ROLE OF MULTINATIONAL CORPORATIONS (MNCs) IN GLOBALISING INDIAN ECONOMY- A CASE STUDY OF HINDUSTAN LEVER LIMITED (HLL)
ABSTRACT THESIS ' submitted for the award of the degree of Bottor of $I)tlosiopI)p
IN COMMERCE ,
By MOHAMMAD FAYAZ
Under the Supervision of DR. MOHD. ASIF ALI KHAN
DEPARTMENT OF COMMERCE ALIGARH MUSLIM UNIVERSITY ALIGARH (INDIA) 1999 -.:>5-ii?5:X, ^-^•^ « , '1 >
I Acc. No ) ABSTRACT
Growth of Multinational Corporations (MNCs) can be divided into four phases: first phase runs upto the First World War. During this phase most of the companies emerged from Europe. Second phase started after the world war second. Third phase started in 1970s and 80s. During this phase new MNCs emerged from Japan. Fourth phase covers recent developments pertaining to role of MNCs in globalization of national economy. It is a march towaards the goal of creating international new economic order. During this phase companies mainly came in the information technology sector. Now the world economies both developed and developing are buzzing with the activities of MNCs in a variety of ways, e.g., FDI inflows and outflows, M &A, Joint venture, services, etc. The investment flows have tremendously gone up. The international production has expanded. Till the end of 1998, there were 53000 MNCs and 448000 foreign affiliates, which are playing key role with their vast assets and competitive potentialities. The worldwide investment by multinational corporations of $236 billion in insurance, telecommunication, chemical, pharmaceuticals and banking speaks volume of globalization during the current decades. Asian countries are the new investment centres for foreign investment. These countries are providing numerous facilities to the foreign investor in the form of vast size of the market, cheap availability of skilled and unskilled labour, marketing incentives and great deal of opportunities for induction of technology.
The problem linked with the MNCs is the choice of place and product. They actually want to operate only in those areas where infrastructure facilities are well developed. This resulted in unbalanced development of the host economy. MNCs generally did their R &D programmes in their parent countries with an objective of establishing supremacy of technology and product innovations.
MNCs are producing goods on mass scale by using capital intensive technology, which in turn creates fewer opportunities for employment. Most of the MNCs are having their prime motive to maximize profits. MNCs are promoting consumerism. Their gigantic size is also posing numerous problems for host countries.
A huge amount of funds flows out of the host country in the form of payment of dividends, profit, royalties, technical fees, know-how fees and interest to the foreign investors. The technologically less developed domestic industrial units can not enjoy the facilities of merger and acquisitions.
The present study is having the following objectives:
1. To evolve and elaborate the conceptual framework of the MNCs.
2. To examine and study the policy changes as a regards the Multinational Corporations in the context of liberalization and globalization of the economy.
3. To study the impact of WTO's provisions on the liberalizing economy, such as India.
4. To study the measures, liberalization packages with the introduction of New Economic Policy for globalization.
5. To critically evaluate the foreign investment trends and portfolio investment trends to determine the relative benefits to the Indian economic by the MNCs.
6. To assess and appraise the performance of Hindustan Lever Limited- a Multinational Corporation in India.
7. To study and examine the problems in the context 4
of overall scheme of globalization with MNCs in general and Hindustan Lever limited in particulars.
The study has undertaken the following hypotheses in consideration:
1. That the MNCs' activities are primarily advantageous to the Indian economy in terms of more flow of foreign capital in the form of FDI, FTAs and GDRs and hence opening up vistas for globalization.
2. That the MNCs in India are contributing enough to the growth and development of the various sectors of the economy.
3. That the MNCs operating in India are creating atmosphere of competitiveness for domestic companies which in a bid to emulate, strengthen their own base through restructuring, amalgamation and M & As.
4. That MNCs are integrated with the development of social sector by deploying considerable funds for education, environment and health care.
WTO stands as an international organization, which regulate the world trade. After a various round of talks and discussions, the treaty of the Uruguay Round has come in April 1995, which commonly known as GATT later on it transformed into WTO. Sir Arthur, Dunkel, Director General of GATT, brought a scheme of proposals referred as Dunkel Draft. The Dunkel Draft, being a legal and technical document, covered seven areas for negotiations, i.e. (I) Market Access, (ii) Agriculture, (iii) Textiles and Clothing (iv) GATT Rules, (v) Trade Related Intellectual Property Right (TRIPs), (vi) Trade in Services and (vii) Institutional maters.
The URT is a March towards the global economy. Trade barriers and quota system of all 117 participating nations will be completely abolished by the year 2004. The TRIPs, opens the gates for financial services sectors, but member countries are allowed to adopt their own foreign investment policy. The argument on Trade Related Intellectual Property Rights (TRIPs) is comprehensive in giving cover to all areas of technology- property, patents, trademarks, copyrights and so on.
WTO has brought the world together. It associates 144 countries as its members with a firm commitment to work for global economy. The member countries are not free to use discrijiunatipn in trade investment and transfer of
( Ace. No..... ''
ij^ technology provides it does not harm the interest of human life. It restricts development of products, chemicals, warhead of mass destruction.
Main provisions of TRIP:
Parties are free to determine the appropriate method of implementing the provisions of the agreement within their own legal system and practice.
There is a general obligation of providing nations treatment to nationals of other parties subject to the exceptions in ,the various intellectual property conventions.
There is an obligation of Most Favoured Nation (MFN) treatment also with certain exceptions.
There is a provision for public interest concerns under which parties may, in formulating their national laws adopt measures necessary protect public health and nutrition and to promote public interest in sectors of vital importance to their socio-economic, technological development, provided such measures are consistent with the provisions of the agreement.
There are enabling provisions of resorting to measures to prevent the abuse of intellectual property rights by right holders. The MFN exemptions taken earlier in the areas of banking, non banking financial services (including insurance) were withdrawn in response to all the important trading partners undertaking a similar MFN obligation. India has also founded a few additional areas.
In the areas of re-insurance the existing binding has been aligned to the market. Earlier, the Indian insurance companies were obliged to code a minimum of 10 percent of the overall premium abroad after retaining the statutory companies. The above 10 percent limit has now been removed to allow Indian insurance companies to exercise the premium to be coded abroad.
Global economy has emerged for MNCs to operate with list risks involved in global trade. India is the beneficiary of WTO looking after progress of global economy in all the member countries. There is phenomenal growth of MNCs in India.
Economic reforms are the important tools for the modern age world economy. To reap the fruits of globalization process every country is unleashing its economy. In 1991 Indian government confronted with the severe internal economic problems. As a result the 8 government of India drafted many reform packages for the various sectors of economy. As a result of NEP, Indian government adopted numerous models to globalize its economy. Capital market being an important organ of an economy, reforms has been implement in capital market, to attract more investors. Government of India established a regulatory body namely Securities and exchange Board of India (SEBI) to control and regulate activities of the capital market and — the interest of investors. Modernization of stock exchange and buy back of shares are recent steps in this direction.
On industrial sector front, provisions and regulation have been specifically simplified in order to facilitate efficient Production concessions, tax relaxation and the tax holidays and various other facilities have been provided to the industrial units.
Simple and easy procedures and many a policies have been adapted by the Government to attract more and more foreign Investment. Special facilities and repatriability norms have been formulated to encourage NRls and MNCs
Globalization is epicenter of all the changes. To globalize Indian economy, Government adapted fiscal reforms on account of correction balance of payment.
Banking sector, insurance sector, hand fall in line with these reforms; RBI announced reduction in CRR, SLR and time factors in various related transactions. Private banks invited to establish other branches. Insurance sector is now open for domestic and foreign private companies; many foreign companies are now operating in this sector.
With the changes in FERA, announced on January 3, 1999, the government has removed certain restrictions on foreign companies, allowed point ventures abroad freely by Indian companies and given more to teeth to the RBI to prevent violations of rules by authorized dealers.
Most of the changes are in the tune with the repeated assurances from the government regarding full freedom for foreign investors
Most of the changes are in the tune with the repeated assurances from the government regarding full freedom for foreign investors. All the FERA changes thus augur well for the country groaning under the pressure of burgeoning trade deficits year after year.
The Foreign Exchange Management (FEMA) bill will replace FERA. FEMA bill introduced by the Finance 10
Minister, Yashwant Sinha, in the Lok Sabha on August 4, 1998. On capital account convertibility front, government appointed Tarapore Committee and its recommendations are in the implementation process. So various economic reforms adopted by the government since July 1991 are now shaping the Indian Economy.
With the advent of economic liberalization and globalization, it is clear that MNCs' stake have been observed to be increasing above 50 percent at a high premium.
It is indicative that in future the consumer and infrastructure sectors would be attracting larger amount of investment. The engineering sector has attracted the highest investment so far. Still the investment has fallen far short of adequate. The approvals in the core and infrastructure sector have always been India's priority. It has accounted for almost 50 percent of the total approvals. But the actual inflows have been at a dismal 20 percent of the approvals, which shows the slightly declining confidence of foreign investors in the Indian economy. The world is now becoming increasing interdependent with the globalization gaining worldwide acceptability. Goods and services 11 followed by financial transactions are now more freely moving across the borders. The capital flows in a variety of arrangements i.e. foreign collaboration, FDI, M&As, joint venture, portfolio investments, 100% subsidiaries have changed the nature of capital flows in the economy. As a matter of fact, these kind of capital flows are usually welcomed by the developing countries for the simple reason that they add to the total investible resources of the country and also act as vehicle of transfer of technology and management. The activities of MNCs in Indian economy have substantially increased. The MNCs are now appearing to be period to invest more in India through this equity stake in their Indian counterparts, setting up more joint ventures and subsidiaries and tending to have entered into more mergers and acquisitions and strategic alliances.
The vibrant activities of 35000 MNCs and 150000 foreign affiliates speaks volume about creating global culture in Indian economy although at the altar of domestic Indian companies. However, their participation in multifarious ways has contributed towards increased production, enhance exports and qualitative marketing, integrating Indian economy with global economies. 12
Foreign investment in India is coming since the independence. The trends in investment made by 10% subsidiary are fluctuating in the range of minimum of Rs. 6 million in quinquennial period from 1975 to 1980- and the maximum of Rs. 27 million in the quinquennial period of 1955 to 1961. The period from 1955 to 1965 was conclusive to foreign subsidiaries. During this period, larger number of foreign 100% subsidiaries was set up in different sector of the economy. In case of subsidiary having ownership between 50% to 100%, the trends in stock of foreign investrhent registered a rising trend. From Rs. 5 million in 1948 it has risen to RS. 52 million 1925. However, during the period 1975-1980, stock of foreign investment has declined as compared to the previous year it was Rs. 46 million. Then in the successive quinquennial period, it registered increasing trended. The stock of foreign investment of subsidiaries having so percent of ownership registered an increasing trend with the start of second five year plan, which was termed as industrial plan, the entry of foreign companies in India is encouraging.
India, in the year 1990, was on the verge of bankrupting in the international market. In order to come out of this 13 economic morass India adopted a relatively market friendly liberalized policy in the mind 1991. A major policy shifts were introduced in the first year of the NEP which was followed by incremental advance in the subsequent years with a number of policy packages for reforms in trade and investments, capital market financial sector reforms, fiscal policy reforms, FERA, capital account convertibility.
In post NEP period the inflows of foreign direct investment through (SIA) and FIPB route is more accessible to the foreign investors as more than 60 percent on average till 1995-96 and more than 70 percent to the higher extent of 80 percent till 1990-99 are channeled through SIA and FIPB route. The second popular route for the foreign investors is the NRIs (40 percent and 100 percent). RBI automatic route occupies the third slot in case of attracting foreign investors. The FDI policy framework provides that FID in 35 priority sectors are given automatic approval by the Reserve Bank of India, if the foreign equity participation is less than 51 percent.
From 1993-94 onward the FIIs role in the Indian share market was prominent with phenomenal increase in the investment US$ 1665 million with 47 percent of share in 14 the total portfolio investment. The bulk of investment by FIIs in the Indian capital market from 1993-94 onward came in the wake of a good number of reform policy packages for standardizing the operation of capital market, birth of SEBI with constitutional empowerment and openness and transparency adopted by it as an effective guidelines to the foreign investors.
However, the turbulence in Asian Financial Markets, frequent change in government at the centre, high range of volatility in share prices and ambiguous and confusing parameter adopted by the credit rating agencies have adversely affected the overall investment by FIIs in Indian capital market.
Recently, offshore funds have become the popular source of raising funds in the foreign financial market. The governments keen interest for opening up offshore financial centres in different parts of the country and abroad are welcome step for attracting foreign investment through offshore funds.
Hindustan Lever Limited (HLL) a Multinational Corporation operating in Indian economy. It has made its name in the history of consumer goods HLL successfully 15 established it vast industrial empire in India. 'Unilever' the British Company, is the parent company of HLL. Product profile of HLL during 1987-98. It reveals that among five important products of HLL, soap and detergents have been dominating since 1995. From 1996 onwards the HLL seems to have changed Us focus concentrating more on food items. However, during 1996-98 soap and detergents still occupies the first position.
The investment in fixed assets has grown at an accelerated ace since globalization in 1991. HLL invested Rs. 1104 crore of capital in fixed assets, during 1998.
It is clear from the debt equity ratio that MNCs are giving great importance to safety aspect of investment. They are taping the equity funds more than the debts. MNCs are major contributors of exports earnings have fourfold over 1987. HLL was able to increase the exports to the tune of 15 percent of the net rates. MNCs are contributing at a substantial rate to the national exchequer. Globalization has produced favourable impact on the development of MNCs on illustrated by factual study of HLL.
Social services sector is an important ingredient of banners environment. Development social services are the 16 responsibility of the central and the state both. It is a fact that due to weak social sector in India, MNCs are showing lukewarm interest to establish their business houses. Lack of social services is the main hurdle in attracting MNCs to take part in the industrial development of the country. The NEP has enlarged the scope of activities of MNCs in the various sectors of economy. It is high time that MNCs should discharge their due responsibilities for the development of social sector. They should come forward with a substantial amount of funds to invest in this sector. This sector rAain provides a strong foundation base for economic development.
For MNCs to play a still more useful and productive role in Indian economy if the following suggestions are implemented.
• Check is needed on the disinvestment of Public Sector Undertakings for foreign enterprises.
• Opening insurance sector to MNCs is not advisable, since these Insurance Corporation under public corporations are making significant contribution to numerous social sectors such as health, education, communication and other infrastructural development. 17
• Globalization in the Indian context should be linked to ever larger scope in creation of jobs.
• The monetary and fiscal policies of the government should augment the corporate value through reduction in rate of interest and taxation, establishing of exchange rates and relaxation in price controls.
• MNCs should be encouraged to invest more in technology for development of the agriculture sector and for strong industrial base in the Indian economy.
The strong industrial base with appropriate technology and developed agriculture sector will contribute to the strength of the economy to fall in line with the spirit of global competitiveness. ROLE OF MULTINATIONAL * CORPORATIONS (MNCs) IN GLOBALISING INDIAN ECONOMY A CASE STUDY OF HINDUSTAN LEVER LIMITED (HLL)
i^ THESIS submitted for the award of the degree of jiottor of ^l^ilo^eiopljp
^yf COMMERCE X -
By MOHAMMAD FAYAZ
Under the Supervision of -^ DR. MOHD. ASIF ALI KHAN
DEPARTMENT OF COMMERCE ALIGARH MUSLIM UNIVERSITY ALIGARH (INDIA) 1999 TS392
Ext. 400661 {Int. 266 Department of Commerce Faculty Member Aligarh Muslim University Aligarh-202002 andia) Dated: .iL.ll::.!!.
TO WHOM IT MAY CONCERN
This is to certify that MR. MOHAMMAD FAYAZ has completed his present thesis entitled "ROLE OF MULTINATIONAL CORPORATIONS (MNCs) IN GLOBALISING INDIAN ECONOMY ' A CASE STUDY OF HINDUSTAN LEVER LIMITED (HLL)'\ under my supervision. To the best of my knowledge the work is of original nature. It also fulfils the requirements for the submission of Ph.D. thesis at the Aligarh Muslim University, Aligarh, India. / /
(Pr. Mohb. AsifAU Kh^n) Research Supervisor
lerice-Cum-Resiciential Acddress 15/B, Medical Colony, Ahgarh - 202002, U.P. (India) Tel: » 0571-504871 e-mail: [email protected] [email protected] CDONTIENTS
Page PREFACE i-iv ACKNOWLEDGEMENT v-vii UST OF TABLES viii-xi CHAPTER - I Multinational Corporations in Global Ambience: Introductory Background and 1-38 Perspective Analysis.
CHAPTER - II Research Design and Methodology. 39-60
CHAPTER - III Word Trade Organization (WTO) and 61-90 Globalisation: A Focus on India.
CHAPTER - IV Economic Reforms for Globalisation of 91-147 Indian Economy.
CHAPTER - V Globalisation of Indian Economy: 148-195 Perspective on MNCs.
CHAPTER - VI Pattern of Foreign Investment in India. 196-249
CHAPTER - VII Performance Appraisal of Hindustan 250-277 Lever Ltijl. (HLL) In Post Liberalisation Era- 1991-1998.
CHAPTER - VIII Social Responsibilities of Multinational 278-309 Corporations (MNCs) in India.
CHAPTER - IX Findings and Suggestions. 310-337
BIBLIOGRAPHY 338-347 APPENDICES (i)
The Role of Multinational Corporations (MNCs) in
Globalising Indian Economy- A Case Study of Hindustan
Lever Limited (HLL), is the topic of my research. MNCs have been the segment of less important of Indian economy until the advent of New Economic Policy (NEP), July 1991.
The entire emphasis of national economic planning was given to development of public sector with a clear objective of establishing socialistic pattern of economy. However,
MNCs took part in banking, chemical, pharmaceuticals, trade and transportation. The companies Act, MRTP Act,
FERA and similar other statutes took care that the MNCs did not become monopolies. MNCs were not free to have controlling stock holdings in any Indian companies, repatriate the profit or disinvest immediately. The income was subject to double taxation at an exclusively high rate.
Imports were restricted. The domestic industry was fully protected by means of high customs and excise duties.
The protectionism policies and central economic planning became altogether redundant and unnecessary after the establishment of WTO in 1995. The government of India made sweeping changes in the wake of NEP, which (ii) was promulgated in 1991. The sweeping economic reforms, amendments of MRTP Act, Companies Act and the FERA assigned highly significant role to MNCs for strengthening the economy. Institutional changes have been made in money and capital market, Industrial policy, trade policy, fiscal policy and monetary policy. In every sense the economy is moving towards globalization with ever- increasing share of MNCs. However, the country has kept certain controls for proper regulations of the activities of MNCs. MNCs would be much more important in making Indian economy globally competitive if the shortcomings in our economic policy, structural adjustment and institutional system are taken care of. The case study of HLL has highlighted the positive impact of NEP on MNCs in global market.
Scheme of Chapterisation - (A Preview):
The present study is divided into nine chapters.
The First Chapter entitled "Multinational Corporations in Global Ambience: Introductory Background and Perspective Analysis", presents a background study with regard to history, origin, worldwide operation and analysis of MNCs. (Hi)
The Second Chapter has been devoted to present the problem areas followed by an extensive review of literature on the MNCs. Logical and cogent description as regards the scope, objectives of the study, the research hypotheses and research methodology have been dealt with at length.
Third Chapter deals with the various facets, dimensions of WTO. It presents the provisions, clauses and sub clauses of WTO related to foreign investment in India.
Fourth Chapter gives an extensive exposition to economic reforms in India. It presents a vivid analytical study of liberalization packages and measures for reforms in capital market, industrial reforms, fiscal reforms; reforms for attracting foreign investment, banking sector reforms, reforms in insurance sectors and regulations to ensure
Capital Account convertibility.
Fifth Chapter presents a panoramic view with regard to MNCs' activities in India especially in the post NEP period. It focuses upon the modus-oprandi of MNCs in arrangements of subsidiaries, joint ventures, collaborations, mergers and acquisitions. It also deals with the role of
MNCs is globalization of Indian economy. (iv)
Sixth Chapter proceeds to enquire into the pattern of foreign investment in India as a result of predominant role of MNCs in globalising Indian economy. It highlights the trends in different components of foreign investments in
India in pre and post NEP period. The chapter present an analytical view of the inflow of foreign investment including
FDI, NRIs, the trends in portfolio investments, comprising
FIIs, GDRs and offshore funds.
Seventh Chapter presents on account of the financial performance of the HLL in the post NEP period. The chapter focuses upon the growth and development of HLL during the NEP period. It also corroborates the view that
MNCs are significant foreign investors in India.
Eighth Chapter presents a vivid picture of social sectors. It highlights the government expenditure in the planning period. The chapter gives an account of negligence of social responsibilities by MNCs and highlights the need of fair contribution in this sector by the MNCs.
Final Chapter presents findings of the study and suggestions which are important to enhance global competitiveness of Indian economy. (V)
ACKNOWLEDGEMENT
I am beholden to Allah, the most Merciful and
Beneficent, for his providential help in accomplishing the arduous research on a topic that is really too wide and extensive in coverage.
I owe a debt of gratitude to Dr. Mohammed Asif Ali
Khan, Research Supervisor, for his guidance and suggestions. Innumerable discussions with him enhanced my understanding and stimulated me to complete the research work.
1 am thankful to Prof. Shah. Mohd. Wasim,
Dean & Chairman, Faculty and Department of Commerce,
AMU, Aligarh, for the necessary assistance in terms of funds for typing the manuscript and the seminar facilities.
I have received invaluable encouragement and help from
Dr. Abdul Quayyum Khan, Senior Lecturer, Department of Commerce, AMU, Aligarh. I am indebted to Dr. Abdul
Quayyum Khan for his unstinted help in the study of the problem. 1 am also thankful to all the faculty members for necessary encouragement and support.
My colleagues at the Department of Commerce, AMU, were especially cooperative and supportive of my efforts. (vi)
For their everlasting encouragement, I thank Mr. Khurshid A/i,
Mr. Naved Asif, Mr. Mustafa, Mr. Ahmad Khalid Khan,
Mr. Israr Ahmad Khan.
I express my sense of appreciation to the staff of library of Reserve Bank of India, New Delhi, Delhi School of
Economics, Federation of Indian Chambers of Commerce and Industry (FICCI), New Delhi, Institute of Economic
Growth, Delhi, Indian Investment Centre, New Delhi, Punjab
National Bank, New Delhi. I am thankful to Ms. Neelam
Joshi, Executive Member of Confederation of Indian
Industries (CII). She has provided me a good amount of useful information. I am also thankful to Mr. T.C. Sharma,
Public Relations Officer, Secretariat of Industrial Approval
(SIA), New Delhi, for his cooperation. I owe a special thank to Mr. Sanjay Kumar Bharti, Upper Divisional Clerk at
Ministry of Industry. I thank my cousin, Mr. Noorullah, for making my stay comfortable at Delhi.
First and foremost, my personal gratitude goes to the loved ones of my family.They stood by me in times of disappointment and depression which I underwent in the course of research work. It is their silent prayers that have seen me through trials and turbulence. My brothers, Mr. (vii)
Sartaj Mohammad, Mr. Mohammad Ahsan and Master
Mohd. Imran, and my sisters, Miss Aalmeen and Miss
Nureen, always encouraged me with their prayers for the completion of my Ph.D. thesis. It is difficult for me to reciprocate their love and affection that has always been a source of strength to me.
1 will be failing in my duty if 1 do not thank my biggest well wishers. They always took keen interest in my
academic pursuits. Mrs. Shakeela Khanam, wife of
Dr. A.Q. Khan, extended her sisterly affection during my whole academic period. Mr. Mahboob Hasan and Mr.
Firoz Alam have been a source of inspiration to me. Their
unbounded love and affection overwhelm me.
Thanks to Mr. M. Ali Hasan, Mr. S. Gauhar Abbas
Naqvi, Mr. Anis of the Seminar Library, Department of
Commerce, AMU Aligarh, for their help and cooperation in
making available reading material.
Finally, I wish to thank Mr. A.K. Azad (Computer Professional) of KGN Compuwriters, Shamim Market, for careful and timely composing and printing of the present thesis.
(Mohammad Fayaz) (viii)
Chapter - I Table 1 Openness Towards Foreign Investors in Different Countries of the World Table 2 Comparative View of Oppenness in Terms of Repatriation of Capital, Imports, Foreign Loans And Domestic Loans Table 3 Comparative Views on Regulatory Measures Adopted By Different Countries Towards Foreign Investors Table 4 FDI and International Production, 1986-1997 Table 5 Regional Distribution of Inward and Outward FDI Stock, 1985, 1990, 1995 and 1997 Table 6 Production by Foreign Affiliates, 1982-1997 Table 7 Past and Future Patterns of MNCs Investments (1996-2000 onward) Table 8 Merger and Acquisition Sales (in Billion dollors) Table 9 Merger and Acquisition Purchase Chapter III Table 1 Global Trade and Negotiations Rounds (Conferences) of the GATT Table 2 Groups and Issues in the Uruguay Round Chapter - V Table 1 MNCs' Stake in Indian Industry Table 2 Foreign Technology Agreement (FTAs) Approvals During 1991-98 Table 3 Statement Showing Number of Foreign Collaboration Approvals (Pre And Post NEP) Table 4 Joint Ventures to Follow (ix)
Table 5 100% Subsidiary And Two Faces of the Controversy Table 6 Presents of Precise Descriptive Profile of the Objective of Multinational Corporations in Setting up 100% Subsidiaries in India
Table 7 MNCs with 100% Subsidiaries (upto June 1998) Table 8 The BPL Merger Table 9 The Unilever Merger Table 10 The Videocon Merger Table 11 The Eveready Merger Table 12 M&A Takover Regulations for 1997-98 Under SEBI Table 13 Custodial Services in Indian GDR Issues Table 14 Financial Services To Indian Companies By Foreign Financial Agency (1991-98) Table 15 : Financial ServicesProvided by Citi Bank to Indian companies Chapter - VI Table 1 Stock of Foreign Investment in India (Pre-NEP Period 1948-1990) Table 2 Country-wise Breakup of Foreign Investment Approvals During 1981-90 (Pre NEP Period)
Table 3 Foreign Direct Investment Flows by Different Categories Table 4 Foreign Direct Investment Actual Flows Vs Approvals (During 1991-98) Table 5 Top Ten Foreign Investors in India (FDI Approvals from 1991 to Dec. 1998) Table 6 Sector-wise Breakup of FDI and Technical Collaboration Approved During the Post NEP Period (August 1991 to Jan 1999) (X)
Table 7 Industry-wise Foreign Direct Investment Inflows Table 8 Net Flows Under Non-Resident Deposits (1993-94 to 1998-99) Table 9 Outstanding Balances Under Different Schemes (March 1994 to Nov. 1998) Table 10 Portfolio Investment Table 11 Portfolio Investment by Different Categories Table 12 Statement Showing FIIs Investment and Share of FIIs in Total Portfolio Investment (1991-92 to 1997-98) Table 13 GDR Inflows (1991-92 to 1997-98) Table 14 Trends in Offshore Funds (1991-92 to 1997-98) Chapter VII Table 1 Product Profile of HLL Table 2 Fixed Assets Table 3 Comporative data of fixed and net carrent assets Table 4 Debt Equity Ratio Table 5 Investment Turnover Ratio Table 6 Net Worth Table 7 Return on Capital Employed (ROCE) Table 8 Sales of HLL Table 9 Product Contribution to Sales (1998) Table 10 Net Profit Margin (1987-1998) Table 11 Statement Showing Comparative Changes in Sales and Profit (1987-1998) Table 12 Statement Showing Earning Per Share and Dividend Per Share (xi)
Table 13 : Price Earnings Ratio (P/E) (1987-1998) Table 14 : Payout Ratio (1987-1998) Table 15 : Interest Coverage Ratio (1987-1998) Table 16 : Exports of HLL (1987-1998) Table 17 : Exports to Net Sales (1987-98) Table 18 Contribution to Central Exchequer (1987-98) Chapter - VIII Table 1 Central Government Expenditure (Plan and Non-Plan) on Social Services in Post-NEP Period Table 2 Central Plan Outlay for Major Schemes of Social Sectors and Rural Development In Post NEP Period Table 3 Expansion of Health Services Table 4 Performance of Special Employment and Poverty AUeviatioin Programmes (Post NEP Scenario) Table 5 Housing and Urban Development Table 6 Family Welfare Table 7 Government's Plan Allocation on Medical and Public Health Table 8 Government's Plan Outlay on Education Table 9 Plan Outlay for Other Social Services -1
f f/uitinatlonaC L^or DO ratio nd in Ltlobai
^^mhience: Urntroductoru ijacharoutia ana
f^erdpectii/e ^^naiudid.
Historical Background of MNCs
Multinational Corporations: A Conceptual Review
Globalisation: A Novel Concept
Global Performance Appraisal of MNCs
Factors Responsible for the Growth of MNCs Worldwide: Post Globalisation Phenomenon H/VI>TEFl MULTINATIONAL CORPORATIONS IN GLOBAL AMBIENCE: INTRODUCTORY BACKGROUND AND PERSPECTIVE ANALYSIS
Historical Background of Multinational Corporations (MNCs)
The history of Multinational Corporations can be traced to trading and business activities since time immemorial.
Mesopotamian and Phoenician are said to be the first transnational merchants entering into business activities with Greeks. With the fall of Roman empire, Middle East and European took to transnational trading. However, due to fall of Roman empire and war between feudal lords and church's prohibitory order of trading with Muslim states withheld the pace of trading. The city-states of Venice,
Florence, Geneva, Pisa provided a platform for trading to
Christian. In the 17th and 18th centuries, the modus operandi of business drastically changed replacing barter economy with money economy. As a result the banks and financial institutions came up. These institutions, though in their nascent form, served as expediter of multinationals.^
At the beginning of 19th century, flow of foreign investment through MNCs mainly came from Western
Europe to the underdeveloped countries of Asia. Africa and America besides USA. There were four big players in the field of capital exports, namely, Britain, France, the
Netherlands and Germany. They were operating within their
area of influence. Actually, all of them made colonies.
These countries basically got hold over the raw materials
and other natural services of their colonies in a big way.
Most dramatic force, which shaped the destiny of MNCs
during this period, was industrial revolution and
development of science and technology.^
The scientific innovation and Industrial revolution
changed the very face of mode of production. A new method
of production emitted. That is factory system of production.
This system resulted in bulk production relatively in lesser
time.^
Mass scale production required a vast market.
Production for domestic market was large enough so these
firms started looking beyond their domestic market for the search of new market and then they started transnational business. Later on, these transnational trading activities
transformed into multinational corporations.
The phenomena of multinational corporations are not a new one. Only the new thing the extent of their business activities, technique, technology production method, managerial competence marketing, financing promotion,
personnel, accounting and social responsibilities which have
been changing drastically over a period of time.
Technologically advanced countries spread their business
activities across the world. Their area of business activities
cross national and political boundaries of nation states,
large scale operations of the modern multinational
corporation is not only confined to the trading activities
only but nowadays they are playing a significant role in
international production and marketing with the help of
their trade marks and patents. These structural changes
brought by MNCs in the history of International economics
are now shaping the destiny of a new economic world
order.*
Growth of MNCs took place in four phases; first phase
run upto the ISt world war. During this phase, companies
were mostly from Europe. These were Dunlop Siemens,
Philips and Imperial Tobacco etc. During 1930-50, the
MNCs were sluggishly operative due to recessional trend in
the world economy. Second phase started just after the
Second World War. During this period only IBM, Fordmotors
and General Motors of America surface on the screen of 4 global economy. From the decades of 1970s and 80s third phase of MNCs growth is registered and companies are mainly from Japan, Europe and Germany. Final phase is the latest one.
During this phase MNCs in the field of information and technology and service sector have come up.
The 20th century has been characterized as a unique period. During this period, the buzz word globalization has gained popular currency. The economies of the world including both developed and developing initiated liberalization process to fall in line with the world economy to reap the benefit of globalization. The special features of this century is the emergence of MNCs on the world scene from developing nations such as South Korea,
Indonesia, Singapore, Hong Kong, India, Malaysia etc.
Multinational Corporations: A Conceptual Review:
A generalized concept, witnessed in all the definition of MNCs, is the pivotal role played by multinational corporations in globalising world economy. Concealment of information by these corporations is termed as their privileged right of secrecy. This secrecy envelops their activities. Due to this, Raymond Vernon forced to shorten his work on foreign companies holding a large group of corporations of different nationalities. There total volume of sales was more than 100 billion dollars and Vernon coined them as a multinational enterprise.5 Dunning bypassed the Word Corporation in his expression most probably due to the legal meaning of Word Corporation.
Dunning put these enterprises into four different groups; these are (1) Multinational Producing Enterprise (MPE), (2)
Multinational Trading Enterprise (MTE) (3) Multinational
Owned Enterprise (MOE) (4) Multinational Controlled
Enterprise (MCE)6 Canadian government five a basic criteria for defining a multinational enterprise. According to this, a minimum limit of operation has to be fixed. An enterprise operating at least in four or fixed countries will be considered as multinational enterprise'.
Dynamic changes are there in the shape, size and mode of working of the MNCs. As Hymer describes it, the workshop transformed into factory to become national corporation, then multi divisional corporation and now multinational corporation^.
There are different set of opinion on the definition of "Multinational corporation. It has different names for different people like, "International Business", "direct Investment" the "Multinational enterprise" International corporate group", "international firm", "The multinational corporation", worldwide enterprise", "The multinational family group and different others. But essentially all MNCs keep their head office in one country (that is mother country) and establish production units, manufacture and sell their various products in different countries.'
In a broader spectrum, all enterprises are deemed as
MNCs which cover all aspects of business activities, such as, control over assets, factories, offices, sales, management marketing promotional activities and running their business in two or more countries, and they are also responsible for mobilizing direct foreign investment from one country to other country^".
Most of the commanding authorities define MNCs in different ways. Some of them have taken area of operation for defining MNCs; where as, some of them have given emphasis on the total operational activities.
In India, a specific definition of MNCs has appeared in Foreign Exchange Regulation Act, 1973. For the purpose of this Act a corporation incorporated in a foreign country or territory shall be deemed to be a multinational corporation, if such corporation: (a) Is a subsidiary or a branch or has place of business in two or more countries or territories,
(b) Carries on business or otherwise operations in two or more countries or territories^^
United Nations Organization (UNO) has standardized the definition of Multinational Corporation that is acceptable almost all over the world. It defines
"Multinational Corporations as the corporate or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise is defined as an enterprise that controls asset of other entities in countries other than its home country, usually by owning a certain equity capital stake. An equity capital stake of
10 per cent or more of the ordinary shares or voting power for an incorporated enterprise, or its equivalent for an unincorporated enterprise, is normally considered as a threshold for the control of the assets. A foreign affiliate is an incorporated or unincorporated enterprise in which an investor, who is resident in another economy, owns a stake that permits a lasting interest in the management of that enterprise (an equity stake of 10 percent for an incorporated enterprise or its equivalent for an unincorporated enterpriser^. 8
Subsidiary:
An incorporated enterprise in the host country in which another entity directly owns more than a half of the share holders voting power and has the right to appoint or remove an majority of the members of the administrative, management or supervisory body^^.
Associate:
An incorporated enterprise in the host country in which an investor owns a total of at least 10 per cent, but not more than a half of the shareholders' voting power. ^*
Branch:
A wholly or jointly owned unincorporated enterprise in the host country which is one of the following (I) a permanent establishment or office of the foreign investor;
(ii) an unincorporated partnership or joint venture between the foreign direct investor and one or more third parties;
(iii) land structures (except structures owned by government entities), and or immovable equipment and objects directly owned by a foreign residents (iv) mobile equipment (such as ships, aircraft, gas or oil-drilling rigs) operating within a country other than that of the foreign investor for at least one year.^^ The above definition has the worldwide acceptability both in developed and developing countries. The present study on multinational corporations is premised on the standard definition of UNO.
Types of MNCs:
MNCs can be grouped into three categories on the basis of their operational area, control system, pattern of management. Investment origin, types of products etc.
(1) MNCs engaged in trading
(2) MNCs working in service sector
(3) MNCs from manufacturing sector
1. MNCs engaged in trading or trading MNCs:-
Pifty per cent revenue collected from the trading activities by a company called a trading company. Nearly
60 percv^nt of world export is dealt by the trading MNCs.
These are the oldest forms of MNCs.
2. MNCs working in service sector: -
A MNCs will be called a service MNC if it is engaged in service sector ^nd derives at least fifty per cent revenue from service providv^d by it. This types of MNCs are widely available in the field cf banking, transport, tourism, finance, 10
insurance etc.
3. MNCs from manufacturing sector:-
A company engaged in manufacturing and derives its
50 per cent revenue from manufacturing activities will be a manufacturing MNCs such as Parry, Colgate and Palmolive etc.^*
Globalization: A Novel Concept:
Globalization is a recent novel phenomenon in the world of trade and industry. It emerged during the late eighties when national markets started integrating with each other to form a global market. It is a form of international business strategy, which helps to form a globally competitive and open market.
Levit in this regard has rightly pointed out that "the emergence of global markets is for standardized consumers products on a previously unimagined scale of magnitude, corporations geared to this new reality benefit from enormous economics of scale in production, distribution, marketing, and management. By translating these benefits into reduced world prices, they can decimate competitors that still live in the disabling grip of old assumptions about how the world works.^^ 11
From the above definition, it can easily be ascertained that globalization covers every aspect of trade and commerce. Globalization simply means 'integrating' the economy of a country with the world economy. It is a process through which a country standardized its means of production upto the world level production standards, to integrate its own economy with the world economy. For that purpose, country may open up the economy to foreign direct investment by providing facilities to foreign companies to invest in different fields of economic activities; removing constraints and obstacles to the entry of MNCs.
From the point of view of world trade, the ratification of the Marrakech Agreement and the establishment of the World Trade organization (WTO) are strengthening the multilateral framework for trade and boosting world trade. WTO and other world level business organizations and business treaties between different countries of the globe are giving much impetus to the process of globalization.
In the Indian context, globalization implies opening up the domestic market to foreign investors by providing them concessional facilities to boost their investment volume in 12 the country. Removing constraints and obstacles and simplifying other procedures to the entry of MNCs.
In real term, globalization implies a regime of perfectly competitive markets with no entry or exit barrier. So globalization is a state of global market, which is perfectly competitive, and having no or very few restriction of national boundaries. It is basically related to the relaxing restrictions on international flows of goods, services, technology and capital
Global Performance Appraisal of MNCs:
The MNCs are termed as the unique species of the fag end of the 20th century when majorities of the developed and developing economies of the world adopted socio economic openness to fall in line with a novel jargon of globalization. The performance of MNCs in terms of openness with increasing technical collaboration, flow of
FDI, repatriations of capital, joint venture, merger and acquisition and subsidiaries are appraised in the following paragraphs to substantiate the fact hat these MNCs have emerged as dominant players in the world economic horizon. 13
Table 1, 2 and 3 have been prepared by the Research
Scholar to present a detailed accounts as regards the policy of openness adopted by the Newly Industrialized countries
(NIC) of the world viz. China, Indonesia, Korea, Malaysia,
Singapore, Taiwan and Thailand. India is also included in this list. The close scrutiny of the tables reveal that these countries under reference have adopted fairly good deal of transparency and openness in the spheres of technical and financial collaboration, imports, foreign loans, domestic loans, foreign investment in the form of FDI etc. and simplified approval of industrial licensing.
