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JOURNAL ON CONSENTIA ON commerce and economics

Issue 2 VOLUME 1

RESEARCHERS CLUB
thinking beyond!

EDITORIAL BOARD

PROF. (DR.) G.P. TRIPATHI DIRECTOR, MATS LAW SCHOOL, RAIPUR, CHATTISGARH MR. S. RAMASWAMY VICE-PRESIDENT, GROUP GENERAL COUNSEL, ESCORTS LTD. MR. ASHISH MITTAL PARTNER, MAHESHWARI & CO. (SOLICITORS & ADVOCATES), NEW DELHI ADV. ANIL DSOUZA SENIOR ADVOCATE MUMBAI HIGH COURT, MUMBAI, MAHARSHTRA ADV. PADMAKAR TRIPATHI LEGAL MANAGER, HDFC BANK, LUCKNOW, U.P MS. NAYANA DAS ASSOCIATE, OASIS LAW ADVISORY, MUMBAI, MAHARASHTRA ADV. PALANIANDAVAN RAMASAMY ADVOCATE, MADRAS HIGH COURT, MADRAS MS. MEENU MAHESWARY ATTORNEY, LEX ORBIS IP PRACTICE , NEW DELHI MS. JYOTSNA CHATURVEDI PRINCIPAL ASSOCIATE, MAHESHWARI & CO. (SOLICITORS & ADVOCATES), NEW DELHI MR. BHARGAVA IYENGAR ASSOCIATE PROFESSOR, MATS COLLEGE OF ENGINEERING, RAIPUR, CHATTISGARH

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS

MESSAGE FROM THE EDITORIAL BOARD

Researchers club is proud to announce the publication of the First Volume of JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS. This Journal provides a glimpse into a few of many high quality research activities conducted by the talented researchers in the field of commerce and economics. The Journal is a compilation of outstanding research papers from numerous disciplines of law submitted by students, faculties and legal professions who have been involved in research, scholarly and creative activities. We would like to thank all the contributing authors for providing such a rich variety of outstanding research articles on a broad range of exciting topics. If you have any questions or comments about the Journal, please contact the editorial board by sending an email to info@researchersclub.org The journal is also available online, please visit the following website: http://www.researchersclub.org

The Editorial Board Consentia on Commerce and Economics

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JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS

TABLE OF CONTENTS

1. AUTHOR PROFILES

2. ARTICLES

ISSUES AND CHALLENGES BEFORE MANAGERS IN THE INDIAN MSMEs ASST. PROF. VIVEK.V BUSINESS AND GOODWILL ANJALI AGARWAL DELEVERAGING A FARCICAL OR COGNIZANT REALITY? ENAKSHI JHA THE MOST FAVOURED NATION PRINCIPLE ISHANI ACHARYA AND RAHUL DAS STRUCTURED SETTLEMENTS NEHARIKA SOBTI A TAP AND A FUMBLE: LESSONS FOR INDIA IN THE GMR-MALDIVES FIASCO SIDDHARTHA SRIVASTAVA LIBERALIZATION AND FOREIGN DIRECT INVESTMENT SHAPING UP THE THREE SECTORS OF THE ECONOMY SMRITI TRIPATHI

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS


RETAILING IN INDIA: THE NEW ECONOMIC MANTRA VAIBHAV GOYAL AND VIBHUTI KHETAN BANCASSURANCE THE INDIAN SCENARIO VINAY KUMAR SOLANKI

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS

DISCLAIMER

The Articles and Research Papers published in Journal on Consentia on Commerce and Economics, and views expressed there in are personal views of the Authors. The Board of Editors in Researchers Club shall not be liable for anything expressed there in. Authors alone are legally responsible for everything including views or contents of the matter included in Journal on Consentia on Commerce and Economics. Articles/Researchers are purely an academic venture.

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JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS

ISSUES AND CHALLENGES BEFORE MANAGERS IN THE INDIAN MSMEs


MR. VIVEK.V

Introduction In India, micro, small and medium enterprises (MSME) is a generic term used to describe all small scale industrial units and medium-scale industrial units. An MSME unit should neither be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit. The MSME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. MSME sector also has a large number of service industries.The small scale sector in India comprises of a diverse range of units from traditional crafts to high-tech industries. Background Micro, Small and Medium Enterprises (MSMEs) are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. They also play a key role in the development of economies with their effective, efficient, flexible and innovative entrepreneurial spirit. The socio-economic policies adopted by India since the Industries (Development and Regulation) Act, 1951 have laid stress on MSMEs as a means to improve the countrys economic conditions.

