being in the nature of unsecured advances cannot be
granted in isolation and could be granted only if all other types of the
export finance are extended to the exporter by the same bank.
 &&#

 .%.
"
(
V The Government of India have formulated a Duty Drawback Credit
Scheme under which banks are able to grant advances to exporters
against their entitlements of duty drawback on export of goods, free
of interest charges.
V The period of advances will be upto a maximum 90 days beyond which
the bank may not allow the advances or may charge normal interest
applicable to export credit.
 &'.

%|

V When a stipulation is incorporated in the sale contract that the goods shall
be paid by a banker¶s credit, the exporter need not worry whether the goods
will be cleared by the importer on arrival at the destination and the exporter
need not lock up his funds by making payment in advance.
V The importer applies to his banker in his country to open and issue in favour
of the exporter a letter of credit and to pay the beneficiary the amount on
his fulfilling the terms and conditions specified in the letter of credit.
 &). 

(+
1

V Where bills are not covered under letters of credit, the exporter would have
to comply with the terms of the relevant sales contract/firm export order 
V At the request of the exporter, the bank will purchase or discount the export
bill and pay the equivalent rupees to the exporter under post-shipment finance.
 &*#
 
 1  
|

1


V Banks sometimes grant advances, against bills sent on collection basis.

V This may be restored to when the accommodation available under the
foreign bills purchased is exhausted or when some export bills drawn
under letter of credit have discrepancies.
V Such facility may also be granted where it is customary practice in the
particular line of trade and in the case of exports to countries where
there are problems of externalization.
&,#
 
 0

  
|
 1

When the goods are exported by the exporter on consignment basis at the risk
of the exporter for sale and eventual remittance of sale proceeds by the
agent/consignee, a suitable limit for this purpose will be sanctioned by
the bankers to their customer exporters.
 &-#
 
 3
1



V In certain lines of exports, it is the practice of exporters not to draw bills for
the full invoice value of the goods but to leave a small part undrawn, for
payment after adjustments due to differences in weight, quality .
ascertained after arrival and inspection, weighment or analysis of goods.
V In such cases, banks are permitted to grant advances against undrawn
balances till the receipt of remittance from abroad, subject to a maximum
of 90 days.
 &#
 
 
4
%
Banks are permitted to grant advances against retention money, which is
payable within one year from the date of shipment at concessional rate of
interest upto 90 days. If such advances extend beyond one year, they are
treated as deferred payment advances which are also eligible for concessional
rate of interest.
 &!


(+


V Export of engineering goods on deferred payment terms and execution of

turnkey projects and civil construction contracts abroad are collectively
referred to as Õ  

V =roject export contracts are generally of high value - such contracts normally
provide payment of a certain portion of the relative invoice value as advance
or down payment, the balance being payable in installments over a period
of time.
V The financing of project exports is a crucial element due to the time lag
between the actual movement of goods or execution of a project and the
receipt of funds.
V ˜evenues are earned after a considerable gestation period. Such contracts
may be concluded by way of suppliers credit.
V The exporter extends credit directly to the foreign buyer and has to arrange
for finance from a commercial bank/Exim bank.
&
 |
|%8 ||9  

V ˜BI has introduced a scheme called post-shipment export credit

denominated in foreign currency (=SCFC) for the benefit of Indian exporters.
V Under the scheme the exporters are eligible to avail post-shipment finance
denominated in foreign currency with the concessional rate of interest.
V Although the exporter will be paid the Indian rupee equivalent of the export
bill, the indebtedness of the exporter to the banker by way of post-shipment
advance would be designated in foreign currency.
 &



V International trade has grown rapidly in the last few decades, and so in the
cases with the techniques of financing.
V The waiting for payment against export bills for a long time, more particularly
because of the financial and political risks, often creates worrying situation
in export business. Forfaiting is a technique to help the exporter to sell his
goods on credit and yet receive the cash well before the due date.
V The word Õ  

 evolved from the French word Ë   which means, the
exporter forfaits/surrenders his rights or claims to payments which he could
have received in future in lieu of immediate cash payments.

|




V In other words, forfaiting involves encashing future trade receivables now,
at a charge. Forfaiting has emerged as an important tool of financing to an
exporter while retaining the benefits of a cash sale.
V The exporters get the money soon on receipt of the notes from the importer
which are presented to the forfaiter.
V Forfaiting is done without recourse , the forfaiter cannot go back to the
exporter for the recovery of the money which the importer may not have
paid him.
V Thus forfaiting is defined as the nonrecourse purchase by a bank or other
financial institution (forfaiter) of receivables arising from an export of goods
and services.
 &&4
 






V Exporter explaining the forfaiter, giving the following details:
-The type of goods and services to be shipped.
- The price and the currency in which goods and services are to be
shipped is invoiced.
- The name of the importer and the country in which he stays.
V ˜eceiving commitment from the forfaiter for the provision of cash finance
upto a certain limit.
V Contract between exporter and importer specifying that payment will be
made by the importer to the forfaiter.
V Signing of notes/trade obligations by the importer and sending them to his
local bank for necessary guarantees.

|




V Guaranteeing of notes by the importer¶s bank and forwarding them to
exporter¶s bank with necessary instructions to release them to the exporter
against the shipping documents.
V The exporter shipping the goods and presenting the shipping documents to
his bank.
V The exporter¶s bank releasing the notes to the exporter and forwarding
the shipping documents to the importer through the importer¶s bank.
V The exporter presenting the notes to his forfaiter and receiving the cash
discounted proceeds.
 &'
"