The Newly Industrialized countries (NIC) resorted to all
sorts of economic liberalization long back, and have therefore, reaped the fruits in the form of higher export,
galore employment rising income, human resource
development. On account of this phenomenal development
they become cynosure of the eyes of the developed
countries as a result more foreign investment, more
technology transfer, more subsidiaries, more joint ventures
and more financial services. Linking their economies to the
global economies. India adopted liberalization and openness
in post 90's with diversified liberalization packages in the
field of finance, bank fiscal, capital market in a bid to 14
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These aspects of Indian liberalization leading to globalization focussing the role of MNCs. Make the detailed subject matter of succeeding chapters of the present study. Table - 4 presents an accounts of global FDI and international production by MNCs/TNCs during 1986-97. It is discernible from the table that the annual growth rate of FDI inflows in 1986-90 accounted for 24 percent which declined to 20 percent in 1991-95. In 1996 the FDI inflows plummeted to an abysmal 2 percent. However, it registered an annual growth of 19 per cent in 1997. Similarly the FDI outflows inward stock and outward stock, assets; sales, gross products and exports of these MNCs registered an increasing annual growth trend during the period under reference, except the periods of 1991-95 and 96. The declining growth of FDI stock, assets, sales, gross products, and exports during the period under reference are attributed to general recession of early 1990. According to an estimate of UNO, there are about 53,000 MNCs/TNCS including large and small both. There are at least 4,48,000 foreign affiliates in the world till August 1998 (Appendix-1). 21 Csj ON vD f^'^'^ CO t-.9 o o 9 o d ON oor>. VO c ON 00 • CM 0> JO ON CD '7^00 Cvi N CO c W Hi o ON ON u(0 ON i-H '-I f^ CO CM ""Cj* • in VO a> e iH O ID o>. O O CO iri eg ^ 00 3 « CN rH TH CO 1-1 cx ON < ON O 2 e D o o c ON ON VOi-HCVJOOCOvOCO T-H lo a> VO C I COt>^Q6^^v£)v6QO 04 C^i ^ ^ E ' 2 CMCSlrHCNCVli-lrSi-l 1—I T-l CM rH 00 ON Q IH- e o c (0 CO Q> C c 00 V) (0 ON ON »—( I s •c «3 = 2 -^ o Crt a c D- O cc .12 QJ c C U '-' c c2 o CO o ^ -a -^ < »^ [I Q) -— (O «3 w *- C o "to 2 CO - ^ 4^ o E S o ^ o 3 •*-' ^ ^ CO (rt O zs •4-1 o 5 O >- S-i TO3 Q) O != £0 o u. v.. (rt ^ ^^ -D 3 o (0 •^ -^ J2 V) CO o "^ £ o ^ (O to O o w O 15 5 5 5 o -4—' o >^ a I O o u- u, (ju 5 SO V, O V 22 Table-5 presents regional distribution of inward and outward stock during the period 1985, 1990, 1995 and 1997. The table reveals that there has been declining trend in both inward FDI stock and outward stock during the period under reference, for developed countries as well as developing countries. The regional distribution of inward and outward stock is heavily skewed towards developed countries reflecting the fact that in the past most FDI originated and stayed in the developed countries, although there are some noticeable upward increases of FDI inward and outward stock of developing countries also. Table - 6 presents an account of production by multinational foreign affiliates during the period 1982 to 1997. Table reveals that potential level of production and sales indicate the use to which assets have been put. Sales of goods and services by foreign affiliates are estimated to be about $ 9.5 trillion in 1997-growing at a faster rate than the worldwide export of goods and services. Detailed accounts of the assets sales and employment of 100-world top MNCs/TNCs ranked by foreign assets for the period of 1996 have been presented in Appendix-II. It 23 (N ^ rH o 0) ON r>. lo o CNJ CO CJN CNJ o O O uS in 00 ON O »-t 00 d 0^ LO ^ CM d Is ^ lO ON c^ CO o t-H '-i to ,rt to «; 00 d d vd d ol ON ON 10 -^t "* CNl °° o ^ (0 vq 00 CO ^^ lO 00 o 5t t^ t^ ON Tt vO o in to o vx> ^ LO 1-t o U ON •^ d d CNJ d CNJ OS (8 fH ON to ^ CV) o 3 in r^ ^ vo o ON 00 CO ON TH CO CO o o ON ^ON L6 ^ o vO •^ d r-i CNJ d CO CO cvi ON ^ ^ Ift ON O ON vo j^ OwN, Q •^ON^^^CNl t^Cs)<^^ 00 •iS • ^ 00 vo •^ -^ O T^ O Q t^ • ^ lO ^ • oO 0 v£> CO CO '^ CNl CT) T-l ^ O ^ ^ O ^ O I-H ^ |t/)in NO T-H CO OO^CN) CO o O ON vd o r- CO CO «c>i06i£J^d^d CO ON ^CN)rHrH'~l00 , CO>-H o ?^ ^ '-^ d iCJ o ^CNJt^d^JcNi 'odd o o r^ ^ ^ CVJ e CONCXN^^^ t>^-1^cOf^ a ON VO CNJ o CNJ CO i-H Ol r^ CO CO CN) CN) CNJ CO; o o- ; ^^ lo ' 00 d "2 e ON .iS c (0 < •*-10• e a0) c3 o o U 0) i-i D ft 3 O -C o CO 1-1 •c = c -a 3 C CO c UJ v (0 to 0) c to S 2 c •4-1 1-1 Q .S 3 ^ •«-• e «3 c '!o 10 •^ 3 (0 3 ft 1- O < UJ in (0 „ UJ c 0 O ^ (O 0 0) U £ t •a • •a 3 i^ en c p ft) ^ UJ O < o (0 D) '^ f 1 0)0" V c ft U) CO •ft .ii .£ §! «j U (^ v^ (0 o ^ o 0 w < J Q < (0 12 •? ft D- c Q ^ (0 icr: D i- u 24 (A 0 ^ vO CM CO CM CO 00 ^ •d CO 00 in -^t q CO t^ o CO € CO in -^ r-i ON cvi o> o 1^ CM CNJ (KN CVI CM eKg i-H CM 1-1 O i0 I c^ o 00 ^ O »-) t^ If \D 00 ^ C^ ^ c>. o> 0^ ON in vo vo VD t^ 00 c^ 1-^ • CM X ON o ^ CM c^ t^ CO ^ in c^ CM in rf r^ o in vf-io CO ^ w « in in in vo t^ w S 0 "S I I e D) •pa 0 u. (A in CM CO CM ON o 00 "* CM o o> CO CO 1-i 00 00 o in CO vo in S in T-H r^ CM o (A CM CM CM CM CM CO ^ ^ m in co '"8 Is OS in in CM 00 CO in CM VO 00 t^ Cr-M- CoM CM vO 00 00 m CrM^ 00 -o^ in VO rH I-H t—1 r-io\ CM CM CO -o^ '^ in -^ CM CO in vo 00 ON o 00 00 00 00 00 00 00 00 c^ c^ ON ON c^ ON ON ON ON C7N ON CTN 25 ON VD 00 CO CO ON CO CO T-l CO CM CM CM CM t-H 00 in y-i '* r- ID in CM CM ^ ^ o o in o CO in 00 ON r-i 1-4 CM in in ^ VO T-H CM t^ CM in o CO VO S 00 ion in icrn> vO 00 00 ON CM T-H in o r^ in o in CO V£> in VO CoO 1-t CO ON vD t^ 00 ON CM x» to (0 E (0 CO CM CO in VO ON c^ CJN c^ ON i C7N ON ON ON C7N 26 is discernible from the Appendix-II that the majority of MNCs belonged to developed countries. A detailed picture about the top 50 MNCs from the developing countries ranked by assets, during the period 1990-1997 is presented in Appendix-III. It is indicative of the fact that MNCs are generally hailing from the newly industrialized Asian countries. However, a few of them also belong to North America and South Africa. The Republic of Korea and Venezuela holds the top two positions in the list of largest 50 MNCs/TNCs headquarter in developing countries ranked by foreign assets. Table - 7 presents a future projections of MNCs' investment in the year 2000 and onward, in Europe, North America, Asia Latin America and Caribbean Africa, North America and Japan. It is discernible from the table that Europe plans to invest 63 percent of investment in foreign countries during 1996 and 2000 onwards. 18 per cent of this foreign inve.stment would be in the different countries of the Europe, 24 percent would go to North America and 10 per cent and 6 per cent would be invested in Asia and Latin American countries, respectively. 27 Tabic - 7 Past and Future Patterns of MNCs Investments (1996-2000 onward) (Percent) Regions Past (1990-1995) Future (1996-2000) Europe North Japan Europe North Japan America America Home investment 41 58 52 37 45 37 Foreign investment 58 42 48 63 55 63 Europe 19 26 2 18 22 North America 26 — 12 24 — 14 Asia 6 28 10 16 38 Latin America and 4 12 6 The Carribian Africa Others Source: Dr. Khan, A.Q. Foreign Affairs Report - "Global Investment and competitiveness - A Focus on India", Vol XLVI, No. 3 & 4, March-April, 1997, p. 16. 28 North America has also planr^ed to invest more in foreign investment as compared to domestic investment. The destinations of investments by North America during the period under reference are expected to go up to 22 per cent in Europe, 16 per cent in Asia, 12 percent in Latin America and Caribbean's. Japan also plans to invest more in the foreign countries. Asia and North America are the central attractions of the Japanese foreign investments. Tables 8 and 9present the picture with regard to the Merger and Acquisitions which have taken place in developing, developed and Central European countries. It is comprehensive from the table that on the sales side, the merger and acquisitions in developing countries account for less than they do in the world FDI inflows. However, an upward trend in merger and acquisition sales by developed countries, and countries in transition is noticiable. Among developing countries majority of merger and acquisition sales. South and south east Asia have been increasing. Significance increases in M&A sales in Latin America and in Central and Eastern Europe recorded in 1997. This record is mainly on account of privatisation. Table 9 reveals that about 90 percent cross border purchases are transaction in which the foreign investors acquires more than 29 half of the voting securities of the resulting business. Developing countries are remain unimportant in the cross border (M&A) market as compare to their position in FDI flows. The relatively low share of developing countries in majority of M&A purchases suggests that the MNCs from developing countries prefer green- field mode of acquisition of minority share holding in existing markets through the FDI. Table 8 Merger and Acquisition Sales (in Billion doUors) Year Developed Developing Central and Eastern Countries Countries Europe SalesGrowth SalesGrowth Sales Growth Rate(%) Rate(%) Rate(%) 1993 100 -- 20 -- 50 1994 130 30 10 HlOO 55 10 1995 155 19.23 20 100 50 (--)9.09 1996 180 16.13 05 (--)75 75 50 1997 230 27.77 10 100 95 26.66 Total 795 65 325 Source: UNCTAD, based on data provided by KPMG Corporate Finance. 30 Tabic - 9 Merger and Acquisition Purchase (in Billion dollors) Year Developed GrowthDeveloping Growth Countries Rate Countries Rate (Purchase) (%) (Purchase) (%) 1993 130 -- 25 1994 160 23.07 35 40 1995 210 31.25 25 {-)28.57 1996 290 38.09 35 40 1997 300 03.45 40 14.29 Total 1090 160 1993 to 1997 Source: Same as table 8 The largest 30 cross border M&A in the five most affected countries, Indonesia, Korea Malaysia, Philippines and Thailand during July 1997-98 has been shown in Appendix W. In Indonesia five M&A took place to the total value of about 3000 million dollars. The acquiring companies belong to Singapore U.S. and Canada. In the 31 Republic of Korea 11 M&As were effected to the tune of 3931 million dollars. The acquiring companies in Korea held from U.S. Germany and Sweden, Malaysia witnessed four joint ventures during the period under reference, out of the four joint ventures three were from US and the remaining one from Germany In Philippines two companies were acquired by the foreign companies each one from Hong Kong and Spain. In Thailand, nine-M&A took place to the tune of 1964 million dollars. The acquirers were from U.S., France, U.K. and Japan. From the foregoing discussion, it may be concluded that in both developed as well as developing countries, the recent feature of that of M&A among large dominant MNCs. Are quite in vogue. The larger MNCs seem to impel other MNCs of the different countries to move to restructuring, amalgamation, M&A According to UNO Investment Report 1998, the Pharmaceutical, Automobile, Telecommunication and Financial Services are typical examples of M&As. In addition to the strategic considerations of the firms, liberalization and deregulation are the other main factors behind the increases in the M&A world over in both developed and the developing countries. 32 Factors Responsible for the Growth of MNCs:World Wide: Post Globalization Phenomenon^* From the foregoing discussion and analysis, it is an established fact that the MNCs all over the world are growing at phenomenal rate. The main reasons responsible for this are attributed to the following factors: 1. Growing Size of Market 2 Varied Field of Operations 3. Improved Marketing Incentives 4. Sound Financial Background 5. Advanced Technology Factory system of production resulted in mass scale production, for this ever-expanding production, enterprises started looking for a vast market. So they expanded their business activities beyond the physical boundaries of the country in which they originated. Business operations of large sized firm enlarge, and they made an international loyalty and image. They started to expand their field of operation. Most of big firms started producing too many products under a single banner. They even set out their activities in consumer products as well 33 as in service sector. This gave a new dimension for these big firms and that is a multinational corporation. MNC has better marketing facilities than that of domestic enterprises (I) It is equipped with the sophisticated and reliable system of marketing information. (ii) It confronts a very little magnitude of competition from domestic firms because of good reputation and image. (iii) It has a more communicable and impressive mode of advertising sales promotion. (iv) It has a good system of warehousing and inventory control. (v) It has competent and professional personnel well- versed in latest technology and information. Financial position of a multinational firm is far better than the domestic firm. (I) It is giant business entity, which enjoys huge financial resources with which it can operate in most adverse atmosphere. 34 (II) It has a speedy mobilizing channel of funds. Funds are generated in one country and used in another country. (III) It has easy reach for external capital markets. (IV) Having international fame and reputation, it can raise more fund in less time, even banks and Investors of host country show a keen interest to invest the hard-earned money in it. The most dynamic force, which is shaping the destiny of world economy, is technology. A MNC comes with the most sophisticated and advance technology in host country. The most driving force for MNCs, is their technology. Underdeveloped countries encouraged these MNCs to operate in their Industrial development process, because they lack technology. Technology transferred from MNCs useful for the various reasons (i) Industrialization works as curable pills for underdevelopment but these countries do not have sufficient resources to stable industrial development on their own. (ii) Domestic raw material, man power, -domestic capital and equipment needs a better handling for achieving optimum level of productivity and under developed countries are not able to attain it. (iii) 35 Depending upon domestic companies only will require, import of raw material, machinery, tools, technical know how and other things which a MNC bring its own. (iv) Under developed countries faces a cutthroat competition in international markets. They also faces difficulty in selling their products, if their product is not upto the mark of international standard. MNCs give then helping hand in revising products standard. Due to availability of huge amount of funds, MNCs have their modernized research and development lab. These research cells work for developing new products, better use and models for existing products. So they have more production opportunities than domestic companies.^' Conclusions: In a nutshell, the MNCs the world over are the recent craze. The world economies both developed and developing are buzzing with the activities of MNCs in a variety of ways e.g. FDl inflows and outflows, M&A, joint venture, services etc. The investment flows have gone up during the period under review. The International production has expanded. Till the end of 1998, there were 53000 MNCs and 4.48,000 foreign affiliates which have played key role with 36 $ 3.5 trillion, accumulated stock of FDI, $9.5 trillion, sales of foreign affiliates and $ 13 trillion global assets. World wide cross border M&A mostly in banking, insurance, chemical pharmaceuticals and telecommunication valued to the tune of $ 236 billion speaks volume of globalization during the current decade. Asian countries are hopefully the new destination for the foreign investment in the form of FDI, joint venture, M&A and financial services on account of vast size of the market, cheap availability of skilled and unskilled labour, marketing incentives and great deal of opportunity for induction of advance technology. India has embarked upon the process of liberalization for globalization of her economy in July 1991, bringing about a host of economic reforms, viz., and financial, fiscal, banking, insurance and capital market. This liberalization programme is expected hopefully to pave ways for easy and smooth integration of world economy with the Indian economy. The succeeding chapter entitled "Research Design and Methodology" presents a comprehensive explanation pertaining to statement of problems, review of literature, issues, scope, objectives and hypotheses of the study. 37 References: 1. Deo Som, "Multinational Corporation And the Third World", Ashish Publishing House, New Delhi, 1986, p.3. 2 Ibid, p.4. 3 Bernal, J.P., "Science in History" London C.A. Watts and Company, 1965, p.3. 4. Ibid., pp.-5. 5. Raymond Vernon, "Sovereignty At Bay: The Multinational spread of US Enterprise", New York Basic Books, 1971, p.4. 6. Dunning John H. "The Multinational Enterprise", The Background, Chapter I; Allen and Union London, 1971, p. 10. 7. Discussion on Foreign Direct Investment in Canada Ottawa, 1972, p. 51 (Report popularly known as Grey Report). 8. Stephen Hymer, "The Multinational Corporation and the Law of Uneven Development", in Jagdish N. Bhagwati, et al.; Economics and World Order, from 1970 to the 1990's, Bombay, Orient Longmont, 1972, p. 113. 9. Tugendhat Christopher, "The Multinations" Harmonds Worth penguin, 1974, p.19. 10. United Nations, Department of Economic and Social 38 Affairs, "Multinational Corporations in World Development, No. 6, 1973, p.5. 11. United Nations Report on 'Transnational', United Nations Publications, Switzerland, 1986, p.7. 12. World Investment Report, "Trend and Determinants", United Nations Publications, Switzerland, 1998, p. 350. 13. Ibid, p. 350. 14. Ibid. p. 350. 15. Ibid, p.350. 16. Mithani, D.M. "International Economics" Himalya Publishing House, Delhi, 1996, pp. 445-446. 17. Buckley Adrian, "Multinational Finance", Third Edition Prentice Hall of India Private Limited, New Delhi, 1998, p.56. 18. Misra, S.K. and V.K. Puri, "Indian Economy" Fourtheenth Revised and Enlarged Edition, Himalaya Publishing House Mumbai, June 1996, p. 845. 19. Ibid, pp. 835-836. CHAPTtl^ " 11 r^edearck Introduction Problem Areas Review of Literature Scope of the Study Objectives of the Study Hypotheses of the Study Research Methodology Adopted Significance and Utility of the Study 39 ^¥L II RESEARCH DESIGN AND METHODOLOGY Introduction In the foregoing chapter a background study with regard to history, origin and operation of Multinational Corporations (MNCs) was dealt with at length. This chapter has been devoted to problem areas followed by an extensive and analytical review of literature on the Multinational Corporations. Cogent and logical description of the scope, objectives of the study, the research hypotheses and research methodology have been presented. With the advent of new economic policy, July 1991, India accepted the concept of liberalization with an emphasis on smooth transition from controlled economy to the global economy. Against this backdrop, several necessary structural changes have been brought about in the economy since 1991, for example, deregulation of the activities of financial institutions, full convertibility on current accept, privatization of public sector enterprises in the form of disinvestment of share, and drastic policy changes for attracting foreign investors, i.e. FDI, Foreign 40 Institutional Investors (FIIs) etc. The conclusion of Uruguay Round, GATT talk, consequent upon creation of WTO and outline of the Dunkel plan have created the concept of global economy. The Multinational Corporations (MNCs) have evinced keen interest in India right from the inception of the introduction of the new economic policy. A large number of high level trade delegations have started visiting. India on account of several socio-economic advantages. India is now considered to be the single largest emerging commodity market in the world. Problem Areas: In the first instance, the problem associated with the MNCs is the choice regarding place and product. Most of the MNCs want to operate only in those areas where infrastructure facilities are well-developed. They also choose those products, which are more profitable. The host country, therefore, faces problem of unbalanced development. Host country undertakes research and development programme for the overall development of the area. Whereas MNCs take R&D programmes mainly for 41 capitalizing innovations in profit and in establisiiing supremacy of technology and product innovations. Third problem linked with the MNCs is productivity. MNCs want to produce goods at a mass scale by using latest technology, which is a sort of capital intensive giving a less room for employment generation. Fourth problem created by MNCs is the degree of strength in the economy. MNCs make utmost endeavour to keep the aim of strengthening themselves. MNCs also make and attempt to integrate their activities internationally in order to achieve domination. MNCs do their best to maximize profit through unbalanced growth. In the era of globalization, MNCs have a significant control over the pricing. They enjoy the inter- subsidiary movements of goods and services and their pricing. Many modern MNCs are playing a significant control over local administration. They even try to lure bureaucrats to fulfil their unsociable acts. MNCs are mainly promoting consumerism by producing consumer goods at a mass scale. This results in an unequal and unfair societal environment. 42 In Indian context, it is unique to notice that the globalization has led to liberalization creating all sorts of socio-politico and economic chaos in the economy. Domestic industries are comparatively week to the competitive prowess of MNCs. MNCs' gigantic size is also posing serious problems. Two top level MNCs' gross total products' value account more than the five developing country's GDP (Mexico, Brazil, India, Iran, and China). A huge amount of money flows out of the host country in terms of payment of dividends, profit, royalties, technical fees, know-how fees and interest to the foreign investors. Most of the MNCs collaborate with the private companies of the host-country but only in those industries where prospects of profit are bright. Weak and sick domestic industrial unit can not reap the fruit of merger, acquisition and take over which has become a new vehicle of globalization process. Because MNCs and foreign investors take interest only in profit making industries. MNCs from advanced countries generally bring obsolete technology, which is no better in comparison to host country's own technology. 43 MNCs are in/hcting imponderable damage on the host country in various ways such as suppression of domestic entrepreneurship, extension of oligopolistic practices such as unnecessary product differentiation, heavy advertising etc. Sometime, they even supply unsuitable products, worsening of income distribution by distorting the production structure to meet the requirements of high- income elite. Past experience shows, that many MNCs do not follow required environmental safety norms, namely proper drainage of industrial chemical effluents, smog etc. By acquiring domestic industrial establishments, they practice full control in the management activities. MNCs do not take R&D programme in developing countries. Their R&D programmes are concentrated in laboratories in the home country or in other industrial countries. Through R&D activities continue to be centralized in the parent country, the host countries have to bear the bulk of their costs since the affiliates of the MNCs in these countries remit payments on this account generally in relation to their sales volume. 44 Observations have revealed that gains perceived in regard to technology transfer are more hypothetical than real. Various studies conducted in developing countries have concluded that the sphere of technology transfer in practice has been far too restricted. Generally MNCs do not give much importance to train the local technicians. So host countries are not able to reap the intended advantage of transfer of technology. Production methods of MNCs are actually they have made foreign exchange intensive and no real effort for enhancing and promoting indigenous techniques of production. Review of Literature: In the following paragraphs an extensive review of literature on the role of MNCs is presented to streamline the scope and objectives of the present study. M. Wilkins\ in his book entitled "The Emergence of the Multinational Enterprise", has presented a wide ranging views on the developmental historical background of US based Multinational Corporations. Brooke, -Michael Z. and Remmers, H. Lee, eds.^ 1970, in the book titled "The Strategy of Multinational Enterprises: Organization and Finance", have dealt with the 45 organizational structure of MNCs and policies related to finance. Dymeza, William, A.^ in his book gives a clear-cut view of the multinational corporation. In this study an emphasis has been given on how to develop integrated set of strategies. Backman, Jules and Block* have critically evaluated the performance and accountability of Multinational Corporations and the role of foreign firms in their investment in United States. M.Wilkins^ (1974), in his book entitled "The Maturing of Multinational Enterprise" has presented a detailed account as regards the different phases of growth of multinational enterprises in United States. Fatemi, Nasrollah Sailpor/ (1975) in his book "Multinational Corporations", has made an analysis regarding domestic employment, technology, trade, tax, equity and balance of payments. The book also deals with the impact of these corporations on the host country's economy. R.J. Barnett and R.E. Muller' (1975), in his book on "Global Reach", has given an overview of different aspects 46 related to Multinational Corporations. W. Vaupel and J.P. Curhan,* (1974) in his book entitled "The World's Multinational Enterprises" have enlisted the leading multinational corporation of the world. The book has also highlighted their operational activities their significant strategies and issues. Barnet, Richard J. and Ronald E. MuUer,' (1975), in their treatise on "Global Reach: The Power of Multinational Corporations", have described as to how a handful of MNCs are controlling and dominating the world economy. The book also throws light on the different economic crises developed by MNCs in the host country. Flanagan, Robert J. Comp.^° (1974), in a book entitled "Bargaining Without Boundaries: The Multinational Corporations and International Labour Relations", presents a brief account of labour problems raised by multinational corporations. Boarman, Patrick M. and Schollhammer, Hans,^^ (1975), in an edited book on "Multinational Corporations and Government: Business Government Relations", gives an outcome of a conference. In the book the following critical issues have been discussed. 47 1. Conflict between governments and firms. 2. Interaction between business and government in multinational operations. 3. Trade policies of the national and multinational business operations. 4. Developing countries and MNCs. 5. Policies for effective relationship between government and business. Hershfield, David C.^^ (1975) !„ the book entitled" The Multinational Union Challenges The Multinational Company" has advocated creation of multinational unions to challenge and influence MNCs in issues related with labour activities. Turner, Lovis,^^ (1970) in "Invisible Empires: Multinational Companies and the Modern World", deals with the problems raised by the multinational corporations in the host countries. Weston, J. Fred,^'* in edited book titled "Large Corporations in a Changing Society", focuses on the various aspects of MNCs, such as, internal organization controlling mechanism, policies, regarding finance and economic policy of the government. 48 Kapopr, Ashok and J.J. Boddewyn,^^ (1973) in a treatise entitled "International Business-Government Relations: US Corporate Experience in Asia and Western Europe", throw light on the interactions developed between enXerpY\ses and host country governments. It also deals with the nature, relations and negotiations with government and control of such relations. Sethi, S. Prakash and Holton, Richard H.^^ In edited book on "Managements of the Multinational: Policies, Operations and Research", present a theoretical outline of multinational business operations and their policies. General management marketing, financial policies and accounting techniques have also been discussed in detail. Radiance, Hugo,^^ in an edited book in "International Firms and Modern Imperialism: Select Readings", deals with the role of MNCs in world economy. The study also focuses on international flow of capital and host country and evaluating conflicting issues related with technological dependence of the underdeveloped and developing nations. Raju, M.-, Prahalad, C.^^ (iggo) Authored book entitled, "The Emerging Multinations: Indian Enterprises in the ASEAN Region". The book focuses on the emergence, 49 growth and activities of Indian Multinational Corporations Operating in ASEAN Regions. Agrawal, J.1^1985) In his book on "Pros and Cons of Third World Multinations : A Case Study of India", outlines advantages and disadvantages of multinationals from third world with particular focus on India. John Martinussen^o (1988) in his thought provoking treatise entitled "Transnational Corporations in a Developing Country - The Indian Experience", examines various aspects of multinationals operating in a developing country. Effects of these companies on the economy of host country have also been discussed. Some chapters have been devoted to analyze Indian position. The study also gives an account of the behaviour pattern of MNCs in India. AV. Bereznoi^i (1990) in his book entitled "Third World Newcommers in International Business: Multinational Companies from Developing Countries", gives a wide account of emergence of multinationals from LDCs. Contradictory role of the new multinationals in the development process has been critically examined. The treatise also highlights national and regional features and capital export centres. 50 Drysdale, Peter (ed.)22 (1972) in an article entitled "Direct Foreign Investment in Asia and the Pacific", presents a blend of different aspects of foreign direct investment by MNCs in Asia and the pacific. It examines growth and role of FDI in Asia. Author has freely presented a comparison between development and flow of foreign capital. Manser, W.A.P." (1972), in an article on "The Financial Role of International Corporations", presents an exhaustive literature on the plight of pecuniary role played by the international corporations. It further deals with the process and progress of capital infusion by international corporations. Reuber, Grant L.^* (1973), in an article on "Private Foreign Investment in Development", has manifested different dimensions of growth and prosperity of foreign investment and development led by these investment. Different problems that may impede process of investment have been briefly summarized. It is a prolific study on development and foreign investment. Singh, D.R.25 (1974), in an article on "Investment Policy and Performance of US Subsidiaries in India" 57 presents an analysis of different policies adopted by the government to regulate foreign capital inflow. It presents a view of climate present in India and working performance of US subsidiaries. It further evaluates performance of US subsidiaries within the guidelines given by the government's investment policies. In the decades of 80s and 90s, a number of articles dealing with the different dimensions of MNCs operating in India have appeared in reputed journals, periodicals and business dailies. However, it is observed from the foregoing review of literature that there is no evidence of any research oriented study on the role of MNCs in India in Post-NEP period. Although articles and write up have been specially finding the place in the business dailies but they have been found lacking in dealing with the significant aspects of MNCs viz., technology transfer, amalgamations, joint ventures, 100% subsidiary and Mergers and Acquisions (M&A). The framework of the present study makes an attempt to cover up the vital aspects, such as, FDI, Amalgamation, joint ventures, M&As, and 100% subsidiary etc. The study focuses the role of MNCs in post-NEP period in a bid to 52 globalize the Indian economy, for reaping the advantage of global economy. Scope of the Study: In the changing economic milieu, the role of multinational corporations in Indian economy is of great significance. The study is the first of its kind to examine the role of multinational corporations in their various facets and dimensions in Indian economy. The study has thrown light in depth as regards the operation of MNCs through FDI, amalgamation, collaborations, joint ventures, 100% subsidiaries, technology transfer and allied activities in the capital market through foreign portfolio investments. The special feature of the present study is the highlight of the role played by MNCs in the above cited arrangements in the post NEP period. However, the focus of the study is centred around foreign investment related MNCs activities. The foreign trade related activities of MNCs have not been undertaken by the Research Scholar on account of the intractable size of the framework of the study. The result of the study is, however, not at all effected the findings to substantiate the vital role played by MNCs in globalization of Indian economy. 53 Objectives of the Study: The study has the following objectives: 1. To evolve and elaborate the conceptual framework of the Multinational Corporations. 2. To examine and study the policy changes as regards the Multinational Corporations in the context of liberalization and globalization of the economy. 3. To study the effects of WTO on the liberalizing economy, such as, India. 4. To study the measures liberalization packages with the introduction of new economic policy for globalization. 5. To critically examine the foreign investment trends and portfolio investment trends to determine the relative benefits to the Indian economy by the MNCs. 6. To assess and appraise the performance of Hindustan Lever Limited - a Multinational Corporation in India. 7. And finally to study and examine the problems in the context of overall scheme of globalization with Multinational Corporations in general and Hindustan Lever Limited in particular. 54 Hypotheses of the Study: The study has sought to test the following hypotheses. 1. That the MNCs operating in a variety of arrangements viz. FDI, amalgamation, collaborations, technology transfer and mergers and acquisition are solely to the advantage of Indian economy in terms of more flow of foreign capital in the form of FDI, FTAs and GDRs, have opening up vistas for global economic integration. 2. That MNCs in India through FDI are sincerely contributing to the growth and development of the various sectors of economy, namely, the automobile, food processing, pharmaceutical and beverages etc. Many more other significant sectors like insurance, banking etc. are also arresting the attention of MNCs. 3. That the existence of MNCs in the Indian economy is creating an atmosphere of competitiveness for domestic companies which in a bid to emulate, strengthen their own base through restructuring, amalgamation and M&As. 4. That MNCs are integrated with the development of social sector by deploying substantial funds for education, environment and health-care. 55 Research Methodology Adopted: The research methodology of the present study has followed the scientific methods and procedures of thesis writing to present and analyze the whole gamut of issues in its broader spectrum and perspective. The study also undertakes to probe into the issues and problems explained in the foregoing paragraphs from the qualitative and quantitative dimensions. At the very outset, the study makes an endeavour to evolve an appropriate theoretical framework followed by culling up the relevant facts, figures and statistical information on the operations of MNCs in India. These informations have been arranged and analyzed in a systematic procedure to test and justify the hypotheses. During the course of study, the data and information have been collected from various sources. However, main reliance has been placed on the secondary data to be gathered from numerous national and international agencies operating in the country. Reputed journals, national and international both, periodicals pertaining to the subject have been extensively made good use of. Specialized institutes. National and International Documentation Centres and the Libraries have been widely consulted. 1 [ Acp. No....^ •' •-•'>, ''Kl^^^^' .i^- 56 The study has warranted a number of trips to the offices of the Embassies / Consulates of the different countries. Government reports and other relevant documents have also been utilized for the purpose. Significance and Utility of the Study: With the globalization gaining currency the world over. The majority economies have developed the consensus for new economic policies by means of acceptance and adoption of market friendly approach. The liberalization and privatization have become the basic tenets. In this changing economic milieu MNCs have emerged as the main actors of the global market. They now play significant role in the spheres of international investment, international production, trade, finance and technology. The present age is now being termed as the age of MNCs on account of their overwhelming role in all areas of economic development activities. In India there are about 35,000 MNCs with nearly 150,000 affiliates having all most substantial control over total output,- ranging from 13Th to l/4Th share, foreign trade to the extent of as much as 70 percent is controlled by them. In India MNCs were welcomed specially after the 57 proclamation of new industrial policy of 1991. The deregulated and liberalized economic atmosphere has made these MNCs keenly interested in the Indian economy. They are now pouring investment in India in a variety of arrangements, viz. FDI, M&A, joint venture, amalgamation, technology, transfer and financial services. The present study is a step in the direction to threadbare examine the vital role being played by MNCs in Indian economy in post New Economic Policy era. Conclusion: In fine, this chapter has succinctly presented the statement of the problems of the study, the review of literature, the scope, the objectives and the hypotheses of the study. This chapter sums up the facts that the Multinational Corporations in post globalization and liberalization era have a. major role to play in the growth and development f a host economy such as, India. The next chapter entitled, "World Trade Organization (WTO) and Globalization: A Focus on India", presents an insight into the various facets dimensions provisions clauses and sub-clauses of WTO related to foreign investment in India. This chapter also evaluates the pros and cons of 58 implementation of various provision of WTO in Indian perspective. References: 1. M.Wilkins, "The Emergence of the Multinational Enterprise", Harvard. 1970. 2. Brooke, Michael Z. and Remmers H. Lee, "The Strategy of Multinational Enterprise Organisation and Finance", London, Longman, 1970. 3. Dymsza, William, A., "Multinational Business Strategy", McGraw Hill, New Delhi, 1972. 4. Backman, Jules and Block, Ernest, "Multinational Corporations, Trade and the Dollar in the Seventies", New York University, 1974. 5. M. Wilkins, "The Maturing of Multinational Enterprise", Harvard, 1974. 6. Fatimi, Nasrollah Sailpur, "Multinational Corporations", Crambury, 1975. 7. R.J. Barnett and R.E. Muller, "Global Reach", London, 1975. 8. W. Vaupel and J.P. Curhan, "The Worlds Multinational Enterprises", Geneva, 1974. 9. Barnet Richard J. and Ronald E. Muller, "Global Reach: The Power of Multinational Corporations", London Jonathan Company, 1975. 10. Flanagan, Robert J. Comp, "Bargaining without Boundaries: The Multinational Corporations and International Labour Relations", Chicago University, Chicago. 59 11. Boarman Patrick M. Schallhammer, Hans eds., "Multinational Corporations and Governments, Business-Government Relations in an International Context", New York, N.Y. Praeger, 1975. 12. Hershfield, David C, "The Multinational Union Challenges the Multinational Company", New York, The Conference Board. 13. Turner, Lovis, "Invisible Empires Multinational Companies and the Modern World", London, Havish Hamilton VIII. 14. Weston, J. Fred, "Large Corporations in a Changing Society", New York University Press, 1974. 15. Kapoor Ashok and J.J. Boddewyn, "International Business-Government Relations : US Corporate Experience in Asia and Western Europe", New York, N.Y. America, Management Association, 1973. 16. Sethi, S. Prakash and Halton, Richard H., "Management of Multinations : Policies Operations and Research", Free Press, 1973. 17. Radiance Hugo, "International Firms and Modern Imperialism: Select Readings", Harmondsworth Penguin, 1976. 18. Raju M. and Prahalad C, "The Emerging Multinations: Indian Enterprise in the ASEAN Region", Madras. 19. Agrawal J., "Pros and Cons of Third World Multinations: A Case Study of India", Tubingen, 1985. 20. John Martinussen, "Transnational Corporations in a Developing Country - The Indian Experience", New Delhi, 1988. 60 21. A.V. Berezoi, "Third World New Comers in International Business : Multinational Companies from Developing Countries", Delhi, 1990. 22. Drysdale, Peter, "Direct Foreign Investment in Asia and the Pacific", Australian National University Press, 1972. 23. Manser, W.A.P., "The Financial Pole of International Corporations", Part B (Preliminary draft Mineographed) Baring Brother Ltd., 1972. 24. Reuber, Grant L., "Private Foreign Investment in Development", Claredon Press, Oxford, 1973. 25. Singh, D.R., "Investment Policy and Performance of U.S. Subsidiaries in India", 1974. CKArXIET^ - 111 Word Urade \Jr^anlzallon I \AJJ\Jj and LttoDaUdation: ^yv ^ocuA on ^ndia. Introduction Significance of Treaty of the Uruguay Round World Trade Organisation (WTO) Trade Related Intellectual Property Rights (TRIPs) Important General Provisions of the Agreement. India's Financial Services Pact with WTO. 61 CMA.l>TrER - III WORLD TRADE ORGANIZATION (WTO) AND GLOBALISATION: A FOCUS ON INDIA Introduction: After having made an extensive review of literature on the Multinational Corporations' Operations, activities and having carved out the objectives, scope of the study and hypotheses of the study, the present chapter deals with the provisions, clauses and sub-clauses of World Trade Organization ,(WTO). The chapter also evaluates the pros and cons of the implementation of various WTO provisions in Indian perspective. WTO fulfills the need for an organization to regulate world trade, ensure production of trade related properly right. The URUGUAY Round of the GATT, 1994, has gone down the history by establishing WTO at Geneva in 1995. Significance of Treaty of the Uruguay Round The eighth Round of Multilateral Trade Negotiations (MTN) of the GATT participants-commonly referred to as the Uruguay Round -was launched at Punta Del Este in Uruguay, Latin America, in September 1986 in a special session and after eight weary years, has been concluded on the 15th December, 1993, at Geneva. 62 The Treaty of the Uruguay Round became effective in April 1995. The Uruguay Round of the GATT, however, grossly differs from its earlier rounds. It involves many different rules of international trade and negotiations, which are redefined, restructured and refashioned. Besides, it deals with new issues of strategic importance and far-reaching implications. It evolves an altogether New International Economic Order (NIEO) for the new millennium. The South Commission, in its third meeting at Mexico, on 5-8 August 1988, explicitly described the Uruguay Round as "an attempt to tackle issues of strategic importance. Its main thrust is for the design and management of the global economy, including the linkages between money, trade and finance. The Uruguay Round may vitally affect the domestic development and future options of the developing countries" in many ways.^ A nutshell review of the eighth Rounds of the GATT is captured in Table 1. 63 Table 1 Global Trade and Negotiations Rounds (Conferences) of the 6ATT Round year Venue Outcome First 1947 Geneva First GATT Agreement was signed, 20 (Switzerland) tariff schedules were formed. 45,000 tariff concessions were exchanged. Second 1949 Annecy Tariffs on specific products (France) reduced but no significant cuts Some 5,000 tariff concessions exchanged . Third 1950-51 Torquay Tariffs on specific products reduced. Around (England) 8,700 tariff concessions exchanged. Fourth 1956 Geneva Tariffs on specific products reduced, but (Switzerland) not significantly only 82.5 billion worth of traiff reductions. Fifth 1960-61 Geneva Cut in traffis average by 20 percent. EC (Dillon Round) (Switzerland) negotiated for the first time as a unit 4,400 tariff concessions exchanged, covering $ 4.9 billion worth of trade. Sixth 1964-67 Geneva Achieved 35 per cent reduction in tariffs (Kennedy Round) (Switzerland) on manufactured goods. Covering $ 40 billion of trade. Seventh 1973-79 Tokyo Signed 11 agreements coveming non tariff . (Japan) barriers, subsidised exports, and tropical products. Tariff reduction and binding covered about $ 300 billion of trade. 64 Bghth 1986-93 Punta Del Este Agriculture Included in agenda for the first (Uruguay/Geneva) time. New terms of trade in services, protection of intellectual propierty rights cind deregulation of controls over foreign investments. Tarrifs on industrial goods reduced. Reduction in farm export subsidies. Removal import barriers. TRIPs, TRIMS and MFA. Source: UNTCAD Report, UNO Publications, Switzerland, 1995, p. 21. With the adoption of a 'package approach', the Uruguay Round is the most complex, complicated and ambitious of any post-war multilateral negotiations on a plethora of issues Initially, the Uruguay Round of Ministerial Declaration signed in September, 1988 contained a mandate for negotiations in 15 major areas: of which 14 areas relating to trade in goods, included in track I meant for the group of negotiations on goods, and the 15th area pertaining to the liberalisation of services, included in track II for the group of negotiations on services.^ The groups and issues in the Uruguay Round are briefly narrated in Table 2 65 Table 2 Groups and Issues in the Uruguay Round Negotiating Groups Main bsues Track I: Group of Negotiations on Goods 1. Tariffs i. Reduction/elimination of existing tariffs. ii. Tariff escalation iii. Formula approach vs. Product-by-product approach 2. Non Tariff Measures i. Elimination/reduction of any non-tariff measures, including quantitative restrictions, ii. How to establish "equivalece" for bilateral negotiations, iii. Whether to treat unjustified quantiative restrictions (QRs) as negotiable, or whether to insist on rolling back these QRs. Natural Resource- i. Tariff esclation Based Products ii. Use of quantative restrictions iii. Access to supplies iv. Products coverage in the group's work 4. Textile and Clothing i. What procedure could be used to integrate trade in textiles and clothing into the workings of the GATT, in effect, how to dismantle the MFA. Agriculture Improved market access through reduction of import barriers. Increased discipline over measures not conforming wWh the GATT, including direct and indirect subsidies, quotas, also reduction of subsidies which do not conform with the GATT. Tropical Products i. Increased liberalisation of processed and semi- processed tropical products. 