The Ministry of Small Scale Industries and Agro and Rural Industries was first created on 14th October 1999 and, on 6th September 2001, further bifurcated into two separate ministries,

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namely, the Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries. Subsequent to enactment of Micro, Small and Medium Enterprises Development Act, 2006 by the Parliament, the President under Notification dated 9th May, 2007 has amended the Government of India (Allocation of Business) Rules, 1961. Pursuant to this amendment, Ministry of Agro and Rural Industries and Ministry of Small Scale Industries were merged into a single Ministry, namely, Ministry of Micro, Small and Medium Enterprises. This Ministry designs policies and promotes/ facilitates programs, projects and schemes and monitors their implementation with a view to assisting MSMEs and helps them scale up.

The majorities of people living in rural areas draw their livelihood from agriculture and allied sectors. However, the growth and balanced development of other sectors such as industry and services is also necessary to sustain the growth of Indian economy in an inclusive manner. The Government of India is striving to improve the economic and social conditions of rural population and non-farm sector through a host of measures including creation of productive employment opportunities based on optimal use of local raw materials and skills as well as undertaking interventions aimed at improving supply chain; enhancing skills; upgrading technology; expanding markets and capacity building of the entrepreneurs or artisans and their groups or collectives.

Definition of MSMEs: Micro, small and medium enterprises as per MSMED Act, 2006 are defined based on their investment in plant and machinery (for manufacturing enterprise) and on equipment for enterprises providing or rendering services. The defined limit on investment for enterprises to be classified as micro, small and medium enterprises is as follows:

Classification Micro Small Medium

Manufacturing Enterprises* Rs. 2.5 million / Rs. 25 lakh Rs.50 million / Rs. 5 crore Rs 100 million / Rs 10 crore

Service Enterprises** Rs. 1 million / Rs. 10 lakh Rs. 20 million / Rs 2 crore Rs. 50 million / Rs 5 crore

* Investment limit in Plant & Machinery ** Investment limit in equipment

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Products of MSMEs: The micro, small and medium enterprises (MSMEs) sector contributes significantly to the manufacturing output, employment and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 per cent of the total exports of the country. The sector is estimated to employ about 595 lakh persons in over 261 lakh enterprises throughout the country. Further, this sector has consistently registered a higher growth rate than the rest of the industrial sector. There are over 6000 products ranging from traditional to high-tech items, which are being manufactured by the MSMEs in India. It is well known that the MSMEs provide good opportunities for both self-employment and wage employment. MSMEs in the country manufacture over 6,000 products. Some of the major subsectors in terms of manufacturing output are food products, textiles and readymade garments, basic metal, chemical and chemical products, metal products, machinery and equipments, transport equipments, rubber and plastic products, furniture, paper and paper products and leather and leather products.

MSME India:

in

The role of micro, small and medium enterprises (MSMEs) in the economic and social development of the country is well known. It is the nursery for entrepreneurship, often driven by

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the individual creativity and innovation, with a significant contribution i n the countrys GDP, manufacturing output, exports and employment generation. MSMEs contribute 8 per cent of the countrys GDP, 45 per cent of the manufactured output and 40 per cent of our exports. The labour and capital ratio in MSMEs and the overall growth in the MSMEs is much higher than in the larger industries. MSMEs are better dispersed. In view of these factors, MSMEs are important for achieving national objectives of growth with equity and inclusion.

In lakh Parameters Type Registered Un Total 74.68 186.45 261.12 305.05 290.61 595.66

registered 64.18 181.30 245.48 224.22 278.35 502.57

Manufacturing 10.49 Total number of working enterprises Services maintenance Total & 5.15 15.64

Manufacturing 80.83 Employment (Person) Services maintenance Total


.

&

12.26 93.09

Source: - Final Report of the Fourth All India Census of Micro, Small & Medium Enterprises 2006-07: Registered Sector.2 : Quick Results : Fourth All India Census of Micro, Small & Medium Enterprises 2006-2007.: Regd. : Registered Enterprises, Unregd. : Unregistered Enterprises.

Major issues concerning the MSME sector Although Indian MSMEs are a diverse and heterogeneous group, they face some common problems, which are briefly indicated below: Lack of availability of adequate and timely credit; High cost of credit; Collateral requirements; Limited access to equity capital; Problems in supply to government departments and agencies; Procurement of raw materials at a competitive cost;

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Problems of storage, designing, packaging and product display; Lack of access to global markets; Inadequate infrastructure facilities, including power, water, roads, etc.; Low technology levels and lack of access to modern technology; Lack of skilled manpower for manufacturing, services, marketing, etc.; Multiplicity of labour laws and complicated procedures associated with compliance of such laws; Absence of a suitable mechanism which enables the quick revival of viable sick enterprises and allows unviable entities to close down speedily; and Issues relating to taxation, both direct and indirect, and procedures thereof. The above mentioned problems can be classified into 6 major thematic areas and constituted separate Sub-Groups for detailed examination. These thematic areas covered (i) credit, (ii) marketing, (iii) entrepreneurship training , (iv) rehabilitation and exit policy, (v) infrastructure, technology and (vi) taxation. The recommendations of the previous Committees, Working Groups and Study Groups, which are relevant in the current context, have been taken into consideration.