V Absence of legal framework
V Lack of data base regarding importers as well as importing countries
V High risk (political, sovereign, transfer and commercial) involved in such
transaction
V =ossible amendment in Foreign Exchange ˜egulation Act, 1973 in terms of
documentation, procedural mechanism, the liability of the export proceeds
.
V ˜esource mobilization
V High cost of finance
V Absence of secondary market .
 &)1 






(+


V +"%$

 - The most outstanding benefit of forfaiting is its
flexibility. The institutions engaged in forfaiting provide the service in a
manner which best meets the needs of the exporter and the importer. The
bank guarantee provided by importer obviates the need to make a thorough
check on creditworthiness of the importer. ¢nly the guarantor bank¶s standing
needs to be verified besides the general economic scenario of the importing
country.

|




V  
% - The exporter needs only to fulfil his commercial
obligations under the contract and submit the correct documents. The
finance is provided by the forfaiter without recourse. This means that
the fluctuations in interest rates and the exchange rates do not matter
during the commitment period. The exporter, therefore, has an assurance
of receiving payment notwithstanding the risks regarding the buyer, the
buyer¶s bank and the buyer¶s country.
V 
4


 m
- The exporter¶s botherations about
administering the sales ledger and collection of payment are taken over by
the forfaiter. This gives considerable relief to exporters.
 &*1 









V --
 - An exporter can offer 100 per cent finance to the
importer through the forfaiting agreement, if that could result in making the
exporter¶s bid more attracting. Goods purchased from different countries can
be clubbed together in one package. The repayment program can be adopted
his needs. Finance can be made available in a wide range of currencies though
most often forfaiters use US Dollars, Deutsche Marks and Swiss Francs.
V +"
 - Factoring allowed the importer to avail not only 100
per cent finance but also finance in a simple, fast and flexible manner.
 &,






V It is a method whereby the factor undertakes to collect the debts assigned

by exporters.
V Money comes to exporters only after collection of bills by the factor.
V Factor acts as an agent of exporters to whom the accounts receivables
are assigned by exporters.
V The factor does not undertake the risk which lies with the exporter.
V ˜elationship between the exporter and the factor continues even after the
assignment of debts by exporters.
V Factoring covers export of consumer goods for relatively short period.
 &!-|
2


V Counter trade is an important source of finance in international trade, in

which the barter deals takes instead of payments in foreign exchange.
V If suppose Country µA¶ imports food grains from Country µB¶ in
consideration petroleum products, it is a counter trade deal.
V These deals avoid the countries maintaining huge foreign currencies reserves.
V Generally third world countries resort to this type of trade due to shortage of
foreign exchange reserves with them.
V Counter trade deals occupies substantial portion in international trade.
 &!.

%|

V Trade between countries is financed mainly through letter of credits known

as Õ 
  
V Goods can be bought and sold with payment of price in various forms like
ready cash, cash against delivery of goods, cash against documents, cash
against acceptance of bills of exchange and so on.
V In case of an international sale transaction, the seller does not desire to
purchase (for resale) or manufacture the goods or after having done so, to
give up control over them, unless he is certain to be paid on his fulfilling the
terms of the contract.
V Similarly, the buyer wants to pay the price only when he has the contracted
goods or at least they are out of the possession and control of the seller.

|




V Thus, a conflict of interest arises. Difference in currency and local laws,
uncertainty of political situation in the countries of the buyer and seller
and ignorance about the other party whereby aggregate the conflict.
V It is here that Õ 
  comes to the rescue of the parties and
promotes International trade.
V Letter of credit is a method of making trade payment, especially while
dealing with unknown traders.
V Through this instrument, it is ensured of specific performance by both the
parties , importer as well as seller.
V The importer makes an application to his banker (issuing bank) to establish
letter of credit in favour of the beneficiary, though another bank (known
as correspondent bank).
V The correspondent bank shall in turn advise the beneficiary or beneficiary¶s
bank (advising bank).
 &!!
|
1
0

;. 


V A letter of credit differs from a bank guarantee.

V A letter of credit is independent of and unqualified by a contract of sale.
V A vendor of goods selling against a confirmed letter of credit is selling
under the assurance that nothing will prevent him from receiving the price.
V =ayment under a letter of credit does not depend on the performance of
obligation on the part of the vendor except those which the Õ
  
expressly imposes.
V ¢n the other hand, a bank guarantee has a dual aspect.
V It is not merely a contract between the bank and the beneficiary of the
guarantee, it is also a security given to the beneficiary by a third party.
V Unless there is some act of omission or commission on the part of the third
party, payment under a bank guarantee does not become due.
 &!(+
|
 


V =ayments for exports are open to risk even at the best of times.
V The risks have assumed large proportions today due to the far reaching
political and economic changes that are sweeping the world.
V An outbreak of war or civil war may block or delay the payment for goods
exported.
V A coup or an insurrection may also bring about the same result.
V Economic difficulties or balance of payments problems may lead a country
to impose restrictions on either import of certain goods or on transfer of
payments for goods imported.
V In addition, one has to contend with the usual commercial risks of insolvency
or protracted default of buyers.

|




V The commercial risks of the foreign buyer going bankrupt or losing his
capacity to-pay are heightened due to the political and economic uncertainties.
V Conducting export business in such conditions of uncertainty is fraught with
dangers.
V Credit Insurance policy covers the payment risk arising out of nonpayment
by overseas buyers and countries for the goods and services exported from
India.
V Credit insurance usually pays around 80-90 per cent of invoice or receivable
that remains unpaid as a result of protracted default, insolvency or bankruptcy
of the overseas buyers or risks specific to the importing countries such as war,
civil war, restriction on remittances, ban on the import of goods .
V The policy is bought by exporting entities to insure their accounts receivable
from losses following the insolvency of debtors.