11. Tariff and non-tariff liberalisation iii. How much reciprocity should be required of developing countries 66 iv. Coverage by product GATT Articles i. Articles on tariff bindings, customs unions, balance of payments, state trading waivers, etc. are to be reviewed. 8. MTN Agreements and i. Improvement, classification on expansion of Arrangments codes. 9. Safcgurds i. Selectivity, transparency, degressivnty, structural adjustment etc. 10. Subsidies and i. Review of the MTN Agreement on subadies CbuntervaiBng Measures and countervailing measures. ii. Definition of subsidy iii. Discipline on export subsidies 11. Trade-Related Aspects i. Clarify GATT provisions of Intellectual Property ii. Ensure measures and procedures to inforce Rights (TRIPs), Includin Q IPR. Trade in Couhterfeit goods. 12. Trade-Related Investment i To elaborate on further pro\nsions. Measures (TRIMs) 13. Dispute Settlement i. Effective enforcement of pannel's conclusions ii. Improvement of the efficiency and transparency. 14. Functioning of the i. Enhanced surveillance inthe GATT to enable GATT System monitoring of trade policies and practices of contracting parties. ii. Improved functioning of GATT as decision making institution. Track II: Group of Negotiations on Services 15. Services i. Definition and statistical issues ii. Board concepts on principles and rules for trade in services. iii. Coverage of multilateral discipline iv. Foreign Investment V. International Labour mobility. vi. Flight of establishcment, etc. Source: UNTCAD Report, UNO Publications, Switzerland, 1995, p. 22. 67 A Trade Negotiations Committee (TNC) was formed to monitor the overall negotiations The TNC was headed by two chairmen, one at the official level and the other at the ministerial level Owing to disagreements of some member countries (especially, the USA and the EEC) on certain key issues like agriculture, the negotiations could not be completed within the scheduled time i.e., by December 1990. The trade negotiations, therefor, resumed by the TNC, in February 1991 by regrouping the original fifteen areas into the following seven areas: (I) Market access, (ii) Agriculture, (iii) Textiles and clothing, (iv) GATT Rules including Trade Related Investment Measures (TRIMs), (v) Trade Related Intellectual Property Rights (TRIPs); (vi) Trade in services and (vii) Institutional matters.^ Since January 1992, these negotiations were proceeded on a four track approach. Track I pertained to negotiations on market access concessions. Track II dealt with the initial commitments made in the area of services. Track III involved the.legal conformity and internal consistency of the agreements and track IV was kept for the possibility of adjustments in the final draft."* 68 World Trade Organisation (WTO): WTO has been established in 1995 for implementation of the various provisions of Dunkel Treaty. To expedite the resumed negotiations in 1991, Sir Arthur Dunkel, Director- General of GATT and the official Chairman of the TNC, tabled a scheme of proposals (commonly referred to as the Dunkel Draft or Dunkel Text) for the consideration of the participating countries. The Dunkel Text, being a legal and technical document, covered seven areas for negotiations, namely: (I) Market Access; (ii) Agriculture; (iii) Textiles and Clothing; (iv) GATT Rules; (v) Trade Related Intellectual Property Rights (TRIPs); (vi) Trade n Services; and (vii) Institutional matters^. The Dunkel Draft (DD) though aimed at narrowing the differences between the participating countries on the extent of liberalisation of global trade became a subject of highly controversial issue for its insistence as well as for its contents as well as insistence on a total package deal agreement without asking for any concessions In the final stage of negotiations, however, the DD was altered and amended, yet there remained a deep imbalance in the exchange of concessions, especially in the areas of textiles, agriculture, and TRIPs. 68 World Trade Organisation (WTO): WTO has been established in 1995 for implementation of the various provisions of Dunkel Treaty. To expedite the resumed negotiations in 1991, Sir Arthur Dunkel, Director- General of GATT and the official Chairman of the TNG, tabled a scheme of proposals (commonly referred to as the Dunkel Draft or Dunkel Text) for the consideration of the participating countries. The Dunkel Text, being a legal and technical document, covered seven areas for negotiations, namely: (I) Matket Access; (ii) Agriculture; (iii) Textiles and Clothing; (iv) GATT Rules; (v) Trade Related Intellectual Property Rights (TRIPs); (vi) Trade n Services; and (vii) Institutional matters^. The Dunkel Draft (DD) though aimed at narrowing the differences between the participating countries on the extent of liberalisation of global trade became a subject of highly controversial issue for its insistence as well as for its contents as well as insistence on a total package deal agreement without asking for any concessions In the final stage of negotiations, however, the DD was altered and amended, yet there remained a deep imbalance in the exchange of concessions, especially in the areas of textiles, agriculture, and TRIPs. 69 The Most Favoured Nation (MFN) clause, the key principle of the GATT, has been taken for granted in the Uruguay Round with a view to outlawing the practice of discrimination and retaliation among the participating countries and thus to promote liberalized world trade. In theoretical understanding, efficiency, growth, equity and reciprocity are purported to be the cornerstones of the liberal trade ethic envisaged in the construction of NIEO. In reality, however, the mode of negotiations and result of the Uruguay I^ound little about economics and politics at war in the decision-making process involved, while containing much of the asymmetry and inequity involved in the Treaty*. Effects of the WTO: The effects of the WTO originate from the Uruguay Round Treaty (URT). The treaty is a march towards the global economy. Trade barriers and the quota system of all the 117 participating nations will be reduced in the years to come and will be completely abolished by the year 2004^ Essentially, the Dunkel Draft is the centre piece of the URT. TRIMS, TRIPs and MFA are the three crucially 70 important agreements of the GATT negotiations at the Uruguay Round. The Agreement on Trade Related Investment Measures (TRIMs) opens the gates of financial services sector, but member countries are permitted to adopt their own foreign investment policy. The Agreement on Trade Related Intellectual Property Rights (TRIPs) is comprehensive in giving cover to all areas of technology- property, patents, trademarks, copyrights, and so on. TRIPs encroaches upon the member country's sovereign right to frame it's own legislation on intellectual property matters. Multi-Fibre Arrangement (MFA) regulated trade in textile and clothing since the last four decades. Under this special arrangement, importing countries such as the US Canada, Austria, Norway, Finland and European Union (EU) could imposed quota restrictions on exports from the developing countries on a selective basis. Hitherto, unrestricted trade was permitted among the developed countries. But the new treaty phases out MFA over a period of 10 years from 1995. In the case of the US, the integration phase is to be 3 per cent in the initial three years, 10 per cent in the next four years, 32- per cent in the next three years and 55 per cent in the end of the tenth year. Under the new Treaty, thus, the process of liberalization of MFA is stage wise and 71 slow which seems to be disadvantageous to the exporting nations. But the fact is that the US actually wanted the phase-out period to be stretched up to 15 years. The Treaty, however, succeeded to have its commitment to dismantle the quota regime over the ten years time, which, of course, is a positive gain for the textile exporting developing countries, including India. It is equally true that the provision of 10 year phase-out period to open up textile quotas in full extent is rather a defensive gain for the US and other OE^CD economies. It gives them sufficient time for adjustment while the developing countries dodge the onslaught of OECD exports.^ Despite its eventual goal for free world trade, the GATT has failed to restrain the formation of trade blocs. The new treaty, however, provides that trade restrictions among the bloc members must be scrapped and their common external tariffs should not be higher than the average level of tariffs levied prior to bloc formation. Upcoming regional blocs, such as EFTA, NAFTA and some other new ones in Asia and the Pacific countries which may emerge in future will lead to trade frictions as well as marginalisation of the trade of developing countries in the global trade economy.^ 72 In short, all these and other provisions in the new Treaty will have a far reaching impact on the growth and pattern of future world trade. By and large; the treaty is considered to be a bold step towards freer trade in the global economy in the 21st century. Many GATT economists are hopeful on the gains accruing due to specialization based on comparative advantage under free trade in the long run. The IMF Report on World Economic Outlook (1993) envisages that the Uruguay Round Treaty on trade liberalization would augment the annual world real income permanently by 200 billion US dollars. In this kind of visualization, however, the distribution aspects are conveniently ignored by the IMF experts. It is a matter of great concern to the Third World countries that the distribution of gains from the trade based on market strategy always keep the poor nations at a disadvantageous position while trading with the developed countries.^° One serious implication of the new treaty is that when the industrial countries could strengthen their control over global agriculture by keeping their food security in tact, developing countries like India are called upon to ultimately dismantle their food security system. It is designed that the 73 subsidies to farmers will go but subsidies to agro business will stand thereby creating TNC monopoly in agriculture. The NIEO will eventually arouse conflicts between the citizens and TNC's interests. The issue of "Trade related intellectual property rights" including "Trade in Counterfeit goods" is a crucial area of the GATT in the Uruguay Round, where the industrial nations have made the most consolidated efforts to deploy against the Third World countries, by denying the latter's access to knowledge and blocking their capacity for innovation and technological improvement, thus, obstructing any increase in their competitive skill. The GATT's new strategy at the Uruguay Round was based on using the economic strength of a few members against the weakness and dependence of other member countries, especially the developing ones. It is Magna Charta of technologically advanced countries over the poor countries. Both in regard to the issues for negotiation and in its structure as well as plans, it is imbalance, asymmetric and weighed against the poor nations. The international economic arrangement devised under the GATT treaty would result in the flow of wealth on a large scale all the time 74 from the poor/developing countries of the Third World to tl)e rich/industrialized nations of the West.^^ The new treaty is a mixed bag of give and take of gains and losses. In the bargain, however, the Third World countries have not succeeded in getting much, since the rich countries of the North have tried their best very successfully in giving a shape to the emerging New International Economic Order (NIEO) from their angle. This has been done by launching the new agenda of negotiations with new themes and new issues largely in their favour in a calculated manner and taking the advantage of the known weakness of the poor countries, who as usual have failed to bargain/ negotiate collectively inside the GATT. In the years to come, the provisions of the treaty signed in the Uruguay Round will have far reaching implications for the developing economies. Trade Related Intellectual Property Rights (TRIPs): The Agreement on Trade Related Intellectual Property Rights (TRIPs) provides norms and standards in respect of the following "categories of intellectual property rights. 75 (a) Copyrights and related rights (b) Trade marks (c) Geographical indications (d) Industrial designs (e) Lay out designs of integrated circuits (f) Protection of undisclosed information (trade secrets) (g) Patents The Agreement sets out minimal standards to be adopted by the parties though they are free to exceed them. These standards have to be given effect to through legislation. While the Agreement lays down the obligations of member countries in respect of the scope, term enforcement of intellectual property rights, it does not prescribe the procedure for fulfilling the obligations. The procedural aspects have been left to national government to devise while bringing their legislation into conformity with the agreement. A transition period of five years is available to all developing countries to give effect to the provisions of- the TRIPs Agreement. Countries that do not provide product patents in certain areas can delay the implementations of the provisions on product patents for 76 another five years. However, they have to provide exclusive marketing rights for products, which obtain patents after 1.1.1995.12 Important General Provisions of the Agreement: The following general provisions apply to the Agreement as a whole: (I) Parties are free to determine the appropriate method of implementing the provisions of the Agreement within tl^eir own legal system and practice. (ii) There is a general obligation of providing national treatment to nationals of other parties subject to the exceptions in the various intellectual property conventions. (iii) There is an obligation of Most Favoured Nation treatment also with certain exceptions. (iv) There is a provision for public interest concerns under which parties may, in formulating their national laws adopt measures necessary to protect public health and nutrition and to promote public interest in sectors of vital importance to their socio-economic technological development, provided such measures are consistent with the provisions of the agreement. 77 (v) There are enabling provisions of resorting to measures to prevent the abuse of intellectual property rights by rights holders. Each area of intellectual property rights covered by the TRIPs Agreement is detailed in the following paragraphs: - A. Copyrights and Related Rights: In the area of copyright and related rights i.e. rights of performers, produces of phonograms and broadcasting organizations, the Agreement requires compliance with the provisions of the Berne Convention. Computer programmes are to be protected as literary works. The term of protection for copyrights and rights of performers and producers of phonograms is to be no less than 50 years. In case of broadcasting organizations, however, the term of protection is to be at least 20 years, India is already a signatory to the Berne Convention and our laws confirm to the provisions of the Convention. The Indian Copyright Act has recently been amended to take care of our own policy concerns. The amended Act, however, -also takes care of our obligations in the TRIPs l^^eemefvt^bn copyrights and neighbouring rights ^^ ^ ^ { Ace. No ' jj '^''. h 78 except for the term of production for performance rights and rights of the producers of phonograms which is 50 years in the Trips Agreement but only 25 years in our amended law. We have a transition period of five years at the end of which these provisions can be brought into conformity with the requirements of the Agreement. B. Trade Marks: Trademarks have been defined as any sign, or any combination of signs capable of distinguishing the goods or services of one undertaking from those of other undertakings. Such distinguishing marks constitute protectable subject matter under the provisions of the Agreement. The Agreement provides that initial registration and each renewal of Registration shall be for a term of not less than 7 years and the registration shall be renewable indefinitely. Compulsory licensing of trademarks is not permitted. The Indian TradeMarks and Merchandise Act, has been recently amended in response to our own requirements. The amended law would also bring our trademark law completely in line with our obligations in the TRIPs agreement. It may be pointed out that by and large the amendments made in 79 the context of the TRIPs Agreement are marginal; the main amendments are in the nature of clarifications and procedural simplifications. C. Geographical Indications: The Agreement contains a general obligation that parties shall provide the legal remedies for interested parties to prevent the use of any means in the designation or presentation of a good that indicates or suggests that the good in question originates in a geographical area other than the true place of origin in a manner which misleads the public as to the geographical origin of the good. There is no obligation under the Agreement to protect geographical indications which are not protected in their country of origin or which have fallen into misuse in that country. In India we do not so far have any specific law on geographical indication, Case law, however enables legal action for protection of geographical indication. We would, therefore, need to enact a new law on the subject. The TRIPs Agreement allows us a transition period of five years for the purpose. 80 D. Industrial Designs: Obligations envisaged in respect of industrial designs are that independently created designs that are new or original shall be protected. Individual governments have been given the option to exclude from protection designs dictated by technical or functional considerations, as against aesthetic considerations, which constitute the coverage of industrial designs. The right accruing to the design holder is the right to prevent third parties not having his consent from making; selling or importing articles bearing or embodying as design which is a copy or a substantial imitation of the protected design when such acts are undertaken for commercial purposes. The duration of protection is to be not less than 10 years. Our law, the Designs Act, 1911 is a very old enactment and would need to be updated. E. Lay out designs of integrated circuits: The obligation in this area is to comply with the Washington Treaty on lay out designs. India is a signatory to the Washington Treaty. The main obligations of the Washington treaty which are also incorporated in the TRIPs Agreement are the protection of the intellectual property 81 in respect of lay out designs that are original in the sense of being the result of their creator's own intellectual efforts and national treatment of foreign right holders. The term of protection is 10 years and the rules in respect of compulsory licensing are the same as in case of patents. We would need to enact legislation to give protection of lay out designs. The TRIPs Agreement allows us a transition period of five years for the purpose. F. Protection of undisclosed information: The agreement requires Members to protect undisclosed information and data submitted to governments or governmental agencies. It also provides that natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed, acquired or used by others without their consent in a manner contrary to honest commercial practices. Further, parties are required to protect against unfair commercial use, undisclosed or other data obtained as a conditions of approving the marketing of pharmaceutical or of agricultural, chemical products. In India we do not have a separate legislation dealing with trade secrets. Common law on the subject is evolving 82 and the courts have provided relief where allegations of wrongful disclosures have been proved. The TRIPs Agreement allows us a transition period of five years to implement these provisions. G. Patents: The basic obligation in the area of patent is that, inventions in all branches of technology whether products or processes shall be patentable if they meet the three tests of being new,^involving an inventive step and being capable of industrial application. In addition to the general security exemption which applies to the entire TRIPs Agreement, specific exclusions are permissible from the scope of patentability in the areas of inventions whose commercial exploitation is necessary to prevent public order or morality, human, animal, plant life or health or to avoid serious prejudice to the environment, diagnostic therapentioi and surgical methods for the treatment of human and animals; and plants and animals other than micro-organism and essentially biological processes for the production of plants and animals. In respect of plant varieties there is an obligation to provide for protection by patents or by an effective sui 83 generis system or by any combination thereof. It is provided that this provision shall be reviewed 4 years after the entry into force of the Agreement. The Agreement does not spell out the elements of a sui generis system and it is left to each government to determine the elements, which could be deemed to be providing effective protection. The TRIPs Agreement provides for a minimum term of protection of 20 years counted from the date of filing. The rights conferred on a patent holder under the TRIPs Agreement ar.e: (a) Where the subject matter of a patent is product, third parties not having the patent holder's consent are prevented from making, using, offering for sale, selling or importing that product. (b) Where the subject matter of a patent is a process, third parties not having the consent of the patent holder are prevented from using, offering for sale, selling or importing the product obtained directly by that process and from using the process. Members of the TRIPs Agreement may provide limited exception to the exclusive rights conferred by a patent provided that such exceptions do not unreasonably conflict with the rights of the patent holder. 84 Use of the subject matter of a patent without the authorization of the right holder including use by the government or third parties authorized by the government, is subject to stringent conditions under Article 31 of the TRIPs Agreement. However, the requirement of prior authorization of the right holder may be waived in case of a national emergency or other circumstances of extreme urgency or in case of public non-commercial use. These conditions may also not be applied where the use is for the purposes of remedying practice determined after judicial or administrative process to be anti competitive. The TRIPs Agreement does not prohibit the use of price control measures. Patents issued in other countries, developing or developed, would not as such confer any rights in India. Only Indian patents, issued under Indian law, would confer these rights upon the holder. Exploitation of patents developed abroad and also granted in India will normally be possible on the basis of grant of a licence by the patent holder. Article 65 of the TRIPs Agreement provides for transitional arrangements, which are as follows: 85 (i) No Member is obliged to apply the provisions of the Agreement before the expiry of a general period of one-year following the date of entry into force of the Agreement establishing the WTO. (ii) A developing country member can delay for a further period of 4 years the application of all provisions other than provisions contained in Article 3 (National treatment); Article 4 (Most Favoured Nation treatment); and Article 5 (Multilateral Agreement concluded under the WIPb). (iii) A developing country member which is obliged by the Agreement to extents product patent protection to areas of technology not so protectable in its territory on the general date of application if the TRIPs Agreement for that Member (5 years following the date of entry into force of the Agreement Establishing the WTO), it may delay the application of the provisions on product patents of the Agreement to such areas of technology for an additional period of 5 years. The above implies that we can delay the application of the provisions of the agreement for a period of five years with an additional five year period in case of sectors in 86 which product patents are not currently available i.e. food, pharmaceuticals and chemicals. We would, therefore, have to put in place the legislation in respect of product patents in the areas of food, pharmaceuticals and chemicals latest by 1-1-2005, i.e., 10 years from the date of entry into force of the WTO Agreement. India's Financial Services Pact with W.T.O.^* On the conclusion of negotiations in Geneva, Agreement on Financial Services was arrived at on 13 December 19^7; India made in improved offer. The MFN exemptions taken earlier in the areas of Banking, Non banking Financial Services (including Insurance) were withdrawn in response to all the important trading partners undertaking a similar MFN obligation. India has also found a few additional areas. In Banking, the number of new bank branches bound for both existing and new foreign banks was increased from eight to twelve per year. In Insurance, status quo was maintained. In the area of re-insurance the existing binding has been aligned to the market. Earlier, the Indian insurance companies were obliged to code a minimum of 10% of the overall premium abroad after retaining the statutory 87 percentage with the domestic insurance companies. The above 10% limit has now been removed to allow Indian insurance companies to exercise their commercial judgement in deciding the premium to be coded abroad. The binding made to the WTO is distinct from the actual practice, which is more liberal. The overall bindings are well within the actual liberalization being permitted in each area. In allowing the limited improvement in Financial Services, the intention of the Government of India has been to increase the confidence level of foreign investors in the Indian financial sector in particular and the economy in general. This is expected to have a positive impact both qualitatively and quantitatively on the inflow of foreign investment and know how into India. During the latest round of negotiations 56 offers representing 70 countries were filed. In all 102 countries have taken commitments in financial services. The Fifth Protocol relating to these negotiations was open for acceptance till 29 January 1999. However, India is now committed to the offer made. The Agreement on Financial Services has come into force with effect from 30th January 1999. 88 Conclusion: In the post war era, under the disguise of GATT, both economics and politics are at war in determining the future of global economy. The GATT, in theory, only makes a tall claim of treating all contracting parties as equal. In practice, however, the poor and small countries are ignored and never allowed to succeed in asserting themselves. The last Uruguay Round was essentially a game played by the rich countries in sustaining the interests of their multinational ' firms. This was clearly witnessed in the process and final results of the Uruguay Round. The truth of the matter is that the big bosses of the world economy have adopted double standards in matters of theory and practice of free trade. They preach liberalization and free trade to increase their access to foreign markets in LDCs. But, at home, they introduce a high degree of protectionism and government intervention with regard to their new products, industries and technologies. In the years to follow, in the NIEO envisaged by the URT, governments of the Third World Nations will have a restricted scope to act positively on'the economic arena to improve the welfare of their people. 89 In a few words WTO has brought the world together. It associates 144 countries as its members with a firm commitment to work for global economy. The member countries are not free to use discrimination in trade investment and transfer of technology provided it does not harm the interest of human life. It restricts development of products, chemicals, warheads of mass destruction. The member countries can, however, put restrictions on selective import, and export, of goods that are not upto the specified standard. Global economy has emerged for MNCs to operate with least risks involved in global trade. India is the beneficiary of WTO looking after progress of global economy in all the member countries. There is phenomenal growth of MNCs in India. The investment by MNCs is helping the country to diversify its industrial base. The succeeding chapter entitled "Economic Reforms for Globalization of Indian Economy", presents a vivid analytical study with regard to numerous liberalization packages and measures for reforms in Capital Market, reforms related to industry, fiscal reforms, reforms related to foreign investment, banking sector reforms, reforms in insurance secloT and capi1.a\ account conver1:ibi\ity etc. 90 References: 1. Edward E. Denison, " Multilateral Trade" Journal of Political Economy, New York, Vol. 35 No. 5 Oct. 1986 p.129. 2. Bid, p.132. 3. Special Features of GATT, "International Agency for Trade." Annual Report, Japan, 1992, p. 35. 4. Ibid, p.37. 5. Ibid, p. 39. 6. Ibid, p.40. 7. John, I Peter, "Significance of Uruguay Round Treaty", Review of Economics and Statistics, Annual Supplement, USA, 1996, p. 43. 8. Ibid, p.44. 9. Ibid, p.46. 10. The IMF Report on World Economic Outlook, Washington, 1993, p. 128 11. Ibid, p.130. 12. W.F. Robert, "Asian Economies and TRIPs", Journal of International Economics, Netherlands, 1995, p.26. 13. Ibid, p.27. 14. Press Information Bureau, Government of India, Delhi,- 19.12.97. cKATnnEn " wr (economic f\efonn6 for (utobaiidation, of ^ndivan C^conom'i Introduction Capital Market and Globalisation Securities and Exchagne Board of India (SEBI) Securities Trading corporation of India (STCI) Role of SEBI. Industrial Reforms Foreign Exchagne Regulation Act (FERA) Capital Account Converibility Fiscal Reforms and Globalisation Banking Reforms and Globalisation 91 - \\7 ECONOMIC REFORMS FOR GLOBALIZATION OF INDIAN ECONOMY Introduction: In the foregoing chapter a vwid discussion has been presented pertaining to the varied aspects of World Trade Organization (WTO) with special reference to India. The present chapter gives an extensive exposition regarding the economic reforms in India. Economic reforms are indispensable tools of the modern age world economy. Economic reforms in India were initiated in July 1991 with three main objectives: stabilization, structural adjustments and globalization of Indian economy. These reforms mainly purported to correct the macro economic imbalances, which had destabilized the Indian economy in the 90's with ballooning inflation rate, high current account deficit, unsustainable fiscal deficit and acute shortage of foreign exchange reserves. As a result the government of India came out with a host of reform packages right from July 1991 in the following areas of business activities. 1. Economic Reforms in: 92 a. Capital market b. Industrial reforms I) Industry ii) Trade policy related reforms iii) Infrastructure sector reforms iv) Foreign direct investment v) Foreign institutional investors 2. Financial Sector reforms 3. FERA and Multinational Corporations in India 4. Fiscal reforms 5. Insurance sector reforms 6. Banking reforms Capital Market And Globalization: The capital market of India has been witnessing a tremendous change with the inception of financial and economic reforms started in July 1991 to keep pace with the world economy. With the induction of globalization process changes in capital market started with a high speed to make conducive ground and atmosphere to bring it to the global standard. Unrestricted inflows and outflows of 93 funds due to the rupee convertibility have given a new dimension to the growth and development of the capital market. Indian capital market is being linked to international markets with the introductions of Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCB). Indian capital market is a multifaceted system having involved in numerous activities. So changes in the capital market ensure improvement in the infrastructure and institutional facilities provided by it including clearance, settlement, depository procedures and custodial facilities.^ Aims of Capital Market Reforms: The very first objective of reforms introduced in capital market is to facilitate a rapid and sustained improvement in the overall functioning of the capital market. To gain investors confidence in the market by paying attention on more and more transparent operation. To infuse new energy as well as strengthen and sharpen the settlement process and persistent uniform trading practices. To establish a well and strong regulatory mechanism. To enhance and improve the functioning of the capital market which eyes on the mobilization of savings and channeling them into the most 94 appropriate productive uses. To make inroad for the issue of new types of equities and debt instruments. Capital market reforms also have the following motives. Modernization in comparison of other stock exchanges, efficient trading and clearance system, enhancing and sharpen the market efficiency, improving the system spreading information.^ Capital Market Reforms^: Capital issues (control) Act, 1947, revoked, office of controller of capital issues abolished, and shares pricing decontrolled. The companies can approach capital market after clearance by SEBI. Securities and Exchange Board of India (SEE!) was established in February 1992. SEBI was strengthening with necessary authority and powers for regulation and reform of the capital market. A notification was issued under the Securities Contract (Regulation) Act, 1956, the power to guide and regulate stock exchanges, was entrusted to SEBI. This includes recognition, rules, and articles, voting rights, delivery contracts, stock exchanges listing and nomination of public representatives. 95 Reparation of complaints of investors is to be encouraged, sharing it with recognized investors associations. This will help in filing suits against companies involved in fault. Permission has been given to Foreign Institutional Investors (FIIs) to operate in Indian capital markets, merely on registration with SEBI. Investment regulations and procedures have been relaxed for NRIs, so that NRIs and corporate bodies can transact in share and debentures with prior permission of RBI. Indian companies got permission to operate in international capital market through Euro-equity shares. SEBI entrusted with the power of issuing regulations and file suits without prior nod of the central government. Other organs of the capital market started functioning all over the country: These organs are Over The Counter Exchange of India (OTCE) and the National Stock Exchange of India with nation wide stock trading and electronic display, clearing and settlement facilities. 96 Primary Market Reforms* (1992-93 to 1998-99): A code of conduct and regulatory framework was formulated to bring merchant banking under the SEBI regulations. To protect the potential investors, the "Banker to the issues" brought under purview of SEBI. The due diligence certificate by lead managers, regarding disclosures made in the offer document, has been made a part of the offer document itself for better accountability. SEBI has transformed and improved disclosure standards; simplified norms and procedures have been formulated to accelerate overall system. It was made a binding norm for companies to disclose all factual and specific risk factors attached with their projects while launching public issues. Stock exchanges need to make it sure that concerned companies have a valid acknowledgement card issued by SEBI. SEBI should make a careful and critical examination of the offer document, to make it certain that all facts disclosed by the company in the offer document, at the time 97 the company applies for listing of its securities in the stock exchange, are in accordance with the prescribed norms. Stock exchanges advised to amend the listing agreement to ensure that a listed company furnishes annual statement to stock exchanges, showing variations between financial projections and projected utilization of funds made in the offer documents and actual. To discourage the use of stock-invest by institutional investors, the facility has been restricted to mutual funds and individual investors. SEBI issues a code of advertisement for public issues for ensuring truthful and fair disclosures. To reduce the issue cost, underwriting by issuer made operational, subject to the condition that if an issue was not underwritten and was not able to collect 90 percent of the amount offered to the public, the entire amount collected would pay back to investors. The current guidelines for bonus shares have been slacked. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices was stopped and fresh guidelines were issued by SEBI. An expert committee headed by Shri Y.H. Maligom entrusted 98 with the task of review the existing disclosure norms and issue procedures and suggested actions based on which new guidelines were issued. SEBI to examine the draft prospectus within 21 days and mandatory period between the date of commend of the prospectus by the registrar of companies and the opening of the issue to be reduced to 14 days. The details of short prospectus to be thoroughly checked by SEBI before the issue of acknowledgement card. SEBI reconstituted governing boards of the stock exchange, introduced capital adequacy norms for brokers and made rules for making the client/broker relationship more transparent, in particular, segregating client and broker accounts. In 1996-97^ the eligibility criteria for issuer was strengthen. Some measures have been taken to provide more flexibility in the issue process. Some stringent and detailed disclosure norms were prescribed, greater transparency in the issue of prospectus needed and separate criteria for financial companies have been introduced. Criteria for accessing the securities market were strengthened. Issuers proposing to make first offer to the 99 public of equity, or any security convertible at a later date into equity are required to have a track record of dividend payment in three of the immediately preceding five years. Issuers not meeting this requirement can access to market, provided their projects is appraised by a scheduled commercial bank or a public financial institution with minimum 10 percent participatin in the project cost. Provided their securities are listed on the OTCEI. This requirement was also imposed in the case of issue made by listed companies where the post issue capital exceeds five times the equity capital prior the issue. No entry restrictions for public sector banks to access market they have been permitted to comply with less strict criteria, public banks permitted to price issue at premium furnished they have a two year profitability record, as against the three year requirement for other issues.^ Restriction was imposed on payment of any direct or indirect discounts or commissions to persons receiving firm allotment. Condition of 5 shareholders for every 1 lakh rupees of fresh issue of capital and 10 shareholders for every Rs. 1 lakh of offer for sale recommended as an initial and continuing listing condition. SEBI gave up vetting of 100 public issue offer documents. SEBI's comments on offer document, if any, will be communicated within 21 days of filing. Debt issues not accompanied by an equity component allowed to be sold wholly by the book building system subject to guidelines prescribed in section 19(2)(b) of the Securities Contracts (Regulation) Rules. The requirement of minimum shareholding are fulfilled, the need of 90 percent minimum subscription in case of "offer for sale" are no longer required.^ The 90 percent requirement is also not needed now in case of exclusive debt issue subject to certain disclosures and exemptions under the companies Act. Housing finance companies deemed to be registered for issue purposes provided they were eligible for refinance from the National Housing Bank. Corporate advertisements, between the date of issue of acknowledgement card and the date of closure of the issue have been permitted, subject to certain conditions, which include the disclosure of risk factors associated with the issue. 101 Promoters with a contribution exceeding Rs. 100 crore have been permitted to bring in their contribution in a phased manner, irrespective of their track record. Issuers have been permitted to list debt securities on stock exchanges without their equity being listed.* No major changes have been brought down in the primary market in 1998-99. However, recommendations made by the "Informal Group on Primary Market" have been accepted and implementation commenced. Following are the main changes: 1. After a specified date, the primary issues to be compulsorily made through the depository mode. 2. In the issues of Rs. 25 crore and above 100 percent book building permitted. 3. Reduction in the minimum number of mandatory collection centres in respect of issues above Rs. 10 crore to 4 metropolitan cities plus the place having the regional stock exchange. SEBI decided to give some specific relaxation to public issue by infrastructure companies,in order to ensure more flow of funds to this sector. 102 Secondary Market Reforms' (1992-93 to 1998-99): The capital market in India has witnessed a sea change in operation of secondary market with the initiation and implementation of various reform packages right from July 1991. These reform measures are briefly adumbrated as under: Regulations were introduced by SEBI which governs substantial acquisition of shares and takeovers and lays down conditions and terms under which disclosures and mandatory public offers are to be made to share holders. 'B' group securities renewal of transactions is prohibited so that transactions can be settled within 7 days. Private mutual funds have now got permission and several have already been set up. All mutual funds allowed applying for firm allotment in public issues. SEBI is authorized to control UTI. Fresh guidelines for advertising by mutual funds are issued and the requirement of pre-vetting of advertisements is removed. To enhance the operation of area of investments by mutual funds, mutual funds are permitted to underwrite public issues and guidelines for investment in money market instruments are relaxed. 103 The procedure for lodgment of securities for transfer lias been considerably relaxed for institutions through the introduction of 'jumbo' transfer deed and consolidated payment of stamp duty. Stock exchanges are now required to take prior permission of SEBI, while introducing carry forward system. This is subject to effective monitoring and surveillance system and infrastructure. The financiers funding the carry forward transactions being lenders of funds will not be allowed to settle their account till repayment of the loan. The carry forward situation shall be disclosed to the market, scrip-wise and broker-wise by the stock exchanges at the beginning of the carry forward session. Capital adequacy norms of 3 percent for individual members and 6 percent for corporate members in their outstanding positions announced. Those suggested by Patel Committee replace graded margins of 20 percent to 50 percent on carry forward transactions. Members doing financing of carry forward transactions will be subject to a limit of Rs. 10 crores. 104 The Depositaries Ordinance was promulgated in September 1995 to provide a legal framework for the establishment of depositories to record ownership details in book entry form. The ordinance proposed to make consequential changes in legislation like the companies Act, Income Tax Act, SCRA, the Stamp act, etc. It provides for detailed regulations to be framed by SEBI as well as detailed byelaws to be framed by depositories with the consent of SEBI. The reforms introduced in 1996-97^° for secondary capital market is as follows: - Custodians of securities existing for a considerable period and engaged in providing services to a number of institutional investors can reach the required minimum net worth of Rs. 50 crore in a phased manner over a period of five years. SEBI to have a custodian to appoint a compliance officer who will deal with the SEBI regarding complaint and reporting issues. Before incorporating any changes that have an impact on settlement of transactions of institutional investors. SEBI should have meetings with the Association of Custodial Agencies of India (ACAI). 105 Stock exchanges asked to modify the listing agreement to provide for payment of interest by companies to investors from the 30th day after the closure of public issues. Uniform good-bad delivery norms and procedure for time bound resolution of bad deliveries through bad delivery cell prescribed. Bad delivery cell procedure has helped to standardize norms. The National Stock Exchange should follow all exchanges to institute the buy-in or auction procedure. In view of the falling percentage of deliveries, exchanges asked to collect 100 percent daily margins on national loss of a broker for every scrip, to restrict gross traded value to 33.33 time the brokers base minimum capital and to impose quarterly margins on the basis of concentration ratios. A study group is made to recommend norms and procedures for greater transparency and fairness in buying negotiated deals. Stock exchanges are required to establish a clearinghouse or clearing corporation. Stock exchanges are not allowed to renew cash group contracts of shares from 106 one settlement to another. A core group for enter-exchange market surveillance has been set up for coordinating action in case of abnormal valuation. SEBI has been given permission for expansion of the trading terminals of screen-based trading systems of stock exchanges to non-stock exchange cities. Expansion of terminals has also been permitted in those cities where they already exist but they are required to a common understanding with the local stock exchange. Membership will be open to the brokers of the other local exchanges. It is expected to provide a sufficient system for settling investor complaints and for timely settlement of arbitration cases arising out of trades transacted on the extended terminals. The expansion of Bombay on Line Trading (BOLT) system of the stock exchange, Mumbai to the trading systems of other exchanges will be ensuring sufficient monitoring and observation system, stipulation of usual margins, capital adequacy, intra-day trading limits fixed for the broker stock exchange and the introduction of trade guarantees. The expansion of terminals will ensure more compefition between various stock exchanges and enhance their efficiency.