Credit or Finance to MSMEs

All kinds of business enterprises require sufficient funds in order to meet their fixed as well as working capital requirements. Finance is one of the critical inputs for growth and development of the micro,small and medium enterprises. They need credit support not only for running the enterprise and operational requirements but also for diversification,

modernization/upgradation of facilities, capacity expansion, etc.

Inadequate access to credit is a major problem facing micro, small and medium enterprises. Generally, such enterprises operate on tight budgets, often financed through owner's

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own contribution, loans from friends and relatives and some bank credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. This is because, on account of their low goodwill and little fixed investment, they find it difficult to borrow at reasonable interest rates. As a result, they have to depend largely on internal resources.

In respect of MSMEs, the problem of credit becomes all the more serious whenever any difficult situation occurs such as a large order, rejection of consignment, inordinate delay in payment, etc. Sometimes, they have to close down their operations due to shortage of funds. Also, there is little or no scope for expansion and growth due to dearth of capital. Hence, economies of scale are not available. In lakh Parameters Type Proprietary Partnership Private Company Enterprises by type of organization Public Company Co-operatives Others Total Ltd. Registered 14.09 0.63 0.43 0.08 0.05 0.36 15.64 Un Total 246.50 1.78 1.50 0.74 1.34 9.26 261.12

registered 232.41 1.15 1.07 0.66 1.29 8.90 245.48

In lakh Parameters Type No Finance Enterprises by source of finance Finance through Finance/Self Registered Un Total

registered 228.51

13.64

242.15

Institutional Sources

1.71

11.77

13.48

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Finance through 0.16 5.20 5.36 Non-Institutional Sources other Total 0.13 15.64 245.48 0.13 261.12

Source: - 1 : Final Report of the Fourth All India Census of Micro, Small & Medium Enterprises 2006-07: Registered Sector.
2

: Quick Results : Fourth All India Census of Micro, Small & Medium Enterprises 2006-2007.3: Regd. :

Registered Enterprises, Unregd. : Unregistered Enterprises

Recognising the importance of easy and adequate availability of credit for ensuring sustainable growth of the MSME sector, the government has undertaken several measures:

Priority Sector Lending

Provision of finance to the sector is a part of the 'Priority Sector Lending Policy' of the banks (both domestic and foreign banks operating in India. For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the priority sector. For the foreign banks, 32% of the NBC is earmarked for the priority sector, of which 10% is earmarked for the small scale sector. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the shortfall is required to be deposited with SIDBI for one year at the interest rate of 8 percent per annum.

Small Industries Development Bank of India (SIDBI)

SIDBI has been set up with the mission to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development. It is the principal financial institution responsible for promotion, financing and development of the sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. The four basic objectives of SIDBI for orderly growth of industry in the small scale sector are:

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Financing Promotion Development Co-ordination

SIDBI's major operations are in the areas of (i) refinance assistance (ii) direct lending and (iii) development and support services. Taking into account the fact that a majority of such enterprises which are at the lower-end of the sector are outside the ambit of institutional finance. Hence, concerted efforts have been made by SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro finance programme. SIDBI has disbursed about Rs. 1700 crore (cumulative) under its programme, benefiting around 50 lakh beneficiaries.

At the State level, State Financial Corporations (SFCs) along with the State Industrial Development Corporations (SIDCs) are the main sources of long-term finance for the sector. State Financial Corporations, the state-level institutions have played an important role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyse investment, generate employment and widen the ownership base of industry.

Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly by the Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view to ensure greater flow of credit to the sector without collateral security. It picked up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued. up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued.

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Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs), was launched with the objective of doubling the flow of credit to this sector within a period of five years. The measures in the policy package, inter alia, include banks to achieve a minimum 20% year-on-year growth in credit to the MSME sector and cover on an average at least 5 new MSMEs at each of their semi-urban/urban branches per year.

Marketing in MSMEs

Out of several problems faced by small and medium scale entrepreneurs, the absence of adequate marketing and export facilities is one of their main concerns. Almost all types of business enterprises face marketing problems, but the small and medium scale enterprises face greater difficulty in the marketing and distribution of their products. Some of these are:Small and medium entrepreneurs tend to face tough competition from the products and sales/ marketing strategies of large scale firm's entrepreneurs. They, at times, find it very difficult to cope with large scale entrepreneurs in terms of cost, quality, standards, popularity, meeting everchanging demands/ preferences of consumers, etc.