|




V The FEMA and banking laws make it mandatory for exporters to bring in
foreign currency during the stipulated period.
V ¢nce an exporter receives payment from the overseas buyer, he needs to
get his G˜ form released by the bank.
V In case the overseas buyer defaults, the exporter approaches the insurance
company for settlement of claims.
V The loss of a large payment may spell disaster for any exporter whatever is
his prudence and competence.
V ¢n the other hand, too cautious an attitude in evaluating risks and selecting
buyers may result in loss of hard-to-get business opportunities.
V Export credit insurance is designed to protect exporters from the
consequences of the payment risks, both political and commercial, and to
enable them to expand their overseas business without fear of loss.

|




V Export credit insurance also seeks to create a favourable climate in which
exporters can hope to get timely and liberal credit facilities from banks at
home.
V For this purpose, export credit insurer provides guarantees to banks to
protect them from the risk of loss inherent in granting various types of
finance facilities to exporters.
 &!(+
|
0


|







V In order to provide export credit insurance support to Indian exporters,

the Government of India set up the Export ˜isks Insurance Corporation
(E˜IC) in July, 1957.
V It was transformed into Export Credit and Guarantee Corporation Limited
(ECGC) in 1964.
V To bring the Indian identity into sharper focus, the Corporation¶s name
was once again changed to the present Export Credit Guarantee
Corporation of India Limited in 1983.
V ECGC is a company wholly owned by the Government of India.
V It functions under the administrative control of the Ministry of Commerce
and is managed by a Board of Directors representing Government,
Banking, Insurance, Trade, Industry, . The present paid-up capital of
the company is ˜s. 900 crore and authorized capital is ˜s. 1,000 crore.

|




V ECGC has launched a number of new export credit risk insurance products
so as to suit the requirements of Indian exporters and commercial banks.
 &!& # 
#"%(|0|

V ECGC provides policies to exporters which are designed to cover short-term

export credit risks. The policy covers both commercial and political risks
from the date of shipment.
V ECGC has introduced many policies such as Ë 
ð
' and
Ë

Ë
V ¢ther covers provided by ECGC include Ë
  
', introduced
as a credit insurance cover to meet the needs of software exporters.
V The Ë


ð 

' is issued to cover the commercial and
political risks involved in rendering IT-enabled services to overseas customers.
V Covers are issued to banks in India to protect them from the risks of loss
involved in their extending financial support to exporters, both at pre and
post-shipment stages.

|




V Specific policies are designed to cover exports of goods and services on
deferred terms of payment under medium and long-term exports.
V Covers are also available for supplies, civil constructions, turnkey projects
and also provided for Ë Ë
 Ë and Ë


  Ë.
V ECGC offers special schemes such as Ë


 

' meant to protect
banks which add confirmation to letters of credit issued by foreign banks.
V The Corporation also issues Ë
 
   ð' to the exporters and
banks, also termed as Ë
  ð
Ë which will address the specific
risk cover requirements of exporters and banks.

|




V ECGC has started export factoring services under which an exporter can avail
finance and credit insurance under one roof.
V ECGC also provides marine insurance covers free of cost to all its exporters
holding specific covers.
V The Corporation plans to introduce Ë 
  


 ð
Ë
 &!'(+

1



V Export Import Bank of India (EXIM Bank) was set up in September 1981
under an Act of parliament The Export-Import Bank of India Act, 1981 with
an objective for providing financial assistance to exporters and importers,
and for functioning as the principal financial institution for coordinating the
working of institutions engaged in financing of export and import of goods
and services with a view to promoting the country's international trade and
shall act on business principles with due regard to public interest.
V Exim Bank is managed by a Board of Directors, which has representatives
from the Government, ˜eserve Bank of India, Export Credit Guarantee
Corporation (ECGC) of India, a financial institution, public sector banks,
and the business community.

|




V Exim Bank plays four-pronged role with regard to India's foreign trade:
those of a coordinator, a source of finance, consultant and promoter.
V Exim offers a diverse range of information, advisory and support services,
which enable exporters to evaluate international risks, exploit export
opportunities and improve competitiveness.
 &!)
 
(<41

V |


1
0
 - It handles a variety of financing programs
for Export ¢riented Units (E¢Us), Importers, and overseas investment by
Indian companies.
V 

/2

0
 - It handles the entire range of
export credit services such as supplier's credit, pre-shipment credit, buyer's
credit, finance for export of project services, guarantees, forfaiting .
V  
|0
 - Lines of Credit (L¢C) is a financing mechanism
that provides a safe mode of nonrecourse financing option to Indian
exporters, especially to small and medium enterprises, and serves as an
effective market entry tool.
V 1  0
 - It is aimed to spearhead the initiative to promote
and support Agri-exports. The group handles projects and export
transactions in the agricultural sector for financing.

|




V 

4(  0
 - It handles the specific financing
requirements of export oriented SMEs. The group handles credit proposals
from SMEs under various lending programs of the Bank.
V (+
 # 0
 - It offers variety of advisory and value-added
information services aimed at investment promotion.
V "
(+
4
 # - Bank offers assistance to
Indian companies, to enable them establish their products in overseas markets.
 &!*(+
|
 
(<41

V  | - Exim Bank's pre-shipment credit facility, in Indian
˜upees and foreign currency, provides access to finance at the
manufacturing stage-enabling exporters to purchase raw materials and
other inputs.
V @ | - This facility enables Indian exporters to extend term
credit to importers (overseas) of eligible goods at the post-shipment stage.
V 

(+
 - Indian project exporters incur ˜upee expenditure
while executing overseas project export contracts  costs of
mobilization/acquisition of materials, personnel and equipment .
Exim Bank's facility helps them meet these expenses.