^^ 107 The National Securities Clearing Corporation Limited (NSCCL) is given the task of guaranteeing settlement of trades in the capital market segment of the NSE. The NSSCL has gained a good progress in strengthening clearing facilities in other regions by setting up regional clearing facilities. This will enhance the efficiency of clearing system. The Dave Committee on Over the Counter Exchange of India (OTCEI) has commended ease up in the maximum size of the issues that may be got listed on OTCEI, relaxation in listing criteria and a shift from a rolling (T+3) settlement to five day account period settlement being followed by other exchanges. Most of the recommendations made by Dave Committee for making OTCEI's functioning more flexible effective and viable have been considered by SEBI and they are in the process of implementation.^^ At the end of each day, short as well as long sales will have to be disclosed to the exchange. They would be controlled through the imposition of margins. Scheme of stock lending has been started. Stock lending has been authorized in which short sellers can obtain securities from an intermediary before making such sales 108 The authorized intermediaries should have minimum net worth of Rs. 50 crore. Reforms introduced in the secondary market in 1998- 99 are as follows: - In secondary market reforms have been taken to enhance investor interest in the share market by providing facility of buy back of share. Other steps have taken by the government are as under: (I) Amendment of SEBI Takeover Regulations, (ii) Extension of damut trading to more scrips. (iii) Introduction of rolling settlement in the damut segment. (iv) More strict disclosure requirements and stipulation of additional margin requirements aimed at curbing excess volatility in share prices. Securities and Exchange Board of India (SEBI): The Securities and Exchange Board of India (SEBI) was formed on April 12, 1988, to accelerate orderly growth of capital market. The SEBI Act, 1992 gave statutory powers to the SEBI for the following purposes: 109 To control corporate and market intermediaries in a dynamic style, the government, on the 26th January 1992, empowered the SEBI to penalize inside traders. These powers were entrusted to the SEBI through promulgation of an ordinance amending the SEBI Act, 1992. The government permitted reintroduction of options trading almost after 40 years, through the amendment made in the Securities Contract (Regulation) Act, 1956. Under new system, securities Appellate Tribunal has been set up to deal with the appeals made against penalties imposed by the SEBI. The amendments enable the SEBI, with regulatory powers over corporate in the issue of capital, transfer of securities and other concerned matters. The amendments also provide that a stock exchange can expand its trading floors only with the prior permission of SEBI.^^ Initiatives of SEBP*: 1. SEBI has established guidelines and norms for the purpose of regulation and control. 2. Corporations have recommended strict disclosure terms and conditions for compliance. 3. Mandatory bar of credit rating has been imposed for issue of debentures etc. 110 4. The capital market of India is opened to foreign institutional investors. 5. In August 1995, government passed the depository system legislation. 6. The SHCIL has opened two companies - National Depository Corporation of India Limited. (NDCIL) and Indian Securities Depository Nominee Company Ltd. (ISDNCL) - to render the introduction of a scripless trading mechanism in the Indian capital market. Securities Trading Corporation of India (STCI): In 1994 a Securities Trading Corporation of India was set up as a developing agent of secondary market in government securities. The STCI has started functioning from June 27, 1994. Reserve Bank of India announced that a primary dealer mechanism is being set up in order to strengthen the secondary market structure. Primary dealers would work like the underwriter of the auctions of government securities. They will act as a 'market maker'*by providing two way quotes and made securities accessible to final investors. The main focus of primary dealers would be to increase the turnover of government securities. Primary dealers got some Ill special facilities by the Reserve Bank of India, as the means of keeping liquidity in their operations. To avail of special facilities, the primary dealers are required to fulfill certain conditions. That is, they should have a satisfactory presence in the auctions. The primary dealers would also be subject to discretionary norms. Role of SEBl: SEBI is entrusted to create a conducive and proper ground required for raising funds from the capital market. The environment which is essential for raising money from the capital market, includes the rules, trade practices, regulations, customs and relations among institutions, brokers, companies and investors. SEBI should endeavour to held the trust of investors and safeguard the interest of investors in general and small investors in particular. This can be attained simply by matching the needs of the persons connected with the security market and maintaining a good coordination among three main bodies directly involved with its operations, namely (a) Investors, (b) Corporate sectors, and (c) Intermediaries. SEBI should provide good and accurate information and it should also make investors aware of their rights in clear 112 and precise terms. It should also keep vigilance on the market liquidity. Safety and profitability of the securities. SEBI should maintain a conducive investment environment and facilitate the corporate sector with better framework to raise industrial securities easily, efficiently and at affordable cost. SEBI should maintain a good network of infrastructure, in order to facilitate expansion and growth of merchant bankers, brokers, commercial banks, mutual funds etc. It will provide efficient service to the investors and the corporate sector at a competitive price. SEBI should develop framework and guidelines for more open, orderly and unbiased conduct in connection to takeover and mergers in the corporate sector to secure just and equal treatment to all the investors and to create an atmosphere conducive and smoothly going path for takeovers and mergers. It should ensure efficient and unbiased mechanism for more orderly conduct in relation to takeovers and mergers.^^ SEBI shall draw more effective and strong law in the existing set up as far as they relate to the industrial investment, mutual funds, investments in units, LIC savings 113 plan, Unit fund, industrial societies and corporations with the purpose of making investment in housing/industrial projects. SEBI should act as an authoritative institution to ensure that the intermediaries are financially strong and furnished with professional and efficient personnel. SEBI should make laws with a specific role of objectives, single administrative authority and an integrated set of policy framework to handle all the aspects of the capital market. It shall adopt a two-stage system of disclosure at the time of initial issue and make obligatory for the corporate houses to furnish detailed information to all the stock exchanges, journalists and investors on demand.^^ SEBI should make a sound relation with the Institute of Chartered Accountants of India, which ultimately will facilitate to devise more effective and modern accounting and auditing standards. It should attempt to impose disciplinary obligations on management, in financial reporting and deal strictly with cases where windows dressing and accounting prudence are employed to the loss of the interest of users of such financial reports and statements. 114 SEBI should make law-making mechanism flexible and dynamic to match with the changing market situations and circumstances. It should make sure that the regulatory framework is dynamic and non-rigid to provide automatic and self-sustain growth and development. It will vet the flexibility of introducing dealers' network by which securities can be easily bought or sold over the counter as in a retail shop. This will enhance liquidity and investment opportunities. There should not be any constrain over the transactions. Industrial Reforms: Various economic reforms initiated in 1991 to boost the overall growth of economy upto the standard of global economy. These reforms were mainly started to attain globalisation via liberalization. The following reforming steps have been taken in various sectors of the economy.^' Industry: 1. Various segments of industry have been delicensed, such as, coal, lignite, petroleum (other than crude) and its distillation products and bulk of drugs. 2. Sugar industry delicensed. 115 3. De-reservation of coal and lignite and mineral oils. 4. Companies are allowed to buy back their own shares subject to a limit of buy-back to twienty five percent of paid up capital and free services. 5. A national task force remitted its 108 points report on information technology and software development. Recommendations made by the Committee have been got nod of government, and proper line of action has been delivered to the department concerned, for its proper implementation. 6. Patent bill has been commended by Rajya Sabha and subsequently promulgated through an ordinance. Trade Policy Related Reforms: The following are the trade policy reforms: 1. By the April 1998 Exim Policy delicensed 340 items of import by shifting them from the restricted list to OGL. 2. An agreement on free trade was initiated on 28 December 1998 between India and Sri Lanka. It will result in -zero import tariffs for most commodities on both sides by 2007. 116 3. Payment of interest on dues to exporters for delays in duty drawbaclt/refund of duty beyond two months. 4. Extension of tax holiday for EOU/EPZ to 10 years. 5. With effect from August 1, 1998, India unilaterally removed all quantitative restrictions on imports of around 2300 items from SAARC countries. 6. Government has given permission to set up private Software Technology Parks (STPs) for exports. 7. The scope of Export Promotion Capital Goods scheme at zero duty has been enlarged further to certain specified biotechnologies and small scale engineering industry. Infrastructure Sector: 1. A room has been made for private investment in power transmission, by amending the Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948. 2. Of the various enactment of the Electricity Regulatory Commission Legislation, the Central Electricity Regulatory Commission was set up with good bunch of provisions for states to establish their own independent regulatory commissions. 117 3. A policy framework for issuing licences for providing Internet services has been pronounced. There will be no licence fee for the first five years and after five years a nominal license fee of rupee 1 will be charged. 4. A National Integrated Highway Project merging the golden quadrilateral connecting Delhi, Mumbai, Chennai and Calcutta with the East-West (Silchar to Saurashtra) and North-South (Kashmir to Kanya Kumari) corridors has been launched. 5. A new Telecom policy framework is under preparation. 6. The Urban Land (Ceiling and Regulation) Act, 1976, repealed through an ordinance. Foreign Direct Investments^: 1. Projects in the following fields got nod of government for foreign equity participation upto 100 percent under automatic route: electricity generation, transmission and distribution, construction and maintenance of roads, highways, vehicles, tunnels and vehicular bridges, ports and harbours. The automatic route is subject to a ceiling of Rs.1500 crore on foreign equity. 2. Unlisted companies are allowed to float Euro issues subject to certain conditionalities. US 3. Permission for FDI under non-banking financial services now includes "Credit and Business" and "Money Changing Business". 4. The companies providing Global Mobile Personnel Communication by Satellite ( GMPCS) services have been allowed FDI upto 49 percent stake subject to licence. 5. Now Indian companies can issue GDRs/ADRs in the case of bonus or right issue of shares, or on genuine business reorganizations duly approved by the High Court. 6. End-use restrictions on GDR/ADR issue proceeds have been removed except those on investment in stock markets and real estate. 7. In private sector banks, multilateral financial institutions have been allowed to contribute equity to the extent of shortfall in NRI holdings within the overall permissible limit of 40 percent. NRIs and Reforms: 1. The aggregate ceiling for investment in a company by all NRIs/PIOs/OCBs through stock exchanges has 119 been made separate and exclusive of the investment ceiling available for FIIs.'^ 2. Investment limit by a single NRI/PIO/OCB has been increased from 1 percent to 5 percent of the paid up capital. 3. For NRIs/PIOs/OCBs aggregate investment ceiling has been enhanced from 5 percent to 10 percent of the paid up capital of a company. This limit can be raised to 24 percent under a General Body Resolution for the listed Indian companies. 4. Permission has been granted to NRIs / PIOs / OCBs, to invest in unlisted companies, fulfilling certain conditions, norms, procedures and ceiling applicable in case of listed companies. 5. The Government is preparing a scheme for Persons of Indian Origin (PIO) for issue of PIOs card which would facilitate a visa free regime to them alongwith some special economic, educational, financial and cultural benefit. Financial Sector Reforms: 1. Discreet rules regulations for banks have made tough to require provisioning for central and state 120 government securities, government guaranteed loans, and general provision for standard assets. 2. Minimum Capital to Risk-weighted Assets Ratio (CRAR) for banks to rise to nine percent by April 2000. 3. Conditionalities for public issue by infrastructure companies have been relaxed. 4. Risk weight of 25 percent for market risk of government securities, 20 percent for state government guaranteed advances in default and 100 percent for foreign exchange open position. 5. Assets in the substandard category to be clarified as doubtful after 10 months instead of 24 months, by March 31, 2001. 6. Regulatory framework for NBFCs rationalized companies, which solicit public deposits to comply with, revised norms. 7. Rolling settlement introduced for dematerialized shares. Number of companies whose shares must be traded in. de-materialized form enhanced. 100 percent book building allowed for issues above 25 crore. 121 8. Bill has been introduced in parliament to have an independent insurance regulatory authority, and opening of insurance and pension funds to private companies. Proposal is under way to allow 26 percent foreign equity stake and additional 14 percent NRI and FII holding. 9. Primary issues to be compulsorily come through depository mode. 10. A bill introduced in parliament for amending the Securities Contracts (Regulation) Act, 1956, so as to enlarge the definition of "Securities" to cover derivative contracts. 11. A new bill have been introduced namely Foreign Exchange Management Act (FEMA), to replace FERA, for easing the foreign exchange related transactions. Foreign Exchange Regulation Act (FERA): Sweeping changes in the Foreign Exchange Regulation Act (FERA), 1973, have again demonstrated the Government's resolve to continue with liberalization of the Indian economy to pave the way for accelerated foreign investment as well as to give a boost to the country's foreign trade. Promulgation of an ordinance to amend the 122 Foreign Exchange Regulation Act 1973 (FERA) substantially dilutes its regulatory provisions to bring it in line with the new liberalized industrial trade and exchange rate policies. With the changes in FERA, announced on January 8, 1993 the Government has removed certain restrictions on foreign companies, allowed joint ventures abroad freely by Indian companies and has given more teeth to the Reserve Bank of India (RBI) to prevent violations of rules by authorized dealers.^° The ordinance has removed a large number of restrictions on companies with more than 40 percent non resident equity, removed FERA controls on Indian firms setting up joint ventures abroad and allowed Indians to hold immovable property abroad, subject to certain conditions to be stipulated by RBI. The ordinance also incorporates into law all the changes, which have so far been made by issue of notification by the Reserve Bank of India or the Central Government. These changes pertain to facilities extended to FERA companies on the appointment of technical and management advisors, opening of branches, acquisition of immovable property by FERA companies in India, borrowing of money or acceptance of deposits by them etc.^^ 123 Facilities were also extended to non-resident Indian (NRIs), Indian companies and residents for opening of foreign currency accounts in India following the introduction of partial convertibility on the current account. Notifications were also issued exempting NRIs returning to the country from making declarations on their arrival in India regarding their assets abroad and from the requirement of prior approval for the acquisition of immovable property in India. The ordinance was issued not only to incorporate into the law all the changes, which were made by issue of notification, but also to delete sections that had lost their relevance over time and rationalize other sections, which were considered necessary, but should be amended to do away with the rigours of irrationalities experienced while administering the Act. In the process, about a dozen sections of FERA 1973 were deleted. It is quite apparent that most of the changes are in tune with the repeated assurances from the government regarding full freedom for foreign investors. Indian firms, too, would find wider opportunities for investment abroad through joint ventures, which eventually should boost exports. As the changes meet the long-standing demand of the industry circles and the export organizations, the 124 ordinance has generally been welcomed. According to the Federation of Indian Export Organization (FIEO), various provisions would help Indian exporters make their presence felt in the international markets and generate additional exports. Liberalization in equity participation would help the Indian exports to be competitive vis-a-vis exports from Pakistan, Bangladesh, Indonesia,Thailand and other countries. It is almost certain that provisions regarding acquisition of immovable property in India coupled with easing of operational restrictions on FERA companies would open up immense possibilities for foreign investors. The investor would also have little reasons to feel constrained by the requirements of export earnings for repatriation of investment income. Likewise, deletion of Section 11 from the Act would enable the exporters to remit commissions to their overseas agents expeditiously. These should augur well for the country, which is under tremendous pressure of burgeoning trade deficit." The government has recently initiated some institutional reforms. Rupee is now partially convertible in capital account. The government has also bringing the bill to replace FERA by Foreign Exchange Management Act (FEMA). 125 The details pertaining to capital account convertibility is discussed in tine following paragraphs. Capital Account Convertibility: The induction of globalization process through the liberalization, initiated since 1991 has transformed the various aspects of the Indian economy in general and the external sector in particular. The domestic economy is now gradually keeping a good pace with the global economy. The foreign trade is almost deregulated; control remains only on consumer goods imports. Imports of gold and silver are now allowed legally. Tariffs on most capital and intermediary goods range between 0 and 25 percent, with an average of about 10 percent. The maximum tariff is now 50 percent. The average tariff on all imports, including consumer goods has declined to 25 percent.^^ If rupee got the status of full convertibility then the market forces will govern all foreign exchange transactions. Market forces will decide the mode of exchange rate. Presently all current account flows are transacted at market exchange rates. The RBI, in relation to FDI governs capital flows" and financial inflows, the permission are 126 almost automatic. Full convertibility of rupee will imply the following. ^'^ 1. Market forces will control all current and capital account transactions with no restriction on inflow and outflow of capital by resident Indians and foreigners as well as NRIs. 2. Market forces will determine the exchange rate of rupee in relation to any foreign currency. 3. Foreign exchange transactions by the RBI and the government will be out of bound, quantity as well as cost. 4. Indians can operate foreign exchange accounts in Indian and foreign banks and they can withdraw or adjust the balance without any restrictions. 5. The RBI can interfere in the foreign exchange market only by buying and selling rupee and foreign currencies. 6. No restrictions on repatriation of capital by foreigners. 7. Indians as well as foreigners can buy and sell shares and debentures in foreign and Indian companies respectively. 127 The two valid arguments are here for the capital account convertibility. These are the following: capital account convertibility fits in with the need of reforms and liberalization. This is right thing to do and it does not require more justification. Tarapore Committee examined the rupee convertibility in 1997. It recommended that the Capital Account Convertibility (CAC) should be introduced in three phases over a period of three years - 1997-98, 1998-99 and 1999- 2000. The committee recommended that while having CAC the economy should fulfil the following conditions.^^ 1. The Gross Fiscal Deficit (GDF) of the centre as a ratio to Gross Domestic Product (GDP) should be brought down from 4.5 percent to 3.5 percent, by the year 2000. 2. The average cash reserve ratio (CRR) of banks should be brought down from 9.3 percent to 3 percent, between 1997 to 2000. 3. The rate of inflation should be kept down to between three to five percent. 4. The non-performing assets (NPAs) of public sector banks should be reduced down to five percent from 13.7 percent. 128 5. The debt service ratio as a percentage of current account receipts must be brought down to 20 percent. 6. Interest should be deregulated. Only market forces should decide the rate. 7. Globally comparable and transparent procedures of financial accounting should be adopted. 8. The RBI should withdraw from primary government borrowing programmes and government must set up its own public debt office for mobilizing its own funds. 9. Creation of weak banks should be strictly banned. 10. There should be a consolidated sinking fund and disinvestment proceeds (from public sector undertakings) and RBI dividends should go into this fund. The Committee understands that the economy is capable of attaining all the above mentioned conditions by the year 2000. But its recommendations have raised too many controversies. This is an instrument for complete financial sector reforms. There arise several questions in relation to the validity of these recommendations. First, are these criteria necessarily desirable, such as inflation rate? Second, if these preconditions are necessarily met, can these be attained within the time span of three years? 129 Third, how interpretations should be drawn from these preconditions? It is a matter of debate can we wait for all these conditions to happen? On capital account convertibility, there are five specific segments for which reforms are needed. The corporate sector, banks, non- banking financial institutions, individuals and financial markets. The validity of recommendation is however questionable. However, the coming days will decide the fate of CAC.26 There is a danger associated with capital Account convertibility. That it can encourage only inflow of capital, ignoring the possibility that once deregulation is introduced it may also lead to capital outflow. It is witnessed that initially inflow is more than outflow because foreigners take advantage of initial low prices of shares and properties. Besides domestic residents may also bring back illegal capital held in foreign. But if economic sectors of various economies do not improve, and lag behind the global economy, then capital later goes out. The capital outflow can be more because foreigners as well as domestic residents can enjoy the advantage so a watchful and prudent look is necessary before having CAC. But it is the need of the hour to have CAC. 130 Fiscal Reforms and Globalization: Financial reform is co-related with the fiscal reform. In the changing atmosphere of global economy, financial system control holds a great significance for the overall growth and development. Without an easy accessibility of funds from the financial system the government can not fulfill diversified political and economic interests. High fiscal deficit therefore tends to be a big barrier to financial reforms. At first when economic reform saw the dawn in India in 1991, fiscal deficit was sky rocketing. At that time it was realized that without fiscal reform the economy could not triggered off. Fiscal deficit can only be improved by either raising tax and non-tax resources or by chopping out the lot of expenditures. The structural adjustment programme (SAP) set gone in 1991, emphasise has been given on the pruning of government expenditure, particularly subsidies and bureaucratic expenditure. The SAP also disapproved public investment. It was felt that public investment is an impediment for private investment.^^ 131 The actual implementation of SAP varied between the centre and the states and also among the states. The speed and frequency of fiscal reform also surged over the years. Some states felt it very hard to implement SAP, particularly the poorer states. Insurance Sector and Reforms: The liberalization of insurance sector is the major feature of the next round of financial sector reforms and the government initiated the process early this year by setting up an Insurance Regulatory Authority (IRA) under the overall administrative control of the Ministry of Finance. The IRA was set up as a follow up of the recommendations made by the Malhotra Committee on insurance sector reforms. The government announced its intention to evolve a broad consensus about the future direction and content of reforms in this sector and accordingly, discussions were held with the management and the unions of the insurance industry and also with different interest groups. The report, especially the major recommendations was also discussed in the consultative committee attached to the Finance Ministry and the leaders of the major opposition 132 parties objected to the foreign companies entry in the insurance sector as also the equity dilution in the General Insurance Corporation and Life Insurance Corporation. Since, no consensus emerged in these discussions; the Finance Ministry could not take decision on the major recommendations of the Malhotra Committee. Notwithstanding this government dilemma, the foreign insurance companies delegations visited India in a big way in the last few months and a number of memorandum of understandings (MoUs) were signed with the Indian companies for positioning themselves properly to take advantage of the sudden announcement on liberalization of the insurance sector. As per the Malhotra Committee's recommendation, the private sector should be allowed to enter insurance sector and no company should be permitted to transact both life and general insurance business. The number of new entrants should be controlled and promoters holding could range from 26 percent to 40 percent of the paid up capital. No person other than promoters can hold more than 1 percent of the equity.- 133 The Malhotra Committee also stipulated that if and when entry of foreign insurance companies is permitted, they should be required to float an Indian company for the purpose preferably as joint venture with the Indian partner. Many of the leading Indian houses which were connected with the private insurance companies in the country in the prenationalisation days, have made preparations to enter the insurance sector again once it is opened up. But while, the government allowed the private sector to set up new banks through its guidelines in January 1993, no hasty decision was taken in respect of the insurance sector since the issue had serious political dimensions and the powerful trade unions, even those close to the ruling party, opposed vehemently the opening up of the industry to the private sector. Lie, which is a statutory corporation, will be converted into a company registered under the Companies Act, if the Malhotra Committee's recommendations are to be implemented. The present capital of Rs. 5 core of LIC contributed entirely by the Centre has to be raised to Rs 200 crore with the government holding brought down to 50 percent thereof and the remainder being held by public at large including a portion for the employees. 134 Both the senior executives of the LIC and also the active trade unions oppose the recommendation. There has been repeated strike action in the insurance industry on opposing the Malhotra Committee recommendations. The government has asked foreign insurance major to forward investment proposals in related or unrelated areas as a prerequisite for screening their applications for insurance licences. These investment commitments will form a part of a total rating system that the Insurance Regulatory Authority (IRA) will adopt while issuing licences. The government's request is seen as a move to ensure that foreign insurance giants have a long-term commitment to the reforms programme of the country, and at the same time provide enough ammunition to the Centre to counter criticism that it is "selling the insurance sector to foreigners for a song".2^ Apart from track record, solvency ratios and other specific indicators to gauge the health of an insurance company, commitments made by foreign players on investments in other related or unrelated sectors in the country will be taken into consideration. These will not only 735 boost foreign direct investment (FDI) but also be proof of their long-term commitment. Many foreign insurance companies and industry intermediaries have drawn up investment plans in response to the government's call. While other areas of the financial scoter provide viable investment options to foreign majors, they are of the opinion that such a stipulation was not unfair. It is a clever way of roping in long-term players and eliminating political pressures. The government might be successful in attracting around $ 1 billion even before the first private licence is issued. While life insurance companies have expressed their desire to set up Asset Management Companies (AMCs), general insurance majors are planning risk management firms. Some foreign insurers have also assured the government that they would pursue their international clients to look at India as an investment option, apart from making available overseas funds for Indian projects. 136 Others are still unsure whether they should commit funds before a clear picture emerges on the exact number of licences IRA plans to issue. Taking the lead in investment commitments are AIG of the US and Standard Life of the UK, which have already signed MoUs with the Tata Group and HDFC respectively. AIG has already committed $ 90 million as a part of its $ 1.1 billion Asia Infrastructure Fund for India, while another $ 60 million is due to come in. AIG has also picked up an interest in the Tata-Bell Canada telecom venture and expects to commit direct and third party funds of around $ 250 million to India by the end of December 1999. Standard Life has already envisaged interest in picking up around $ 40 million in private placements in HDFC, and is working on extending infrastructure funds to the country. While Lloyd's brokers Marsh and McLenan has applied to the Foreign Investment Promotion Board (FIPB) to set up a joint venture risk management company with Indian re-insurance brokers J.B. Boda, Commercial Union has already set up a representative office in New Delhi. Eagle Star, Legal, and General Assurance is also planning risk management divisions and intend to recruit Indian personnel 137 for training abroad. This is a step at developing in-house expertise in an industry, which has not witnessed much innovation on the product front. Several other foreign players have already started purchasing office and residential space in the country and looking for investment opportunities that could help portray a long-term image. In fact, one of the world's largest broking houses, Sedgwick has already floated a joint venture - Sedgwick Parekh Health Care India Pvt. Ltd. The Government is aware that it will not attract huge FDI inflow only by allowing foreign insurance companies to set up shop. A system of rating has been suggested for insurance companies, when the industry is finally thrown open and private and public sector companies enter the arena. The recommendation is part of a report submitted to the Insurance Regulatory Authority. The rating system had been suggested to allay apprehensions of unethical practices by private insurance companies as had been practiced by some companies that had been in operation prior to the nationalization of the sector in 1972.^^ 138 The rating will be done on the basis of the quality of services provided by the company, payout of claims and handling of clients. It will also depend on financial parameters such as the net-worth, total business volume of the company, quality of investments and the general performance of the company. In the general insurance category, the rating will serve as a guide to prospective clients about the financial stability of the insurance company whom they are approaching for a cover. Since, after opening up of the industry, a company would be able to offer both general and life insurance covers, separate ratings are proposed to be introduced for the life insurance and general insurance segments because the risk profile in the two cases is totally different. It has not yet been decided whether the rating would be done by the existing rating agencies such as CRISIL, CARE and ICRA or a separate body is to be formed catering exclusively to the insurance industry. The performance of the companies would be periodically reviewed and the ratings updated. The ratings would be then made public so that both individuals and 139 organizations could exercise their choice on the basis of it. The Insurance Regulatory Authority (IRA) of India will shortly announce a Regulatory Framework governing private and foreign participation in this sector. The government would have to amend the LIC and GIC Act before private entrance could be allowed into the Insurance Industry. Banking Reforms and Globalization: Since the inception of new economic policy in 1991, the government of India is trying to bring changes in all sectors of economy to harmonize it with the globalization process. Keeping in view the main objective of globalization government of India brought reforms in the banking sector. It has appointed a series of committees and working groups to study the current situation and recommend reform measures. One of the most significant committees is the Narasimham Committee appointed by RBI in 1991. The committee recommended the following measures:^° 1. Reduction in statutory liquidity ratio (SLR) from 38.5 percent of demand and time liabilities of commercial banks in 1991 to 25 percent. 140 2. Reduction in cash rese^rf/e ratio (CRR) of commercial banks from 15 percentt {lemand and time liabilities to 5 percent. 3. Phased deregulation of administered interest rates on bank deposits and advances and lending of term lending institutions. 4. Phasing out the directed credit and differential interest rates to priority and other sector. 5. Augmentation of capital base of commercial banks to the international norms of 8 percent deposits though public issue of shares; and 6. Prudential classification of assets and liabilities of commercial banks. Committee also suggested certain guidelines to consolidated rural brariches and makes them more viable in order to keep pace with globalization. Since 1991 only a few rieforms have been implemented in banking sector. These are as under: 1. Statutory Liquidity Ratio (SLR) on incremental net domestfc demands and time liabilities (NDTL) declined from 38.5 percent to 25 percent. 141 2. SLR securities are continuously revealed and included in balance sheet. 3. Interest rates on deposits and advances of cooperative banks completely deregulated, subject to a minimum- lending rate of 12 percent. 4. Average cash reserve^jratio (CRR) on NDTL reduced gradually from 15 percent to 10.5 percent and is further brought down to 10 percent in March 1998. 5. Commercial bank interest rate on loans above Rs. 2 lakhs completely dejregulated and the number of administered interest rates on commercial bank advances reduced from more than 20 to only 2. 6. Interest rates on domestic term deposits above 2 years deregulated. 7. Nationalized commerci2\l banks allowed raising capital through debt and equity to attain international capital adequacy norms; term,i|ending institutions are allowed to raise capital from market. 8. Scheduled commercial^ banks are allowed to subscribe to shares and debentures in both primary and secondary markets subject to a maximum of 5 percent of incremental deposits in the previous year. 142 9. 13 public sector banks have attained a capital to risk weighted assets ratio of 8 percent. Full capital adequacy norm obtained by all foreign banks and many Indian banks. 10. Banks are permitted to lend foreign currency denominated loans under the foreign exchange risk is borne by the borrowers. 11. New private banks given license to operate and about 10 banks have come up since 1991. 12. CRR on non-resident Indian were first rationalized and finally removed with effect from 1996. Interest rate on term deposits under these accounts also completely deregulated since 1996. SLR on deposits under these accounts brought down to 25 percent, at par with deposits in other accounts. Conclusion: Since the induction of new economic policy in 1991, Indian government adopted various modes to globalize its economy. The most significant changes have taken place in capital market. Capital market is an organization, which is playing a - vital role in new economic arrangement. Reforms have been implemented in capital market, to attract more investors. Government of India established a 143 regulatory body namely SEBI to control and regulate activities of the capital market and ensure the interest of investors. Modernization of stock exchanges and buy back of shares are recent steps in this direction. On industrial sector front, provisions and regulations have been specifically simplified in order to facilitate efficient production: concessions, tax relaxation and the holidays and various other facilities have been provided to the industrial units. Government adopted many simple and easy procedures to attract more and more foreign investment. Special concessions and repatrability norms have been formulated to lure NRIs and MNCs. Globalization is epicenter of all the changes. To globalize Indian economy, government adopted fiscal reforms on account of correcting balance of payment. Banking sector, insurance sector, have also been witnessed similar trends. RBI announced reduction in CRR, SLR and time factors in various related transactions. Private banks invited to operate in banking services. In insurance sector foreign as well as domestic private companies can operate now onward. 144 With the changes in FERA, announced on January 3, 1993, the government has removed certain restrictions on foreign companies, allowed joint venture, abroad freely by Indian companies and given more teeth to the Reserve Bank of India (RBI) to prevent violations of rules by authorized dealers. Most of the changes are in tune with the repeated assurances from the government regarding full freedom for foreign investors. All the FERA changes thus augur well for the country groaning under the pressure of burgeoning trade deficits year after year. The Foreign Exchange Management (FEMA) Bill will replace FERA. FEMA bill introduced by the Finance Minister, Yashwant Sinha, in the Lok Sabha on August 4, 1998. On capital account convertibility front, government appointed Tarapore Committee and its recommendations are being implemented. The domestic economy is now sufficiently strengthened and substantially integrated to the global economy. It also needs time to derive more fruits from the globalization. The forthcoming chapter entitled "Globalization of Indian Economy: Perspective on MNCs", presents a vivid 145 analysis with regard to the MNCs operating in India especially in the post NEP period. It presents an account regarding modus oprendi of MNCs in arrangements of subsidiaries, joint ventures, collaboration and mergers and acquisitions. References: 1. RBI Bulletin, Published by RBI Mumbai, Nov. 1996, p. 36. 2. Sinha, S.L.N., "The Capital Market of India", Vora & Company Publishers Pvt. Ltd., Bombay, 1960, p.l. 3. Economic Survey, Govt, of India, Ministry of Finance, Economic Division, New Delhi, 1995-96, p. 61. 4. Ibid., p. 61. 5. Indian Economic Survey 1996-97, as presented in Lok Sabha by the Finance Minister, special supplement No. 2 of 1997, p. 54. 6. Ibid., p. 55. 7. Ibid., p. 55. 8. Nabhi's Manual for Foreign Collaboration and Investment in India, Nabhi's publications. New Delhi, 1998, p. 70. 9. Economic Survey, Govt, of India, Ministry of Finance, Economic Division, New Delhi, 1995-96, p. 62. 10. Ibid, p. 72. 11. Ibid, p, 75, 146 12. Indian Economic Survey 1996-97, as presented in Lok Sabha by the Finance Minister, special supplement No. 2 of 1997, p. 58. 13. Singh Balwinder, Singh Lakhwinder, "Securities and Exchange Board of India, Some Vital Issues", Dateline, Business India's, Business Weekly, Mumbai, March 17-23, 1994, p. 1. 14. Ibid, p. 2. 15. Ibid, p. 5. 16. V.K. Bhalla, S. Shiva Ramu,"International Business", Anmol Publications Pvt. Ltd., New Delhi, 1996, p. 186. 17. "Preparing for a Second Generation of Economic Reforms", (Editorial) Yojana, vol. 43 no. 4, April 1999, New Delhi, pp. 32, 33. 18. Ibid, p. 33. 19. Ibid, p. 34. 20. "International Industries", Annual Journal, Calcutta 1992, p. 264. 21. Ibid, p. 264. 22. Ibid, pp. 265, 268. 23. B.B. Bhattacharya, "Financial Reforms and Financial Development in India", Institute of Management Technology, Ghaziabad, IMT Research Series 02, Excel Books, New Delhi, 1998, p. 101. 24. Ibid, p. 104. 25. Bibek Debroy, "Foreign Exchange Management: From Fera to FEMA" the Chartered Accountant, Journal of 147 the Institute of Chartered Accountant, New Delhi, vol. XLXII No. 3, September 1998, p. 14. 26. Ibid, p. 16. 27. B.B. Bhattacharya, "Financial Reforms and Financial Development in India", Opcit, p. 71. 28. The Daily Economic Times, New Delhi, August 13, 1996, p. 8. 29. The Daily Financial Express, New Delhi, October 29, 1996. 30. B.B. Bhattacharya, "Financial Reforms and Financial Development in India", Opcit., p. 29. - V LI Co ha lid at Ion of Jrndian C^conomu: f^erdpectlue on Introduction MNCs in Indian Economy Foreign Technology Agreements Special conditions Applied to Approvals for Investment and Technology proposals Technical collaboration Channels of Technology Transfers/ Financial Investment Mergers & Acquisitions Takeovers and Strategic Alliances Vulnerability of Indian Companies to Takeovers Financial Services 148 GLOBALISATION OF INDIAN ECONOMY: PERSPECTIVE ON MNCs Introduction The foregoing chapter has dealt with reforms for globalization of Indian economy. The analysis examined issues of industrial reforms, Capital Market reforms, opening up insurance sector and the amendments of FERA. The present chapter highlights impact of MNCs on the economic globalization in India. MNCs in Indian Economy: Industrial revolution has played pivotal role in the formation of the MNCs., which solely was responsible for the birth, and development of technology. During the fifteenth century labour intensive industry transformed into the machine intensive, production oriented manufacturing industry. The feudal system of industry based on monopoly of guilds was no longer adequate for the growing needs of the market. As Karl Marx said it *' The feudal system of industry, in which industrial production was monopolized by closed guilds, now no longer sufficed for the growing wants of new markets. The manufacturing system took its plac^^ 149 Industrial revolution not only revolutionized but also transformed total system of production from labour intensive to machine intensive. New inventions such as ' ste^m engine, electricity and later on atomic energy changed the face of industrial establishments. Small business houses took the shape of giant industries. Modern industry entered into every corner of the globe, which created a giant world market. This market has provided a wide fillip to commerce, which in turn has bolstered further extension of industry^ From the earliest appearance of capitalism, the industrialized countries had constantly been looking for market to absorb their surplus a phenomenon in keeping with Marxist writings.^ The maximization of profit become the motive of business activities which enticed firms to shift their operations to foreign markets where labour as well as raw material was cheapy From the very existence of MNCs there was a constant growth in the size and method of working of the MNCs. Hymer clearly pointed it, the workshop turned into factory to become national corporation, then multidivisional corporation and now multinational corporation."