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 1 9 9 1 . 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.
Int.
400661
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: navedasi@ndf.vsnl.net.in
asifkhan44@hotmail.com
 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 1 9 9 1 .

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 1 9 9 5 . 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 / V I > T E F l
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 1 9 3 0 - 5 0 , 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

p h a s e 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 2 0 t h 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, 1 9 7 3 . 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 m o r e 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 p e r m i t s 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 e n t e r p r i s e 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 g o v e r n m e n t

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. T h e 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 e n g a g e d in trading or t r a d i n g MNCs:-

Pifty per cent revenue collected from the trading

activities by a company called a trading c o m p a n y . Nearly

60 percv^nt of world export is dealt by the trading MNCs.

These are the oldest forms of MNCs.

2. MNCs w o r k i n g in s e r v i c e s e c t o r : -

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.^*

G l o b a l i z a t i o n : A Novel Concept:

Globalization is a recent novel p h e n o m e n o n 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 P e r f o r m a n c e A p p r a i s a l 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 p r e p a r e d by the Research

Scholar to present a detailed accounts as regards the policy

of o p e n n e s s 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 p h e n o m e n a l 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 9 0 ' s with diversified liberalization packages in the

field of finance, bank fiscal, capital market in a bid to

 14
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integrate and globalizes her economy with the world

economies. 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 1 9 8 6 - 9 7 . 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 1 9 9 1 - 9 5 . In 1 9 9 6 the FDI inflows

plummeted to an abysmal 2 p e r c e n t . However, it registered

an annual growth of 19 per cent in 1 9 9 7 . 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 1 9 9 1 - 9 5 and 9 6 . 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

5 3 , 0 0 0 MNCs/TNCS including large and small both. There
are at least 4 , 4 8 , 0 0 0 foreign affiliates in the world till
August 1 9 9 8 (Appendix-1).
 21

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 22

Table-5 presents regional distribution of inward and

outward stock during the period 1 9 8 5 , 1 9 9 0 , 1995 and

1 9 9 7 . 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 1 9 8 2 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 a s s e t s for
the period of 1 9 9 6 have been presented in Appendix-II. It
 23

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 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

1 9 9 0 - 1 9 9 7 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 2 0 0 0 and onward, in Europe, North

America, Asia Latin America and Caribbean Africa, North

America and J a p a n . It is discernible from the table that

Europe plans to invest 6 3 percent of investment in foreign

countries during 1996 and 2 0 0 0 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 I n v e s t m e n t s

( 1 9 9 6 - 2 0 0 0 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, 1 9 9 7 , 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 J a p a n e s e 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

M e r g e r and A c q u i s i t i o n Purchase

(in B i l l i o n dollors)

Year D e v e l o p e d 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

3 9 3 1 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 1 9 6 4 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

1 9 9 8 , 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

F a c t o r s R e s p o n s i b l e for the G r o w t h of MNCs:World

Wide: P o s t G l o b a l i z a t i o n 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 r e a s o n s 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 p r o d u c t i o n , 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

o p e r a t e 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) D o m e s t i c 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 . 4 8 , 0 0 0 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 a s s e t s . World

wide cross border M&A mostly in banking, insurance,

chemical pharmaceuticals and telecommunication valued to

the tune of $ 2 3 6 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 1 9 9 1 , 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, 1 9 8 6 ,
p.3.
2 Ibid, p . 4 .
3 Bernal, J.P., "Science in History" London C.A. Watts
and Company, 1 9 6 5 , p . 3 .
4. Ibid., p p . - 5 .
5. R a y m o n d V e r n o n , " S o v e r e i g n t y At Bay: T h e
Multinational spread of US Enterprise", New York
Basic Books, 1 9 7 1 , p . 4 .
6. Dunning John H. "The Multinational Enterprise", The
Background, Chapter I; Allen and Union London,
1 9 7 1 , p . 10.
7. Discussion on Foreign Direct Investment in Canada
Ottawa, 1 9 7 2 , 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
1 9 7 0 to the 1 9 9 0 ' s , Bombay, Orient Longmont, 1 9 7 2 ,
p. 1 1 3 .
9. Tugendhat Christopher, "The Multinations" Harmonds
Worth penguin, 1974, p . 1 9 .
10. United Nations, Department of Economic and Social
 38

Affairs, "Multinational Corporations in World

Development, No. 6, 1 9 7 3 , p . 5 .