|




V 
(+
 
|
 
%
2 


 # - Exim Bank
offers a special credit facility to Indian exporters of consultancy and
technology services, so that they can, in turn, extend term credit to overseas
importers.
V 0


 - Indian companies can avail of these to furnish
requisite guarantees to facilitate execution of export contracts and import
transactions.
 &!,

(+
$3 
(<41

2
8
+


 9
- =roject finance
- Equipment finance
- Import of technology and related services
- Domestic acquisitions of businesses/companies/brands
- Export product development/˜esearch and development
- General corporate finance
7
|


8
+


 9
- Working capital term loans (less than 2 years)
- Long-term working capital (upto 5 years)
- Export bills discounting
- Export packing credit
- Cash flow financing
5

- Letter of credit limits
- Guarantee limits
 &-

5
+
|

 
(<41


7
|



- Bulk import of raw material
2

- Import equipment
(+


- =re-shipment credit
- =ost shipment credit
- Buyers' credit
- Suppliers' credit (including deferred payment credit)
- Bills discounting
- Export receivables financing
- Warehousing finance
- Export lines of credit (nonrecourse finance)

|




(>%


8


 9
- To part finance project expenditure (project,

includes new
project/expansion/acquisition of business/company/brands/research
and development).
 &1

|

V The bilateral credits are government protocol credits or the credits, which
are given by friendly foreign countries at concessional rates of interest, to
finance the imports from the donor country.
V Under the bilateral credit, the procurement source is tied to goods and
services of the donor country. In this scheme the exporter gets paid by the
donor country against shipments or progress bills as the case may be and
the donor country treats payments to exporters as disbursements under the
bilateral credit to the borrowing country.
V These credits are not available for commercially viable projects, so that the
funds meant for development of basic needs are not diverted to subsidize
exports from a country.

|




V This credit is generally given to the government of the donee country and
is passed on in a combination of the below three forms and the grant element
cannot exceed 35% in a mix of the below three packages taken together as
per the ¢ECD guidelines:
V 0
 - This is a type of bilateral credit, provided by a friendly country at
zero rate of interest under a protocol signed by the two countries.
V


 - These loans are given at a rate, which is much below the
prevailing market rate of interest. These loans have longer maturity periods.
V (+
| - Export credit loans are given at the interest rates prevailing
in the market. These loans are given at commercial reference interest rate.
With a view to stimulate the export the export of goods and services major
export credit agencies have been set up by governments across the world.
Government supported export finance is an attractive financing alternative
for companies seeking to expand into international markets.
 &!  
|

V Another source of finance are the export credit agencies of the different
countries interested in supplying equipment.
V It is always possible that a proportion of the cost of particular project will
be provided by the sponsoring government.
 & 
(

=


V A special economic zone (SEZ) is a specially demarcated area and

special policies and laws are framed for it, which are not applicable to
other areas of the country.
V The rationale behind the establishment of SEZs is to boost economic
liberalization with primary focus on the promotion of export-oriented
production in the country.
V An SEZ is a geographical region that has economic laws that are more
liberal than a country's typical economic laws.
V The SEZ is a new concept increasingly seen as an alternative way of
economic growth through exports and duty exemption.
V In India, Special Economic Zones Act, 2005 was enacted to create specifically
delineated duty-free enclaves.

|




V The promotion of SEZ is an attempt to deal with infrastructural deficiencies
and procedural and bureaucratic complexities caused by monetary, fiscal,
taxation and labour laws.
V An SEZ can be defined as 'an industrial zone with special incentives, set up
to attract foreign investors, in which imported materials undergo some
degree of processing for value addition before being exported again.'
V An SEZ is a modification of concept 'Export =rocessing Zone'.
 &$" # 
 
 SEZ

V to attract investment to the country, particularly, foreign investment.

V to create employment and to improve living standards of the people.
V to enable transfer of improved technology to the country.
V to enable economic development of the country.
V to foreign exchange out of export of goods manufactured from SEZ units.
V to attract foreign direct investment to boost the process of creating
infrastructure and for creating new industrial enterprise.
V to enhance the competitive ability of products manufactured in India.
 &&

 
 
 (=

V Units approved under SEZ scheme would be permitted to set up SEZ.

V The SEZ units shall abide by local laws, rules, regulations or byelaws as
exacted by the government. They shall also comply with industrial and
labour laws which are locally applicable.
V Security arrangements will be provided by the SEZ.
V The SEZ should have a minimum area of 1000 hectares and at least 25% of
the area is to be earmarked for developing industrial units.
V Minimum area will not be applicable to product specific and port/airport
based SEZs.
V Wherever the SEZs are land-locked, an Inland Container Depot (ICD) will
be an integral part of SEZs.
 &'> 



 (=

V SEZs should be set up only on barren land.

V Acquisition of land in critical conditions should be limited to single crop
agricultural land.
V In case of any double crop agriculture land has to be acquired to meet the
minimum area for SEZ and it should not be more than 10% of the total area.
&)(+
 ?.
"
 
|
 
  (=

V Exemption from any duty of customs, under the Customs Act, 1962 or the
Custom Tariff Act, 1975, on goods imported into, or services provided in a
SEZ or a unit in it.
V Exemption from any duty of Customs Act 1962 or the Customs Tariff Act,
1975, on goods exported from, or services provided from a SEZ or from
a unit.
V Exemption from excise duty under the Central Excise Act, 1944 or the
Central Excise Tariff Act, 1985, on goods brought from Domestic Tariff
Area (DTA) into SEZ or unit.
V Drawback or such other benefits as may be admissible from time to time on
goods or services provided from DTA into SEZ or unit.
V Exemption from Service Tax under Chapter V of the Finance Act, 1994 on
taxable services provided to a developer or unit in SEZ.