* 150 India is no exception to the phenomenon of MNCs existence. They are here in India since time Immemorial. East India Company is a glaring case in sight. The present chapter highlights the role of MNCs in Indian Economy. Table-1 has been prepared by the Research Scholar to present the increasing stake of MNCs in Indian industries until the period 31st Mar 1998. The table is indicative of the fact that MNCs are almost omnipresent in all the sectors of the Indian Economy, barring of course the agriculture sector. Their presence can be felt overwhelmingly in Agro- chemicals, pharmaceutical, food processing, electrical equipments, automobiles, personal product, computer hardware and software, leather products and host of consumer products. The Research Scholar is of the opinion that it was only after liberalization that MNCs' stake has been observed to be increasing above 50 percent at a high premium. It is felt that in future the consumer and infrastructure sectors would be attracting larger amount of investment. The engineering sector has attracted the highest investment so far. Still the investment has fallen far short of adequate. The approvals in the core and infrastructure sector have always been India's priority. It has accounted for almost 50 percent of the total approvals. But the actual 151 inflows have been at a dismal 20 percent of the approvals, which shows the slightly declining confidence of foreign investors in the Indian economy. One reason* why the foreign investors feel more comfortable in the consumer goods sector is the interface with the government and the regulatory authorities. In consumer goods, there is no interface between the investor and the regulatory agencies once the proposal is cleared. However, in infrastructure, the investor has to get clearances from different regulatory agencies. Not only this, the local people also tend to oppose the project under the influence of some leader whose purpose is political gain. The interface does not end with the approvals but is an ongoing process, which acts as a major determinant. The telecom industry has been able to catch up because an independent regulatory authority has been formed and the government has been quick to allot the licences. Table 1 MNCs* Stake in Indian Industry Industry MNCs Foreign Stake Market Leader Agrochemicals Hoechst Schering 50.09 United Phosphorus Novartis India 51.00 Bayer India 51.00 152 Personal care Proctor & Gamble 65.00 Hindustan Lever ReckiU & Colman 51.00 Colgate Palmolive 51.00 Food Nestle India 51.00 Hindustan Lever Cadbury India 51.00 Pharmaceuticals Glaxo India 51.00 Ranbaxy Laboratc Hoechst MR 50.10 E Merck India 51.00 Electrical equipment ABB 50.99 BHEL GEC Alsthom 66.50 Engines Cummins India 51.00 Cummins Irxlia '- Wartsila NSD 51.00 Electronic&-Audion"V Philips India 51.00 BPL Electronics-Instrument Siemens 51.00 Siemens 2-3 Wheelers Kinetic Honda 50.92 Bajaj Auto Drilling equipment Ingersoll Rand 74.00 Ingersoll Rand Lubricants Castro! India 51.00 IOC Industrial gases BOC India 51.00 BOC India Photographic equip. Kodak India 74.00 Jindal Photofilms Paints ICI (India) 50.84 Asian Paints Soaps/Detergents Hindustan Lever 51.00 Hindustan Lever Tyres Goodyear India 74.00 MRF Dyes/Pigments Clariant India 51.00 AtuI Car batteries Exide Industries 50.70 Exide Industries Leather footwear Bata India 51.00 Bata India 755 Bearings SKF Bearings 51.00 SKF Bearings LCVsflSCVs Ashok Leyland 50.94 Tel CO Textiles Coasts Viyeiia 51.00 Bombay Dyeing Engine parts MICO 51.00 MICO Mining SesaGoa 51.01 MA Air-conditioners Carrier Aircon 51.00 Carrier Aircon Computer hardware Digital Equipment 51.00 Altos India Sourc: Oipital Market Vd. ^W 01, Mumbai, March 2^Apr 5,1998, P. 13 MNCs as a Means of Technology Transfer, Foreign Collaborations and Joint Ventures: Since the. dawn of civilization on earth, instruments, tools and equipment, are playing a crucial role in shaping human life. With the help of these tools man starts a civilized life. In the beginning people have been working with stone tools. Gradually the modern tools replaced these stone tools. Technology is the slogan for success in the new era of globalization. It is having greater significance on human life. Man is striving to devise more sophisticated technology. Technologies are lifeblood for modern corporate sector in particular and for common man in general. 154 Unfortunately, most of the developing countries lack the capacity of producing their own technology. On the other hand industrialized countries are enjoying a good chunk of resources to develop latest technology, comparatively at a lower cost. So less developed countries are heavily relying on the industrialized countries. To bridge this ever widening gap between 'haves and have-nots' there exists a new phenomenon of technology transfer^ Foreign Technology Agreements: Automatic permission has been allowed for foreign technology proposals in higher priority industries upto a lumpsum payment of Rs 1. crore, 5 percent royalty for domestic sales and 8 percent for exports, subjected to total payment of 8 percent of sales over a 10 year period from date of agreement or 7 years from commencement of production. The prescribed royalty rates are net of taxes and will be calculated according to standard procedures laid down as per the New Industrial Policy of India.^ Other than high priority industries automatic approval is also available as per the above guidelines, if no free foreign exchange is needed for any payments. Specific approval is required for all other proposals under the common parameters laid down by the government. 155 Permission is not obligatory for hiring and availing of the services of foreign technicians and also for foreign testing of technology developed indigenously. Payment may be made from blanket permits or free foreign exchange according to specified guidelines provided by the RBI. Applications for seeking permission in respect of item (1) and (2) would be examined by the RBI, and other proposals should be submitted to government of India, Ministry of Industry (SILA). In case 9f item (2) foreign exchange requirement is needed to be met from EXIM Scrips. Special Conditions Applied to Approvals for Foreign Investment and Technology proposals:* 1. The total stake holding by non-resident in the undertaking should not cross the percentage specified in the approval letter. 2. (i) Basis for the calculation of royalty will be laid upon the net ex-factory sale price of the product exclusive of excise duties, minus the cost of the standard bought out components irrespective of the source of procurement, including sea freight, insurance, custom duties etc. Royalty payment will be limited to the 156 licensed capacity plus 25 percent in excess thereof for such items requiring industrial license or on such capacity as specified in the approval letter. This restriction will not work to items not requiring industrial license. In respect of production more then specified limit, prior permission of government would have to be taken regarding the conditions of payments of royalty in respect of production more than specified limit. (ii) Payment of royalty would not be made after the expiring of the period of agreement. If the orders had not been completed with in the specified period of agreement. However, where the orders itself took a long period, time in completion of orders, then the royalty for an order booked during the period of agreement but completed after the expiry of agreement period would be payable only after a Chartered Accountant certified that the orders in fact have been firmly booked and execution began during the period of agreement and the technical assistance was available on a continuing basis even after the period of agreement. 157 (iii) There is no specified minimum guaranteed royalty permitted. 3. The lumpsum payment should be made in three instalments as per detail given below or as specified in the approval letter. (a) First l/3rd after the approval for collaboration proposals is obtained from Reserve Bank of India and agreement is filed with the authorized Dealer in Foreign exchange. (b) Second l/Srd at the time of delivery of know how documentation. (c) Third and last l/3rd instalment should be paid at the time of commencement of commercial production or within the time span of four years, since Reserve Bank of India granted approval and agreement is filed with he authorized Dealer in Foreign exchange whichever is earlier. The lumpsum payment can be made in more than three installments subject to completion of the activities as given above. 4. All reimbursement to the foreign collaborator shall be made as per the exchange rates enforced on the date of reimbursement. 158 5. For reimbursement of money, applications may be filed to the authorized dealer in form A2 with the following document listed below: (i) Copy of "No objection" issued by the income tax authorities in the standard form or a certificate issued by the bank authorized as regarding the payment of the tax, where the tax has been paid by the concern at a flat rate of 30 percent to the a authorized bank. (ii) A certificate from the Chartered Accountant in forms TCK/TCK (depending upon the purpose of payment). (iii) A declaration by the applicant carrying the message that the remittance is adhering to specified rules parameters and condition of the collaboration approved by RBI and government. 6. The agreement shall be in accordance with the Indian laws. 7. A copy of agreement of the foreign investment and technology transfer duly signed by both the parties may be submitted to the authorities listed below. (i) Administrative Ministry/Department. 159 (ii) Department of Scientific and Industrial Research New Delhi. (iii) Concerned Regional office of Exchange Control Department, RBI. (iv) Authorized Dealer designated to service the agreement. 8. All payment under the foreign investment and technology transfer agreement including rupee payment (if any) to be made in connection with engagement/deputation of foreign technical personnel such as passage fare, living expenses etc. of foreign technicians would be liable for the levy of cess under Research and Development cess Act. 1986 and the Indian company while making such payments should pay the cess prescribed under the Act. 9. A return (in duplicate) in form TCD should be submitted to Regional office of the Reserve Bank of India in the first fortnight of January each year.' Technical Collaboration*: Indian companies are free to enter into technology transfer agreements with foreign companies provided that the payment terms satisfy the following conditions established by the Government. 160 • The lump-sum know how fee payable does not exceed US$ 2 million • Royalty payment does not exceed 5 percent of domestic sales and 8 percent of exports. • The payments are subject to an overall ceiling of 8 percent of total sales over a 10-year period from the date of agreement or over a 7 years period from the date of commercial production. These payments may be net of Indian taxes and will have to be at market rates of exchange. The approval process for technology purchase is automatic and the RBI to ensure that the proposals are in agreement with norms for the Government must approve automatic approval scrutinizes applications. The objective of this policy is clearly to ensure easy access to upto date technology to Indian companies and to determine purchase prices on commercial considerations rather than on those imposed by the Government. Channels of Technology Transfers/Financial Investment (1) Joint Ventures: This is the most commonly used mode by foreign 16] corporations and non-residents for their investments in India as this mode provides maximum visibility and presence in the country. Joint venture is generally financial as well as technical collaboration, although a pure financial collaboration is also now possible. Joint ventures could be either in the form of • Greenfield projects, or • Takeovers or strategic alliances with existing Indian companies. Greenfield projects: A Greenfield project is set up with new manufacturing facilities and new plant and machinery. For this purpose, an Indian joint venture company is to be formed with normally 51 percent equity held by a foreign company. The balance 49 percent can be held by an Indian partner and financial institutions or allotted to public by listing the shares on any stock exchange in India. The Indian Government is increasingly encouraging investments in the infrastructure industries. In industries such as power sector, even equity upto 100 percent is permitted to the foreign companies. 162 Table-2 provides an insight into tlie Foreign Technology Agreements (FTAs) during 1991-98 i.e. post NEP period. The table reveals that the Foreign Technology Agreement approvals have been declining over the years. In 1991 the number of foreign technology approvals constituted 70 percent of the total foreign approvals, which declined to 55 percent in 1992. Then in the successive years till 1997, marginal decline has been witnessed. So much so that it declined to 28.4 percent in 1997. The total number of foreign technology approvals in 1998 accounts for 34.30 percent of the total foreign approvals which signifies that there is a slight upward trend in the FTAs approvals as compared to the previous year. The reason of declining trends in share of FTAs in total foreign approvals may be attributed to soaring FDI during the period under review. This has happened on account of government policy for attracting more FDIs as compared to any other sources of foreign capital. 163 Table -2 Foreign Technology Agreement (FTAs) Approvals During 1991-98 lotal No. ot Approvak Year Including percentage percentage FDIs + FTAs share of FTAs chzmge of FTAs in Total api^ovals over the year 1901 950 70.00 — 1992 1520 54.47 (-)15.53 1993 1476 46.82 (-) 7.65 1994 1854 42.72 (-) 4-1 1995 2337 40.02 (-) 2.7 1996 2303 32.31 {-) 7.71 1997 2325 28.39 (-)3.92 1998 1505 34.29 5.9 Source:- Compiled and computed by the Research Scholar. FTA= Foreign Technology Agreement. Total Approval includes Number of FDI Approval and Number of Foreign Technology Agreement. Table 3 presents a statement showing number of foreign collaboration for both pre NEP and post NEP period. The pre NEP period has been taken from 1983 to 1990 and the post NEP period spans from the year 1991 to 1998. Table reveals that the number of foreign collaboration increased to 740 in 1984 representing growth of almost 10 percent over 1983. In 1985 the number of foreign collaboration approvals registered steep increase of 42 percent. However in the successive two year i.e. 1996-97 164 negative growth is witnessed. In 1988 the number of foreign collaboration approvals slightly picked up. But again in the year 1989 heavy down fall in the number of approvals was accounted. In the year 1990 positive growth trend is discernible as compared to the previous year. The over all average growth trend in the number of foreign collaboration approvals during the pre NEP has registered 3.30 per cent, which is of course not a very healthy sign. The reason for the wavering trend is attributed to mainly two factors: political and social uncertainties and upheavals in the beginning of the decade of nineties and transition period of shackled economy to an unleashing economy specially during the middle and later part of the decade of nineties, when the then Prime Minister Mr. Rajiv Gandhi announced some of the liberal foreign policy packages with regard to foreign capital. The post NEP scenario as regards foreign collaboration approvals tells a different story. The advent of New Industrial Policy of 1991 seems to have much influence on foreign collaboration approvals. However, some erratic trends have been witnessed. The reasons for these have been largely attributed to frequent changes in political 165 reign, cumbersome procedural formalities, absence of suitable partners in case of collaboration, joint ventures. Negative impact of prolonged controversial settlement over Enron power project and ambiguous policy framework. However, the comparison between the pre NEP and post NEP trends in number of foreign collaboration approvals indicate its' own story. It is significant to note that the average growth trend in post NEP period has registered 16percent growth as compared to 3.30 percent in pre NEP period. This is because of the liberalization packages adopted by the government for globalization of the economy. Tabic - 3 Statement Showing Number of Foreign Collaboration Approvals (Pre And Post NEP) Pre NEP Post NEP Year No. of urowth ^^ear No. of Growth Approval ( percent) Approval ( percent) 1983 673 ~ 1991 950 — 1984 740 9.96 1992 1520 60 1985 1050 41.90 1993 1476 (-) 2.89 1986 1017 (-) 3.14 1994 1854 25.61 166 1987 853 (-) 16.13 1995 2337 26.05 1988 926 8.56 1996 2303 (-) 1.45 1989 605 (-) 34.67 1997 2421 5.12 1990 726 19.83 1998 2787 15.11 Overall average growth trend 3.29 15.94 Source: Compiled and computed By Research Scholar from the Economic Surveys (Various Issues). A detailed account as regards the companies with collaborators' stake of 25 percent and more under the joint venture is presented in Appendix-V. It is discernible from the Appendix that the foreign companies having stake of 25 per cent or more mainly belong to UK, USA, Japan, and Germany. However, the foreign companies from Sweden, Netherlands, Spain and Denmark, are also witnessed participating in this process of joint venture with Indian companies. It is further observed that majority of the companies of different countries under reference are having stake in between 40 percent to 50 percent. However, there are some companies with equity stake ranging between 25 percent to 40 percent. The Research Scholar feels that with the onset of liberalization packages these companies are showing keen interest to increase their equity stake in their counterpart companies in India. 167 The collaborator's interest to increase the equity stake in Indian counterparts are largely owing to the vast market size, cheap labour cost, sound technical and business know- how and availability of requisite resources. Table-4 provides a list of joint venture to follow in 1998 onwards. Table reveals that the foreign companies of the countries under reference having current equity stake ranging between 18 percent to 51 percent are most likely to increase the equity stake ranging between 32 percent 72 percent. It is prominently observed that the companies under reference are planning to convert their minority equity stake into majority equity stake, i.e. 51 percent or more equity holdings except the one company from Belgium. 100% Subsidiary in India: With the onset of the New Economic Policy consequent upon several liberalization packages for the foreign investors, MNCs/TNCs are now keen on setting up 100% subsidiary in India in both related as well as unrelated lines of business. This subsidiary syndrome is not any beneficent to the Indian affiliates but the Multinational Corporation reaps the advantage to the full in a variety oi ways. 168 8 § 8 8 s 8 8 8 8 8 < < U) CO Z U) (O •o U) lO {8 S Z lU S 8 8 8 00 8 8 ^ 8 8 8 00 0> 8 CO O ^ § 5) CO d i in lA U) O lU (0 >« >< >« p (0 c c c g - c CO CD CD CD V ^ o. « ^ CO « (0 a> y: V " OQ D -(>D Z D 3 O D O D o c 3 f O (0 I I D CD o. mm E s 3 E Z Q 9 S" I 1 O Ul O o «9 Urn o o N CQ I ^= I s a> (0 •e ,Z at < o) o F Q:^ I (0 CD u CD CD S (D E E •¥•1 E The following Table-5 presents a comparative percolating merits and demerits of the 100% subsidiaries to the multinational corporation as well as shareholders. Table 6 presents a precise descriptive profile of the objectives of multinational corporations in setting ups 100 percent subsidiaries in India. Table 7 provides comprehensive accounts with regard to statistics of 100% subsidiary and their area of interest during the post NEP period. The table reveals that these MNCs under reference have evinced interest in beverages, service sector, food products, detergents, chemicals and health care products, diary and milk based products, and high-tech products. Merger & Acquisition and Takeovers: Merger and Acquisitions are now being accepted as a vital means for corporate restructuring and redirecting capital towards efficient management. The new legal framework governing Merger and Acquisition activities has opened the doors to hostile takeovers, setting out objectives, guidelines and allowing the predator and the pray to get on with their attack and defence maneuvers without the SEBI having to step in as arbitrator. The on- 170 o I 9> VI CA u s .a > I 1 g CM .a I I (0 o .a 2 .a f > 0 8 IN I e ^ 2 I 0 u 1 It O ON u in 00 (0 in Q> CO in (S -a (X CA .a CA o o 2 in I •i ON ea .2 H ON .a •s 3 o e o -g I 3 a a 3 e .a O S 00 60 OS CvJ 2 CA a 9> I CO to 3 I «-> §) o a o o 2 s a < > o ca s 60 e. 18 o u .a 4> .a •s -B I I "eo to e ea es v 8 «n o a Q> .S !• o CM o o •s o *-> 8 .S o I CO .s 3 V tn % .a .a *trt •o .a D I a I CQ I ea •a I • • CA o 3 o CA u ^ 2 ? ^ 3 0 I ? <5 9 I s 0 4> OL. tM O « u 0 JI2 ••sa a 60 0 (A u I (A e 0) 0 MM I CO 2 a g T3 I I ^ J: o c O •pa V) I I ON E2 E2 i£ f2 V S ON VO (A •«" • o ^ 0) « S -i o o I T3 (N T3 0 a to 3 OB CO & «»« en 13 •M ^4^ s < ••- i-i 3 o a « U3 •C ^ Hi Q u 5 O 0) V I Q Z, «) •p« >i V u a C "55 o 3 c CQ • • a U c & c r u o £ ^1 o c (J 5 a. < 5 c3 J5 Q 1 § 172 8 -s es a > o s to •-» i §- 1^ 1^ 43 8 (5 I ^ .2 60 2 S .a s ^ o « a •I S ^ o 2 c^ cSl 6 g" cs i a a I o u OS a < CO 5 PQ 0a I a 08 § u o CB a a c« a a 2 o S PQ a o •a o M V o 173 CO To s I I •I ll p. en O •a g cs J2 S 2 60 60 .s .a t^ tt i .S •J? •R I w W •a CO S b 4 eo e es CO "5 CO N I Ji J2 s ^ O y « .3 u ffi & X I C/5 c C/5 D C/3 w •uo ^N D CO .<-> ^ 6 ^ CA O &< 1 i es (A 1u O> E a: ^; 174 §- o & o o 1 ej dC (A |g O % g-a PL'S V i ^ 8 l-c § § p o i^ S C/3 2 (S.^ T3 60 o I I 00 0\ (A •s in J a § ^ TH -C 3 « ^ .a •5 "3 2 « -s ^ •a 4) fl « 'a 4> „ 6 a 9> o ^ a 4> ^ en CQ U S c/3 n CLi t 06 I a I o I o •a 00 CO CO 175 going slowdown has depressed share prices to level where acquisitions have become viable and the political vacuums has created the ideal opportunity to move in for the kill without the government's intervention adding to the ammunition. The financial institutions are signaling, for the first time ever; that they will no longer be protecting existing owners of companies from taking over bides. SEBI has begun the exercises to plug loopholes in the existing regulations on takeovers. Among others pricing norms for inter se transfer of share among promoters is one of the issues that the regulatory body is reportedly examining. The existing regulations exempt inter se transfer of shares among promoters, including inter se transfer of shares among Indian promoters and foreign collaborators, where the transferor and transferee have been collectively holding not less than 5 percent stake for a period of at least three years prior to the proposal for transfer of the stake. SEBI is concerned that an inter se transfer of shares among promoters at a price higher than the market price will not benefit shareholders. But the fact remains that buying an additional stake can be done only at mutually 176 agreeable prices and therefore, inter se transfer of shares among promoters would always be at a price higher than market price. However, prescribing pricing norms in such cases is not desirable as this could affect inter se transfer. The logic behind exempting inter se transfer of shares among promoters was that this type of transfer does not affect shareholders interest and the overall promoter holding remains the same. Inter se transfer of shares among family members of the main promoter predominantly takes place when the baton is passed from the older generation to the new generation. Inter se transfer of shares can also be from friends and relatives of the main promoter to the main promoter are among promoters, when one of the Co- promoters transfers the stake in favour of the other. Most inter se transfers of shares have been among Indian promoters and foreign collaborators, with the former transferring their stake to the latter. Recently the RPG group decided to transfer its stake in RPG Ricoh in favour of the foreign collaborator, Ricoh Company of Japan. Similarly the Kirloskar group took shareholders nod for transfer of 1 percent of their 25.5 percent stake in 177 Kirloskar Cummins, now Cummins India in favour of Cummins Engine Company, Inc., US, wiiicli held a 50 percent stake. Usually it is agreed between co-promoters/Indian promoters and foreign collaborators that in case any party wishes to get rid of its stake the other party are given the first preference for buying the outgoing party's stake. It is the same principle that prevails in inter se transfer of shares among the family members of the main promoters, which SEBI seems to have taken into account, and rightly so, while exempting inter se transfer of shares among promoters If shareholders interest is to be safeguarded in any such situation, the solution could lie in involving shareholders. Thus where inter se transfer of shares results in change in control. It could be made mandatory to obtain shareholders approval in such eases. Appendix VI presents a comprehensive and detailed list with regard to M&A affected during 1991-98 178 Table 8 The BPL Merger BPL LTD BPL Sanyo BPL BPL Sanyo Post-Merger Techno Refng. Utilities BPL Sales 1180.38 161.83 215.95 229.29 1504.56 Net Profiots 47.32 6.71 10.11 10.12 76.44 PBT 60.83 6.71 10.11 10.12 87.77 Equity Capital 26.93 17.59 29.64 15.73 50.1 Reserves 230.98 28.48 87.51 31.21 378.18 Net worth 257.92 46.07 117.15 46.94 428.28 Debt 242.84 70.25 96.07 79.90 489.06 Debt: Equity 6.94 1.52 0.82 1.70 1.14 Book Value 93.11 24.64 36.61 21.45 85.48 EPS(Rs) 17.08 3.59 3.15 6.13 15.26 Share Price(Rs) 45.00 13.50 16.00 15.00 NA P/E Ratio 2.63 3.81 5.08 2.44 NA Source:- Business Today Vol. 7, No. 5,, March 7-21, 1998, New Delhi P. 85. PBT=Profit before tax, EPS = Earning per share, P/E= Price earning, NA= Not Available. Table 8 reveals that as to how will the Rs. 2,500 crore BPL Group gain from the giant four-way merger between BPL Sanyo Technologies, BPL Refrigeration, BPL Sanyo Utilities, and BPL LTD? The primary pay off will be the improvement in the form of a post merger debt equity ratio of 1.14 While higher than the pre-merger ratio of 0.94 for 179 BPL LTD and 0.82 for BPL Refrigeration, this level is still much lower than those of BPL Sanyo Technologies (1.25) and BPL Sanyo utilities (1.70). So, while only two companies could have borrowed large amounts of money pre merger, the post merger company can borrow as much as Rs 200 crore at which point its debt equity ratio will be 1.60 and channel the funds into any of its operations. That is in sharp contrast at the pre merger situation, when the two businesses were cut off from financing opportunities. Table 9 The Unilever Merger Hindustan Lever Brooke Bona HLL-BBLIL Lipton India Ltd. Sales 3.366.94 2,073.98 5,440.92 Net Profits 239.22 126.46 365.68 PBT 392.36 177.13 569.49 Equity Capital 145.84 120.48 199.40 Reserves 670.00 291.91 961.91 Net Worth 815.84 412.39 1.161.31 Debt 160.20 239.22 399.42 Debt. Equity 0.19 0.58 0.34 Bookvalue 55.89 34.25 58.22 EPS (Rs) 13.03 10.49 18.34 Share Price (Rs) 800.00 322.00 — P/E Ratio 48.80 30.69 — 180 The table reveals Hindustan Lever (Levers) gain from the merger of group company Broke Bond Lipton India Ltd (BBLIL) with itself. For the answer, consider the access that the merged companies foods business, which was originally under BBLIL will get. With a turnover of Rs 3,367 crore and net profits of Rs 239 crore, Levers is a veritable profit powerhouse. And with reserves of Rs 670 crore, it is a storehouse of funds which its core businesses do not really need. By contrast, BBLIL having operated in a business where margins are traditionally low, has net profits of only Rs 126.46 crore, and reserves of Rs 291.91 crore. Naturally, that would have forced it to borrow heavily to raise the Rs 350 crore it needs to bankroll its new thrust into foods. The merger, therefore, will unlock Levers vaults, allowing the surplus funds parked in its accounts to be used for generating new businesses on the former BBL's behalf. Table 10 The Vidcocon Merger Videocon Videocon Post-Merger International Narmada Videocon Sales 1.638.75 26.42 1.655.17 Not Profits 88.36 12.35 100.71 181 PBT 124.74 13.60 137.74 Equity Capital 51.67 172.71 68.94 Reserves 805.43 219.39 1,024.82 Net Worth 857.10 392.09 1,249.19 Debt 593.62 124.90 718.52 Debt. Equity 0.69 0.31 0.57 Bookvalue 165.00 22.69 181.27 EPS (Rs) 17.00 0.72 14.61 Share Price (Rs) 48.00 4.50 — P/E Ratio 2.80 6.42 " Source: Same as Table 8. Just where will the benefits from the merger of Videocon Narmada Electronics (VNE) with Videocon International Ltd (VIL) manifest themselves? Probably on the bourses. While VNE's turnover is Rs 26.42 crore, its equity is Rs 173 crore, thanks to the strategy of funding new projects through equity. But with net profits of just Rs 12.35 crore, its EPS is a paltry Rs 0.72 making fund raising extremely difficult. By contrast, VIL with a turnover of Rs 1,638.75 crore and net profits of Rs 88.36 crore on an equity of just Rs 51.67 crore, has an EPS of Rs 17. The post merger company assuming as their share prices of Rs 4.50 and Rs 48 suggest a swap ratio of 10 VNE shares 182 for one VIL share will have an equity of only Rs 68.94 crore, but reserves of Rs 1,025 crore, which are Rs. 219 crore higher than before. Crucially, the EPS will be Rs 14.61 even as gearing stands at 0.9, casing the way for both equity and debt financing for future projects. Table 11 The Eveready Merger Eveready India Mcieod Russel Eveready Industries Sales 430.10 146.00 613.98 Net Profits , 34.36 28.00 72.78 PBT 63.36 37.34 100.70 Equity Capital 32.58 29.83 36.00 Reserves 82.32 272.31 354.63 Net Worth 116.75 301.83 418.58 Debt 74.83 227.23 302.06 Debt. Equity 0.64 0.75 0.72 Bookvalue 35.83 100.90 116.27 EPS (Rs) 10.54 9.39 20.21 Share Price (Rs) 190.00 78.00 — P/E Ratio 11.00 8.00 — Source: Same as Table 8. Just which of the financial gains that the merger of McLeod Russel with Evereaday industries a generate will prove most important for the B.M. Khaitan Group? The group's Rs 290 crore acquisition of Evereaday, then Union 183 Carbide, in 1994, had been conducted through McLeod Russel, which had been forced to make a rights issue of Rs 265 crore to bankroll the buy out As a result, its equity capital ballooned from Rs 10 crore to Rs 29.83 crore and debt, from Rs 30 crore to Rs 227 crore between 1993- 94 and 1995-96. However, with sales stagnant at about Rs 146 crore, the company was in a financial soup. The merger, however, involving a swap of three McLeod Russel shares for two of Evereaday's, will create a company with an equity capital of just Rs 36 crore. And the combined turnover of Rs 614 crore will make the post merger Eveready much stronger than the two-pre merger companies. Takeovers and Strategic Alliances: Usually the joint ventures are in the form of takeovers or strategic alliances with the existing reputed companies with a niche market. For example, in the recent past, the world famous company Coca Cola tied-up with Parele to launch its famous brand coke in India and bottling plants of Parle all over India. Similarly. General Electric formed a strategic alliance with Godrej to enter into the refrigerators market by making use of a niche market the 184 Godrej enjoys in India by forming a separate joint venture company. In addition, foreign companies expanding their operations are increasingly using India for abundant labour and strong industrial base for Asia. The availability and supply of abundant raw materials acts as an additional advantage. The following table No. 12 presents M&A and takeover regulation for 1997-98 under SEBI Vulnerability of Indian Companies to Take Over: It is widely felt that the SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997, are in favour of the acquirers or bidders. What's more, the sagging stock market, with falling market capitalization, in the last couple of years makes quite a few Indian companies vulnerable to takeovers. The comparison between the enterprise value of a company and the value of its fixed and liquid assets could provide a good insight into those companies, which could be vulnerable. Thus if the enterprise value is less than the value of the fixed and liquid assets the company could be a potential takeover target. 185 (0 oo o oo eg r^ S ^r— CM U) CM CM CM S CO CO 0) M UJ ^8 ^ 8£ 8S cvi w cs s mm # o o § (0 I •pa 8 0) •>bi s (0 0) P 3 %- (0 ^ i- ^ 1 .i £ o •« tn £ "^r U o v ^ i a E g 00 c 8 go o 00 o 0) .*. «^ ^ n A >£^ '5 0) (0 B X lO I Q. Z to I 6 CO o (0 (0 in £ D (0 •s •c c Q) 7 X To ^ ^ c 3 ? o 0) V. ^ ? j£ ^ 15 •c ur (0 c •s « |2 •0 ^ o I m n -> To 2 Q. < c o o c « UJ a CO E CD o (0 £ (0 u E ^ n 5 E « T3 c ^ O) 0) E 1 5 < < 1 186 o 8 o 00 XT 0> co CM 8 § ^ 8 5? 8 ? 0) CO II o 5 « ° CM S (O >,^ oo ^.^ 55 ^ •E <. £ I 0) (0 IS tl (0 c r •? o E (0 t? (0 w •S •>< ? .21 "B -i^s "I^ 8 •oI 3 C oO V0) CO 1 3 t5 < CO OQ D < (0 CO c 2 f S I E a> S to .to (0 CO (0 (0 v E >< (0 CO "c CO 2 Q. d) "O I S c CO 187 A few leading corporate which could be takeover targets based purely on the comparison between enterprise value and value of fixed and liquid assets (Appendix VII). Only companies with market capitalization of over Rs 50 crore included although it was observed that the extensive list has more than 1500 companies. Financial Services: In the context of economic liberalisation for globalization and the role of foreign funds in stimulating investment, much attention has been paid to the easing of rules and regulation in various sectors to permit the entry of foreign companies. The data of foreign fund flows into the country since 1991 is impressing by any reckoning. More remarkable is the fact that many Indian companies have gone global, tapping overseas funds. This gave great significance to international custodial and assistant service agencies. These agencies are generally incorporated as commercial merchant banks international investment banks. They are assisting domestic companies and MNCs in raising funds from abroad in the form of GDR/ADR, FII and convertible bonds. These are acting as lead managers, Co- 188 managers, joint managers etc. They are having their branches in number of countries, having a headquarters in its origin country. Most of the foreign banks are providing custodial and agency services to investors. Table - 13 provides a list of foreign financial services companies which have acted in different capacities such as lead manager, Co-lead and joint managers etc. for the Indian companies with regard to raising of foreign funds through GDRs, and ADR. ^ Table 13 Custodial Services in Indian GDR Issues S.No Local Managers Company 1. Barclays dc zoete wedd (BZW) SCICI BZW Indo-Gulf 3. Kleinwort Benson Jindal Strips 4. Kleinwort Benson Indian Rogon 5. Paribas Cap. Market Mahindra & Mahindra 6. Jardine Reming Stertite 7. Jardine Reing Gujrat Ambuga 189 8. Jardine Fleming Hindalco. 9. Jardine Fleming G.E. Shiping and James Capel 10. Jardine Heming Videocon 11, J.P. Morgan ICICl 12. CS First Boston (cSFB) Bombay Dyeing 13. Goldman Sachs Arvidn Mills 14. Citicorp Securities Grasim Industries 15. Merril Lynch Essar Gujrat Source: The Economic Times, New Delhi, 25 December 1998, p.5 Table - 14 Financial Services To Indian Companies By Foreign Financial Agency (1991-98) Name of the Value of GDR/C.B. Status of James Company US$ Million Capel & Company 1. Reliance Industries 150 Co-Manager 2. Grasim Industries 90 Co-Manager ITC 68.85 Co-Manager Gujrat Amba 75 Co-lead 5. SCICI 100 Joint Lead Manager 190 6. Souther Petrocheical 74.75 Lead Manager Industries Corporation 7. EISAR Gujrat 75 Co. Lead 8. Arvind Mills 125 Co-Manager 9. ICICI 200 Co-Manager 10. The Great Eastern 100 Joint Lead Manager Shipping Company Source:- The Economics Times, New Delhi, 25 December, 1998, p.6. Table 14 presents a list of Indian companies which have been assisted by foreign financial agencies in raising foreign fund through GDR and CBs (Convertible bonds) Table indicates that the Cappel and company, reputed foreign financial agency, has acted in different capacities for ten Indian companies under review for receiving capital through GDR in foreign countries. Table 15 gives a detailed account of the services provided by the City Bank to 23 Indian companies under reference for ra\s\r\3 capUal abroad through GAR ADR, Right issue, and FII etc. CONCLUSION: To sum up it may be concluded that MNCs are promoting economic globalization in India. The world is now 191 < Z c CO c (0 « 2 B < a < ^ 0 < < BP I E fe C 2 2 c c (0 CQ •^8^ 11 5 iI I •0 I 3 fe 0 O O - .8 3s ^ 0) f I s ^^ ^ I ^ ? 1 ^ iiir IS I 0) a> c (0 Ji Q. < (0 (0 E (0 I a> o I ^ o ? £ S i CO CO O e JO c CM to o» cvi (0 (0 3 < c g I B g CO M s 1 c « 2 T3 c E _i v o Q. 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C5 t C0 • • .CO o < U ' u T- CM CO •* lO CO h- oo a> CM CO o CM CM CM 3 CM 0 193 becoming increasingly interdependent with the globalization gaining worldwide acceptability. Goods and services followed by financial transactions are now more freely moving across the borders. The capital flows in a variety of arrangement i.e. foreign collaboration, FDI, M&As, joint venture, portfolio investments, 100% subsidiaries have changed the nature of capital flows in the economy. As a matter of fact, these kinds of capital flows are usually welcomed by the developing countries for the simple reason that they add to the total investible resources of the country and also act as a vehicle of transfer of technology and management. The Indian economy is set on the high growth path since the advent of New Economic Policy of 1991. The economy does offer high foreign investment opportunities in terms of more number of foreign collaborations, technology agreements, more joint ventures and setting up of 100% subsidiaries. The foregoing analysis has made it crystal clear that in the pre and post NEP period, the ac ivities of MNCs in Indian economy have substantially increased. The MNCs are now appearing to be poised to invest more in India through increasing their equity stake in their Indian counterparts, setting up more joint ventures 194 and subsidiaries and tending to have entered into more mergers and acquisitions and strategic alliances. The vibrant activities of 35,000 MNCs and 150,000 foreign affiliates speak volumes about creating global culture in Indian economy although at the altar of domestic Indian companies. However, their participation in multifarious ways has contributed towards increased production, enhanced exports and qualitative marketing integrating Indian economy with global economies. The next chapter has been devoted to study the trends in different components of foreign investments in India in pre and post NEP period both. The chapter presents a critical analysis with respect to the inflows of direct investment including FDI, NRIs. The trends in portfolio investments, comprising FIIs, GDRs and offshore funds, have also been critically examined. References: 1. Karl Marx and Frederick Engles, Manifesto of the communist party (Moscow, Progress publishers, Reprinted 1975 p-42. 2. Ibid, p. 43. 3. V.I. Lenin, "Imperialism, The Highest Stage of Capitalism", Moscow Progress Publishers, 195 Seventeenth Reprint, Moscow, 1978, pp. 78-80. 4. Stephen Hymer, "The Multinational Corporation and the Law of Uneven Development," in Jagdish No. Bhagwati, ed., Economics and World order: From 1970's to 1990's (Bombay, Orient Longman, 1972). p. 113. 5. Kothari's Industrial Directory of India, 40th edition, published by Kothari Enterprise, Chennai, India, 1996-97, 1, p. 102. 6. Nabhi's Manual for Foreign collaboration and Investment in India. Published by V.K., Puri, Nabhi Publications, New Delhi, 1998, p.27. 7. Ibid, t>- 29. 15. Kothari's Industrial Directory of India, Opcit,l, p. 103. C KAPXtn - VI f^attern of Jordan ^nuedtment in ^ndtca. Introduction Foreign Investment Policy of Government Foreign Direct Investment Foreign Investment Trends: An Appraisal Post New Economic Policy Era Foreign Institutional Investors (FIIs)- Unique Species in Indian Capital Market Global Depository Receipts Offshore Funds in Post NEP Period Policy Impediments to Foreign Investment in India 196 CMA.I>TEFl-X/I PATTERN OF FOREIGN INVESTMENT IN INDIA Introduction The foregoing chapter examined the role of MNCs in Globalizatioin of Indian Economy. The present chapter proceeds to enquire into the pattern of foreign investment in India as a result of predominant role of MNCs in globalizing Indian Economy. After getting independence on 15th August 1947, India inherited a broken and shattered economy and plenty of problems of socio-economic backwardness. The agricultural sector was not adequately developed to meet the growing needs of its population for food. The country was lagging behind other developed nations in the field of technology and capital which was essential for speedy industrialization. India realized the need for industrialization with foreign capital in 1948. The industrial policy resolution spelt out the framework for speedy industrial development in the country. In government's resolution of 1948 it has been broadly proclaimed that there will be a policy with regard to foreign capital participation in Indian industries. Now the area of 197 concentration is the need to control and regulate foreign capital flow in national interest. The past experience of foreign capital and foreign domination on the Indian economy was nightmarish. But today situation has changed, and it is taking a new shape. So our regulatory objective should give more emphasis on the effective and advantageous utilization of foreign capital. To bridge the gap between our savings and need have funds, we should supplement domestic capital with foreign capital. It is also necessary because in lot of cases we need scientific, technical and industrial knowledge and capital equipment, which only can be adopted through foreign capital.^ The Government of India mooted the following guidelines.^ 1. All the companies, Indian or foreign, had to conform to the general requirements of the government's industrial policy. 2. Indian companies as well as foreign companies will be given same treatment. 3. Foreign companies will have the right for remittance of profit and repatriation of capital within the guidelines laid down by the government regarding foreign exchange. 198 4. If foreign companies necessarily acquired by the government or nationalized compensation would fairly and equally be paid. 5. As a rule the Indians will hold the effective control of the company and major shares. Though there was a rule, that effective control and major shares should be in Indian hands, but there were no hard and fast rules in this regard. If foreign control of a company for a limited period is in the national interest, then government will not oppose it and each single case will be taken into consideration wholly on merit basis.^ On June 2, 1950, the Government of India announced that the foreign investors could remit their investment in the country after January 1, 1950. They were also permitted to remit their reinvestment and profit made. Foreign Investment Policy of Government of India: In spite of all facilities given by the government foreign capital did not come into India during the time of first plan. The cloud of suspicion was covering the mind of foreign investor. But the policy proclaimed by the Prime Minister in 1949 and in the 1956 Industrial Policy Resolution, had given a vital area to foreign capital investment. The process 199 of liberalization went on in a small manner, which gave impetus to the role played by foreign investment. The government slackens its rule governing majority ownership in many cases and bestowed much tax relaxation for foreign investors.* Early phase (1948-67)^ Soft Attitude towards foreign investment just after getting independence, India was heavily inclined towards the import substitution and industrialization in a planned manner to develop a strong strategy and framework with a focus on the development of domestic capabilities in heavy industries including that of manufacturing sector. The area of import substitution was wide to the extent of everything, which could be made within the country, with the help of its own capabilities. The domestic industry was well-protected, by the high tariffs and quantitative prohibition on imports. In order to channelise country's decimal investible resources, in accordance with the plan priorities, an industrial licensing system was advanced, that worked as the regulatory investment for all industrial investments beyond a certain minimum. A huge number of key industries were kept under the public sector, either because of their strategic nature. 200 or lack of initiative in the private sector due to large capital requirements and long gestation period. As a part of strategic development large investments were needed in creating a favourable atmosphere to develop human skill and technology and scientific and engineering facilities. The government did a lot to mobilize internal investible sources to finance the growing economy. Due to the limited capacity of domestic technology, skills and entrepreneurship, India's attitude towards FDI was soft. FDI was considered on bilateral benefit basis, but the majority local ownership was preferred. Foreign investors were given assurance of no restrictions on the remittances of profits and dividends, in case of acquisition a fair compensation was promised. In 1957-58, the foreign exchange crisis compelled the government to liberalize its' attitude towards FDI. In order to lure foreign investment to finance foreign exchange component of projects, a number of enticement and concessions were provided to foreign investors. The protection accorded to local manufacture acted as an important location advantage encouraging market-seeking FDI. A large number of foreign companies doing business in India with export mechanism 207 started establishing manufacturing concerns on Indian soil. In the late 1950s and early 1960s period lots of western multinational corporations started showing inclination in Indian industrial sector. Protective and Restrictive Middle Phase from 1968 to 1979 Investment made during early phase by both the foreign as well as domestic investors created a base for development of skill, technology, machinery, fabrication, manpower, scientific and infrastructure facilities. A number of sustained capabilities were domestically developed in the field of processing and product adaptability. A considerable number of design engineers and management experts had gathered with the required expertise, which they have gained as acting subordinates for western prime experts. By late 1960s India got a commanding capability in plant fabrication. The share of imported machinery has gone down from 69 percent in 1950 to fewer than 25 percent by 1968-69 as a proportion of gross domestic capital formation. However, locally developed skills and infant industry of India required some sort of protection to stand by the fierce competition from the industrialized countries' business houses. Domestic capital, skill and 202 entrepreneurship had begun to ease somewhat. But outflow on account of remittances of dividends, profits, royalties and technical fees, etc. have grown up sharply and it becomes a burden of foreign exchange.^ All above factors contributed to adopt a more restrictive attitude towards foreign collaboration approvals and FDl. Restrictions were imposed on proposals of foreign direct investments unaccompanied by technology transfer and those seeking more than 40 percent foreign ownership. Government announced industries in which FDI was not deemed reasonable due to domestic capacities. The permissible range of royalty payments and duration of technology transfer agreements with Parent Corporation were also specified for differe.nt items. The guideline chalkout for foreign collaborations r.eeded exclusive use of Indian consultancy services wherever available. The renewals of foreign collaboration agreements were restricted. FERA and Foreign Capital: From 1973 onward, activities of foreign as well as domestic large industrial houses were restricted to a specified group of core or high priority industry. In 1973 203 a new Foreign Exchange Regulation Act (FERA) came into being which required all foreign companies operating in India to register under Indian corporate legislation with upto 40 percent foreign equity. Exemptions were available from the general limit of 40 percent to the companies working in high priority, or core or high technology sectors, or for those, which were producing predominantly for exports. Sagacious Deregulation in 1980s: At the end of 1970s India's failure to bridge the gap between volume and proportion of her manufactured exports. Second World War oil price hike compelled the government to review the policies. It has been felt that international competitiveness of Indian goods is far below than the foreign goods due to growing technological obsolescence and poor goods quality, limited range and higher production cost due to the highly protected local market. Yet another reason of declining Indian export was the domination of MNCs in marketing channel. Indian government took the heed of situation and government led emphasis on the modernization of industry with the help of liberalized imports of capital goods, technology and know-how. By this step, Indian industry exposed to foreign 204 competition by gradually liberalizing the trade arena for Multinational Corporation by assigning them ample scope to play a more dominant role in manufactured exports. The strategy of giving more emphasis to MNCs was reflected in the policy declarations that were made in the 1980s. These highlighted liberalization of industrial licensing (approval) rules, a number of other incentives and restriction from foreign equity under FERA to 100 percent Export Oriented Units. To attract more MNCs, four new Export Processing Zones (EPZ) were set up in addition to the two existing ones.