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Most of them do not have their own marketing network. So, they ultimately have to rely on outside sources for distributing their products. This also tends to raise the cost of their products and services. Most of them do not have good knowledge and/ or experience of various marketing concepts and strategies. As a result, they are unable to understand quickly and accurately the prevailing as well as constantly changing market trends. Furthermore, inspite of having huge potentialities of extensive market for their products, they are mainly unwilling to opt for efficient marketing techniques. They also lack the resources and funds needed for effective sales promotion. Many of such enterprises cannot afford to spend much on advertising, sales promotion, market research, etc. They find it difficult to sell their output at remunerative prices because of higher cost of production and non-standardised quality of products. They also have to sell their products at throwaway prices due to their weak bargaining power (especially in dealing with big buyers) and urgent needs of funds.

Thus, it is right to say that most of small and medium entrepreneurs do not correctly understand as to what kind of products are actually needed by the market, how big/small is the market, when the products are needed and how to deliver such products. All these problems keeps them mainly isolated from the market trends and conditions and, thus, tend to restrict their operations.

Besides, small and medium scale enterprises are the most significant contributor in the field of India's exports. There has been a prominent increase in the exports from this sector of both traditional and non-traditional goods including jewellery, garments, leather, hand tools, engineering goods, software, etc. Also, the enterprises with good export performance have greater stability in the economy. But, there is still lot of problems in exporting the products by small and medium entrepreneurs to other regions/ countries/ areas. They are not very familiar with the steps and formalities involved in exporting goods from India. They need to be made aware of all the steps involved in the process, such as, registration of exporters; selection of export market and buyers; receipt of enquiries, letter of intent, letter of credit, bill of lading, etc;

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insurance coverage; obtaining shipping order; certificate of origin; sending documents to importers; etc. Entrepreneurship training in MSMEs:

Entrepreneurship has been considered the backbone of economic development. It has been well established that the level of economic growth of a region to a large extent, depends on the level of entrepreneurial activities in the region. The myth that entrepreneurs are born, no more holds good, rather it is well recognized now that the entrepreneurs can be created and nurtured through appropriate interventions.

In the era of liberalization, privatization and globalization along with ongoing IT revolution, capable entrepreneurs are making use of the opportunities emerging from the evolving scenario. However, a large segment of the population, particularly in the industrially backward regions/rural areas generally lags behind in taking advantage of these opportunities. Therefore, there is a need to provide skill development and entrepreneurship development training to such people in order to bring them to mainstream of economic growth.

The industrial policies of the Government announced from time to time, have laid considerable emphasis on promotion of women entrepreneurship, particularly among first generation women entrepreneurs, through various training and support services. Special attention is being given by organising exclusive Entrepreneurship Development Programmes (EDPs) for women.

RURAL EMPLOYMENT GENERATION PROGRAMME (REGP)

REGP is a flagship scheme of the Government of India for employment generation programmes in the unorganised sector. Though there are no specific reservation for women entrepreneurs under this scheme, still there has been substantial participation (around 30 per cent) of women as a result of the promotional efforts undertaken in this regard. In order to encourage participation of women in the programmes, the following relaxations are being provided to women beneficiaries:

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Capital Subsidy in the form of margin money is provided at the rate of 30 per cent (for general category it is 25 per cent) of the project cost up to Rs.10 lakh and 10 per cent on the balance project cost up to Rs. 25 lakh. The borrowers contribution is 5 per cent of the project cost in case of women beneficiaries while in the case of general category, it is 10 per cent of the project. Bank finance in the form of loan is 95 per cent of the project cost in case of women and other weaker section borrowers as against 90 per cent of the project cost in case of general category. In lakh Parameters Type Male Employment by male and female Female Total Rehabilitation and exit policy Major Causes of sickness: There are many and varied reasons for sickness in MSME sector. Some of these are: Inadequacy of working capital, delay in sanction of working capital and time gap between sanction of term loan and working capital. Poor and obsolete technology Problem related to availability of raw material Inadequate demand and other marketing problems Erratic power supply Labour problems Infrastructural constraints Poor Management Inadequate attention to R&D Diversion of resources Registered 74.05 19.04 93.09 Un Total 486.80 108.86 595.66

registered 412.75 89.82 502.57

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Inability of the units to face growing competition due to liberalisation and globalisation

Working Group on rehabilitation of Sick units As per the recommendation of the Group of Ministers, RBI had set up a Working Group to review the exiting guidelines in regard to rehabilitation of sick MSME units and to recommend revision of guidelines making them transparent and non-discretionary for the rehabilitation of current sick and potentially viable MSME sick units. All the major recommendations were accepted by the RBI, including a change in the definition of sick MSME units, norms for deciding on the viability of sick units, etc. The revised definition would enable Banks to take action at an early stage for revival of the units. Based on the accepted recommendations of the Working Group, the RBI had drawn up the Revised Guidelines for Rehabi litation of sick MSME units, which were circulat ed to

all the Schedu led Commercial Banks for implementation. Infrastructure, technology: Infrastructure: Adequate infrastructure facilities are necessary for the overall development of every sector of the economy. In the wake of liberalisation and globalisation, its presence and importance for the proper growth of small and medium enterprises cannot be underestimated. Both the Central and the State Governments are making continuous efforts to upgrade the infrastructural set up of the various States, Union Territories (UTs), Districts of the country.