|




V Exemption from the Securities Transaction Tax levied under section 98 of
the Finance Act, 2004 in case the taxable securities transactions are entered
into by a non-resident through the International Financial Service Centre.
V Exemption from the levy of taxes on the sale or purchase of goods under
the Central Sales Tax Act, 1956.
 |
'



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V A public sector enterprise (=SEs) is a business undertaking owned,
controlled and managed by the state, on behalf of and for the benefit
of the public at large.
V The basic objective of public enterprising is to achieve the strong
industrial base and to provide infrastructure for the development of
the economy of the state.
V The concepts of Financial management are equally applicable to both
private sector undertakings and =SEs, but the rules, procedures,
accountability of financial decisions are more rigid in =SEs, as they
are financed by the government out of taxes collected from
the public.

|




V The nature of public sector accounting is quite different from that
adopted by the private sector.
V The majority of the public sector industries are budget financed by
the Central or State Governments depending on the ownership and
also receive the largest portion of their funds in the form of grants
from the government.
V They are subject to a high degree of direct and indirect regulation
as regarding funding and pricing policies.
V The public sector accounting information need to prepare to the
requirements of wider and more diverse group of interested
parties than in the private sector.
 '!$" # 







V Financial information useful for making economic, political and

social decisions and demonstrating accountability and stewardship.
V Information useful for evaluating managerial and organization¶s
performance.
V Information useful for planning and budgeting, and for predicting the
impact of the acquisition and allocation of resources on the
achievement of operational objectives.
V Financial information useful for determining and predicting the flows,
balances and requirements of short-term financial resources of the
public sector unit.
 '(%
V It is the audit which ensures that every rupee invested yields
optimum results.
V The main objective of efficiency audit is to ensure that:
- there is most optimum utilization of investment, and
- that investment is channelized in most profitable lines.
V Efficiency audit indicates towards appraisal or scrutiny of actual
performance with reference to expected efficient standards.
V The parameters based on which efficiency audit is conducted are:
- return on capital
- capacity utilization
- optimum utilization of men, machines and materials
- export performance and import substitution
- liquidity position
- payback period .
 '
%

V It is an examination of actions and decisions to find out whether they

are in public interest and meet the standards of proper conduct.
V The propriety audit is concerned with examining that there is no
leakage of revenue or wastage of funds by mistake or fraud.
V It is concerned with ascertaining appropriateness from legal,
financial or economic point of view.
V The use of public money in =SEs, requires proper utilization.
V Each =SE will have to follow clearly laid down rules, procedures
and authorizations while spending the funds.
V The approval of expenditures is governed by the principle of
Õ  which requires to answer the following questions:

|




- whether the proposed expenditure is justified.
- whether the alternative ways exists in minimization of cost.
- impact of the expenditure on the overall business.
- whether the expenditure is properly authorized as per the internal
procedures laid down.
- whether the expenditure is incorporated in the budget approved
by board of directors.
- whether the expenditure to be incurred in exceptional cases,
proper authorization and financial concurrence is obtained
from the competent authority.
 '&1
# 

1
V The budget of =SE is prepared on the basis of Õ 
concept
by the Budget ¢fficer of the Accounts and Finance Department and
placed before the board of directors for approval.
V The approved budgets forms the basis for approval of expenditures
incorporated in the budget subject to procedural authority.
V Sometimes, mismatch of cash inflow and cash outflow arises, then
the expenditure is controlled to bring balance with cash inflow.
V If there is any substantial change take place after completion of first
or second quarter, the revised budget is submitted to the board of
directors for approval.
V The revised budget is adopted only when there is a gross failure to
achieve the original budgeted results.
V The deficiencies in original budget may be covered up while
preparation of revised budget.
 '' 





V The strategic financial planning in =SEs requires to concentrate in

aligning the conflicting financial objectives.
V For =SEs seeking to make investment decisions, the concept of N=V
may not be regarded as entirely appropriate.
V That is, the principle of discounting remains valid but, since the
objective is no longer simply profit maximization, what are
regarded as the cost and benefit of a project must be re-specified.
V In business organizations, investment decisions can be evaluated
using discounted cash flow techniques and a project might be adopted
if it will add to the wealth of the organization and its owners.
V But in case of =SEs, there are social objectives for investment
decisions and investments are required to be measured in terms of
social costs and social benefits.

|




V For a private sector project, the rate of discount is the marginal or
weighted average cost of capital for the business.
V In public sector, the selected discount rate of discount must reflect
the cost of investment funds to society as a whole, so it is generally
referred to as a Õ

  
 
.
V A market rate of interest forms the starting point for determining
a social rate of discount and this will then be adjusted to a level
which ensures an optimal consumption, investment ratio, this
optimum is government determined.
V =SEs are organized mainly as departmental enterprise or statutory
corporation or companies.
V The strategic financial planning in public sector requires to consider
the following:
- The development of an adequate financial information system
which would enable them to monitor and forecast external
parameters and assessment of internal capabilities.
- The existence of clear strategic financial objectives.
- The coordination of the plant with the government¶s economic,
social, fiscal and monetary policies.
 ')

#

V The Financial Advisor occupies a pivot role in management of =SEs.
V He acts as a principal advisor on financial matters to the chief
executive of the enterprise and renders financial advisory services
to the committees.
V The Financial Advisor will help the =SEs in the following matters:
- Estimation of short-term and long-term financial needs of
the enterprise.
- Formulation of financial policies and authorization procedures.
- Determination of the level of activity and setup of
cost-volume-profit relationships of different activity levels.
- Evaluation financial and economic viability of the project,
feasibility reports, social costs and benefits.
- ˜eview of cash flow and operational performance on periodical
basis.