11. United Nations Report on 'Transnational', United

Nations Publications, Switzerland, 1 9 8 6 , p . 7 .
12. World Investment Report, "Trend and Determinants",
United Nations Publications, Switzerland, 1 9 9 8 , p.
350.
13. Ibid, p. 3 5 0 .
14. Ibid. p. 3 5 0 .
15. Ibid, p . 3 5 0 .
16. Mithani, D.M. "International Economics" Himalya
Publishing House, Delhi, 1 9 9 6 , p p . 4 4 5 - 4 4 6 .
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. P u r i , " I n d i a n E c o n o m y "
Fourtheenth Revised and Enlarged Edition, Himalaya
Publishing House Mumbai, J u n e 1 9 9 6 , p. 8 4 5 .
19. Ibid, p p . 8 3 5 - 8 3 6 .
CHAPTtl^ " 11

r^edearck <Jje6lqn and riflethodolo n-

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 1 9 9 1 ,

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 1 9 9 1 , 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 r e a p the

fruit of merger, acquisition and take over which has b e c o m e

a new vehicle of globalization p r o c e s s . 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.^ 1 9 7 0 ,

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. T h e 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", p r e s e n t s

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 n a t u r e , 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,

O p e r a t i o n s and Research", present a theoretical outline of

multinational business operations and their policies. General

m a n a g e m e n t 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

d e p e n d e n c e of the underdeveloped and developing nations.

Raju, M.-, Prahalad, C.^^ ( i g g o ) 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 ^ 1 9 8 5 ) 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 a p p e a r e d 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.

S c o p e of t h e 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 t h e 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....^ •'

•-•'>,
' ' K l ^ ^ ^ ^ ' . 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 p u r p o s e .

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

1 5 0 , 0 0 0 affiliates having all most substantial control over

total output,- ranging from 13Th to l / 4 T h 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 a t m o s p h e r e has made

these MNCs keenly interested in the Indian economy. They

are now pouring investment in India in a variety of

a r r a n g e m e n t s , 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 E m e r g e n c e of the Multinational

Enterprise", Harvard. 1 9 7 0 .
2. Brooke, Michael Z. and Remmers H. Lee, "The
Strategy of Multinational Enterprise Organisation and
Finance", London, Longman, 1 9 7 0 .

3. D y m s z a , William, A . , " M u l t i n a t i o n a l Business

Strategy", McGraw Hill, New Delhi, 1 9 7 2 .
4. Backman, Jules and Block, Ernest, "Multinational
Corporations, Trade and the Dollar in the Seventies",
New York University, 1 9 7 4 .

5. M. Wilkins, "The Maturing of Multinational

Enterprise", Harvard, 1974.
6. Fatimi, Nasrollah Sailpur, "Multinational
Corporations", Crambury, 1 9 7 5 .
7. R.J. Barnett and R.E. Muller, "Global Reach", London, 1975.
8. W. Vaupel and J.P. Curhan, "The Worlds Multinational
Enterprises", Geneva, 1 9 7 4 .
9. Barnet Richard J. and Ronald E. Muller, "Global
Reach: The Power of Multinational Corporations",
London Jonathan Company, 1 9 7 5 .
10. F l a n a g a n , Robert J. C o m p , "Bargaining without
B o u n d a r i e s : T h e Multinational C o r p o r a t i o n s and
International Labour Relations", Chicago University,
Chicago.
 59

11. B o a r m a n P a t r i c k M. S c h a l l h a m m e r , H a n s e d s . ,
" M u l t i n a t i o n a l C o r p o r a t i o n s and Governments,
Business-Government Relations in an International
Context", New York, N.Y. Praeger, 1 9 7 5 .
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, 1 9 7 4 .
15. Kapoor Ashok and J . J . Boddewyn, "International
B u s i n e s s - G o v e r n m e n t R e l a t i o n s : US C o r p o r a t e
Experience in Asia and Western Europe", New York,
N.Y. America, Management Association, 1 9 7 3 .
16. S e t h i , S. P r a k a s h and Halton, Richard H.,
"Management of Multinations : Policies O p e r a t i o n s and
Research", Free Press, 1 9 7 3 .
17. Radiance Hugo, "International Firms and Modern
Imperialism: Select Readings", Harmondsworth
Penguin, 1 9 7 6 .