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Inspite of all this, the small and medium scale entrepreneurs are constantly facing the problem of infrastructural bottlenecks, which restricts their day-to-day business operations as well as their future growth prospects. Infrastructure needed by entrepreneurs include all types of transportation facilities like railways, waterways, roadways and airways (depending on the type of small and medium scale firm running by these entrepreneurs) as per the suitability of the business, as well as proper established channels of telecommunication and adequate supply of power. Lack of any of these facility can cause serious damages to the firm's value chain process, that is, to the production, consumption and distribution of the products of small and medium entrepreneurs, who already face problems of lack of finance, inadequate marketing facilities, technological obsolescence, etc. Some of the major problems faced by small scale entrepreneurs with respect to infrastructure are:1. Inadequate infrastructural facilities creates the problem of acute shortage of basic raw materials, especially those which are scarce and need to be imported from distant places, needed by small and medium scale enterprises. 2. Small and medium scale entrepreneurs find it difficult to distribute their products to the markets which are located at far off places because of incomplete construction or nonexistence of basic roads/ highways. 3. Lack of proper airways and waterways facilities also restricts the growth prospects of those medium/small scale firms whose target market is located abroad. 4. Small and Medium scale enterprises face shortage of power supply, due to which they are unable to make full utilization of plant capacity. Most of them find it difficult to install their own power generating plants, so as to ensure their uninterrupted operations, due to lack of required funds. 5. Most of them are located in rural areas or remote areas of the country, due to which they find it difficult to communicate with people outside the region. This is because of nonexistence of proper telecom network.

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Hence, small and medium scale entrepreneurs continued to face the problem of infrastructure bottlenecks in terms of presence of inadequate transportation facilities, low/ no access to sound power supply, lack of proper communications channels, inadequate marketing facilities, lack of funds, etc. All this affects the long run profit earning capacity of such entrepreneurs as well as inhibits the chances of survival of enterprises run by them. Technology: Majority of the small scale units use old techniques of production and outdated machinery and equipment. Upgradation of the technology and achieving economies of scale is one of the major problems facing the sector. They cannot afford new machines and equipments and are therefore not in a position to use the latest techniques of production. They do not find it possible to conduct research and development on a continuing basis. Therefore, productivity and quality in small scale firms tends to be low while unit cost of production is generally high. But with liberalization of the economy, the MSMEs are facing stiff competition from imports and need technological upgradation in order to produce better quality products at cheap rates. As far as sourcing technology is concerned, small businesses face the following three essential problems: Obtaining information about technology is the first important issue. For most of them, information about available technology options is through word of mouth or from a visit to an advanced unit. Few have access to technical literature, professional journals or information about new product launches. But with the advent of internet, new vistas are opening up through electronic journals, catalogue downloads and advanced search facilities. Actual procurement of the technology is the next important issue because even if information is obtained, there are barriers to import of technology and other problems relating to technology transfer, vendor capability, after sales support, import procedures, etc which impede procurement.

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Acquiring finance for technology upgradation is also a problem. Small enterprises generally look to external sources of funding for upgrading technology as withdrawing money from business entails its own costs. With a view to foster the growth of MSME sector in the country, government has taken up several initiatives: ISO 9000/14001 Certification Fee Reimbursement Scheme was introduced in order to incentivise technological upgradation, quality improvement and better environment management by the MSEs. The scheme provides incentive to those small scale/ ancillary undertaking who have acquired ISO 9000/ISO 14001/HACCP certifications. In order to reduce the cost of funds, a scheme called Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation in Small Scale Industries has been put into place. It aims at facilitating technology upgradation by providing upfront capital subsidy to small scale industry units, including tiny, khadi, village and coir industrial units, on institutional finance (credit) availed of by them for modernisation of their production equipment (plant and machinery) and techniques. National Manufacturing Competitiveness Programme (NMCP) has been launched by the government in order to help MSMEs improve their competitiveness. The schemes under this Programme are aimed at addressing the technology/quality upgradation needs of the sector, mainly in the public-private partnership mode.

Small Industries Development Bank of India (SIDBI) in collaboration with United Nations-Asian Pacific Centre for Transfer of Technology (UN-APCTT) had established Technology Bureau for Small Enterprises (TBSE) to bring synergy between Technology and Finance for Small and Medium Enterprise (SME) sector. The objectives of the company are to: 1. provide professional services for technology transfer in order to enhance market competitiveness of small and medium enterprises and promote sustainable development. 2. maintain and provide data base on technology options available from different countries.