|




 - Advising on capital expenditure proposals.
- Conduct of special studies on cost, reporting on feasibility
of cost management and control programs.
- Submission of periodical reports on operational and
financial performance of the enterprise to the Chief
Executive.
- Analysis of financial results of all operations and advising on
future operations of the enterprise.
 '*7
|

4


V In =SEs, the gross working capital  the investment in current
assets is considered.
V The size of working capital and the level of current assets is
used for optimization of productivity of other assets, and estimation
is made to support a given volume of output or prescribed level of
activity.
V While determination of size of working capital, the management¶s
attitude towards risk and the operational aspects are taking into
account.
V The sources available for working capital finance is restricted in
case of public sector and operates in a typical decision environment.

|




V The investment policy is dependent on social and economic policy
of the government. The retained earnings and depreciation are
a permanent source of working capital, which can be used only
when the unit is in operation.
V Trade credit is not considered as a source of finance, since the
working capital of =SEs are considered under the Õ


 concept.
',

 


7
|

4

 (

V ¢ver stocking of inventory in =SEs resulting in blockage of funds

and consequently causes disruption in production schedules.
V Generally, the cost of project do not make any provision for working
capital margin. If the long-term sources are not generated for working
capital, it is required to rely on short-term sources.
V The =SEs are generally capital intensive projects and its current assets
to fixed assets ratio is very low.
V There is a need for selling the products in bulk, obviates the need
for discount and credit policies.
V The opportunity cost of idle resources is neglected.
V The lead times in procurement of material is inordinately long
and excessive inventories are carried to Õ

 which occupies
substantial space.

|




V The production cycle is often much longer due to process imbalance,
causing huge stocks of work-in-process, and operating cycle of
working capital also tend to be longer.
V There would be substantial under utilization of capacity, but the stock
levels are maintained at very optimistic levels.
V =SE much rely on short-term sources for financing working capital.
Commercial banks supply major quantum of working capital since
the risk involved is less.
V The concept of Õ


ð

 is totally neglected.
V The cost of production is substantially high in =SEs as compared
to private sector. The monopoly market, often encourages to
continue its operation.

|




V Its major customers would include other government departments
and agencies, causing substantial delay in collection of receivables.
V Due to working capital shortage, the units may have to lookup
for special grants from government, ultimately leads to industrial
sickness.
 '-$" # 
|

1 (

V To express in financial terms capital works necessary to meet

the objectives expressed or implied of an organization within
an accounting period or periods.
V To set out the agreed priorities of capital schemes.
V To facilitate coordination of plans and resources by:
- allocating the financial resources between departments.
- assisting in implementation of capital expenditure schemes.
- providing a basis for forecasting cashflows and financial
requirements.
- providing a basis for forecasting revenue implications.
- providing a basis for budgetary control.
- to satisfy government control requirements.
 '  "# . 


V The =lanning Commission formulates the five year plan indicating the
broad strategy of planning, the role of each sector, the physical
targets to be achieved by each sector and the financial outlays to be
made available for the development of each sector.
V The administrative ministries develop sectorial plans. It is in these
plans that the projects of the =SEs are identified. The identification
of a project provides the green signal for the preparation of its
feasibility report.
V The concerned =SE prepares the feasibility report and forwards
it to its administrative ministry.

|




V The administrative ministry carries out a preliminary scrutiny of the
feasibility report and sends copies of the same to the various
appraising agencies viz., =lanning Commission, Department of
Economic Affairs, =lan Finance Division of the Finance Ministry and
the Bureau of =ublic Enterprises (B=E) for their comments.
V The =roject Appraisal Department (=AD) of the =lanning Commission
carries out a detailed appraisal.
V The Investment =lanning Committee of the =lanning Commission
discusses the appraisal note of the =AD and recommends to the =IB
the view of the =lanning Commission on whether the project
should be accepted, rejected, deferred, or redesigned.

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V The =ublic Investment Board (=IB) considers the:
- Appraisal note of the =AD along with the view of the
=lanning Commission.
- The comments of the B=E.
- The comments of the =lan Finance Division of the Ministry
of Finance.
- The note of the Administrative Ministry.
If the =IB clears the project, it sends to the Cabinet for its approval.
V The Cabinet generally accepts the recommendations of the =IB
and approves the implementation.
 '!|
1
% 
V The basic notion of investment appraisal is very simple.
V It involves defining the objectives of the organization, identifying
the capital projects that will achieve the objectives, evaluating the
costs and benefits of each project, making a decision on whether to
accept or reject the project. In public sector investment appraisal,
social cost-benefit analysis is used.
V Under CBA, the decision criterion is that a project should be
undertaken providing that the discounted value of the social benefits
attributed to the project exceeds the discounted value of the social
costs attributed to the project.
V Social benefits are not solely restricted to cash returns but include
any favourable effects that may affect members of the community
at large.

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V Many of the costs and benefits of =SEs are not directly measurable
in money terms, that the techniques of cost-benefit analysis
are appropriate.
V Cost-benefit analysis is concerned with assessing all of the economic
and social advantages (benefits) and disadvantages (costs) of a
project and then quantifying these in monetary terms.
V If the social benefits exceed social costs then project would be
sanctioned.
 '


V |

  
 - The capital structure decisions in =SEs
involves the identification of various sources of finance. In practice,
the government finances =SEs half the requirements in the form of
capital and the balance half in the form of loan.
V
 
  The sources of funds in =SEs, more or less
similar to private sector undertakings, can be classified into:
(a) internal sources, and (b) external sources. The internal sources
of funds include retained earnings, depreciation provision .
V 5

 - In case if =SEs are incurring cash losses or
suffering for payment of wages, the government may provide non-plan
fund to sustain its day-to-day operations and for payment of wages.
The non-plan funds are provided by government only when justification
is given by =SEs to the concerned administrative ministry.