^ The trade policies related with the import of raw material and capital goods were gradually liberalized. The list of items on the Open General License (OGL) gradually expanded. Only between 1984-85, 150 items and 200 types of capital goods were added to OGL list. Tariffs on imports of capital goods were also pruned. Imports of designs and drawings and capital goods were permitted under a liberalized technical development fund scheme. Liberalization in policies related to industries and trade was accompanied by more open and welcome attitude towards FDIs and foreign licensing collaborations approval 205 systems were simplified. A more flexible and tender policy governing foreign ownership was adopted and exceptions from the general ceiling of 40 percent on foreign equity were allowed on the merits of individual investment proposals. The procedures and rules dealing payments of royalties and lump sum technical fees were streamlined and withholding taxes were reduced. Foreign companies in India adopted Liberal attitude in approvals for opening liaison offices. New norms and routes were developed enabling direct application by a foreign investor even before choosing an Indian partner. For clearing FDI proposals from the following counties - Japan, Germany, the US and the U.K., a fast channel was set up in 1988 to expedite the proceeding. Foreign Direct Investment: Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest and control of a residential entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).* Foreign direct investment implies that the investor exerts a significant degree of influence on the 206 management of the enterprise resident in the other economy. Such investment involves both the initial transactions between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. Individuals as well as business entities may undertake foreign direct investment.' Foreign direct investment (inflows and outflows) includes capital provided (either directly or through other related enterprise) by a foreign direct investor to a FDI enterprise, or capital received from a FDI enterprise by a foreign direct investor. Three components are there in FDI. These are equity capital, reinvested earnings and intra- company loans.^° 1. Shares of an enterprise purchased by the foreign direct investor in a country other than its own, known as equity capital investment. 2. Reinvested earnings comprise the direct investor's share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates or earnings not remitted to the direct investor such retained profits by affiliates are reinvested. 207 3. Short or long-term borrowings and loans transacted between direct investors (parent enterprises) and affiliate enterprises called as intra-company loans or intra-company debt transactions. The Government of India has adopted a policy to welcome foreign investment and collaborations on a selection basis, investment was allowed only in those areas where it would be of advantage for the Indian economy. On July 24, 1991 Government of India announced a New Industrial Policy or New Economic Policy, which opened the doors of many industries for foreign capital participation. Before adoption to this policy foreign equity was strictly allowed to participate only in those industries where domestic capital was not available. They were specially allowed in trading activities, plantations, financial and banking institutions. They were not allowed to operate in government-protected areas and industries of basic and strategic significance to the Indian economy. The aims of the new industrial policy are^^ 1. To hold on the gains already achieved. 2. To rectify the crookedness or weaknesses that have emerged on the economic screen. 208 3. To uphold sustained growth in productivity, gainful employment and efficiency. 4. To acquire international competitiveness. The new policy of foreign investment cites that automatic approval will be given for foreign direct investment upto 51 percent foreign equity in high priority industries. This clearance will be available only if foreign equity furnish the foreign exchange requirement for imported capital goods. The import of components intermediate goods, raw materials and payment of know-how fees and royalty will come within the parameters provided by the general policy applicable to indigenous industries. But payment made in lieu of dividend would be monitored by the RBI to ensure the balance between capital outflows in the form of dividend and export earning over a period of time. Various other foreign capital participation including 51 percent equity participation, which do not fall under the above criteria will need prior permission for clearance. But foreign capital proposal need not to have foreign technology agreement necessarily companies operating in export oriented industries will be permitted to hold 51 209 percent foreign equity. To enable them to access to international markets. These trading companies and domestic trading and export houses will be treated equally as per the import-export policy. Foreign Investment Trends: An Appraisal: Table-1 has been prepared by the Research Scholar to present the statement with regard to stock of foreign investment in India during the period 1948 -1990. The table reveals that the trends in investment made by the 100% subsidiary are fluctuating in the range of minimum of Rs 6 million in quinquennial period from 1975 to 1980 and the maximum of Rs. 27 million in the quinquennial period of 1955 to 1961. Further more, the table is indicative of the fact that the period from 1955 to 1965 was conducive to the foreign subsidiaries. During this period, larger number of foreign 100% subsidiaries was set up in different sectors of the economy. In case of subsidiary having ownership between 50% to 100%, the trends in stock of foreign investment registered a rising trend. From Rs. 5 million in 1948 it has risen to Rs 52 million in 1975. However, during the period 1975-1980, stock of foreign investment has declined as compared to the previous year 210 - it was Rs. 46 million. Then in the successive quinquennial period, it registered increasing trend. The stock of foreign investment of subsidiaries having 50 percent ownership registered an increasing trend. Table 1: Stock of Foreign Investment in India (Pre-NEP Period 1948-1990) (Rs. in million) Uirect Investment Porttollo ToTiT" Investment by 50-100% Others Total Invest- (Dl+PI) Branches subsidiary 50% Direct ment 100% owned Invest Subsidiary ment Mid 1948 14.6 4.5 4.0 23.1 5.7 28.8 End 1955 24.3 11.9 2.4 38.6 3.9 42.5 End 1961 27.0 20.7 5.0 52.7 4.3 57.0 End March 1965 26.2 26.8 8.2 61.1 5.5 66.6 End March 1970 22.3 37.3 13.9 73.5 9.4 82.9 End March 1975 22.7 51.7 22.9 97.3 10.8 108.1 End March 1980 6.0 45.5 41.8 93.3 12.2 105.5 End March 1985 10.2 50.1 42.6 102.9 13.2 116.1 End March 1990 11.3 52.2 44.1 107.6 15.1 122.7 • DI = Direct Investment PI = Portfolio Investment Source: Compiled by the Research Scholar from Reserve Bank of India's Bulletins, Govt, of India, Mumbai. The total direct investment for the period under reference shows an increasing trend. However, during the quinquennial period under reference i.e. 1975 to 1980, 211 there is a declining trend. But thereafter in the successive couple of period it registered rising trend. The stock of foreign portfolio investment in India during the period under reference presents somewhat wavering trends. The total stock of foreign investment including direct investment and portfolio investment presents a rising trend till the end of March 1975. However, in the quinquennial period of 1980 it declined but in other two successive quinquennial period i.e. end of March 1975 and end of March, 1990 rising trend is discernible. On the whole, it may be inferred that with the second five-year plan, which was termed as industrial plan, the entry of foreign companies in India is encouraging. Table-2 presents countrywise breakup of foreign investment approvals during 1980-1990 i.e. pre New Economic Policy (Pre NEP) period. The table reveals that among the countries under reference, USA has been the active partner holding top position with 25.3 percent of the foreign investment approvals of the total during the period under review. The second position in order of merit is held by Federal Republic of Germany having 17 percent of foreign investment share out of the total followed by NRIs 212 (8.9 percent), Japan (8.4 percent) and U.K. (7.1 percent). Table 2: Country-wise Breakup of Foreign Investment Approvals During 1981-90 (Pre NEP Period) Country Investment Approvals Share in Total (Rs. crores) Investment % 1. U.S.A. 322.7 25.3 2. Federal Republic 218.5 17.2 of Germany 3. Japan 107.4 8.4 4. U.K. 90.3 7.1 5. Italy 59.8 4.7 1 6. France 44.1 3.4 7. Switzerland 40.3 3.2 8. NRIs 113.4 8.9 9. Others 227.5 21.9 Total 1274.0 100.0 Sources: Ruddar Datt, K.P.M. Sundharam, "Indian Economy", S. Chand & Company Ltd., New Delhi, 1995, p. 288. Post New Economic Policy Era: India attained independence in 1947 and the planning era started from 1951 experimenting with a state controlled, import substitute policy regime. However, after almost five decades, much of the dreams cherished could not be translated into reality owing to a host of reasons. 213 India confronted with depleting foreign reserves, sluggish industrial production, soaring inflation with unpredictable general price rise and failure of public sector enterprises. India, in the year 1990, was on the verge of bankruptcy in the international market. In order to come out of this economic morass India adopted a relatively market friendly liberalized policy in the mid 1991. A major policy shifts were introduced in the first year of the NEP which was followed by incremental advance in the subsequent years with a number of policy packages for reforms in trade and investments, capital market, financial sector reforms, fiscal policy reforms, FERA, capital account convertibility. Insurance and banking sector reforms, etc. and disinvestment in public sector enterprises etc. In the following paragraphs an attempt is being made to measure the impact of policy reforms on the inflow of foreign direct investments with the help of trend analysis. The flow of foreign direct investment is channelised through three significant routes viz. RBI automatic route, SIA and FIPB route and NRIs route. Table-3 provides informations with regard to inflow of foreign direct investment through these three routes during the post NEP period i.e. 1991-92 to 1997-98. It is 214 i ^ ,-1 ON vo o ^ CsJ CO 00 CO ,-( 00 CO CO 00 ^ '-' CO Q VD 5 $!i ^ vo o ID 00 CSJ b CM S <^ W % CSJ ON ^CO S ^ - S^ CO CNJ S fC-M vSoo ("N^ b CsJ ON o ON in o CM CO ON ^r^ S I CM ^ in Co CO 8^ ili ^ t^ C^J *£ \0 s CM CO ON CO S § S ^ in Table-4 presents statistics pertaining to FDI actual inflows as percent of approval during 1991-98. It is discernible from the table that the approvals in both rupee terms and dollar terms have registered rising trend till 1997. It is interesting to note that actual inflows in proportion to approvals are quite dismal. In 1991 the actual inflows as percent share of approval was 48 percent, which plummeted to the bottom of 13 percent in 1992. The main reason for this steep fall is ascribed to outbreak of communal clashes all over the country owing to demolition of Babri Mosque. Table-4 : Foreign Direct Investment Actual Flows Vs Approvals (During 1991-98) Year Approvals Actual Inflows Actual Inflows as Rs crore U.S. $ million Rs crore U.S. $ million % of approvals to U.S. $ terms 1991 739 325 351 155 47.7 1992 5256 1781 675 233 13.1 1993 11189 3559 1786 574 16.1 1994 13590 4332 3009 958 22.1 1995 37489 1.1245 6720 2100 18.7 217 1996 39453 11142 8431 2383 21.4 1997 57149 15752 12085 3330 21.1 1998* 25103 6132 8433 2073 33.8 Total 189968 54268 41490 11806 21.7 * Upto September 1998, Note : The approval and actual inflows include NRI direct investment approved by RBI. Source: Indian Economic Survey, Ministry of Finance, New Delhi, 1998-99, p. 87. The actual inflow of foreign investment started slightly picking up from 1995 till the last year of the period under reference. However, the striking point with regard to actual inflows of foreign direct investment is that on average, actual inflows has been to the level of 20 percent to the approvals. Table-5 gives the information about top ten foreign investors in India during 1991-98.The table reveals that the USA was on the top with 37 percent share in the total foreign investment during the period under review. In the post liberalization era, Mauritius is the new entry among the top investors in India. Mauritius has 16 percent of investment in India to his credit followed by UK (11.4 percent), Japan (16.6 percent), Germany (6 percent). South 218 Korea (5.3 percent) and Australia (5.2 percent). Israel, Malaysia and Netherlands are the. new foreign investors evincing keen interest in India in post liberalization period. Table>5 : Top Ten Foreign Investors in India (FDI Approvals from 1991 to Dec. 1998) Name of the Country Amount Percentage (Rs million) shares l.USA 426093 37.39 2. Mauritius 183593 16.14 3. U.K. 130137 11.42 4. Japan 75130 6.59 5. Germany 67603 5.93 6. South Korea 60412 5.31 7. Australia 59063 5.18 8. Malasia 54445 4.77 9. Israel 42270 3.71 10. Netherland 40633 3.56 Total 1139739 100 Source : Compiled and computed by Research Scholar from The Times of India, New Delhi, May 24, 1999, p. 15. Sectoral trends in FDI during post-liberalized era have been shown in table 6. The table reveals that the bulk of the foreign investment has been in the priority sector. Fuels alone accounted for more than 32 percent of total FDI and 219 technical collaboration approval followed by transport 18 percent, metallurgical industry 6.85 percent etc. Table 6: Sector-wise Breakup of FDI and Technical Collaboration Approved During the Post NEP Period (August 1991 to Jan 1999) S.No. Sector In percent 1. Fuels 32.11 2. Telecommunication 17.83 3. Transport Industry 6.85 4. Service Sector 6.32 5. Mettalurgical Industry 6.00 6. Electrical Equipment 5.14 7. Food Processing Industry 4.49 8. Hotel & Tourism 1.89 9. Others 19.27 Source : The Hindustan Times, "Economy and Business", New Delhi, June 8, 1999, p. 15. Industrywise breakup of foreign direct investment inflows has been presented in table-7 from the period March 1995 to March 1997. Once again the trend in industry-wise FDI inflows is similar to that of sectoral inflows of FDI, i.e. chunk of the investment bagged by priority sectors followed other industries under reference. The trends in FDI 220 in sectoral as well as industry are in tandem with the policy of the government attracting investments in priority sector i.e. Telecommunication, Metallurgic, Service Sector, Transport, Electrical Equipment, Hotel and Tourism and Fuels. Table-7: Industry-wise Foreign Direct Investment Inflows Industry March 1995 March 1996 March 1997 Amount % share Amount % share Amount % share 1. Engineering 131.6 15.0^ 251.19 17.76 730.2 35.50 2. Chemicals & Allied Products 141.2 16.19 126.7 8.94 303.8 14.77 3. Food and Dairy Products 60.9 6.98 85.0 5.99 237.5 11.55 4.Finance 97.7 11.21 270.0 19.04 217.0 10.55 5. Electronics & Electrical Equipments 56.4 6.47 129.6 9.14 153.6 7.47 6.Computers 10.2 1.17 52.1 3.67 58.7 2.85 7. Pharmaceuticals 10.1 1.16 54.8 3.86 47.6 2.31 8.Services 93.4 10.71 100.4 7.08 15.2 0.74 9. Domestic Appliances 108.3 12.42 0.5 0.04 15.1 0.73 10. Others 162.2 18.60 347.0 24.48 278.3 13.53 Total 872.0 100 1418.0 100 2057.0 100 Note: NRI Direct Investment routed through RBI has been excluded as industry-wise details are not available. Source : Capital Market V. Xn/26, Mumbai, March 22, 1998, p. 8. 221 Net inflows under non-resident deposits declined from US $ 3,314 million in 1996-97 to US $ 1,119 million in 1997-98 (table 8). The outflow under FCNR(A) continued due to redemption of payment. The relative rates of return and the perceived risk premium on emerging market debt has influenced the flows into these accounts, some of the domestic policy related factors which seem to have contributed towards subdued net flows including imposition of incremental cash reserve ratio of 10 percent on non resident deposits and the linking of interest rates under FCNR (B) with LIBOR, which had the effect of lowering interest rates, offered under this scheme, and thereby reducing its attractiveness. In order to encourage mobilization of long term deposits and concomitantly to discourage short-term deposits, the interest rate ceiling on FCNR (B) deposits of one year and above was raised and the ceiling on such deposits below one year was reduced in April 1998.^^ 222 Table-8: Net Flows Under Non-Resident Deposits* (1993-94 to 1998-99) (US $ million) Schemes 1993-94 1994-95 1995-96 1996-97 1997-98 1997-98 1998-99 1. FCNR (A) (-)1317 (-)2249 (-)2796 (-)1949 (-)2305 (-)2233 2. FCNR (B) 1075 1979 2669 1773 971 340 -846 3. NR(E) RA 728 964 (-)208 1244 1197 935 559 4. NR(NR) RD 1187 682 1279 2246 1256 991 654 5. FC(B&0)D (-)576 (-)558 Total 1097 818 944 3314 1119 33 366 RE : Provisional Estimates. * Ail figures are inclusive of acrued interest. (a) RCNR (A): Foreign Currency Non-Resident (Accounts) (b) FCNR (B): Foreign Currency Non-Resident (Banks) (c) NR(E)RA: Non-Resident (External) Rupee Accounts. (d) NR (NR) RD: Non-Resident (Non-Repatriable) Rupee Deposits. (e) FC (B&0)D: Foreign Currency (Banks & Other) Deposits. Sources. RBI Bulletin, RBI, Mumbai 1999, p. 98. As at the end of March 1998, outstanding balances (table 9) under various non-residential deposit schemes stood at US $ 20,367 million. Comparison of estimated net flows under non-resident deposits during April-November 1998 vis-a-vis the corresponding period in 1997 shows a compositional shift in favour of rupee denominated account 223 in response to policy initiatives undertaken in 1997-98. Net inflows under non-residents deposit (excluding redemption payments under FCNRA which had since been discontinued) at US $ 367 million during April-November, 1998 were substantially lower than those of US $ 2266 million in the same period of 1997. Positive flows have been recorded only in the NR{E)RA and NR(NR)RD schemes. The initiatives in terms of freeing of interest rates and removal of incremental CRR, may have acted as incentives to attract deposits in these accounts.^^ Table-9: Outstanding Balances Under Different Schemes* (March 1994 to Nov. 1998) (US $ million) Schemes March 94 March 95 March 96 March 97 March 98 Nov. 98 1. FCNR(A) 9300 7051 4255 2306 01 0 2. FCNR (B) 1108 3063 5720 7496 8467 7621 3. NR(E) RA 3523 4556 3916 4983 5637 5778 4. NR(NR) RD 1754 2486 3542 5604 6262 6449 5. FC(B&0)D 533 — — — — — Total 16218 17156 17433 20389 20367 19848 * AH figures are inclusive of acrued interest. (a) FCNR (A): Foreign Currency Non-Resident (Accounts) (b) FCNR (B): Foreign Cun-ency Non-Resident (Banks) (c) NR(E)RA: Non-Resident (External) Rupee Accounts. (d) NR (NR) RD: Non-Resident (Non-Repatriable) Rupee Deposits. (e) FC (B&0)D: Foreign Cunrency (Banks & Other) Deposits. Source. RBI Bulletin, Government of India, Mumbai 1999, p. 98. 224 Foreign Portfolio Investment And Globalisation of Indian Economy: The new economic policy of July 1991 aimed at rationalizing the control, efficient monitoring and globalization of the Indian economy particularly the capital market to attract the maximum foreign capital. In India, one of the significant routes to bring the foreign capital is foreign portfolio investment. Foreign capital through foreign portfolio investment comes through three important routes i.e. Foreign Institutional Investors (FIIs), GDRs and Offshore funds. The following paragraphs give a detailed accounts with regard to policy framework and analysis pertaining to the trends in foreign portfolio investment during post NEP period. Table-10 presents an account as regards the portfolio investment trends during 1992-98. It is discernible from the table that in the initial year i.e. 1992, only US $ 4 million portfolio investment had poured in. However, in the successive years, the portfolio investment went up as high as US m $ 244 approximately 6000 percent increase over the previous year. In 1993 also the portfolio investment registered satisfactory growth. In other years under 225 reference, there have been erratic trends. The main reasons for this erratic trend in portfolio investment in the year 1995-96 and 1997-98 are attributed to primarily the immaturity of Indian capital market and secondly in the later phases of 1996-97 and 1997-98 the contagious economic crisis from the East Asian countries. Table-10: Portfolio Investment Year Portfolio Investment Change over the Grow/th rate (US $ million) (U.S. $ million) (%) 1991-92 4 - - 1992-93 •244 240 6000.00 1993-94 3567 3323 1361.00 1994-95 3824 257 7.20 1995-96 2748 (-)1076 (-)28.13 1996-97 3312 564 20.52 1997-98 1828 (-)1484 (-)44.80 1997-98 1742 (-)86 (-)4.93 (April-Dec) Source -. Compiled and worked out by Research Scholar from different issues of Economic Surveys. Table -11 presents a comparative picture of different categories of foreign portfolio investors making investment in Indian economy. Of the three portfolio investors the 226 e C^ .0 Co Si 00 CNJ CN) E ON 00 in CN) in in 1 d in ^1^ ^1^ rH • 9 00 tf)^ q^ , , ^_^ • CN) vO CO CO 00 CN) < ON 1-H rH in o in in 1-H ON TH ON v£> ON. r-l in CO 00 ON 00 00 Co 1 CN) ON in in ^ ON 00 CO O 1-rHi s ON ON VO iri CM »—1 »-H in CO rH ""^ "~^ t^ , , ^_^ ON CN) vO in VO -* ^ 1 rH T-\ CN) •j vO CNJ VD O vO ON CO CO CM c^ 00 r-i O (3 ON CO in l-H 4d 1—( rH Qe) vO _^ _- • ON 00 ON rH in •4-1 uS o CO VO o c o 00 00 in ON CM CM CO VO CM Q ON Q 1—t CM V) ill V ON i c 1 o CM in CO ON irj" CN CO 00 CO CM o 3 1 ON 00 o ON O ON rH CM CM vO "o CO g t—1 CO in (A CO ON 1 •c in O 1 CM VO CM 1 CO 00 15 5 ON in 00 in CM CD 0 ON rH CO o 1-H CO y-K i »2 CO ON VO (0 1 O CO CO CN) rH CO CO s: o CN) CM 00 rH «• ON o ON. VI ON s: rH f—1 iCSO s: ON c 1 O 1—1 1 1 S ON VI 1 ON o DC 1—t c -t-cJ c a Q> (0 to 0) 1 o a iS > *3 Si i 2^ .2 O in c o 2 0) V) CO o E i3 o o 3 U Cu r-J CM CO ti: (/o) 227 Foreign Institutional Investors (FIIs) and Euro Equities are the main source of foreign portfolio investment in India. However, it is discernible from the table that of late, the offshore funds have also gained currency as the popular source of portfolio fund in Indian economy. Foreign Institutional Investors -FIIs - Unique Species in Indian Capital Market The FIIs are the modern mode of international finance having a major role to play in foreign investment. FII includes, pension funds, mutual funds, investment trust. Assets Management Companies, Nominee Companies and Incorporated Institutional Portfolio Managers etc. More recently, Indian government has allowed these FIIs to invest in primary and secondary market and other securities listed/to be listed on the stock exchanges/OTC exchange of India. It was a part of economic reforms initiated in 1991.1'* In this regard the government of India has followed some specific policy framework which includes following guidelines issued on 14th September 1992: 1. Before making any investment by FIIs, in the listed securities in India, they will have to get registered with the SEBI. 228 2. Lock-in period will not be there for the purpose of investments made by FIIs. The FIIs will enjoy concessional tax regime of a flat rate of 20 percent on dividend and interest income and a tax rate of 10 percent on long-term capital gains. 3. FIIs looking for investment avenues will have to get registered with SEBI will be needed to have a registration from the securities commission/ regulatory organizations of the Stock Market in the country of origin. FI|s enjoy general permission of RBI to invest through a designated bank branch and to appoint domestic custodian for the custody of investment made by them. Initial registration with SEBI will be valid for five years.^^ 4. There is no bar as regards the volume of investment (minimum or maximum) for entry of FIIs. 5. All the secondary market operations of FIIs have to be performed through recognized intermediaries in Indian Stock Exchanges including OTCEI. 6. FIIs will be allowed to repatriate the capital, capital gains, income received as interest, dividend etc. 229 7. After every five years, the RBI's and SEBI's permission under FERA is subject to renewability. 8. RBI should supply the name of companies to the designated bank branches where FIIs can not make investment. 9. FIIs are allowed only to buy or sell on cash and delivery basis, meaning thereby, they have to abstain from short selling in securities. 10. FIIs participation in disinvestment is permissible through stock exchange including the OCTCEI. 11. Preferential allotment for FIIs restricted to 15 percent of the total equity subject to further limit to 24 percent of total investment in the equity of company by FIIs, NRIs and OCBs. 12. FIIs are required to appoint an agency subject to recognition by SEBI to act as a custodian of securities and for other custodial services.^^ 13. FIIs can purchase and sell government securities and treasury bills within overall approved debt ceilings. To facilitate better risk management by investors, authorized dealers have been permitted to provide 230 forward cover to FIls in respect of their fresh equity investments in India. Moreover, transactions among FIIs with respect to Indian stocks will no longer require post-facto confirmation from the RBI. Also 100 percent FII debt funds have been permitted to invest in unlisted debt securities of Indian companies. ^^ The government has taken a history-creating step by allowing foreign institutional investors to enter the Indian capital market. It is hailed as a sagacious and prudent step towards globalising Indian economy. Table-12 presents a statement showing FIIs investment and their share in total portfolio investment in Indian capital market during 1991-92-1997-98. Table reveals that the entry of FIIs in Indian capital market started in 1992- 93 with merely US $ 1 million investment having a negligible share of 0.41 percent in the total portfolio investment. From 1993-94 onward the FIIs role in the Indian share market was prominent with phenomenal increase in the investment US $ 1665 million with 47 percent of share in the total portfolio investment. The bulk of investment by FIIs in the Indian capital market from 1993-94 onward came in the wake of a good number of 231 reform policy packages for standardizing the operation of capital market, birth of SEBI with constitutional empowerment and openness and transparency adopted by it as an effective guidelines to the foreign investors. Table-12 Statement Showing FIIs Investment and Share of FIIs in Total Portfolio Investment (1991-92 to 1997-98) (U.S. $ million) Year Total Portfolio FIIs Investment % of FIIs in fnvestement Total Portfolio Investment 1991-92 4 - Nil 1992-93 244 1 0.41 1993-94 3567 1665 46.68 1994-95 3824 1503 39.31 1995-96 2748 2009 73.11 1996-97 3312 1926 58.15 1997-98 1828 979 53.56 April 1997-98 1742 973 55.86 Source: Compiled and Computed by Research Scholar. 232 However, the turbulence in Asian Financial Markets, frequent change in government at the centre, high range of volatility in share prices and ambiguous and confusing parameter adopted by the credit rating agencies have adversely affected the overall investment by FIIs in Indian capital market. The two budgets i.e. 1998-99 and 1999-2000 have made a number of provisions for attracting more FIIs, more portfolio investment. The main provisions among others are increment of share of FIIs in individual company to 30 percent, permission to FIIs to invest in non registered companies and participation in debt funding etc. SEBI has also made utmost attempt to create conducive atmosphere to attract portfolio investments through number of measures-prominent among these measures is the creation of an Overseas Investment Cell (OIC). Global Depository Receipts: Global Depository Receipts (GDR) is a negotiable instrument evidencing a fixed number of equity shares of the issuing company generally denominated in US dollars irrespective of the currency in which the underlying shares are denominated.^* 233 Modus operandi for GDR issues:^' The following steps are required for GDR issues: i) Approval of Board of Directors before making GDR issues. ii) Shareholders extra-ordinary general meeting to take the consent of shareholders. iii) Two tier approval of Ministry of Finance "in principle" and final. iv) Permission of RBI. v) The stock exchange on which the GDR is to be listed is also finalized. vi) Custodian bank and the depository bank are appointed. vii) Lead managers arranged for the road shows. viii) Pricing is done after the finding at the road shows. Appointment of Agencies Engaged in Process:^" i) Lead/joint lead managers ii) Co-lead/co-managers iii) Listing agents iv) Global depository 234 v) Legal counsel for Indian law and international law vi) Special accountant to the issue vii) Printers of international repute for prospectus viii) Process agent ix) Road shows x) Pricing and closing. Conditions for GDR Issues:^^ 1. The company making issue should have a good performance record of at least 3 years. 2. Permission should be taken from Department of Economic Affairs; Ministry of Finance, size of the issue should be got approved from ministry. 3. It is mandatory that the foreign resources would be remitted to India on completion of the issue. 4. There is no lock in period for the GDRs to be issued. 5. All trading transactions of the GDRs outside India would be free from any income tax in India. GDR guidelines further liberalized under specific condition: Unlisted companies are now permitted to float Euro issues. All end-use restrictions on GDR issue proceeds 235 have been removed except the prevailing restrictions on investments in stock market and rent estate. The 90-day validity period for final approvals of GDR issues has been withdrawn and final approval will continue to be valid. Indian companies are now permitted to issue GDR in the case of Bonus or Right issue of shares or on genuine business reorganizations duly approved by the high court. Advantages of GDR to Indian Companies: Indian companies have discovered that they can take advantage of, certain voting arrangements that they can conclude with the depository bank that is their holder on record. Voting arrangements are naturally not possible for companies when it comes to dealing with their non-GDR shareholders. Besides, since the Indian company issues rupee dominated shares (usually in the name of the depository bank), it takes on no foreign exchange risk whatsoever — although it receives foreign currency funds. It is administratively much easier for a company to deal with a single shareholder (the depository bank) for a substantial chunk of its shares in terms of such corporate actions as dividend payments, right issues, bonus issues, information 236 dissemination, annual general meetings etc. The foreign investors, on their part, afe generally unconcerned about voting rights and management control in an Indian company, being interested only in the return on their investment by way of capital appreciation and dividend income. GDRs never result in an outflow of Indian currency that exceeds the amount that they originally bring in. Since the proceeds of converted GDRs can be realized only at prevailing share prices and prevailing exchange rate, the amount that the foreign investors can take out of the country in such a situation can only be a fraction of the amount that originally came in when both the share prices and the exchange rates were higher. Table-13 presents an account of GDR inflows in the post New Economic Policy period i.e. 1991-92 to 1997- 98. It is discernible from the table that the Global Depository Receipts (GDR) have become important channels in garnering foreign funds. In 1992-93 the foreign funds raised through GDR accounted for US $ 86 million which went upto US $ 1602 million in 1993-94 registering a growth rate of whopping 1763 percent. In 1994-95 the 237 total funds guaranteed through GDR accounted for US $ 1839 million a growth of approximately 15 percent over the previous year. However, in the successive year i.e. 1995-96 the growth registered a negative trend {-) 92 percent. In the other couple of successive years the growth in GDR funds have picked up, but a discouraging rate. The poor performance of GDR is attributable to emerging market risk perception and the discouraging conditions of the domestic capital market. The Indian companies to raise an enhanced amount of global funds consider the new guidelines with regards to GDR and ADR announced by the government in 1998-99 welcome steps. Table-13: GDR Inflows (1991-92 to 1997-98) fJJS $ miUion) Year GDR inflows Change over the Growth rate (%) ($ million) year 1991-92 - - - 1992-93 86 - 100.00 1993-94 1,602 1,516 1762.79 1994-95 1,839 237 14.79 1995-96 149 (-)1,690 (-)91.90 1996-97 650 501 336.24 1997-98 1,000 350 53.85 Source: Compiled by the Research Scholar. 238 A comprehensive list of Indian GDR issues till April 14th 1998 is presented in Appendix-VIII. It is seen that despite the numerous policy packages with regard to the policy for GDR issuance, number of Indian companies have issued the shares at discount to raise global fund. Off-Shore Funds in Post NEP Period: Recently offshore fund in India has attracted considerable attention of the country. According to one estimate approximately half of the world's funds pass through offshore funds. In this process, the main players are private financial institutions, assets protection trusts and other foreign trust, captive insurance companies, ships and marine insurance funds etc. Offshore funds across the world share some common characteristics, which distinguish them from other financial centres. These include economic and political stability, a good legal system, a pragmatic regulatory environment with minimum exchange controls, high level of confidentiality, good communication services and connectivity to the rest of the world and the basic infrastructure of a metropolitan city. Some of the key benefits attached to offshore funds through offshore financial centres include: increased foreign investment. 239 offshore business of the country coming on the shore, increased world class job opportunities, expansion of financial services industry, development of related industries such as tourism and improvement in the credit worthiness of the country. India makes a glaring case for developing offshore financial centre for increased offshore funds in India. Mumbai, Chennai, Cochin, Khandala, Toutikorin are some of the choicest locations eligible for setting up offshore financial cen^tres. Now it has become of paramount significance that to access the potential benefits and risk associated to an OFC, the Indian planner should come up with a planned approach and a principled decision for identifying infrastructure changes, assessment of local skills, gradual deregulation with increasing integration, making environment conducive to the functioning of OFC to make India a truly potential financial centre in the 21st century. The following paragraphs present a comprehensive analytical study as regards the trends in offshore funds during post NEP period. Table-14 presents an account pertaining to trends in offshore funds during the period 1991-92 to 1997-98. Of 240 late offshore funds have become the popular source of raising funds in the foreign financial market. The total reveals wavering growth trend during the period under reference. Their share in the table portfolio/investment is although negligible but important. With the government shows keen interest to open up offshore financial centres in different parts of the country and outside hopefully boost the inflows of offshore funds in Indian economy. Table-14: Trends in Offshore Funds (1991-92 to 1997-98) (U.S. $ million) Year Total Portfolio Offshore funds % share in Investment Portfolio investment 1991-92 4 4 100 1992-93 244 3 1.23 1993-94 3,567 382 10.71 1994-95 3,824 239 6.25 1995-96 2,748 56 2.04 1996-97 3,312 20 0.61 1997-98 1,828 204 11.16 April 1997-98 1,742 157 9.01 Source: Compiled by the Research Scholar. 241 Policy Impediments to Foreign Investment in India: There arc currently six possible entry routes / clearing mechanisms for foreign investment, depending on the sector, extent of foreign equity desired, level of investment and geographical location of the project. This system is considered to be complex by many foreign investors. So it appears that the number of entry routes should be reduced to only two i.e. the Automatic Approval Route of RBI and the Foreign Investment Promotion Board (FIPB). The policy framework should be further liberalized to make the automatic approval route of RBI more penetrative. An increased share of the automatic approval route in the foreign investment approvals will reduce the pressures on the FIPB system. Further increasing the permissible level of equity or the list of high priority sectors can expand the scope of the automatic approval route. The FIPB system has the basic strength of flexibility as the terms and conditions of any type can be negotiated. However, this flexibility can also resulted in less transparency. So a more transparent policy framework, without causing any loss to the inherent flexibility of the system is desirable. 242 Some impediments associated with the positive and negative list. The Indian system has both a positive and negative list. The positive list consists of 35 priority sectors where automatic approval is granted, subject to certain conditionalities. There is a negative list where no foreign investment is allowed. Most of the foreign investors feel that a negative list approach identifying areas where foreign investment is not allowed is a better approach than the 'positive list' approach, which indicates the sectors where foreign investment is allowed. However, the government of India has a different thinking. It feels that negative list approved may give an impression that the earlier restrictive regime is still being followed. This issue is more related to perception than substance. Since perception is more important in gaining credibility, it may be desirable to accept a 'negative list' approach. Business can be operated efficiently only when, not only the foreign investment policy is friendly but also the collateral regimes are transparent, flexible and market sensitive. Some of the policy impediments are given under: Formulation of a policy allowing flexibility in the labour market has been a consistent demand of some countries, especially Japan and Germany. The current legal regime 243 places a large degree of control on the management of the labour force by the medium and large corporate sectors. There is a fear among the labour force of existing industrial unit, that at the time of collaboration with foreign entity control of management may go into the hands of foreign top level management and they may adopt a policy of hiring and firing the labour. At the beginning most of the labour union were against the foreign equity participation but now they are giving relatively some what silent nod to the foreign investors. Government should formulate a better network of guidelines on this front, which should be acceptable by both foreign investors, and labour unions to reduced the bottlenecks impeding foreign investment process. A survey shows that Intellectual Property Right (IPR) is a major impediment for some firms, particularly in the area of pharmaceuticals and agro-chemicals. These firms have in fact two different types of concerns. First, as major multinationals, they have a huge product list of which many are off-patents. IPR regime is not a concern for these products while the regulatory control mechanism, represented by registration formalities, submission of 244 detailed documentary evidence, etc. is second, IPR is a concern when new products are involved. Here, the attitude is that these will not be brought into India, till the IPR issue gets settled satisfactorily. It can be presumed that the IPR issue will get settled within the framework of the Uruguay Round. The government has already initiated action in this direction. Taxation system of India also worked against the wishes of the foreign investors, which comparatively get more flexible taxation facilities in other Asian countries. A transparent foreign investors conducive and indigenously suitable taxation system is the desire of the hour. Impediments related to the infrastructure developments are receiving due attention from the government. Though government of India simplified the complex rules, procedural formalities and involvement of bureaucracy reduced drastically. Further, more liberal and easy procedural formalities are required to attract more and more foreign investment in India. The clearance points for various projects need to be shortened. Statutory clearance for foreign investment approvals should be further curtailed. 245 Conclusion: Foreign investment has clearly been a major factor in stimulating economic growth and development in recent times. The contribution that Multinational Corporations can make as agents of growth, structural change and international integration has made foreign investment a coveted tool of economic development. In India, there has been a growing recognition that any credible attempt towards economic reforms is involving upgradation of technology, scale of production and linkages to the increasingly integrated globalize production system through the participation of Multinational Corporations. The development strategy before 1991 was neglected in India. The government is now pursuing a pro-active policy to attract foreign investment. However, the foreign investment policy per se is skill only one of the concerns of the foreign investors, for the foreign investment policy determines the ease of accessing the domestic market and the terms and conditions of entry. From the foregoing discussion it is manifest that foreign investment into India in 1997-98 was lower at U.S. $ 5025 million compared to U.S. $ 6008 million in 1996-97 because of a decline in portfolio investment. Although 246 Foreign Direct Investment (FDI) increased by 18.6 percent from U.S. $ 2696 million in 1996-97 to U.S. $ 3197 million in 1997-98, portfolio investment declined from U.S. $ 3312 million in 1996-97 to U.S. $ 1828 million in 1997- 98. This decline in portfolio investment is mainly attributable to the contagion from the East Asia crisis, which adversely affected capital flows to all emerging markets. The decline in portfolio investment from 1997-98 onwards has '.been contributed by a decline in inflows of both foreign institutional investment and GDRs. Fresh inflow of funds by FIIs declined from U.S. $ 1,926 million in 1996-97 to U.S. $ 979 million in 1997-98. This trend intensified in 1998-99 with an estimated outflow of U.S. $ 752 million during April-December 1998 compared to inflows of U.S. $ 973 million during the corresponding period in the previous year. GDRs raised in 1997-98 was U.S. $ 645 million, which was less than half the amount of U.S. $ 1,366 million raised in 1996-97. The declining trend has continued during the first nine months of 1998- 99 with only U.S. $ 15 million raised compared to U.S. $ 612 million during the same period in 1997-98. The poor performance of portfolio investment is a consequence of 247 both enhanced emerging market risk perception and the depressed condition of the domestic capital market. Recently, offshore funds have become the popular source of raising funds in the foreign financial market. The government's keen interest for opening up offshore financial centres in different parts of the country and abroad is welcome step for attracting foreign investment through offshore funds. In a nutshell, the Indian economy is all set on the high growth path. The economy does offer high opportunities for foreign investors. Foreign direct investors, portfolio investors including FIIs now must address the problems of economic development as well as social welfare. The reform process is very much in place and moving ahead well. It is now high time that the government should strongly urge that there is a great deal of congruence between the foreign investment flows and what the Indian economy requires. The policies should be fashioned in such a way that the congruence is maintained and the question of foreign investment flows reached the desired levels. The next chapter entitled "Performance Appraisal of Hindustan Lever Limited (HLL) in Post Liberalization Era -1991-98" presents a succinct account of the financial 248 performance of th^ HLL in the post-liberalization period. The chapter highlights the points as to how in the wake of globalization, the HLL, age-old multinational company in India has steadily grown from strength to strength financially. References: 1. Constituent Assembly of India (legislative) Debates, vol. no. 1, 6 April 1948, p. 2385. 2. Ibid, pp. 2385-6. 3. Ibid, p.. 2386. 4. S.K. Misra and V.K. Puri, "Indian Economy", Himalaya Publishing House, Mumbai, p. 820. 5. Kumar, Nagesh, "Liberalisation and Changing Patterns of Foreign Direct Investments", Economic and Political Weekly, Vol. XXXIII, No. 22. Mumbai, May 30, June 5, 1998, p. 1322. 6. Ibid, p. 1322. 7. Ibid, p. 1323. 8. This definition of FDI is based on OECD, Detailed Benchmark Definition of Foreign Direct Investment, second edition (Paris, OECD, 1992) and International Monetary Fund, Balance of Payment Manual Fifth edition (Washington, D.C.) IMF 1993. 9. World Investment Report, "Trends and Determinants", United Nations Publication, Switzerland, 1998, p. 350. 249 10. Ibid, p. 351. 11. Kothari, Industrial Directory of India, 38th edition published by Kothari Enterprises, Chennai, 1992, p. 40. 12. The Economy Survey of India, Ministry of Finance, Government of India, New Delhi, 1998-99, p. 90. 13. Ibid, p. 91. 14. "Special Report on FIIs", Business Today, New Delhi, August 22, September 6, 1993, p. 42. 15. Guidelines for Investment by FIIs", Chartered Secretarjy, New Delhi, October 1992, p. 934. 16. Ibid, p. 935. 17. "Indian Economic Survey", Ministry of Finance, New Delhi, 1998-99. 18. Charumathi, B., "Euro Issues - An Effete Era", The Indian Journal of Commerce, vol. XLIX, No. 189, Hyderabad, Dec. 1996, p. 14. 