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3. provide micro small & medium enterprises information on sources of technology and means of accessing them. 4. provide background information on technology seeking enterprises to technology suppliers and collaborators. 5. identify business partners willing to collaborate and extend support to tie up financial assistance and other requirements such as drafting agreements, obtaining various approvals and preparation of business plans required for transfer of technology. 6. provides financial syndication through banks and financial institutions.

Besides, National Small Industries Corporation Ltd. (NSIC) has taken up an initiative to enhance technology options for small scale industries. An ISO 9001 certified company, it has been working to fulfill its mission of promoting, aiding and fostering the growth of small scale industries and industry related small scale services/business enterprises in the country. Over a period of five decades of transition, growth and development, NSIC has proved its strength within the country and abroad by promoting modernization, upgradation of technology, quality consciousness, strengthening linkages with large medium enterprises and enhancing exports projects and products from small industries.

Also, Small Industries Development Organization (SIDO) has set up 10 Tool Rooms and Training Centres in the country in order to assist small scale units in their technical upgradation by providing good quality toolings. Further, in order to facilitate investments for technological upgradation and higher productivity in the micro and small enterprises, the phased deletion of products from the list of items reserved for the exclusive manufacture by such enterprises is being undertaken. Taxation: High tax rates are one of the major reasons for firms to drift into the informal economy. This holds for the countries all over the world, including developed countries. These effects are compounded by high compliance costs for small firms to deal with tax laws and other forms of

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government regulation. This is a specific size-related disadvantage compared to large-scale firms, which have not only the necessary accountants, but also frequently, also in-house tax and legal advisors. Compliance costs have monitory implications (such as paying tax advisor fees or salary payments to personnel dealing with tax issues); time cost implications (in the form of time spent by a taxpayer to handle tax issues), and physiological cost (in terms of anxiety, stress and apprehensions related to possible mistake or a possible audit by the tax authorities). The Department of Revenue in collaboration with MSME Associations (including CII) shall organize seminars and workshops on Goods and service tax (GST), with special sessions for MSMEs, for wider debate and allaying the apprehensions of the MSMEs about GST. MSME Associations will take steps to guide their members in the facility of e-filing of IT returns through interactive workshops. Conclusion: None of these measures will work unless their implementation status is monitored regularly at the highest level. The issues are simply too diverse to be handled by a single line Ministry. MSME organizations accordingly recommends the establishment of Prime Ministers Council on Micro and Small Enterprises in the Prime Ministers Office which may oversee implementation of these recommendations on a half yearly basis. The Ministry of MSME shall be the servicing arm for the Council. Reference: Websites: 1. 2. 3. 4. 5. http://business.gov.in http://msmementor.in/MSME_Sector_India.asp http://msme.gov.in/ http://www.rbi.org.in/home.aspx http://msmefoundation.org

Reports: 1. 2. 3. 4. 5th census MSME sector MSMEs in India_Issues and Possibilities in Times of Globalisation Report of the Task Force on Micro, Small and Medium Enterprises MSME Annual report 2011-12

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BUSINESS AND GOODWILL


MS. ANJALI AGARWAL

Section 27 of the Indian Contract Act, 1872 specially provides that every agreement by which anyone is restrained from exercising a lawful profession1, trade or business of any kind, is to the extent void. Section 27, does not draw any distinction between partial (reasonable) and complete restraint. Thus whether the agreement imposes a total restraint, e.g., it says that A shall not carry on a trade anywhere in the country during his lifetime, or it imposes a partial restraint requiring A not to trade with a certain area or for a certain duration, the contract is void. Point to be noted in this regard is that in India even reasonable restraint are void unless they fall under two kinds of exceptions that are upheld, first category is of this which are specifically mentioned in the statues and the second is of those which are created by the judiciary by its judgements. It is quite pertinent to note at this juncture that the Indian Contract Act owes its origin to the English Contract Act where contracts in restraint of trade are upheld if the degree of restraint is reasonable. RESTRAINT OF TRADE: In India Agreements in Restraint of Trade are governed by Sec. 27 of the Indian Contract Act, 1872, which is enunciated as follows: "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." The assessment of these two tests of reasonableness is made against the facts and circumstances at the time the agreement was made not at the time the agreement is sought to be enforced or damages claimed for breach.
1