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V 
%
 The supplementary grant is provided
by the government if the actual requirement of funds exceeds
the estimated amount. This supplementary grant is provided when
full justification is given by the =SEs to the concerned
administrative ministry.
 '


%
 (
V Administered and controlled pricing by the government
V Socioeconomic objectives to be achieved
V Subsidies available to the public enterprise
V Subsidies available to the users of the enterprises products
V State of financial health of the enterprise
V Degree of control on the enterprise by the government
V Impact of liberalization policies of the government
V Government attitude towards the enterprise
V Nature of product/service relevance to economic condition
V The market structure for the product
V Goals of the enterprise  profitability of social goal 
 '&|
  
   (

V Short tenure of managers appointed by Government to manage

these units - thus they take steps for short-term gains ignoring
long-term implications - 
 buying industrial peace ignoring
long-term effects of indiscipline, giving wage rises without
consideration of productivity rise, ignoring quality for production etc.
V A really sick company without any hope of revival cannot be kept
alive for long by artificial means.
V Government was indeed never serious about making the =SEs
profitable as the main emphasis was on employment generation
and employment protection. Hence, many =SEs are highly
overstaffed.

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V =SEs were treated as Õ
  under Article 12 of Constitution by
Supreme Court and hence employees got much more protection
than that is available to other employees, which consequently led to
indiscipline and low productivity.
V Less flexibility prevails in =SEs. Business needs quick decision and
action. This is not possible in a bureaucratic organization.
V =sychology of human beings is basically selfish, and he can work
best only when he has something personally to gain.
V Constant fear of CAG audit queries and parliamentary questions, which
increases tendency of Õ



 
 and delaying decisions.

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V Due to a judgment of Supreme Court, many contract labourers
had to be absorbed. This has abnormally increased wage costs
and efficiency is lowered.
V =olitical interference and corruption is high in =SEs.
 ''0#
:



V The concept of Õ

 
 ð   
refers to the following elements
- reforming of =SEs,
- reduction of state involvement in =SEs
- reduction of =SEs involvement in nation¶s economic
activities and
- division of industries between public sector and private
sector, and
- allocation of strategic activities to public sector and
economic activities to private sector.
V The new economic policy of 1991 first introduced the break through
concept of Õ

 
 ð   
, advocating the privatization
of =SEs to improve its efficiency and to reduce the budgetary
support and involvement of state in =SEs.
 ')

 
 (
V .  - The new industrial policy introduced by Government
in 1991 has taken bold steps in liberalizing licensing policy of private
sector and now many a industry need not obtain industrial licence
except fulfillment of bare formalities and procedures.
V 
1


 - =reviously the inefficiency crept
in =SEs has caused substantial budget allocations to meet working
capital needs. Now, the =SEs are informed of self sustenance
by increasing profitability and to reduce dependence on budget
allocations.
V 

%.%  - The reduction in customs and excise
tariff allows the indigenous industries to meet the global competition,
integrating the Indian industry with global economy to enable free
trade in compliance with WT¢ trade agreements.

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V . 
4
 %  - The current economic and business
conditions require a quick decision making system to enable the
=SEs to respond to fast changing business and market conditions.
The reforming process considering the importance of decision
making systems, allows the =SEs to evolve their own policies for
procurement of material, investment decisions, financing decisions,
pricing of products, wage structure .
V The measures for reforming the =SEs include the following:
- ˜eforming =SEs by signing Memorandum of Understanding
(MoU) and Green Field =rivatization.
- Selling the shares of =SEs, partly or wholly, to the private
sector or to general public.
- Allowing to close down =SEs, which cannot be revived.
 '*. # 
V The public sector is now concentrating on selective activities and
investments are focussed on strategic high-tech and essential
infrastructure.
V Now the =SEs are signalled for self sustenance and to stop relying on
government¶s budgetary support.
V Disinvestment is a process in which the holding concern reduces
its portion in equity by disposing its shareholdings.
V µDivestment¶ as per SEBI (Substantial Acquisition of Shares) Guidelines,
means the sale by the Central Government/State Government, of its
shares or voting rights and/or control, in a =SE.
V =rivatization means giving the entire management control over the
=SE to private enterprising.

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V In disinvestment process, the government may retain partial control
with it and disposing its holding to some extent.
V The disinvestment reduces the government participation in the
company. =rivatization is just opposite situation of nationalization.
V Under process of privatization, government sells their equity
shares to employees, mutual funds, individual persons and their
organizations.
V Disinvestment always forms part of privatization.
 ',

  
. # 


V According to first approach, wherever government sells its equity
holding in =SEs to public or private parties, financial institutions
and mutual funds . It is called as disinvestment.
V According to second approach, when =SEs are generally directed
by the government to issue their equity shares to the public,
private parties, financial institutions and mutual funds with a view
to reducing its control, that is also taken as disinvestment.
 '!-|

#
:


>


V whether the objectives of the company are accomplished
V whether there is any decrease in number of beneficiaries
V whether serving the national interest will be affected on
disinvestment
V whether the private sector can efficiently operate and manage
the enterprise
V whether the original rate of return targeted could not be achieved
V whether the socioeconomic objectives lost its purpose.
 '!$" # 
. # 
V #

 - The government is making a way out of
necessity to raise revenues for bringing down the fiscal deficit as
commitment made to the IMF.
V 
#% - This is being undertaken to ensure
greater accountability and improved efficiency. These financial
institutions and mutual funds are expected to off load them into
the secondary market.
V 4
  - Disinvestment is resorted to meet budgetary
targets and to bring the =SEs to meet the market discipline,
competitiveness and to emphasize on profitability and maximization
of shareholders wealth.
V 
 
":

 - With the help of disinvestment program,
government would be in a position to garner sufficient resources.
¢ut of such funds, government can make available some funds
as loan to =SEs.