18. Raju M. and Prahalad C , "The Emerging Multinations:

Indian Enterprise in the ASEAN Region", Madras.
19. Agrawal J . , " P r o s a n d C o n s of T h i r d World
Multinations: A Case Study of India", Tubingen, 1 9 8 5 .
20. John Martinussen, "Transnational Corporations in a
Developing Country - The Indian Experience", New
Delhi, 1 9 8 8 .
 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. 2 1 .

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 o n 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 1 9 9 0 . 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 1 9 9 2 , these negotiations were proceeded

on a four track a p p r o a c h . 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 O r g a n i s a t i o n (WTO):

WTO has been established in 1995 for implementation

of the various provisions of Dunkel Treaty. To expedite the

resumed negotiations in 1 9 9 1 , Sir Arthur Dunkel, Director-

General of GATT and t h e official Chairman of t h e T N C ,

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 n e g o t i a t i o n s ,

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 O r g a n i s a t i o n (WTO):

WTO has been established in 1995 for implementation

of the various provisions of Dunkel Treaty. To expedite the

resumed negotiations in 1 9 9 1 , 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 1 9 9 5 .

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 5 5 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 2 0 0 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 a r e a s 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, 1 9 1 1 is a very old enactment

and would need to be updated.

E. Lay o u t d e s i g n s of i n t e g r a t e d 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 h o m e , 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 o n ' t h e economic arena to improve the welfare

of their p e o p l e .
 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 o p e r a t e

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 t h e 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 9 0 ' 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 1 9 9 1 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

C a p i t a l 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.^

A i m s of C a p i t a l 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 m a r k e t

after clearance by SEBI.

Securities and Exchange Board of India (SEE!) was

established in February 1 9 9 2 . SEBI was strengthening with

necessary authority and powers for regulation and reform

of the capital market.

A notification was issued under the Securities C o n t r a c t

(Regulation) Act, 1 9 5 6 , 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* ( 1 9 9 2 - 9 3 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 a c c o r d a n c e 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 2 1 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 1 0 0 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

S e c o n d a r y Market R e f o r m s ' ( 1 9 9 2 - 9 3 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

1 9 9 1 . 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 p r o c e d u r e 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 p r o c e d u r e .

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 3 3 . 3 3 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 t h o s e 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

e n h a n c e 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 1 9 9 2 ,

empowered the SEBI to penalize inside traders. These

powers were entrusted to the SEBI through promulgation

of an ordinance amending the SEBI Act, 1 9 9 2 .

The government permitted reintroduction of options

trading almost after 40 years, through the amendment made

in the Securities Contract (Regulation) Act, 1 9 5 6 . 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

a m e n d m e n t s 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 1 9 9 5 , 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.

S e c u r i t i e s Trading Corporation of India (STCI):

In 1 9 9 4 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 J u n e 2 7 , 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.

R o l e 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 t e r m s . 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 s h o p . This will e n h a n c e liquidity and

investment opportunities. There should not be any constrain

over the transactions.

Industrial Reforms:

Various economic reforms initiated in 1 9 9 1 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 3 1 , 2 0 0 1 .

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 p a r a g r a p h s .

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 2 5 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 2 5 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 1 9 9 1 , 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 1 9 9 1 , 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 S e c t o r 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

p u r p o s e 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

p r e p a r a t i o n s to enter the insurance sector again once it is

o p e n e d u p . 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.

L i e , 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

2 0 0 crore with the government holding brought down to

50 p e r c e n t 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 r e p e a t e d 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.

T h e s e 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 $ 9 0 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 $ 4 0 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.

B a n k i n g Reforms and Globalization:

Since the inception of new economic policy in 1 9 9 1 ,

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 1 9 9 1 . The

committee recommended the following measures:^°

1. Reduction in statutory liquidity ratio (SLR) from 3 8 . 5

percent of demand and time liabilities of commercial
banks in 1991 to 2 5 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 b o r r o w e r s .

11. New private banks given license to operate and about

10 banks have come up since 1 9 9 1 .

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

2 5 percent, at par with deposits in other accounts.

Conclusion:

Since the induction of new economic policy in 1 9 9 1 ,

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. 6 1 .
4. Ibid., p. 6 1 .
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, 3 3 .
18. Ibid, p. 3 3 .
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. 1 0 1 .
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. 7 1 .
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 p h e n o m e n o n 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 1 9 9 8 . 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 p r e s e n c e 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

p h e n o m e n o n 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 4 9 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 1 9 9 1 - 9 8
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 1 9 8 3 to 1 9 9 0 and

the post NEP period spans from the year 1 9 9 1 to 1 9 9 8 .