19. lOB Quarterly News Review, April-June 1995, pp. 20- 21. 20. Jain, V.S., "Launching of a Successful GDR Offering", The Management Accountant, Vol. 31 no. 5 May, Calcutta, 1996, p. 364. 21. Ibid, p. 365. ci-iArxtT^ - \r\\ l^erformance ^^ppraidai of ^J^indudt cJLeuer Historical Background of Hindustan Lever Limited (HLL) Progress Profile of HLL Performance Appraisal of HLL and Globalisation 250 PERFORMANCE APRRAISAL OF HINDUSTAN LEVER LTD. (HLL) IN POST LIBERALIZATION ERA- 1991-1998 The previous chapter has rendered an account of pattern of foreign investment in India. The present chapter is a case study of HLL to corroborate the view that MNCs are significant foreign investors in India. Historical Background of Hindustan Lever Limited (HLL): Hindustan Lever Limited (HLL) has made its name in the history of consumer goods. HLL successfully established its vast industrial empire in India. "Unilever", the British company, is the parent company of HLL; its birth is an interesting event of the history. Soap making is accidental discovery. It took place in Warrington, England, on Oct. 27, 1885. The broth of soap was carelessly left boiling in a pan. No body knew that it would turn into a soap so clean, bright and pure that it would create manufacturing history and forever alter the way house wives did their laundry.^ It was a revolution meticulously planned by William Herketh Lever, the diligent and intelligent British industrialist most personally involved with the breakthrough 251 in creating a history. The first Unilever product saw the Indian soil in 1888. When sunlight soap was imported to India. Lifebuoy was introduced in 1895 and other famous brands of Unilever like Pears, Lux and Vim followed. Vanaspati renamed Dalda, was launched in 1918. Unilever set up its first Indian subsidiary in 1931, Hindustan Vanaspati manufacturing company, followed by Levers Brothers India Limited (1933) and United Traders Limited (1935). These three companies merged in July 1956 as a riesult, birth of HLL with 10 percent equity participation. It was the first foreign subsidiary having adopted the step of offering its equity to the Indian public. Uni-Lever, which gradually divested its stake in HLL, now holds only 51 percent equity in the company. Now in India, it is the leading multinational, which is leading from the fronts. Brief Progress Profile of HLL: In 1888, four-year after England witnessed the emergence of sunlight, visitors to the bustling harbour in Calcutta, India, might have seen an unusual package of crates just landed and lying almost unnoticed among other goods. The sides of the crates bore the mighty legend 'made 252 in England by Lever Brothers, and in these packages were tablets of sunlight. Within thirty days, "the tablet that foams" had entered Indian homes and housewives' hearts. Setting a new standard of washing efficiency with it, a new era in India's industrial history quietly emanated, leading in 1956, to the formation of Hindustan Lever Limited (HLL). In 1888 Sunlight soap introduced in India, as an imported product. It was the beginning of the history^. In 1895, Lifebuoy soap launched into Indian market; Lever Brothers appoints agents in Bombay, Madras, Calcutta and Karachi to gear up the whole sale business. In 1902 'Pears' the original glycerin soaps came in India. In 1905. Lux soap and Lux flakes introduced. In 1913, cleans to sparkle, Vim scouring powder, and first range of Erasmic toilet preparations introduced. In 1914 Vinolia soap introduced in India. In 1922 Rinso soap powder launched. In 1924 Gibbs dental preparations introduced. 253 In 1925 Lever Brothers gains full control of NorthWest Soap company. In 1926, Hartogs registered Dalda Trademark. In 1930, Unilever forms on January 1 through merger oi Lever Brothers and Margarine unie. In 1931, Hindustan Vanaspati Manufacturing Company registered on November 27 Sewri factory site bought in 1932 Vanaspati manufacture began at sewri. In 1933, .Application made for setting up soap factory next to the Vanaspati factory of Sewri; Lever Brothers India Limited incorporated on October, 1934. Soap production starts at Sewri factory in October; North West Soap company's Garden Reach Factory, Calcutta rented and expanded to manufacture lever brands. In May 1935, United Traders incorporated to market personal products. 1937 Mr. Prakash Tandon, one of thee first Indian covenanted managers joins Hindustan Vanaspati Manufacture (HVM). In 1938 Rexona bathing soap introduced in India. In 1939 Garden Reach Factory purchased outright concentration on making up Dalda Vanaspati as a brand. 254 In 1941 Agencies in Bombay, Madras, Calcutta and Karachi taken over; Company acquires own sales force. In 1942 Unilever takes stiff decision to "train Indians to take over junior and senior management positions in stead of Europeans". In 1943 personal products manufacture begins in India with plant at the Garden Reach Factory. In 1944 Reorganization of the three companies with common management but separate marketing operations, Mr. W.G.J. Shaw and Mr. C.S. Petit become joint managing Directors of the three companies. In 1947 Mr. W.G.J. Shaw leaves, Mr. CS Petit alone takes full charge. In 1951 Mr. Prakash Tandon becomes first Indian Director. Shamnagar, Tiruchy and Ghaziabad Vanaspati factories bought. In 1953 Mr. A.J.C. Hosk-Abrahal takes over as chairman from Mr. C.S. Petil. In 1955, 56 percent of managers are Indians. In 1956 Three Companies merge to form the giant Hindustan Lever Limited, with 10 percent Indian equity participation. 255 In 1957 Mr. S.H. Turner takes over as chairman from Mr. A.J.C. Hoskyns. Abrahall Uni-lever special committee approaches research activity by Hindustan Lever. In 1958 Research Unit starts its operations at Bombay Factory. In 1959 Pilot project for growing peas; trial Milk collection projects, and surf launched. In 1961 Mr. P.L. Tandon takes over from S.H. Turner as the first Indian Chairman; out of 205, 191 managers were Indians Lux Toilet soap comes in new colours. In 1962 formal exports departments begins. In 1963 Index-port Limited, fully owned subsidiary, formed and in 1964 Etah dairy established. In 1965 Ghaziabad plant for dehydration of peas started and Hima dehydrate peas introduced in market. In 1966 Lever's baby food and more new foods launched; Nicket catalyst production begins; Indian share holdings shoot up to 15 percent. In 1967, Hindustan Lever Research centres biggest in the private sector, starts in Bombay. In 1968 Mr. V. G Rajadhyaksha took over as chairman from Mr. Prakash Tandon. Fine Chemicals Unit Commissioned at Andheri, Informal price control on soaps starts. 256 In 1969 Monopolies and Restrictive Trade Practice Act (MRTP) came into force; Rin bar started. In 1971 Mr. V.G. Rajadhyaksha presents a plan for diversification into chemicals to Unilever for special committee approval. In the same year Clinic shampoo was ?ilso introduced. In 1973, Foreign Exchange Regulation Act (FERA) came stipulated those foreign owned companies having 75 percent turnover in core sector or are exclusively export oriented, can retain 74 percent foreign equity stake. All other foreign owned companies must reduce foreign stake to 40 percent. In 1974, Pilot Plant for industrial chemicals as Taloja launched. Informal price control on soaps withdrawn. Liril Marketed by HLL. In 1975 Ten year modernization plan for soaps and detergents plants mooted; Jammu project work started, statutory price control on vanaspati and baby foods withdrawn close-up fresh breath confidence tooth paste introduced. In 1976 further amendments to FERA, 51 percent foreign equity allowed for companies with 60 percent turnover in core sector and 10 percent in exports, contraction work of Haldia chemicals complex starts; Taloja chemicals unit starts operation. 257 In 1977 Jammu synthetic Detergent plant inaugurated; Indian share stake climbed to 18.57 percent. In 1978 Indian equity stake went up to 34 percent; Fair & Lovely skin cream launched. In 1979 Sodium Tripoly phosphate; plant at Haldia commissioned; Madras Exports processing zone unit is established. In 1980, Mr. A.S. Ganguly takes over as chairman from Mr. T Thomas; Unilever share holding stake in the company slips to 51 percent. In 1982 Fine Chemicals production begins at Jammu, Unilever got government nod for 51 percent equity stake. In 1984 Foods, Animal feeds businesses transferred to Lipton; Chhindwara unit is established. In 1985 DAP plant at Haldia commissioned. In 1986 Agro products unit at Hyderabad starts functioning, first range of hybrid seeds comes out Khamgaon soaps unit and Yavatmal personal products unit start production. In 1988 Manglore Detergents unit acquired; Lux International, Breeze, the goodness of real rose, and wheel introduced. In 1989 Fluid cracking catalyst plant at Haldia, Detergents unit at Sumerpur and footwear (Export) unit starts at Pondicherry. 258 In 1990 Mr. S.M. Datta takes over as chairman from Dr. A.S. Ganguly. In the same year soap unit, Orai and functionalised; Biopolymer unit, Pondichcrry commissioned; Sandeshkhali Prawn (exports) grown out farm went cornmercial; Surfmatic detergent, phosphogypsum, organic manure marketed. In 1991 Lifebuoy plus, Le Sancy, Breeze, Sandalwood, Liril Cologne Lime Soaps, Triple power Rin Powder and Surf Ultra detergents; Close up Green toothpaste, Fair & Lovely Lotion, Carbagen strike the market. In 1992 A joint venture, Nepal Levers limited formed to produce soaps and toiletries in Nepal. Soaps Units Dabgram and Shivalik cellulose commissioned. Comfort fabric softener launched, Mentadent G tooth paste Introduced'*. Performance Appraisal of HLL and Globalization: Table - 1 provides a detailed product profile of HLL during 1987-1998. The table reveals that among 5 important products of HLL, soap and detergents have been dominating since 1995. From 1996 onwards the HLL seems to have changed its focus concentrating more on food items. However, during this period i.e. 1996-98, soap and 259 detergents still occupies the iirst position followed by food, personal products, chemical and fertilizer products and miscellaneous. Table - 1 Product Profile of HLL Year Soaps& Personal hoods Uhe. Agn Others Total detergents Products Pert Animal feeds 1987 73 05 01 11 10 100 1999 69 07 02 14 08 100 1989 69 07 01 14 09 100 1990 71 07 01 12 09 100 1991 69 05 02 15 09 100 1992 68 05 03 15 09 100 1993 66 08 02 14 10 100 1994 63 09 05 12 11 100 1995 59 12 07 13 09 100 1996 44 10 34 6 6 100 1997 43 11 33 7 6 100 1998 42 12 32 7 7 100 Source:- Compiled from Annual Report and Accounts HLL,, Mumbai, 1996 P. 25 260 The table 2 depicts long term investment policy of HLL. The investment in fixed assets have grown at an accelerated pace since globalization in 1991. HLL invested Rs 1104 crore of capital in fixed assets, during 1998. It is an increase of 31 percent over the previous year. The growth Table - 2 Fixed Assets S.No. Year fixed Assets percent changeiave r Rs Lakhs the Year (Trend) 1. 1986 10.808 (-) — 2. 1987 12.450 1642 15.19 3. 1988 14,404 1954 15.69 4. 1989 16.335 1931 13.40 5. 1990 17,919 1584 9.69 6. 1991 19,353 1434 8.00 7. 1992 22.275 2922 15.09 8. 1993 25.434 3159 14.18 9. 1994 32,890 7,456 29.31 10. 1995 39,556 6666 20.27 11. 1996 72,171 32615 82.45 12. 1997 84,270 12,099 16.76 13. 1998 110.350 26080 30.95 Source:- Compiled and Computed from Annual Report and Accounts HLL,, Mumbai, 1996 P.32 261 of fixed investment is exceeded by 83 percent of growth in 1996. It is the healthy impact of globalization of Indian economy in MNCs. It shows phenomenal expansion in investment of MNCs in response to global changes. Table 3 makes a comparison of current assets with fixed assets. The information is highly revealing to find that Table - 3 Comporative data of fixed and net carrent assets:- Year fixed Assets Net current Netcurrent Assets (Rs Lakhs) Rs Lakhs Fixed Assets 1986 10.808 11,983 110.87 1987 12.450 17,875 143.57 1988 14.404 17,603 122.21 1989 16„335 18,5345 113.53 1990 17,419 22,674 130.17 1991 19,353 25,408 131.29 1992 22.275 29.858 134.04 1993 25,434 19,560 76.90 1994 32,556 34,202 103.99 1995 39,556 45,767 115.70 1996 72,171 37,867 52.47 1997 84,270 38,680 45.90 1998 1.10,350 37,843 34.29 Source:- Compiled and Computed from Annual Report and Accounts HLL„ Mumbai, 1996 P.32 262 current assets consume more capital than fixed assets. The ratio has declined since fixed investment in response to globalization in India. It has fallen from 111 percent in 1986 to 34 percent in 1998. It is a good sign that MNCs are making fixed investment in response to globalization of Indian economy. Table 4 has worked out debt equity ratio. It is clear from the table that MNCs are giving great importance to Table - 4 Debt Equity Ratio Year Debt Equity D/E Ratio Percentage 1. (Rs. Lakhs) 2. (Rs.Ukhs)3 2/3(4) 5 1987 12086 18346 0.6587 65.87 1988 11743 20607 0.5698 56.98 1989 12819 22852 0.5609 56.09 1990 15967 25538 0.6228 62.28 1991 16475 29046 0.5672 56.72 1992 20027 33330 0.6008 60.08 1993 11521 38568 0.2987 29.87 1994 14654 53826 0.2722 27.22 1995 16021 63828 0.2510 25.10 1996 26005 99153 0.2622 26.22 1997 28255 110215 0.2563 25.63 1998 30445 120338 0.2529 25.29 Source: Compiled and Computed from various Annual Reports and Accounts of HLL Mumbai, * Equity includes Reserves and surplus 263 safety aspect of investment. They are taping tlie equity funds more than the debts. The ratio has fallen from 66 percent in 1987 to 25 percent in 1998 under the influence of globalization policy. Globalization is a phase full of uncertainties that runs counter to high degree of financial leverage. The Table 5 furnishes justification for total investment by MNCs. HLL is making investment in response to growth Table - 5 - Investment Turnover Ratio Year Sales Fixed Assets Current Assets Total Assets ^ Net Sales (1) (2)Rs lakhs (3) Rs. lakhs (4) Rs. lakhs (6) Rs. lakhs IT = Total Assets 1987 81,500 12,450 17,875 30,325 2.6875 1988 86,469 14,404 17.603 32.007 2.7015 1989 10,3,137 16,335 18.545 34,880 2.9569 1990 1,23402 17.919 22.674 40.593 3.0399 1991 1,50,761 19,353 25,408 44,761 3.3681 1992 1,75,703 22,275 29.858 52,133 3.3702 1993 2,06.317 25.434 19.560 44.994 4.5854 1994 2,82,648 32,890 34,202 67.022 4.2172 1995 3,36,695 39,556 45,767 85.323 3.9461 1996 6.60,011 72,171 37,867 1.10,038 5.9980 1997 74,2520 84,270 38.680 122950 6.0392 1998 864630 110350 37843 148193 5.8344 Source: Compiled and Computed from Annual Reports and Accounts, HLL, Mumbai IT= Investment Turnover. 264 in investment turnover since the inception of globalization in 1991. The investment turnover ratio has gone up from 3 percent in 1987 to 6 percent in 1998. The accelerated growth rate took place since 1993. So higher investment turnover ratio is the justification to MNCs' investment. Table 6 furnishes factual information of the impact of globalization on the net worth of the MNCs. Net worth of Table - 6 Net Worth Y5ar Net t-ocea snare capital Reserve 3+4 snare noiders Net vvortn= (1) Assets (2) (3)Rs. lakh Surplus(4) funds(3+4)(5) Share holders fund Rs Lakh Net fixed Assets 1987 12,450 9,332 9,014 18,346 1.47 1988 14,404 9,332 11.275 20,607 1.43 1989 16,335 9,332 13,520 22,852 1.40 1990 17.919 9,332 16,206 25.538 1.43 1991 19,353 13,999 15,047 29,046 1.50 1992 22,275 13,999 19,331 33,330 1.50 1993 25,434 13,999 24,569 38,568 1.52 1994 32,890 14,699 39.127 53,826 1.64 1995 39.556 14,584 49.244 63,828 1.61 1996 72.171 19,917 79.236 99,153 1.37 1997 84270 20921 68.363 89284 1.05 1998 110350 30481 86.482 116963 1.06 Source: Compiled and Computed from Annual Reports and Accounts, HLL, Mumbai 265 HLL has been changing at a wavering rate. 1994 was the year of highest net worth, which came down to 1 percent in 1998. The reason is faster growth in long term investment than the owners' funds. Table 7 reveals return on capital employed. Return justifies growth of capital employed under the impact of Table - 7 Return on Capital Employed (ROCE) EBIT Year Share Capital Reserves & loan funds Capital EBIT ROCE= K100 Rs lakhs Surplus Rs lakhs employed Rs. lakhs Capital Emp (1) (2) Rs. lakhs (3) (4) (S) (6) 6+5x100 (7) 1987 9332 9014 12086 30432 9753 32.08 1988 9332 11275 11743 32350 10147 31.366 1989 9332 13520 12819 35671 10712 30.029 1990 9332 16206 15907 41445 12905 31.137 1991 13999 15047 16475 45521 15833 34.781 1992 13999 19331 20027 53357 19817 37.140 1993 13999 24569 11521 50089 25000 49.911 1994 14699 39127 14654 68480 33225 48.517 -1995 14584 49244 16021 79849 39237 49.138 1996 19917 79236 26005 125158 66225 52.913 1997 20921 68363 28255 117539 72340 61.55 1998 30481 86482 30445 147408 79343 53.83 Source:- Compiled and Worked out from Annual Reports and Accounts, HLL, Mumbai 266 globalization of Indian economy. The return on capital employed has gone up from 32 percent in 1987 to 35 percent in 1996 and further to 62 percent in 1997. It shows favorable impact on MNCs Table 8 shows the trend in the sales of HLL in the wake of globalization. There has been more than 300 Table - 8 Sales of HLL S.No. Year Sales in Rs. Lakhs Percent Change Index (Net of Excise) Over the Year No. 1 1987 81500 100.00 2 1988 86469 6.10 106.10 3 1989 103137 19.28 125.38 4 1990 123402 19.65 145.03 5 1991 150761 22.17 167.20 6 1992 175703 16.54 183.74 7 1993 206317 17.42 201.16 8 1994 282648 36.98 238.14 9 1995 336695 19.12 257.26 10 1996 660011 96.03 353.29 11 1997 782000 18.48 371.77 12 1998 893340 14.23 386.00 Source:- Compiled and Computed from Annual Reports and Ac counts of HLL, Mumbai. 267 percent increase in tiie sales of HLL over its base year 1987. The globalization has produced good results in terms of market share. The MNCs have undertaken production of diversified products to enhance safety especially after the globalization policy of India. Table 9 reveals that soaps and detergents Table - 9 Product Contribution to Sales (1998) Products ' Share in Percent Soaps and Detergents 43.14 Dairy products 1.21 Personal products 11.30 Ice Creams 1.95 Beverages 19.74 Fruits and vegetables 1.20 Oils and Vanaspati 6.93 Branded staple foods 1.43 Others 7.80 Speciality cheemicals 1.90 Animal feeding stuff 3.40 Total 100 Source:- The Economic Times, New Delhi, 25 December 1998, p. 5. 268 and beverages are the products that cor\tribute more than 60 percent to the total sales of HLL. The growth in the market share is accounted by competitive edge that MNCs have acquired after globalization. Table 10 depicts the changes in the net profit margin. The table substantiates the view that the MNCs are capable Table • 10 Net Profit Margin (1987-1998) 'fear Net Profit after Sales ^ Net Profit after tax taxes (Rs. Lakhs) (Rs. Lakhs) NPM = Sales (1) (2) (3) (4)2+3 1987 4650 81500 0.05705 1988 4878 86469 0.05641 1989 5381 103137 0.05217 1990 5874 123402 0.04760 1991 8020 150761 0.05319 1992 9848 175703 0.05604 1993 12727 206317 0.06168 1994 18996 282648 0.06720 1995 23922 336695 0.07120 1996 41.270 660011 0.06252 1997 780250 782000 0.0742 1998 73036 893340 0.08176 Source:- Compiled and Computed from Annual Reports & Accounts of HLL, Mumbai. # NPM = Net Profit Margin. 269 to improve their margin from 5 percent to 8 percent during 1991 to 1998. The globalization has improved the net profit margin of MNCs. Table 11 makes a comparative study of change in sale and profit. Globalization has again produced favorable effects on MNCs. The growth of profit is faster than the Table-11 Statement Showing Comparative Changes in Sales and Profit (1987-1998) Year Sales in Rs Lakhs Profit Aner Taxes comparative Percentage change (Net of Excise) Rs. lakhs Sales Profit 1987 81500 4650 — 1988 86469 4878 6.10 4.90 1989 103137 5381 19.28 10.31 1990 123402 5874 19.65 9.16 1991 150761 8020 22.17 36.53 1992 175703 9848 16.54 22.79 1993 206317 12727 17.42 29.23 1994 282648 18996 36.98 49.26 1995 336695 23922 19.12 25.93 1996 660011 41270 96.03 72.52 1997 782000 58025 18.48 40.60 1998 893340 73036 14.23 25.86 Source:- Worked out by the Research Scholar from Annual Reports of various years. HLL, Mumbai. 270 growth of sales except the year 1996 which is marked by 90 percent of increase in sales and 72 percent in profits. Table 12 shows the dividend policies of MNCs since globalization. The MNCs are following liberal dividend policy. The dividend per share has grown at average rate of 20 percent. The rate of change is fastest since 1994. As a result of major changes in economic policy of India. Table -12 Statement Showing Earning Per Share and Dividend Per Share Year Earning Per snare Annual Dividend per share (Rs) Annual Adjusted for (Rs)(Bonus) change (Adjusted for bonus) change 1987 3.32 — 1.67 — 1988 3.48 4.82 2.13 27.54 1989 3.84 10.34 2.33 9.38 1990 4.20 9.38 2.80 20.17 1991 5.73 36.43 3.85 37.50 1992 7.03 22.69 4.20 9.09 1993 9.09 29.30 5.60 33.33 1994 13.02 43.23 8.00 42.86 1995 16.40 25.96 10.00 25.00 1996 20.72 26.34 12.50 25.00 1997 29.10 40.44 13.15 5.20 1998 38.39 4.43 14.21 8.06 Source:- Computed from Annual Reports & Accounts HLL, Mumbai 271 Table 13 gives an account of the performance of share in the stock market. The capitalization rate of earnings has gone up form 14 percent to 39 percent during the period of globalization The HLL is able to fulfill the expectation of its investors. Tabic - 13 Price Earnings Ratio (P/E) (1987-1998) Year Market Price ot a Earning Pershare ff Market Price or (Adjusted for Bonus) a share (1) Share (2) EPS (3) EPS 2+3 1987 47.67 3.32 14.36 1988 49.33 3.48 14.18 1989 74.00 3.84 19.27 1990 96.67 4.20 23.02 1991 168.00 5.73 29.32 1992 365.00 7.03 51.92 1993 575.00 9.09 63.26 1994 590.00 13.02 45.31 1995 624.00 16.40 38.05 1996 807.00 20.72 38.95 1997 827.00 29.10 28.42 1998 925.00 30.39 30.44 Source:- Worked out by the Research Scholar from Annual Reports of various years,HLL,Mumbai. 272 Table 14 reveals the payout ratio. MNCs are quite liberal in terms of high payout ratio since globalization of India economy. The payout ratio of HLL has increased from 50 percent to 60 percent during 1987 and 1998. Table-14 Payout Ratio (1987-1998) Year Dividend per Earning Per-share DPS (1) Share (Rs) Adjusted for D/P = bonus EPS (4) DPS (2) (EPS) (Rs.) |2+3 1987 1.67 3.32 0.5030 1988 2.13 3.48 0.6120 1989 2.33 3.84 0.6067 1990 2.80 4.20 0.6666 1991 3.85 5.73 0.6719 1992 4.20 7.03 0.5974 1993 5.60 9.03 0.6201 1994 8.00 13.02 0.6144 1995 10.00 16.40 0.6097 1996 1250 20.72 0.6032 1997 13.15 29.10 0.4518 1998 14.21 30.39 0.4675 Source:- Compiled and computed by Research Scholar from Annual Reports & Accounts of HLL, Mumbai. 273 The MNCs are able to enjoy high interest coverage ratio (Table 15). Globalization insists on credit rating. The MNCs want to stay solvent by borrowing only within the limit of the earnings. The interest coverage ratio has gone up from 5 percent in 1987 to 8 percent in 1991 and further to 19 percent in 1998. The higher the ratio, more solvent is the firm. Globalization has led to healthy practice among MNCs. Table - 15 Interest Coverage Ratio (1987-1998) Year EBIT interest Intrest coverage Ratio (1) Rs. lakhs(2) Rs.lakhs (3) EBIT (2*3 Interest (4) 1987 9753 1923 5.07 1988 10147 2209 4.59 1989 10712 1751 6.12 1990 12905 1831 7.05 1991 15833 2063 7.68 1992 19817 3219 6.16 1993 25000 2723 9.18 1994 33225 2954 11.25 1995 39237 2015 19.47 1996 66225 5700 11.61 1997 68483 4553 15.04 1998 80817 5732 14.09 Source:- Worked out by the Research Scholar from Annual Reports of HLL, (various years) Mumbai. 274 MNCs are major contributors of export earnings. The table 16 reveals export performance of HLL, which has an upward trend in export earnings four times over 1987. Globalization has accelerated the rising trend. Table - 16 Exports of HLL (1987-1998) Year Exports* Increase Increase over the year Rs. lakhs over the Previous (in percent) Year (lakh) Index No. 1987 8600 — 100.00 1988 9700 1100 12.79 112.79 1989 11900 2200 22.68 135.47 1990 15000 3100 26.05 161.52 1991 19500 4500 30.00 191.52 1992 21400 1900 9.74 201.26 1993 25600 4200 19.63 220.89 1994 45600 20000 78.12 299.01 1995 58200 12600 27.63 326.64 1996 92100 33900 58.25 384.89 1997 115200 23100 25.08 409.97 1998 139215 24015 20.84 430.86 Source:- Compiled from Annual Reports of various years, HLL, Mumbai. Note: * Includes Exports made by HLL's subsidiaries 275 Exports performance of MNCs has risen under the influence of globalization HLL was able to increase the exports to the tune of 15 percent of the net sales. Table - 17 Exports to Net Sales (1987-98) Year Net sales Export" Export to Net saies' Rs. Iakhs(2) RsJakhs (3) 1987 81500 8600 10.55 1988 86469 9700 11.22 1989 103137 11900 11.54 1990 123402 15000 12.15 1991 . 150761 19500 12.93 1992 175703 21400 12.17 1993 206317 25600 12.41 1994 282648 45600 16.13 1995 336695 58200 17.29 1996 660011 92100 13.95 1997 782000 115200 14.73 1998 893240 139215 15.58 Source:- Worked out by the Research Scholar from Annual Reports of HLL (various Years), Mumbai. ** Includes exports made by subsidiaries MNCs are contributing at a substantial rate to the national exchequer in the wake of growth of earnings, production and sales. In 1998 the contribution of HLL was 276 4 percent higher than the previous year. The contribution was 53 percent in 1996 higher than in 1995. The substantial increase in contribution to central exchequer is the result of simplification of taxation system and reduction in taxation rate, which is a welcome change in fiscal policy in response to globalization. Table - 18 Contribution to Central Exchequer (1987-98) Year Contribution to Growth (in Rs. lakhs) Growth Rate Exchequer Index No. (Rs. lakhs) 1987 29900 — — 100.00 1988 31000 1100 3.68 103.68 1989 34600 3600 16.61 120.29 1990 42100 7500 21.68 141.97 1991 49900 7800 1853 160.50 1992 62000 12100 24.25 184.75 1993 70400 8400 13.55 198.30 1994 84300 13900 19.74 218.04 1995 91500 7200 8.54 226.58 1996 139800 48300 52.79 279.37 1997 163890 24090 17.23 1998 180300 16410 10.01 Source:- Compiled from Annual Reports of various years HLL Mumbai. Note:- Includes Exports made by HLL's subsidiaries 277 Conclusion: In conclusion, globalization has produced favourable impact on the development of MNCs as illustrated by factual study of HLL. MNCs have expanded, improved earning capacity, profit and profitability, MNCs are making significant contribution to export earnings. Their contribution to National Exchequer has gone up substantially as a result of low taxation rate and simplified procedure of tax evaluation. Reference: 1. Annual Reports and Accounts of HLL Mumbai India 1998 2. Hamara, House Journal of Hindustan Lever Limited, Vol. 45, No. Ill, Mumbai, Nov/Dec. 1992 , p. 22 3. Ibid, p. 25. 4. Annual Report and Accounts of HLL, Opcit, p.2. CHAPTtn " Vlll SocialIKe6pon6lollltle6 of rl/liA.ltlnatlonai L^orporationd I ilfl //C61 in ^nala. * Introduction * Health Service * Housing and Urban Development * Family Walfare * Madical and Public Health Services * Education * Other Social Services 278 M/VI>TER - X7III SOCIAL RESPONSIBILITIES OF MULTINATIONAL CORPORATIONS (MNCs) IN INDIA Introduction: The previous chapter has made analytical study of Hindustan Lever Limited (HLL) to highlight the fact that multinational corporations have been playing important role in globalization of Indian economy. The present chapter makes an attempt to raise the issue of social responsibilities of the multinationals that a free market economy is hardly suitable to tackle. The concept of social responsibility is not new and it has been thoroughly discussed during the past several decades by the pioneer economists, business executives, political scientists, sociologists and psychologist. Elton Mayo opined that those countries whose businessmen turned away from just economic profits to more responsible goals would develop in a stable and secure manner while others would experience social disorganization.^ Nichols has given his thought on social responsibility as under: 279 "That economic prosperity, the furtherance of which is a common endeavour, is good in itself; that the businessman's role is to pursue it; and given the assumption that the company is essentially a cooperative organization; that by facilitating the achievement of organizational goals the businessman himself is furthering the interest of all partners who give the company it existence".^ Frielden a pioneer authority on social responsibility, emphasises, "that corporations, if they are to service, will have to be responsive to the needs of the society, they have a tremendous stake in solving the problems of employment as well as in community development and have had the potential for accomplishing the task."^ John Humble believes that " Social responsibility is one of the key areas of the business and is typically concerned with the external environment problems of pollution, community and consumer relations, and the internal environment problem of working conditions, minority groups education and training".* The social responsibilities of a businessman or a corporation, refers to the obligations of business to pursue those policies, to make those decisions or to follow those 280 lines of actions wtiich are desirable in terms of the objectives and values of our society.^ In a most impressive manner, Prime Minister, Mr. Lai Bahadur Shashtri, has given an accurate definition of social responsibility, while addressing at the Annual General Meeting of the Associated Chamber of Commerce and Industry of India in Calcutta on 21 December 1964. He clearly pointed out, that "Nothing would make government happier than to see an increasing sense of social responsibility in industry which will make it possible for government to concentrate more on measures to help industry rather than to control it.^ Fred Blum had given a wider meaning to social responsibilities of a company. He opines as follow:^ i. Provision of an adequate level of income for a working family, i.e. minimum wages to its workers. ii. Provision of equal opportunities for all employees to develop their abilities and potentialities; iii. Preservation of the liberty of the individual and protection against the dangers of paternalism. iv. Ensuring the qua]'}ty of goods and services eliminating adulteration; 281 V. All round development of the locality in which an enterprise is located e.g. no fouling of the atmosphere. Responsibilities of business houses are having paramount importance for the society at large. However, a corporation should be responsible for the well being of following groups: (I) Corporation itself (ii) Shareholders (iii) Workers (iv) Consumers (v) Competitors (vi) Local Community (vii) State. The first and prime objective of a corporation is to earn a handsome profit for its own survival. A company should be responsible enough to earn good profits by exploiting natural resources in most adequate way. Today, shareholders are the real owners of big corporations. Funds provided by the shareholders should be invested in a proper way. Corporation owes responsibility to shareholder that they should have a full information about the working of the enterprise. Accurate and timely information should be provided to shareholders. Manpower is the living asset of an enterprise. In most of the cases management of corporation feels that labour is not discharging its responsibilities efficiently and the cost 282 of labour increases with the flow of cost of production and creates serious situation for the growth of the corporation and for the return on the capital employed. On the other hand, the labour feels that the management profits through exploitation of the labour. There is a situation of tension and distrust. It is essential that in the interest of the economy of the corporate sector the labourers should be treated as partners of the organization and they should have complete faith not only in the management but also in its working and development. All workers should have equal opportunities to develop their capacities and potentialities. They should receive good wages, better working conditions, fair and just treatment from their bosses, and other facilities which are necessary for a normal life. Consumers are very important for every corporation. There is the minimum and clear responsibility that the product should be adequate for the purpose for which it is held out to serve, and that under some reasonable set of circumstances. Consumers are the persons who are vitally concerned with the cost of production, sales price and other policies of the corporation and as the growth and its profits are dependent on the consumers, it is very important that the interest of the consumers should be kept on the high priority. 283 Nowadays, cutthroat competition is prevailing in every sector of the economy. Every business concern is attempting to produce better goods at a minimum cost. No doubt keen competition is good from the consumers point of view but fierce competition may compel some companies to adopt unsociable practices to stand in the market. Company should provide environment friendly surroundings to the local community. It should also promote various programmes sponsored by the government for the uplift of the society at large. Every company on the moral ground should comply with the rules regulations and laws of the land. It should be accountable to the state. The economic planning in India has been the period of controlled economic development. The National Economic Plan has been preoccupied with the transformation of the Indian economy from agriculture economy into industrial economy. The social services have been neglected to large extent. An optic view is presented in the following paragraphs to highlight the need for MNCs to come forward with investment in social sector. 284 The Government is alive to its responsibilities of social services for improvement of social contents of the society. The social sector in India is concerned with the following aspects. Social services: That consists of education, health and family welfare, water supply sanitation, housing and urban development. The social sector is extended to information, welfare of background classes and labour welfare social welfare and nutrition are however, important aspects of social sectorsl The Government is focussing attention on rural development. For the removal of the slums, new programmes have been launched since 1996. The new programmes known as basic minimum services. Similarly, basic minimum services are the part of social sectors for the rural development. The following analysis in the accompany Table 1 gives a composite picture of the social sectors in post NEP period. The social services have gone up by four times during 1991 and 1998-99. In 1990-91 the central government had spent 5380 crore rupees which has raised to 21159 crore in year 1998-99. 285 7\ ON ID Oi in v£> CO oo o o o CO SO CM CO ON to CO o. oo 00 so oo o •»* o r>- v£> ON m ro 5 CM ° 2 O c o O t—1 o SO OO »—1 CO CO 1^ CM ^ OS OS CM t»- esj in OO SmO CM £ so ^ r-> esj s? §5 CM Oi 00 t—1 SO r^ CO CO o »—1 00 in r~ ID OO OS »n ON ON CO oo o CO r^ irj 00 irj ON ^^ CO CM CM »—< ion I CM CM (A CO ^ CM so OS o CO in SO o t~- o n- f". ON o o CM so so OOo o OO vO CO mCM i-H m in *-H SO 00 in ON CO <—1 SO I CO ON CO "(3 CM ON »-H in CM CM r~- CO 5 ON oo O ON CM C^M »-H 5 ON in in c I o 00 00 CM o 0 in SO CM NO o oo CO r~ w—i^ ON CM 00 00 •—1 CO CM CO in § 3> 00 CM CM 1—1 m oo CM « 00 Si 00 00 00 ON r~ oo CO CO 00 £f 00 o CM o so CO CO oo CO so "I ON CM in CO in ON in ON r-« 00 I «-H in CM 00 00 CM *—« in • 3> o NO 3 t^ 00 SO ON OO 00 I oo OO oo o r- in CO so CO OO CM m CM SJ CO CM so C5 C m CM 00 J to .S CO « f c E o CO X 1/1 I 1 n] o I e c -^ u E •*o3 in 85 cr m • ss S5 00 m so m 85 eo m ir> I NO CM in m o t CD tn O ON CM I m ON ON ON ON o\ I 00 ON CO ON en VO ON Q CM o\ CO e>j ON 2 o< w u c o\ 10 6 c ON oo ON it «*o« ^^ 'c I g I § "So 3 e ^ O c o u UJ c3 S u I in 2%7 Rural development has occupied an important place in the provisions for the development of social sectors. There has been 2.5 times increment in expenditure on rural development during the period under review. In 1990-91 a sum of Rs. 2678 crore, was spent on rural development which increased to 5890 crore in 1998-99. For slums in urban areas, a new programme has been launched. The new programme is known as basic minimum services. In 1996-97 an initial amount of Rs. 2466 crore was spent. The allocation has been raised to Rs. 3760 crore in 1998-99. The social sector as a whole claimed an allocation of Rs. 8058 crore in 1990-91 that increased to Rs. 30809 crore in 1998-99. There are two different trends for the development of social services in India. The social services as a percent of total government expenditure increased by 1.5 times from 7.7 percent of total expenditure to 11.5 percent. However, it is not matched by increase in expenditure on social services as percent of GDP. The expenditure on social services as percent of GDP was 1.4 percent in 1990-91, which increased marginally to 1.7 percent in 1998-99. 288 Further analysis of the central plan outlay for the development of social sector and rural development is given in table 2 for the NEP-1990-91 to 1998-99. As a matter of fact total plan expenditure for the year 1990-91 was Rs. 30468 crore out of which 19.1 percent was spent on social sector and rural development. This constitutes 1 percent of GDP at current market price. Most of the plan outlay was earmarked for rural development including poverty alleviation and employment. A modest provision was mode to not reveal any major shift in the policy for the development of social sector and rural development. The allocation for rural development was Rs. 8632 crore. The education got the funds of R. 3385 crore. The family welfare was allocated the fund of Rs. 1535 crore. The revised estimates for 1996-97 shows lapses of funds under the head education rural development. The lapses are the results of inadequate planning and inefficiency in execution. These inadequacies are the main bottlenecks in the development of social sector. In 1997-98 total central plan outlay on major schemes for social sector was Rs. 18394 crore out of the total plan expenditure of Rs. 82852 crore. It is 29.3 percent of total 289 plan expenditure. The allocation for social sector shows an increase of 1 percent in terms of expenditure on social sectors out of total plan outlay. The expenditure on social sector is marginally higher as a percent of GDP. It is 1.2 percent of GDP. However, the pattern of expenditure on different heads of social sector does not show any change. Rural development and rural employment got biggest amount of Rs. 9001 crore. Education got the funds of Rs. 4095 crore. Family welfari was allocated the funds of Rs. 1829 crore. Health received the funds of Rs. 955 crore for health and family welfare. The total central plan outlay and major scheme of social sector claimed Rs. 5816 crore in the plan outlay for 1990-91 budget expenditure. The revised estimates shows reduction in total plan expenditures which means that all the scheme could not accomplished during the plan year. The single category of the plan lapses is actually rural development rural employment, education and health. It highlights the need for strict compliance with time schedule for social sector and rural development. In 1995-96, the central plan outlay for social sector was raised to Rs. 13612 crore out of total plan-expenditure of Rs. 48500 crore. The plan expenditure was 1.1 percent 290 of GDP. 31 percent of the plan-expenditure was made on social sector scheme. The pattern of expenditure shows importance of rural development and rural employment with total expenditure of Rs. 7700 crore. Education claims an outlay of Rs. 15825 crore. Family welfare got an outlay of Rs. 1581 crore. Health and other programmes for social sector were given a small share in the total allocation of funds. In 1996-97, the share of social sector was reduced to 29.8 percent' of the total plan expenditure. The plan expenditure remain constant at 1.2 percent of GDP, there have been no change in the share of plan expenditure of the GDP. The pattern of allocation of funds among different heads of expenditure does not show any increase. Nevertheless, the allocations to each head of social sector were stepped up in 1997-98. The execution of the plans still suffered from the lapses, which are revealed by revised estimates. There were lapses of funds for rural developments, education, family welfare and health. The total lapses of funds in social sectors is amounted to approximately Rs. 2000 crore or 27 percent of total plan expenditure and I.l percent of GDP. 291 ON 2 SO 0^ ID ON VD CD ON in rt t— ^J- OO OJ CO y—l ON CO S^ evj r~ 0\ f-o\H TJ- C>4 O in OO O "c J »-H •—1 »—1 Tl- CM CM ON CM O ON t o |2 O m OO ON o CO »—1 CM CM o oo ON OO O s sCM mON I t—1 OO OO »—1 ON in CM 1/3 OO ON »—1 OO CM CM OO o ^ CO o ON OO 1 t^ o ON 1 CM i CM CO CM in in UJ 1^ sO »—( OO a in in in OO OO NO ON vo c CM •—' OO s i 00 ^ in in m CNJ CM in OO NO CO o CO NO CO CM in OO VO OO o CO CNJ CM OO OO NO ON 00 OO XJ- CO ON ON o OO in CM VO ON in in 5 in CM ON 04 VO _ OO VO OO 00 0\ I CM y-i CM ON o CM ^, ^ O OO 00 o OO in CO in o OO o vo «J sD in CM CO ON OO ^ E 8 OO CO in in in CO in vo c=> ^^ CO CM CO in OO »—I VO ON 00 CM CM CM CO o CO CSJ CM 0 ON 6 •i? ON ON ^^ o in in NO in in o OO Tj" o o \0 vO ON r^ r^ CO vo VO CO OO CM CM vo CO CM CO CO 1 s O g .1 g e e "53 ^s. o. (O 8 _o 3 ^ s 13 I oe s> # u -CJ te u. c Si 10 UJ i <0 § S' C c o. 3 V -o crs: E (cO ^ g U^J o 3 0) -i .O UJ g i :§ i Q ^ .2N g g> -^ u ~iS "5. s J 3k- E UJ ns I 5 DC UJ nj CO m VO 292 OS 2 o o o ON C ON o in OO o O ON so O nJO .(0 CM s m CO in o CO s ON o O .-I evi o OO o o m ON ON 5 OO in UJ o OO in in in ON 00 o OO to in o> o CVJ 00 CO O^ in ON ON 5 lO CM o OO in OO •in m SO & in o\ esj ON vc m ON m m 2| ID •^ vo 1—1 (^ eg CO CmO •rt m I CO o co CM in e0> 5 E c s o c ns B S, to SN =5 <<3 C ns IS) .SN c E I O. U] o o o. jj } a: 3 en & CO I is o. en I "S E i S T3 < cr: § C I S^ g' E E -o o ^5 iZ ?* ^ UJ ct en S^ O c CN O |2 293 ON -^ Tj- CM o o o^ oo oCM o6CVJ ON o o vo CO ovo vo CM CM CO oo oo CM CM VO £33" \o VO so 00 VO CM o\ CO in CM oo CO CO vo vo in . o^1o" CO \ in CM 00 ' vo o NO e. OO CO o> I m CM o in VO oo oo CO CM vo C3 0^ in vO ON in CM o> 6 o\ vo o» vo VO 00 o OV CO I I C CO In 1998-99, the total plan outlay has been stepped up to Rs. 72002 or 28.2 percent of total plan expenditure. Rs.20809 crore is allocated for social sector. The funds for social sector are 1.2 percent of GDP. It shows a significant increase in the expenditure of development of social sectors. The pattern of allocation shows emphasis on rural development, rural employment, health education and family welfare. Rural development and rural employment got Rs. 9811 crore. It constitutes approximately 45 percent of total plan expenditdre for social sector. Education received total funds of Rs. 4246 core or 20 percent of plan expenditure for social sector. Family welfare got the funds of Rs. 2484 or 10 percent approximately of total plan expenditure for social sector. The funds for health amounted to Rs. 1195 crore or 5 percent of total plan outlay for social sector. There is no change in the pattern of allocation of funds for the social sectors. Health Service: Health services are not well developed in India. There are not many medical colleges in India. Table 3 reveals that the number of medical colleges increase at very slow rate, from 28 in 1951 to 165 in 1997. All the hospitals are not 295 v£> 0^ Lf5 < •< cs) cr> <: o < < Z '^ VD Z z z I CM CM CO 9 i~- in .^ VO in 0^ CM £? i-; C*5 vO y? VO SI O CM ON CM in 00 in •—« in CO in CM r>- VO «—I CM CM »-i CO co CM m O CM m in VO o CO NO oo a> in VO CM o^ CO ^H oo CD '^ CO in CM in «—1 OO oo 00 o ^ TJ- CM OS o r~ VO in ovOo 00 >«int s ^ CM »—1 § in ov CM O CM ^ in CM oo \o •—' 00 •—I ^5 ^ 1 ON i S2 o mS § Tt in in CO S CO 1—1 °^ CM - CO CO S ' S ^ VO in 0^ O VO 3 = ON VO O •* o in I ^ s S CO ON CM S CO 12 in tM CO ^ C CO j^ CO "•" .2 e OO a wt Tj- in in o oo ON I-H •^ oo a m CM VO in CM f^ ^ O«N^ VO w*o\ CM VO as - :S CO iS in g s ^ CM ^S I X S I X _o w c 3 J2 '5. o !S E E •? to . I •« S I 5 -o s 8 i n] £ in X Q Q z to •—' CM CO lO VO 1-^ od ON o I 296 adequately available to the people; there is equally less number of hospitals. Number of hospitals increased at a sluggish rate from 2694 in 1957 to 150978 in 1996. The dispensaries where medicines are provided to patient are not sufficient. Stock of medicine is not adequate for the treatment of serious diseases. Number of dispensaries has increase from 6515 in 1951 to 28225 in 1996. Some community health centres have been established for the treatment of communicable diseases like TB, Smallpox, Malaria and 6ther epidemics. The Community Health Centres were established for the first time in 1981. Number of Community Health Centres in 1981 was 217, which increased to 2628, in 1997 The Community Health Centres cannot cover the entire population in terms of epidemics. These centres cannot be effective to check the other communicable diseases. The primary Health Centres are the core services in rural and semi-urban areas for the medical health in absence of hospitals and dispensaries. The rural areas and the semi- urban areas do not have hospital and dispensaries. They entirely depend upon traditional treatment, which is generally hazardous. The number of primary Health Centres 297 in 1951 was 725. It increased to 22446. Since 1971 sub- cetnres have been added to the health services for first aid and medical consultancies. The sub-centres are under the control of para medical staff. The number of sub-centres in 1971 was 28489. It increased to 136397. Available hospital beds of all types at all places are insignificance ratio to population. In 1951 there were 111178 beds, which increased to 870162 beds in 1996. The beds in 1996 were in the ratio 1:1000 persons. The number of dodlors is not sufficient to deal with a large size population. The ratio of doctors to population is very poor. It stood the ratio of 1:2000 persons in 1997. The total picture of health services is dismal. It is absolutely necessary to expand health services. Sufficient funds, training centres and medical colleges should be established for rapid expansion of health services in the country. Performance of special employment and poverty alleviation programmes: Special Employment and poverty alleviation programmes have been started since 1996-97. The object of the programme is to create jobs in rural areas and urban 298 areas by means of labour intensive works, like JRY programme, EAS programme and IRDP. The other programmes are for the youth training with the help of trained youth. There are certain unspecified programmes, like scheme for self-employment programme. The following Table 4 furnishes a detailed account of the programmes since 1996-97 in terms of target and achievements. In rural areas a target of 4141.4 lakhs mandays of employment was set which has been fulfilled to the extent of 90% in 1996- 97. In 1997-98, a target of 3865 lakhs mandays of employment was set under JRY programme, which was exceeded by 110 percent. In other words, more jobs were provided than the target. 1998-99, a target of 5,967 lakh mandays of employment was set, which was fulfilled more than 33 percent by Nov. 1998. It shows that JRY scheme is a significant programme in rural areas for employment and poverty alleviation. The EAS mandays of employment has made good progress. It created 4830 lakhs mandays of employment in 1996-97, 4718 lakhs mandays of employment in 1997-98 and further 2376 lakhs mandays of employment in 1998-99. The IRDP made some contribution for rural families. It created 19.2 lakhs mandays of employment in 1996-97, 299 oo »—I CM \0 P~- 00 CM o VC in m NC o o o CVJ en o o ITS CM * • so •o ON OS o O E ON N£> ON 0) v£> ON ON Z CO E .0) IiS e CO r~ m Tf \D r>; v£> i-H ^-^ p oo •^ »—J 'o oo T—1 CvJ o r>^ CO Tf «o\ I ON s CO CM oo I oo CO o CO CO o vb c> CM v^ Tf oo o .