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V .



" - Such disinvestment would
enable the public, to participate in the equity of =SEs.
V (


%
  - This would encourage the
employees to buy shares of =SEs and thereby become their
owner also. This would ultimately develop the sense of
belongingness among them. It may motivate them to work
harder and improve the work culture.
V 

"



 - With the reduced holding
of the government in the equity of =SEs, the bureaucratic hold
and control would also be reduced considerably.
 '!!. #  
%
V 



 
"
 - The list of companies
offered in the first phase of disinvestment had to be limited to those
companies whose investments in market appreciates without much
difficulty and price reasonably. Later on companies were categorized
in three categories - A, B and C.
V 
 >%- The pricing formula adopted for the referral
price was average of NAV (Net Assets Value) and =ECV (=rofit-Earning
Capacity Value) at 10% industry capitalization rate. This was as
existence at that time.
V 



 # 
  - A direct offer of shares
to the public was not feasible because even with the most
sophisticated valuation skill a fair issue price on company by company
basis was possible to determine since the =SEs were unknown to
the market.
 '!4
 
M




  ( . # 

V Net assets value (NAV)

V =rofit-earning capacity value (=ECV) method at capitalization
rate of 4% to 8%.
V Discounted cash flow (DCF) method based on about 5 years
discounted rate.
 '!4
 
. # 

V 2

 - This recommendation involve 100% change of

ownership through direct sale of shares at a fixed price. Depending
on the size of the offer and the state of the capital markets,
the process may need to be phased over a period of time.
V 

 - The strategic sale transaction of a government
company will consist of two elements: (a) Transfer of a block of
shares to a strategic partner, and (b) Transfer of management
control to the strategic partner. A strategic sale may involve
selling of a (i) substantial stake with management control,
or (ii) minority stake supplemented by technology transfer
arrangements.

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V $

 - This measure involves partial sale of equity
ownership at a fixed price by a book-building process. The need of
the =SEs for additional capital will also be taken into account by
creating additional shares. The commission recommended
reservation of a sizeable quantity of shares for offer to the small
investors and =SE employees.
V |




 - In case, there is no Õ
ð
 


in the company, the commission is of the view that there would be
no option but to close down the operations of the company and
liquidate all its assets and liabilities.
 '!&
#

. # 

V The basic problem with =SEs is neither the quality of assets nor
the skilled manpower, but the overall decision making system.
These enterprises would realize true potential only when they are
privatized. In private sector, the decision making process is quick
and decisions are linked with the competitive market changes.
V The disinvestment and privatization process would bring in better
corporate governance, transparency, corporate responsibility,
exposure to competitive forces, improvement in work
environment .

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V The market participation in capital of =SEs through stock exchanges
would enable the market to discover the latent worth of =SEs. The
market capitalization also increases.
V The loss making =SEs can be successfully revived by asking
the strategic partner to infuse fresh capital and by exercising
excellent management control over sick =SEs.
 '!' 
 . # 


V Selling of profit making and dividend paying =SE would result in loss
of regular source of income to the government.
V There would be chances of Õ


 

 by the strategic partner.
Most of =SEs have valuable assets in the shape of plant and machinery,
land and buildings etc. It may be possible that the strategic partner
may very well dispose of these assets, make money, leaving the
=SEs as a sick enterprise.
V The government¶s policy of disinvestment includes the disposal of
both profit making, as well as, potentially viable =SEs.
 '!)  . # 


V =roposals for disposal of any =SE, based on recommendations of

Disinvestment Commission (DC) or Cabinet Committee on
Disinvestment (CCD).
V After CCD clears, selection of Advisor through competitive bidding
process.
V The Advisor assists Government of India in the preparation and
issue of µExpression of Interest¶ in newspapers.
V After receipt of Õ


 

 from interested parties,
prospective bidders are short-listed.
V Õ


 by the concerned =SE.

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V Based on Õ


 by =SE, the Advisor prepares
µInformation Memorandum¶ for giving it to the short listed bidders
who has entered into a µConfidentiality Agreement¶.
V Advisor, with the help of Legal Adviser, prepares Share =urchase
Agreement.
V Discussions among Advisors, Government and ˜epresentatives of =SE.
V Valuation of the =SE in accordance with the standard national practice.
V The Õ
 


 and Õ
 




are finalized, based on the reactions received from the prospective
bidders.
V These agreements are then vetted by µMinister of Law¶ and are
approved by Government.

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V Thereafter, these are sent to prospective bidders for inviting for
final bidding.
V The bids received are examined, analyzed and evaluated by the
µInter Ministerial Group¶ and placed before the CCD for final
approval of bids.
V After the transaction is completed, all papers and documents
relating to it are to be turned to the µComptroller and Auditor
General of India¶, to enable to undertake an evaluation of the
disinvestment, for placing it in =arliament and releasing it to
the public.

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V In the disinvestment process mentioned above, the µDepartment of
Disinvestment¶ is assisted, at each stage by µInter Ministerial Group¶
comprising officers from the µMinistry of Finance¶, Department
of =ublic Enterprises, The administrative Ministry, Department
controlling =SEs (Department of HI and =E) and ¢fficers of
Department of Disinvestment and Advisors.