Table reveals that the number of foreign collaboration

increased to 7 4 0 in 1 9 8 4 representing growth of almost

10 percent over 1 9 8 3 . 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 1 9 9 8

onwards. Table reveals that the foreign c o m p a n i e s 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 3 2 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. 5 1 percent or

more equity holdings except the one company from

Belgium.

1 0 0 % S u b s i d i a r y 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
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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

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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 , 5 0 0 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 2 9 . 8 3 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
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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

b e e n 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 2 3 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

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 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 K A P X t n - 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

C M A . I > T E F l - 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 i n d e p e n d e n c e on 15th August 1 9 4 7 , 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 1 9 4 8 . 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 s h a p e . 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 c o m p a n i e s , 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 t h e r e 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, 1 9 5 0 , 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.

F o r e i g n I n v e s t m e n t P o l i c y of G o v e r n m e n t of India:

In spite of all facilities given by the g o v e r n m e n t 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 1 9 5 6 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 p h a s e (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 a t m o s p h e r e 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 1 9 6 8 to 1 9 7 9

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 1 9 5 0 to fewer than 2 5 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 4 0 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 1 9 7 3
 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 D e r e g u l a t i o n 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 2 4 , 1 9 9 1 Government of India a n n o u n c e d 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 5 1 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 c o m p o n e n t s intermediate goods, raw

materials and payment of know-how fees and royalty will

come within the p a r a m e t e r s 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 5 1

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 T r e n d s : An A p p r a i s a l :

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 - 1 9 9 0 . 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 1 9 7 5 to 1 9 8 0 and

the maximum of Rs. 27 million in the quinquennial period

of 1 9 5 5 to 1 9 6 1 . Further more, the table is indicative of

the fact that the period from 1955 to 1 9 6 5 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 1 9 4 8 it has risen to Rs 52 million in 1 9 7 5 .

However, during the period 1 9 7 5 - 1 9 8 0 , 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 1 9 9 1 . 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

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 215

discernible from the table that 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 88 percent till 1998-99 are channelised 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
FDI in 35 priority sectors are given automatic approval by
the Reserve Bank of India, if the foreign equity participation
is less than 51 percent. This substantiates the fact that in
the post NEP period FDI flows in priority sector has been
some what less than 51 percent equity participation which
has been discouraging FDI trends on the whole shows an
increasing trend during the period under reference.
However, a comparative picture of inflow of FDI during
1997-98 (April -Dec) 1998-99 (April-Dec) has fallen to US
$ 1562 million from US $ 2511 million for the
corresponding period of 1997-98 a decline of approximately
38 percent. The chief reason for this decline may be
attributed to the frequent change of government at the
centre, skirmishes among the states over fluctuating,
 216

directionless FDI policy framework and on top of the entire

global recessionary cobweb.

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 1 9 9 1 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 5 6 . 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 1 9 9 8 , outstanding balances

(table 9) under various non-residential deposit schemes

stood at US $ 2 0 , 3 6 7 million. Comparison of estimated net

flows under non-resident deposits during April-November

1 9 9 8 vis-a-vis the corresponding period in 1 9 9 7 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 1 9 9 4 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 1 9 9 2 - 9 8 . It is discernible from the

table that in the initial year i.e. 1 9 9 2 , 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 6 0 0 0 percent increase over

the previous year. In 1 9 9 3 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
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 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 S p e c i e s

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 2 0 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
( 1 9 9 1 - 9 2 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. 1 9 9 8 - 9 9 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 a t m o s p h e r e

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. T h e r e 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 p r o c e e d s

 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 m a n a g e m e n t 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 e x c h a n g e 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. 1 9 9 1 - 9 2 to 1 9 9 7 -

98. It is discernible from the table that the Global

Depository Receipts (GDR) have become important channels

in garnering foreign funds. In 1 9 9 2 - 9 3 the foreign funds

raised through GDR accounted for US $ 86 million which

went upto US $ 1 6 0 2 million in 1993-94 registering a

growth rate of whopping 1 7 6 3 percent. In 1 9 9 4 - 9 5 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
( 1 9 9 1 - 9 2 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 P o s t NEP P e r i o d :

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 c o m p a n i e s , 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

( 1 9 9 1 - 9 2 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 t o 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. T h e 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. 3 5 1 .
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. 9 1 .
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 <JLta. ^^MJLCJLJ Jrn f-^odt

1991-1998.