Pragji Soorji v. Parasullah Mullick, AIR 1922 PC 167:65 IC 271

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The onus of establishing that as between the parties, the restraint is reasonable, having regard to their respective interests, lies on the person seeking to rely on the restraint, and the onus of establishing that it is nevertheless contrary to public interest lies on the person who asserts it. The starting point is that restraints are contrary to public policy and, therefore, void unless in the special circumstances of the particular case: 1. The restraint is reasonable as between the parties. 2. The restraint is reasonable having regard to the public interest in competition. RESTRICTIVE COVENANTS The basic premise of this article revolves around service contracts, which are signed, between employers and employees and are generally termed as restrictive covenants. With regard to restrictive service covenants the position in India is that a restrictive covenant between master and servant operative during the period of employment is valid and enforceable. The reason given by the Apex court while upholding such a covenants is that it is reasonable and necessary to protect the employers interest. In the Indian law, a service covenants extending beyond the term of service is void2, where in similar cases; the English law would allow a restraint, which would be reasonable. Negative covenants operative during the period of employment when the employee is bound to serve the employer exclusively, are generally not regarded as restraint of trade and do not fall under Section 27 of the Indian Contract Act. The negative covenant is a contract of employment placing a restraint on the employee that he shall not serve in any competitors firm for two years at the place of his last posting after the employee left his first company. But a term restricting an employee from trade secrets and confidential information3 after ceasing employment can be enforced. The principle contention raised in this article is that even a post service restrictive convent, if reasonable, qualified and limited in operation both temporally and spatially should be taken as valid and enforceable alike any other covenant which is operative during the course of employment as it is necessary for the employers trade interest4.
2 3

As defined in .2(g) of the Indian contract act,1872 Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd , 1967 INDLAW SC 383 4 The Law Commission of India in its 13 report has recommended that 7 of the Indian Contract Act, 1872 should be suitably amended to allow such restrictions and all contracts in restraint general or partial, as were reasonable in

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EXCEPTIONS TO AN AGREEMENT IN RESTRAINT OF TRADE: There are many exceptions to the rule, some of them are created by statutes and some are arising from judicial interpretation of section 27. The exceptions are as follows: a) Sale of goodwill: One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein: Provided that such limits appear to the Court reasonable, regard being had to the nature of the business. b) Partnership: Under Partnership Act, partners of a firm may restrict their mutual liberty to do any trade other than within their firm. An outgoing partner may also be restricted from carrying on similar trade for a period of time. c) Trade Combinations: Companies doing business in the same field may regulate their trade practices for example opening and closing time of business even if they marginally put restraint. However, restrain on employment are not allowed in disguise of regulation. This was seen in the case of Kores Mfg Co Ltd v. Kolok Mfg Co Ltd5 where the Companies made an agreement that they would not hire anybody who has worked in the other company in past 5 yrs. The agreement was held void. d) Restraint upon employees: The restraint upon employees can be seen in the case of Niranjan Shanker Golkari v. Century Spinning and Manufacturing Co Ltd6- A company were offered collaboration by a foreign company on the condition that they will maintain complete secrecy. A person was employed in the company on the condition that he will not work for any other company in the same business for 5 years. SC held the agreement valid. But as my topic of research is sale of goodwill I will be dealing with it only. Sale of goodwill which is a statutory exception.

the interest of the parties time and a restraint imposed in order to give effect to such a contract would apparently be treated in the same way. 5 (1959) Ch 108: (1958) 2 WLR 858: (1958) 2 All ER. 6 AIR 1967 SC 1098

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What is Goodwill7? The first issue towards approaching this section is the definition of goodwill. 'The goodwill which has been the subject of sale is nothing more than the probability that the old customer will resort to the old place.' The definition cited above is of course the very simplistic and rather lay men meaning of what goodwill results in. It has been more elaborately defined in Trego v. Hunt by Lord Macnaughten as: 'Often it happens that goodwill is the very sap and life of the business, without which the business would yield little or no profits. It is the whole advantage whatever it may be , of the reputation and connection of the firm , which may have been built up by years of honest work or gained by lavish expenditure of money.' Goodwill is essentially an intangible asset of a firm accruing to it by the good conduct and business performance. Therefore it can effectively be defined as the benefits arising from connection and reputation of the business and is primarily an asset. It is intangible and rather difficult to identify per se. It is also difficult to specify when the goodwill takes existence and no business which commences possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. It has been held in the case of CIT v. B.C. Srinivasa Setty8 that the goodwill is affected by everything relating to the business , the personality of the owners, the nature and character of the business , its name and reputation , its location , its impact on the contemporary market and on the prevailing socio-economic ecology. Lord Eldon's observation in the case of Churton v. Douglas John.9 is a very important aspect of the meaning of goodwill, 'goodwill must mean every advantage -every positive advantage , If I may so express it as contrasted with negative advantage of the later partner not carrying on the business himself - that has been acquired by the old firm in carrying on its business , whether connected with the premises in which the business was previously carried on, or with the late firm , or with any other matter carrying with it the benefit of business.'
7 8

As defined in 55 of The Indian Partnership Act, 1932. [1981] 128 ITR 294. 9 (Eng.) 174