-I O CM o CO o> CO o Lfi 00 -^ - ^ o o o\ •^ •«* I ON ON ON CO o CO ^r cvi o «-< oo I ^ 4—• J p lO b & CsO CgO ^.i 1 - o tn g g !S c S en (S ^ 1^ 1^- -p 1 c -o o. p, •K fO I"^ 1 Q) E s > c • t 1 cc i ••^iM 1!2 1 .o c o o CL § ;j & §> iS, I 5 S « io 15 £ C 3 1 "S "E X nj C5 < -i CO to NIJ r^ o6 ON 300 "^ TT V£> CO esj c>j o ON o 2 ON eo ON OS "£ «> ^ «? CM I* cvi «*? CO ^ c> _i in OO VO rj> '^ ^ »-« eg CO I ON ON c CM ^S CN) <0 a & "8 C v£) v£ vC sC CM CM 8 > v£> ^ Tj- c TT "^ .-I d 5 o esi cc o o\ U t I ON o> t ce C CVl (0 CO oi irj <^ •—1 CO 1—< csi I Lf5 c o I g g c w (A s en (0 en 0) s g iS s 1 i -i I c c -i. s re UJ O) g en c -o c 3 c k« '!5 <*« eg =) S o 1 n3 ,y s 2 i J|i I S CtL c e c o •K o E e eg O E lil f LU I S3 (Xl to g' a. ra a. ^ . I Z ni .A (J O I CQ »-H u ^ csj ^S- 301 17.1 lakhs mandays of employment in 1997-98, and 7.7 lakhs mandays of employment in 1998-99. DWCRA is another programme for employment and poverty alleviation in rural areas substantial number of jobs is provided under the programme. The programme for employment includes constructions of houses, construction of wells and construction of sanitary latrines. Programmes for employment in urban areas created 135.8 lakhs mandays in 1996-97 and 44.6 lakh mandays was the actual employment created. It shows poor performance of programmes in urban areas. 2/3rd of the target could not be fulfilled. The programmes for self-employment and establishment of enterprises create jobs for the alleviation of poverty. In short the programme has to be extended to create enough jobs, each year at least 40 crore of jobs must be created for the 40 percent additional workers to bring down the employment to zero percent. It causes for huge investment in employment sector. Housing and Urban Development: Table -5 gives a plan wise breakup of the outlay on housing and urban development during first plan and annual 302 Table • 5 Housing and Urban Development Plan Period Amount Percent Share in (Rs. Crore) Total Outlay First Plan NA NA Second Plan NA NA Third Plan (1961-66) 127.6 1.5 Annual Plan (1966-69) 73.3 1.1 Fourth Plan (1969-74) 270.2 1.7 Fifth Plan (1974-79) 1150.0 2.9 Annual Plan (1979-80) 368.8 3.0 Sixth Plan (1980-85) 2839.1 2.6 Seventh Plan (1985-90) 4229.5 2.3 Annual Plan (1990-91) 1680.0 2.9 Annual Plan (1991-92) 1352.3 2.1 Eighth Plan (1992-97) 10550.0 2.4 Annual Plan (1997-98) 6121.0 4.4 Annual Plan (1998-99) 3905.0 3.7 Source: India - A Reference Annual (Various Issues) Ministry of Informatin and Broadcasting. plan 1998-99. Housing and urban development has not received adequate attention of the Planning Commission till the Seventh Plan. It is only in two annual plans 1997-98 and 1998-99, that the allocation of the Central Government 303 has increased to reach 4 percent of the total outlay. In the period preceding the New Economic Policy, the share of Housing and Development has received almost stagnant at 1 percent to 2 percent. Nevertheless, more than 40 percent of population does not have a house. It is a huge problem that should be tackled for the development. Family Welfare: Family Welfare is an important component of social services. The Family Welfare activities include, health services, subsidized nutrition food for weaker section, care of old age people and care of lactating mothers. The family welfare programmes received substantial share of total outlay in the Fifth Plan and annual plan for the 1979-80. Table 6 shows that, it has received 5.3 percent of the total plan outlay during the Fifth Plan and 5.2 percent of total plan allocation in the annual plan for 1979-80. Rest of the plan period allocated from 1 percent to 3 percent of the total plan outlay to Family Welfare. It is a known fact that the death rate of the mothers from delivery is alarmingly high. The alarming rate of death is because of malnutrition during the pregnancy. The early growth of infants is below average because of deficiency in minerals. These factors 304 Table - 6 Family Welfare Plan Period Amount Percent Share In (Rs. Crore) Total Outlay First Plan NA NA Second Plan NA NA Third Plan (1961-66) 199.2 2.4 Annual Plan (1966-69) 190.0 2.9 Fourth Plan (1969-74) 538.1 3.4 Fifth Plan (1974-79) 2140.0 5.3 Annual Plan (1979-80) 633.6 5.2 Sixth Plan (1980-85) ~ — Seventh Plan (1985-90) 3266.3 1.8 Annual Plan (1990-91) 782.2 1.3 Annual Plan (1991-92) 1023.3 1.6 Eighth Plan (1992-97) 6500.0 1.5 Annual Plan (1997-98) 1829.4 1.4 Annual Plan (1998-99) 2489.4 2.4 Source: India - A Reference Annual (Various Issues) Ministry of Informatin and Broadcasting. highlight the needs for greater attention to the Family Welfare Programme. It is necessary that programme must be made comprehensive and universal. 305 Medical and Public Health Services: A panoramic view of medical and public health services is presented in table 7. It shows that the share of medical Table - 7 Government's Plan Allocation on Medical and Public Health Plan Period Amount Percent Share in (Rs. Crore) Total Outlay First Plan 65.20 3.30 Second Plan 140.80 3.00 Third Plan (1961-66) 225.9 2.6 Annual Plan (1966-69) 140.2 2.1 Fourth Plan (1969-74) 335.5 2.1 Fifth Plan (1974-79) 760.8 1.9 Annual Plan (1979-80) 223.1 1.8 Sixth Plan (1980-85) 3412.2 3.1 Seventh Plan (1985-90) 3688.6 1.9 Annual Plan (1990-91) 1040.8 1.8 Annual Plan (1991-92) 924.8 1.4 Eighth Plan (1992-97) 7575.9 1.7 Annual Plan (1997-98) 3074.4 2.2 Annual Plan(1998-99) 11945.5 1.1 Source: India - A Reference Annual (Various Issues) Ministry of Informatin and Broadcasting. 306 and health services has declined from 3 percent of total plan outlay to 1.1 percent in the annual plan for 1998- 99. As a consequence the medical public health services are not able to cope with the fast growing population. There is alarming increase in the death with medical services in country. It is necessary that medical and public health services should receive a larger amount. Education: Education is the basic input for the development of enlightened society. It is constitutional right of every citizen to get free education upto primary level. A large part of the population in the country is illiterate. According to an estimate the average rate of illiteracy is 45 percent. However, the Planning Commission does not seem to show concern about literacy. The table 8 shows the declining trend in the share of education in the plan outlays. It has declined from 6.9 percent in the Third plan to 4.3 percent of the total plan outlay in annual plan 1998-99. Other Social Services: It includes water supply, development of civic facilities, energy, transportation and communication. Table 9 depicts stagnant share of other social services in total plan outlay. 307 Table - 8 Government's Plan Outlay on Education Plan Period Amount Percent Share in (Rs. Crore) Total Outlay First Plan 153.0 NA Second Plan 273.0 NA Third Plan (1961-66) 588.7 6.9 Annual Plan (1966-69) 306.8 4.6 Fourth Plan (1969-74) 774.3 4.9 Fifth Plan (1974-79) 1710.3 4.3 Annual Plan (1979-80) 263.0 2.2 1 Sixth Plan (1980-85) 2976.6 2.6 Seventh Plan (1985-90) 7685.5 3.5 Annual Plan (1990-91) 2316.5 4.0 Annual Plan (1991-92) 2599.0 4.0 Eighth Plan (1992-97) 19599.7 4.5 Annual Plan (1997-98) 8208.2 5.9 Annual Plan (1998-99) 4566.9 4.3 Source: Economic Survey (Various Isseus) Ministry of Finance, New Delhi. Eighth Plan is the exception to the general trend. In the Eighth Plan and the annual plan for 1997-98 earmarked 8 percent and 8.4 percent of the total plan outlay. For the remaining plan period the other social services have been constant at 6 percent share in total plan outlay. 308 Tabic - 9 Plan Outlay for Other Social Services Plan Period Amount Percent Share In (Rs. Crore) Total Outlay Sixth Plan (1980-85) 6688.7 6.1 Seventh Plan (1985-90) 14283.9 7.9 Annual Plan (1990-91) 3787.1 6.5 Annual Plan (1991-92) 4399.3 6.8 Eighth Plan (1992-97) 34786.3 8.0 Annual Plan (1997-98) 11705.7 8.4 Annual Plan (1998-99) . 6154.4 5.9 Source: Same as Table 8. Conclusion: In conclusion, development of social services is the responsibility of the Central and the State governments both. It is clear from the foregoing discussion that the lack of social services is the major hurdle in attracting MNCs to take part in the industrial development of the country. The New Economic policy (NEP) has enlarged the scope of activities of MNCs in all the sectors of economy. It is equally important to call upon MNCs to play their due role in the development of social services along with the government. The MNCs should be asked to invest in social 309 services, which is the foundation to establish a strong industrial base and economic structure for globalization. References: 1. Mayo, E., "The Human Problems of an Industrial Civilization", New York, Johnwiley and Sons, 1933. 2. Nichols, T., "Ownership Control and Ideology-An Inquiry into Certain Aspects of Modern Ideology", George Allen and Unwin, 1967. 3. Frielden, J., "Today the Computers, Tommorrow the Corporations", Business Horizons, 13(3), 13-20, 1970, p, 20. 4. Humble, J., "Social Responsibility Audit-A Management Tool for Survival", Foundation for Business Responsibilities, London, 1993, pp. 52-53. 5. Khan, A. Farooq, "Business and Society", Sultan Chand and Company Limited, New Delhi, 1985, p. 54. 6. CD. Deshmukh, "Social Responsibilities of Business", Sachin Publication, Jaipur, 1980, p. 183. 7. Blum, F., "Social Responsibilities of Business", India International Centre, New Delhi, 1966, p. 47. CKAPXtU " IX ^indinadad andana —'f^QQ^uggedtlond^ Findings Suggestions 310 - I>C FINDINGS AND SUGGESTIONS Findings: Growth of Multinational Corporations (MNCs) took place in four phases, first phase run upto the 1st world war. During this phase, companies were mostly from Europe. These were Dunlop, Siemens, Philips and Imperial Tobacco etc. During 1930-50 the MNCs were sluggishly operative due to recessionery trend in the world economy. Second phase started after the Second World War. During this period only IBM, Fordmotors and General Motors of America surfaced on the screen of global economy. From the decades of 1970s and 80s third phase of MNCs growth is registered, and companies are mainly from Japan, Europe and Germany. Final and fourth phase is the latest one. During this phase MNCs in the field of information technology and service sector have come up. The Newly Industrialized countries (NIC) of the world, viz. China, Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand have adopted fairly good deal of transparency and openness in the sphere of technical and financial collaboration, India also adopted a more liberal attitude towards foreign investors. 311 Global FDI inflows in 1986-90 accounted for 24 percent growth which declined to 20 percent in 1991-95. In 1996 the FDI inflows plummeted to an abysmal 2 percent. However, it registered an annual growth of 19 percent in 1997. The declining growth of FDI stock, assets during the period are attributed to general recession of early 1990. The regional distribution of inward and outward stock is heavily skewed towards developed countries reflecting the fact that in the past most FDI originated and stayed in the developed countries, although there are some noticeable upward increases of FDI inward and outward stock of developing countries. It is striking to note that out of the top 100 MNCs from the world, majority of them belonged to developed countries. Further analysis reveals that the top 50 MNCs from the developing countries ranked by assets, during the period 1990-1997 are generally hailing from the newly industrialized Asian countries. However, a few of them also belong to North America and South Africa. It is worth recollecting that developing countries remain unimportant in the cross border merger and acquisition (M&A) market as compared to their position in FDI flows. 312 The relatively low share of developing countries in merger & acquisition purchases suggests that the MNCs from developing countries prefer green-field mode of acquisition of minority share holding in existing market through the FDI. According to UNO investment Report 1998, the pharmaceutical, Automobile, Telecommunication and Financial services are typical examples of M&As. Strategic considerations of the firms. Liberalization and deregulation are the other main factors behind the increases in the M & A the world over in both developed and in developing countries. In brief the following five factors are responsible for the growth of MNCs. 1. Growing size of Market. 2. Varied field of Operations 3. Improved Marketing incentives. 4. Sound Financial Background. 5. Advanced Technology. The foregoing main factors have played pivotal role in the development of MNCs. 313 The world economics both developed and developing are buzzing with the activities of MNCs in a variety of ways e.g. FDI inflows and out flows. M&As, joint venture, services etc. The international production has expanded till the end of 1998, There were 53000 MNCs and 4,48,000 foreign affiliates which have played key role with 3.5 trillion accumulated stock of FDI, $9.5 trillion sales of foreign affiliates and $13 trillion global assets. Problem Areas: The first problem with the MNCs is the choice regarding place and products. Most of the MNCs want to operate only in those areas where infrastructure facilities are well developed. They also chose those products, which are more profitable. The host country, therefore, faces problem of unbalanced development. Host country undertakes research and development programme for the overall development of the area. Whereas MNCs take R&D programmes mainly for capitalizing innovations in profit and in establishing supremacy of technology and product innovations. Third problem linked with the MNCs is productivity. MNCs want to produce goods at a mass scale by using latest 314 technology, which is a sort of capital intensive giving a less room for employment generation. Fourth problem created by MNCs is the degree of strength in the economy. MNCs make utmost endeavour to keep the aim of strengthening themselves. MNCs also make an attempt to integrate their activities internationally in order to achieve domination, MNCs do their best to maximize profit through unbalanced growth. In this era of globalization, MNCs have a significant control over the pricing. They enjoy the inter- subsidiary movements of goods and services and their pricing. Many modern MNCs are playing a significant control over local administration. They even attempt to lure bureaucrats to fulfil their unsocial acts. MNCs gigantic size is also posing serious problems. Two top level MNCs' gross total products' value account more than the five developing country's GDP (Mexico, Brazil, India, Iraq, and China). A huge amount of money flows out of the host country in terms of payment of divided, profits, royalties, technical fees, know-how fees and interest to the foreign investors. Most of the MNCs collaborate with the private companies 315 of the host country but only in those industries where prospects of profit are bright. MNCs from advanced countries generally bring obsolete technology, which is no better in comparison to host country's own technology. The study has the following objectives: 1. To evolve and elaborate the conceptual framework of the Multinational Corporations. 2. To examine and study the policy changes as regards the Multinational Corporations in the context of liberalization and globalization of the economy. 3. To study the effects of WTO on the liberalizing economy, such as, India. 4. To study the measures, liberalization packages with the introduction of new economy policy for globalization. 5. To critically examine the foreign investment trends and portfolio investment trends to determine the relative benefits to Indian economy by the MNCs. 6. To assess and appraise the performance of Hindustan Lever Limited a Multinational Corporation in India. 316 7. And finally to study and examine the problems in the context of overall scheme of globalization with Multinational Corporation in general and Hindustan Lever limited in Particular. The study has sought to test the following hypotheses: 1. That the MNCs operating in a variety of arrangements viz. FDI, amalgamations, collaborations, technology transfer and mergers and acquisition are solely to the advantage of Indian economy in terms of more flow of foreign capital in the form of FDI, FTAs and GDRs and hence opening up vistas for global economic integration. 2. That MNCs in India through FDI are sincerely contributing to the growth and development of the various sectors of economy, namely, the automobile, food processing, pharmaceutical and beverages etc. Many more other significant sectors like insurance, banking etc. are also arresting the attention of MNCs. 3. That the existence of MNCs in the Indian economy is creating an atmosphere of competitiveness for 317 domestic companies which in a bid to emulate, strengthen their own base through restructuring amalgamation and M&As. 4. That MNCs are integrated with the development of social sector by deploying substantial funds for education, environment and healthcare. A trade Negotiations Committee (TNC) was formed to monitor the overall negotiations. Owing to disagreement of some member countries (especially the USA and the EEC) on certain key issues like agriculture, the negotiations could not be completed within the scheduled time. The trade negotiations, therefore, resumed by the TNC, in February 1991 by regrouping the original fifteen areas in the following seven areas: (i) Market access, (ii) Agriculture, (iii) Textiles and Clothing, (iv) GATT Rules including Trade Related Investment Measures (TRIMs), (v) Trade Related Intellectual Property Rights (TRIPs); (vi) Trade in Services and (vii) Institutional Matters. WTO has been established in 1995 for implementation of the various provisions of Dunkel Draft. To expedite the resumed negotiations in 1991, Sir Arthur Dunkel, Director-General of GATT and the Official 318 Chairman of the TNC tabled a scheme of proposals for the consideration of the participating countries. The Dunkel Text, being a legal and technical document, covered seven areas for negotiations, namely: (i) Market access, (ii) Agriculture, (iii) Textiles and Clothing, (iv) GATT Rules, (v) Trade Related Intellectual Property Rights (TRIPs); (vi) Trade in Services and (vii) Institutional Matters. The effects of WTO originate from the Uruguay Round Treaty (URT), The treaty is a march towards global economy. Trade barriers and the quota system of all the 117 participating nations will be reduced in the years to come and will be completely abolished by the year 2004. Dunkel Draft is the centrepiece of the URT. TRIMs, TRIPs and Multi-fibre Arrangement (MFA) are the three crucially important agreements of the GATT negotiations at the Uruguay Round. The Agreement on Trade Related Investment Measures (TRIMs) opens the gates of financial services sector, but member countries are permitted to adopt their own foreign investment policy. The Agreement on Trips in comprehensive in giving cover to all areas of MFA is stage wise and slow, which seems to be disadvantages to the exporting nations. But the fact is that 319 the US actually wanted the phase out period to be stretched up to 15 years. The treaty, however, succeeded to have its commitment to dismantle the quota regime over the ten years' time, which of course is a positive gain for the textile exporting developing countries, including India. It is equally true that the provision of ten-year phase-out period to open up textile quotas in full extent is rather a defensive gain for the US and other OECD economies. It gives them sufficient time for adjustment while the developing countries dodge the onslaught of OECD exports, technology property, patents, trade marks, copy right, and so on. TRIPs encroach upon the member country's sovereign right to frame its own legislation on intellectual property matters. MFA regulated trade in textile and clothing since the last four decades. Under this special arrangement, importing countries such as the US, Canada, Austria, Norway, Finland and European Union (EU) could imposed quota restrictions on exports from the developing countries on a selective basis. Hitherto, unrestricted trade was permitted among the developed countries. But the new treaty phases out MFA over a period of 10 years from 1998. In the case of the US, the integration phase is to be 3 percent in the initial three 320 years, 10 percent in the next four years, 32 percent in the next three years and 55 percent in the end of the tenth year. Under the new treaty, thus, the process of liberalization. Despite its eventual goal for free world trade, the GATT has failed to restrain the formation of trade blocs. The new treaty, however, provides that trade restrictions among the bloc members must be scrapped and their common external tariffs should not be higher than the average level of tariffs levied prior io bloc formation. Upcoming regional blocs, such as EFTA, NAFTA and some other new ones in Asia and the Pacific countries which may emerge in future will lead to trade frictions as well as marginalisation of the trade of developing countries in the global trade economy. One serious implication of the new treaty is that when the industrial countries could strengthen their control over global agriculture by keeping their food security in tact, developing countries like India are called upon to ultimately dismantle their food security system. It is designed that the subsidies to formers will go but subsidies to agro business will stand thereby creating TNC monopoly in agriculture. The NIEO will eventually create conflicts between he citizens and TNCs' interests. 321 The GATT's new strategy at the Uruguay Round was based on using the economic strength of a few members against the weakness and dependence of other member's counties, especially the developing ones. It is Magna Charta of technologically advanced countries over the poor countries. Both in regard to the issues for negotiation and in it structure as well as plans, it is imbalance, asymmetric and weighed against the poor nations. The international economic arrangement devised under the GATT treaty would result in the flow of wealth on large scale all the time from the poor/developing countries of the third world to the rich/industrialized nations of the west. Following are the main provisions of TRIP. 1. Parties are free to determine the appropriate method of implementing the provisions of the Agreement within their own legal system and practice. 2. There is a general obligation of providing national treatment to nationals of other parties subject to the exceptions in the various intellectual property conventions. 3. There is an obligation of Most Favoured Nation treatment also with certain exceptions. 322 4. There is a provision for public interest concerns under whicii parties may, in formulating their national laws adopt measures necessary to protect public health and nutrition and to promote public interest in sectors of vital importance to their socio-economic technological development, provided such measures are consistent w/ith the provisions of the agreement. 5. There are enabling provisions of resorting to measures to prevent the abuse of intellectual property rights by rights holders. On the conclusion of negotiation in Geneva, Agreement on financial services was arrived at on 13 December 1997; India made an improved offer. The MFN exemptions taken earlier in the areas of Banking, Non Banking Financial Services (including Insurance) were withdrawn in response to all the important trading partners undertaking a similar MFN obligation. India has also found a few additional areas. In the area of re-insurance the existing binding has been aligned to the market. Earlier, the Indian insurance companies were obliged to code a minimum of 10 percent of the overall premium abroad after retaining the statutory percentage with the domestic insurance companies. The above 10 percent limit has now been removed to allow 323 Indian insurance companies to exercise tlieir commercial judgement is deciding the premium to be coded abroad. In India, Capital market reforms have been carried out extensively. The capital market reforms have the following motives. Modernization in comparison of other stock exchanges of the world, efficient trading and clearance system, enhancing and sharpen the market efficiency, improving the system spreading information. Capital Issues Control Act, 1947, revoked, office of controller of capital issues abolished and shares pricing decontrolled. The companies can approach capital market after clearance by SEBI. Securities and Exchange Board of India (SEBI) was established in February 1991. SEBI was strengthening with necessary authority and powers for regulation and reform of the capital market. A notification was issued under the Securities Contract (Regulation) Act, 1956, the power to guide and regulate stock exchanges, was entrusted to SEBI. This includes recognition, rules, and articles, voting rights, delivery contracts, stock exchanges listing and nomination of public representatives. 324 Reparation of complaints of investors is to be encouraged, sharing it with recognized investors associations. This will help in filing suits against companies involved in fault. Permission has been given to Foreign Institutional Investors (FIIs) to operate in Indian capital markets, merely on registration with SEBI. Investment regulations and procedures have been lessened for NRIs, so that NRIs, and corporate bodies can transact in share and debentures with prior permission of RBI. Indian companies get permission to operate in international capital market through Euro-equity shares. SEBI entrusted with the power of issuing regulations and file suits without prior not of the Central Government. Other organs of the capital market started functioning all over the country. These organs are Over The Counter Exchange of India (OTCEI) and the National Stock Exchange of India with a nation wide stock trading and electronic display, clearing and settlement facilities. No major changes have been brought down in the primary market in 1998-99. However, recommendations 325 made by the "Informal Group on Primary Market" have been accepted and implementation commenced. Main changes are as follows. 1. After a specified date, the primary issues to be compulsorily made through the depository made. 2. In the issues of Rs. 25 crore and above, 100 percent book building permitted. 3. Reduction in the minimum number of mandatory collection centres in respect of issues above Rs. 10 crore to'. 4 metropolitan cities plus the place having the regional stock exchange. In secondary market, reforms have been taken to enhance investor interest in the share market by providing facility of buy back of share. Other steps have been taken by the government are as under: i. Amendment of SEBI Takeover Regulations. ii. Extension of demat trading to more scrips. iii. Introduction of rolling settlement in the demat segment. iv. More strict disclosure requirements and stipulation of additional margin requirements aimed at curbing excess volatility in share price. 326 1. Various segments of industry have been delicensed, such as, coal and lignite petroleum (other than crude) and its distillation products and bulk of drugs. 2. Sugar industry delicensed. 3. De-reservation of coal and lignite and mineral oils. 4. Companies are allowed to buyback their own shares subject to a limit of buyback to twenty five percent of paid up capital and free services. 5. A national task force submitted its 108 points report on information technology and software development. Recommendations made by the committee have got nod of government, and proper line of action has been delivered to the department concerned for its proper implementation. 6. Patent bill has been commended by Rajya Sabha and subsequently promulgated through an ordinance. 1. By the April 1998 Exim Policy delicensed 340 items of import by shifting them from the restricted list to Open General License (OGL). 2. An agreement on free trade was initiated on 28 December 1998 between India and Sri Lanka. It will 327 result in zero import tariffs for most commodities on both sides by 2007. 3. Payment of interest on dues to exporters for delays in duty drawback/refund of duty beyond two months. 4. Extension of to holiday for EOU/EPI to 10 years. 5. With effect from August 1, 1998, India unilaterally removed all quantitative restrictions on imports of around 2300 items from SAARC countries. 6. Government has given permission to set up private Software Technology Parks (STPs) for export. Projects in the following fields got permission of government for foreign equity participation upto 100 percent under automatic route: electricity generation, transmission distribution, construction and maintenance of road, highways, vehicle, tunnels, and vehicular bridges, ports and harbours. Permission for FDI under non-banking financial cervices now includes "Credit and Business" and "Money Changing Business". Now Indian companies can issue GDRs/ADRs in case of bonus or right issue of shares, or on genuine business reorganizations duly approved by the High Court. 328 Investment limit by a single NRI/PIO/OCB has been increased from 1 percent to 5 percent of the paid up capital. Permission has been granted to NRIs/PIOs/OCBs to invest in unlisted companies, fulfilling certain conditions, norms, procedures and ceiling applicable in case of listed companies. Tarapore Committee examined the rupee convertibility in 1997 and it recommended that the Capital Account Convertibility (CAC) should be introduced in three phases over a period of three years 1997-98, 1998-99 and 1999- 2000. The Committee recommended that while having CAC the economy should fulfil the following conditions. 1. The Gross Fiscal Deficit (GDP) of the centre as a ratio to Gross Domestic Product (GDP) should be brought down from 4.5 to 3.5 percent, by the year 2000. 2. The average Cash Reserve Ratio (CRR) of banks should be brought down 9.3 percent to 3 percent, between 1997 to 2000. 3. The rate of inflation should kept down to between thee to five percent. 4. The Non-performing Assets (NPAs) of public sector banks should be reduced down to 5 percent from 13.7 percent. 329 5. The debt service ratio as a percentage of current account receipts must be brought down to 20 percent. 6. Globally comparable and transparent procedures of financial accounting should be adopted. 7. The RBI should withdraw from primary government programems and government must set up its own public debt office for mobilizing it own funds. 8. Creation of weak banks should be strictly banned. The IRA was set up as a follow up of the recommendation made by the Malhotra Committee on insurance sector reforms. The government announced its intention to evolve a broad consensus about the future direction and content of reforms in this sector and accordingly, discussions were held with the management and the unions of the insurance industry also with different interest groups. Lie will be converted into a company registered under the companies Act. The present capital of Rs. 5 crore of Lie contributed entirely by the centre has to be raised to Rs. 200 crore with the government holding brought down to 50 percent thereof and the reminder being held by public at large including a portion for the employees. 330 After liberalization MNCs stake have been observed to be increasing above 50 percent at a high premium. It is felt that in future the consumer and infrastructure sectors would be attracting larger amount of investment. The engineering sector has attracted the highest investment so far. Still the investment has fallen for short of adequate. The approvals to the core and infrastructure sector have always been India's priority. It has accounted for almost 50 percent of the total approvals. But the actual inflows have been at a disnfial 20 percent of the approvals, which shows the slightly declining confidence of foreign investors in the Indian economy. Most of the developing countries are lacking the capacity of producing their own technology. On the other hand industrialized countries are enjoying a good chunk of resources to develop latest technology comparatively at a lower cost. So less developed countries are heavily relying on the industrialized countries. To bridge this ever widening gap between haves and havenots there exists a new phenomenon of technology transfer. Automatic permission has been allowed for foreign 337 technology proposals to higher priority industry upto a lumpsum payment of Rs. 1. crore, 5 percent royalty for domestic sales and 8 percent for exports, subject to total payment of 8 percent of sales over a 10 year period from date of agreement or 7 years from commencement of production. The prescribed royalty rates are net of taxes and will be calculated according to standard procedures laid down as per the New Industrial Policy of India. The total number of Foreign Technology Approvals (FTAs) in 1998 accounts for 34.30 percent of the total foreign approvals which signifies that there is a slight upward trend in the FTAs approval as compared to the previous year. The reason of declining trend in share of FTAs in total foreign approvals may be attributed to soaring FDl during the period under review. This has happened on account of government policy for attracting more FDIs as compared to any other sources of foreign capital. The post NEP scenarios as regards foreign collaboration approvals tell a different story. The advent of New Industrial Policy of 1991 seems to have much influence on foreign collaboration approvals. However, some erratic trends have been witnessed. The reasons for these have been largely 332 attributed to frequent changes in political reign, cumbersome procedural formalities, and absence of suitable partners in case of collaborations. Joint ventures. Negative impact of prolonged controversial settlement over Enron power project and ambiguous policy framework. With the onset of the New Economic Policy consequent upon several liberalization packages for the foreign investors, MNCs/TNCs are now keen on setting up 100% subsidiary in India. This subsidiary syndrome is not any beneficent to the Indian affiliates but the Multinational Corporation reaps the advantage to the full in a variety of ways. It is widely felt that the SEBI {substantial Acquisition of Shares and Takeovers) Regulations, 1997 are in favour of the acquirers or bidders. What's more, the sagging stock market, with falling market capitalization, in the last couple of years makes quite a few Indian companies vulnerable to takeovers? The strategy of giving more emphasis to MNCs was reflected in the policy declarations that were made in the 1980s. These highlighted liberalization of Industrial licensing (approval) rules, a number of other incentives and 333 restrictions from foreign equity under FERA to 100% export oriented units. To attract more MNCs, four new Export Processing Zones (EPZ) were set up in addition to the two existing ones. The aims of New Industrial Policy: 1. To hold on the gains already achieved. 2. To rectify the crookedness or weaknesses that have emerged on the economic screen. 3. To uphold sustained growth in productivity, gainful employment and efficiency. 4. To acquire international competitiveness. Foreign investment has clearly been a major factor in stimulating economic growth and development in recent times. The contribution that Multinational Corporation can make as agents of growth, structural change and international integration has made foreign investment a coveted tool of economic development. In India, there has been a growing recognition that any credible attempt towards economic reforms is involving upgradation of technology, scale of production and linkages to the increasingly integrated globalized production system through the participation of Multinational Corporations. The 334 development strategy before 1991 was neglected in India. The government is now pursuing a pro-active policy to attract foreign investment. However, the foreign investment policy per se is still only one of the concerns of the foreign investors, for the foreign investment policy determines the ease of accessing the domestic market and the terms and conditions of entry. Foreign investment in India in 1997-98 was lower at US $5025 million compared to US $ 6008 million in 1996- 97 because of a decline in portfolio investment. Although Foreign Direct Investment (FDI) increased by 18.6 percent from US $ 2696 million in 1996-97 to US $ 3197 million in 1997-98, portfolio investment declined from US $ 3312 million in 1996-97 to US $ 1828 million in 1997-98. This decline in portfolio investment is mainly attributable to the contagion from the East Asia crisis, which adversely affected capital flows to all emerging markets. The Indian economy is all set on the high growth path. The economy does offer high opportunities for foreign investors. Foreign direct investors, portfolio investors including FIIs now must address the country from the point of view of economic development as well as social welfare. The reforms process is very much in place and moving ahead well. 335 Globalization has produced favourable impact on the development of MNCs as illustrated by factual study of Hindustan Lever Limited (HLL). MNCs have expanded, improved earning capacity, profit and profitability. There has been more than 300 percent increase in the sales of HLL over its base year 1987. The growth of profit of HLL is faster than the growth of sales. HLL was able to increase the exports to the tune of 15 percent of the net sales. MNCs are making significant contribution to export earnings. Their contribution to National Exchequer has gone up substantially as a result of low taxation rate and simplified procedure of tax evaluation. Development of social services is the responsibility of the central and the state government both. It is crystal clear that the lack of social services is the major hurdle in attracting MNCs to take part in the industrial development of the country. The NEP has enlarged the scope of activities of MNCs in all the sectors of economy. It is equally important to call upon MNCs to play their due role in the development of social services. The MNCs should be asked to invest in social services sector, which is the foundation to establish a strong industrial base and economic structure. 336 Suggestions and Recommendations: MNCs have played important role in globalization of Indian economy. The MNCs will play still more useful role if the following suggestions are implemented. It is not in the interest of the national economy to disinvest public sector enterprises just for foreign exchange. It is necessary that distinction is made between profitable and losing public units. The government should offer tranches of share to MNCs when it is found that a public unit can not be salvaged and put back on sound rail as a profitable concern. It is not advisable to invite MNCs in the insurance sector, which is the main channel for mobilizing domestic savings. Insurance corporations of the public sector are making important contribution to numerous projects of social sectors including health, education, communication, power and other infrastructure. Globalization in the Indian context should be linked to ever-larger investments in jobs. The MNCs should be invited to take the project, for investment, which can lead, to absorption of unemployed hands of the country. 337 Unemployment is the basic problem that can upset the economic and social harmony. The monetary and fiscal policies should make initiatives that are helpful to augment the corporate value. It would be much more useful to lower the rate of interest and taxation, stabilized the exchange rates and hold the price line. The MNCs should be encouraged to invest in technology for development of the agricultural sector. The strong agriculture sector is the guarantee of the strong economy. India should refuse to continue to be exporter of raw materials for industries of the industrialize countries. It requires investment in technology for strong industrial base in cooperation with MNCs in collaboration with domestic industries. The strong technological base guarantees strong economy for global competition. The country will be in a position to take full advantage of the upcoming globalization as a consequence of WTO arrangement. It is a fact that the India had made mistakes in past so far as economic planning concerned. The private initiative of MNCs would be strong motor to globalize Indian economy. I^IBU OOlWPI-tV 338 Books: A.V. Berczoi, "Third World New Comers in Interantional Business: Multinational Companies from Developing Countries," Delhi, 1990. Aharoni, Yalv, "The Foreign Investment Decisioin Process", Mass, Harvard Unviersity Press, 1966. 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CA E o f O « i CA c •e CD Q. 1 I c E o UJ .0) O (0 0) •c I ?3 CD >O» E 0) 0 o a E m CD (0 I CD C a o U c i CB V) Q E > 3 ? ' I 1 X c u] £ 0) E w a. 1 I I CD *• 8 1 8 E. "5 .2 ? S •s 1M E CD S < in z"w m 1 i 1 i> O 0) Appendix - VI Mergers and Acquisitions During 1991-1998 Acquirer/Bidder Target Period Status Aarti Oranics Salvigor NA A Abhijit Rajan Gammon India Nov.1993 A Aegis chemicals Amit Alcohol & June. 1996 A Carbon Dioxide AFT industries Empire Plantations Aug, 1996 A Altar Group Sharp Industries May, 1996 A Akar Group Uvifort Metalizers Feb, 1995 A Alcatel Priyaraj Electronics Jan, 1994 B Alliance DLJ BFL Software AprI, 1997 B 1 Anchor Financial Services Shrenik Securities Jan, 1997 B Arvind Mafatlal Group Iveon Laborataries Oct, 1996 A Asea Brown Boveri Lenzohm Electrical Apr, 1997 A B.D. Bangur Group GKW Aug, 1994 A Bagri Family Hindustan Sanforisers May, 1997 B Bayer Industries ABS Industries Oct, 1996 A BBLIL Kissan Apr, 1996 A BBLIL Milkfood Ice Cream AprI, 1995 A BPL Uptron CPT May, 1996 A British Gas Gujrat Gas July, 1997 A BSES Orissa Power Supply Corp. Dec, 1996 A Carborundum Universal Cuttfast Abrasives Mar, 1996 A Chemilnova Agro Lupin Agrochemicals Sep, 1997 A Cherry Fashions Unity Agrotech Indus. Feb, 1997 A C-Mac industries Centum Electronic Oct, 1997 A Coca-Cola Co. Parle Exports Brands Sep, 1993 A ConAgra Inc. ITC Agro-Tech July. 1997 B Crompton Greaves Goa Electricals Aug, 1997 A Cyanamid Wyeth Laboratories Apr, 1996 A Dil Vikas Finance Eld Dorado Securities Oct. 1997 A Oresdner Klelnwort Ind Global Shares & Secutiries May, 1997 A DSM Alpha Drugs Dec, 1996 A Duncon Indust. ICI's Fertilezers div. Ja, 1994 A EID Parry Bharat Pulverising Dec, 1995 A EID Pary Falcon Gulf Ceramics Jan, 1995 A Electrolux Maharaja International Jan, 1995 A Elpro Internatiohal & RCA Mukund Flexpack Nov, 1997 B Esab India Maharashtra Weldaids May, 1994 A Essar Group Tamilnadu Mercantile Bank Oct, 1995 B Essar Group Sterling computers Oct, 1996 A Eveready Industries Madhura Tea State Oct. 1997 A Exide Industries Standard Batteries Nov. 1997 A Feinchemie Schwebda Enzymes Pharma Dec, 1996 A Fl Group PIc IIS Infotech Dec, 1997 B Fidelity Industries Swastik Rubber Products feb, 1997 A Gabriel India Stallion Shox Dec. 1995 A GE Capital SRF Finance May. 1997 A GEC Alsthom Modi Mirnees Sept . 1997 B Gillette Parle's oralcare division Mar, 1997 A Giliete Harbans Lai Malhotra and Sons; oct, 1996 B GKW Powmex Steels Dec. 1996 A Glaxo India Biddle Sawyer Oct. 1997 A Glaxo India Meghdoot Chemicals Oct., 1997 A Glaxo India Croydon Chemical Works oct, 1997 A Goodricke Group Himalaya Tea Garden Feb, 1996 A Heinz Glaxo's food division Oct, 1994 B Henkel Spic India Calcutta Chemicals July, 1997 B Hindustan Lever East Cost Fertilizer Jan, 1994 B Hindustan Lever Lakme feb, 1998 A Hindustan lever TOMCO Mar, 1994 A Hindustan Lever Vashisti Detergents Feb, 1996 A Honda Motor Co. Shriram Honda Power July, 1997 B ICICI ITC-Classic Finance Nov, 1997 A IFB Industries RHW India Oct, 1996 A IIS Infotech EClCS Infonnation Technology May, 1996 A Inchcape Gestetner ndia Jan., 1994 A Infar BE Animal Health July, 1997 A Kirloskar Electric UB-Mec Batteries Oct, 1996 A Knoll Pharma Boots Pharma Apr, 1997 A Kopran Kampala Pharma Oct., 1996 A Krone Krone Communications May, 1996 A KSB Engg. MIL Controls Aug, 1997 A Kumupulan Emas Berhard Palmtech Indiaq Oct, 1997 B Kuoni Travel STOC May, 1997 A Lambweston Tarai Foods Apr. 1996 A Leader Cables Incab Sep, 1996 A Mannesmann VDO International Instruments Nov., 1997 A Merind Tata Pharma Aug, 1997 B Merloni Racold Appliances Dec, 1996 A Micro Plantae Temptation Foods Jan, 1996 A N. Prasad & others Vorin Laboratories Jun, 1996 A Nagarjun Steels Penar Steels Dec. 1997 A NEPC Damania Airways Sep, 1995 A NEPC South India Cements Dec, 1995 A NEPC ModiLuft March, 1996 B Nestie NDDB's Dempo Dairy July, 1992 B Nicholas Piramal Sumitra Pharma Oct, 1995 A Nicholas Piramal Roche Products No. 1993 A Nicholas Piramal Boehringer mannheim India July, 1997 A NRI Investments Trans plastics jan, 1997 A Oriental Bank Punjab Coopertive Bank Mar, 1997 B Oriental Banic Bari Doab Bank March, 1997 B Pepsi Co. India Duke & Sons jun, 1996 A Pharma Products Wander India Mar, 1996 B Phillips Carijon Black Gujrat Carbon & Industries June, 1996 A Phillips Carbon Black Carbon & Chemicals jun, 1997 A Plysindo Best & Crompton Engg Aug, 1997 A Polysindo JCT's synthetic fibre division Sep, 1997 A Portacom Wireless Microwave communictioin May, 1997 A Praxair India Jindal Praxair Oxygen Nov. 1997 A Praxair India Hindustan Gas Jun, 1995 A Premier Synthetics Blue Blends petrochemicals Feb, 1997 A Pressman Group Comfort Inn Apr, 1996 A Ranbaxy Laboratories Croslands Research feb, 1997 A Redly Chemicals Armour Polymers Oct. 1996 A REPL Engineering Eltrol Oct. 1996 A RPG Enterprises Fibreglass Pilkington 1994 A RPG Enterprises HHS Telecom Services Sep, 1996 B Sabroe Refrigeration ABB Alfa Stal Refrigeration July. 1997 B Sara Lee Transelektra Oct. 1995 A Sara Lee Nutrine Confectionery Dec, 1997 B Shaw Wallace East Coast Breweries May, 1994 A Siemens Punjab Communication Jan. 1994 A Siemens Webel Telematik March, 1994 A Simoco Phillips Telecome Indst. March. 1997 A SIS Sharebrokers Springfield Securities July. 1997 A SPIC UB Petroproducts Sept, 1995 A SPIC Ind-ltal Chemicals Feb. 1996 A Sun Pharma Carco Pharma Labs (US) Aug. 1997 A Sun Pharmaceuticals MJ Pharmaceuticals Nov. 1996 A Sun Pharmaceuticals Knoll Pharmaceutical's Plants Feb . 1996 A A Sun TV Gemini TV Oct. 1996 A TSWA International Anthem Communications Dec. 1997 B Yokogawa Electric Yokogawa Blue Star Jan, 1997 A Source: Business Today-Vol. 7, No. 5, New Delhi, March 7-21, 1998, P 74-75. I U ?! JS S s ;; » ^ -. 5 S I in ^ ^ s' !^ s in ^ s '^ S S P: fO CD If) r^ «> CO lA in « "r in 9 T- at dt at $ Si in oo «? 3[ 8*» CD CM i i n s S CO ^ ^ £2 in in CO 5 ^ in § S ^ a> in in CO o in (D 8 «D ^ 5? ih CO S a in CO eo' S o 7 ^ tt> r^ S g o •n s I oi eo CM CO CD CO in in C<4 CO T- ^«• T- CO CO eo a> «p s o * ri iri in T^ ^ CO at I s CM CM OI a ig in CO 1^ y- t^ m ^ 1 la O o I .t m •c e Z & c I ^ I (0 Si a: |5 « i E u. Q. < E CD Q. 6 s E ? 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