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- 1 9 9 1 - 1 9 9 8

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 1 9 3 1 ,

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 P r o g r e s s 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 1 9 4 1 Agencies in Bombay, Madras, Calcutta and

Karachi taken over; Company acquires own sales force.

In 1 9 4 2 Unilever takes stiff decision to "train Indians

to take over junior and senior m a n a g e m e n t positions in

stead of Europeans".

In 1 9 4 3 personal products manufacture begins in India

with plant at the Garden Reach Factory.

In 1 9 4 4 Reorganization of the three companies with

common management but s e p a r a t e marketing operations,

Mr. W.G.J. Shaw and Mr. C . S . Petit become joint managing

Directors of the three companies.

In 1 9 4 7 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 1 9 5 5 , 56 percent of managers are Indians.

In 1 9 5 6 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 1 9 7 8 Indian

equity stake went up to 34 percent; Fair & Lovely skin

cream launched.

In 1979 Sodium Tripoly p h o s p h a t e ; 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 5 1 percent. In 1 9 8 2 Fine Chemicals

production begins at Jammu, Unilever got government nod

for 5 1 percent equity stake.

In 1984 Foods, Animal feeds businesses transferred to

Lipton; Chhindwara unit is established. In 1 9 8 5 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 1 9 9 1 Lifebuoy plus, Le Sancy, Breeze, Sandalwood,

Liril Cologne Lime Soaps, Triple power Rin Powder and

Surf Ultra detergents; Close up Green t o o t h p a s t e , 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 1 9 9 5 . From 1 9 9 6 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 changeiaver

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 a s s e t s : -

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 1 9 9 1 . 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 E m p
(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 =
(1) (2) (3) (4)2+3 Sales

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 - 1 2

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 / V I > T E R - 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 m a n a g e m e n t 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 m a n a g e m e n t 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 p a r a g r a p h s 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
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 286

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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

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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
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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
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 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 1 9 5 1 was 7 2 5 . It increased to 2 2 4 4 6 . Since 1 9 7 1 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 1 9 7 1 was 2 8 4 8 9 . It increased to 1 3 6 3 9 7 .

Available hospital beds of all types at all places are

insignificance ratio to population. In 1 9 5 1 there were

1 1 1 1 7 8 beds, which increased to 8 7 0 1 6 2 beds in 1 9 9 6 .

The beds in 1 9 9 6 were in the ratio 1:1000 p e r s o n s . 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 1 9 9 7 .

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 1 9 9 6 - 9 7 . 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

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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 4 0 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 c o m p o n e n t 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. T h e family

welfare programmes received substantial share of total

outlay in the Fifth Plan and annual plan for the 1 9 7 9 - 8 0 .

Table 6 shows that, it has received 5.3 percent of the total

plan outlay during the Fifth Plan and 5.2 p e r c e n t of total

plan allocation in the annual plan for 1 9 7 9 - 8 0 . Rest of the

plan period allocated from 1 percent to 3 p e r c e n t 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. T h e s e 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 P e r c e n t S h a r e 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 1 9 9 7 - 9 8 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. C D . 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.
C K A P X t U " IX

^indinadad and
ana —'f^uggedtlond
^QQ^

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 1 9 9 1 - 9 5 . In 1 9 9 6

the FDI inflows plummeted to an abysmal 2 percent.

However, it registered an annual growth of 19 percent in

1 9 9 7 . 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 1 9 9 8 , There were 5 3 0 0 0 MNCs and 4 , 4 8 , 0 0 0

foreign affiliates which have played key role with 3.5 trillion

accumulated stock of FDI, $ 9 . 5 trillion sales of foreign

affiliates and $ 1 3 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 1 9 9 5 for implementation

of the various provisions of Dunkel Draft.

To expedite the resumed negotiations in 1 9 9 1 , 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 p h a s e 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,

p a t e n t s , 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 p h a s e s out MFA over a period

of 10 years from 1998. In the case of the US, the

integration p h a s e 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 1 9 9 1 . 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

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 340

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 341

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 343

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 344

Articles. Journals/Periodicals:

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 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.
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