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It is the public approbation10 which has been won by the business, and that is considered as a marketable thing it is the probability of the customers or clientele of the firm resorting to the person or persons who succeed to the business as a going concern. In Laxmidas v. Nanabhai11 , the question was regarding maintainability of a suit and counter claims. The essential reading regarding Section 55 was laid down as ' Goodwill is a part of the assets of a firm. The prima facie12 rule is that the goodwill of the firm being a part of that assets has to be sold just like other assets before the account between the partners can be settled and partnership wound up.' But no particular reference to goodwill which is only one of the several assets of a firm in a plaint for taking accounts of a dissolved partnership is required. Similarly the existence of goodwill is an asset of the firm , which has to be sold and the proceeds divided between the partners in the account taking is no bar to the conversion of a counter claim into a plaint in a cross suit is not easy to comprehend. What is therefore seen is that goodwill like any other asset can be sold at the time of dissolution. The most relevant judgement on this section has been the case of Khushal Khemgar Shah & others v. m/s Khorshed Banu Dadibar13. The facts of the case read as follows, Dadiba Boatwalla was one of the eight partners of m/s Meghji Thoban & co. Boatwalla died and by virtue of clause 8 of the deed of partnership; the business of the firm was continued by surviving partners. Now, his widow and son obtained the letter of administration and commenced an action in the High Court. This was resisted by the surviving partners and the High Court held that the plaintiff (widow and son) were not entitled to an account of profits and losses after the death of Boatwalla. However the court held that the plaintiff was entitled to 6% interest per annum on Boatwalla's share including the goodwill. In return the defendants appealed again, contending that the plaintiffs as legal representatives were not entitled to a share in the goodwill. The reason being that the goodwill may be taken into
10 11

'Approbation ' was one of the original meaning of goodwill before it was used as commercial slang. AIR. 1964 SC 11: [1965] 1 SCJ 1 12 (Latin) A legal presumption which means on the face of it or at first sight. 13 [1970] 3 SCR 689

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account only when there is dissolution of the firm and in any event because Boatwalla had already agreed the interest on goodwill would cease on his death and the business would be continued by the surviving partners. The Supreme Court through Justice Shah, opined that" 'Section 55 does not allow the interpretation, that, goodwill may be taken into account only when there is a general dissolution of the firm, and not when the representatives of the partner claim their share in the firm , which by express stipulate is to continue notwithstanding death of a partner. The provision deals with the concept and consequences of dissolution of the firm. The Act does not operate to extinguish the right in the assets of the firm of a partner who dies, when the partnership agreement provides that on his death, the partnership continues.' The court also laid down the guidelines of interpretation of the deed of partnership. 'The court must insist upon some indication that the right to a share in the assets is by virtue of an agreement; that the surviving partners are entitled to carry on business on the death of the partner to be extinguished. In the absence of a provision expressly made or clearly implied, the normal rule that the share of a partner in the assets devolves upon his legal representatives will apply to the goodwill as to other assets.' Sale of Goodwill: Although a restraint seeking to protect the convenantee14 against competition per se is not upheld in the case of other contracts15, a purchaser of a business is entitled to protect himself against competition per se on the part of vendor. a) As per Indian Contract Act 1872....? X agreed to become as assistant for 5 years to Y who was a Doctor practising as Delhi. It was also agreed that during the term of agreement X will not practise on his own account in Delhi. At the end of one year, X left the assistant ship of Y and began to practise on his own account. Referring to the provisions of the Indian Contract Act 1872. Decide whether X could be restrained from doing so?
14 15

11(2) of the Indian Partnership Act Vancouver Malt and Sake Brewing Co., Ltd. Vs. Vancouver Breweries, Ltd (AIR1934PC101, 150Ind. Cas.232)

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The previous answers has rightly quoted the provision of the Indian Contract Act, 1872 but wrongly explained it. Section 27 of the Act provides: - Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Saving of agreement not to carry on business of which goodwill is sold. Exception - One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business, therein : Provided that such limits appear to the Court reasonable, regard being had to the nature of the business. 'Any agreement/contract' which 'restrained the party' from exercising a 'lawful profession, trade or business of any kind', is to 'that extent void', if the agreement/contract which is restraining the trade or profession as in this case, then how that contract be legally enforced? No one can restrain X for doing his own professional practise independently. The contract between X & Y was void from inception itself as per provision of this section & cannot be legally enforced through the court of law. This exception deals with a class of cases which had a leading part in causing the old rule against agreements in restraint of trade to be relaxed in England. The rule apparently arose from a popular dislike of all combinations tending to raise prices, which may be compared with the agitation in America against the modern system of trust. It has been laid down in quite modern cases, as the governing principle, that no power short of the general law, not even the partys own bargain, should be allowed to restrain a mans discretion as to the manner in which he shall carry on the business16, and originally the rule was without expectations. In time, however, it was found that a rule so rigid and far-reaching must seriously interfere with transactions of everyday occurrence17, and from the early the 16th century onwards, restrictions for a time certain to prevent the seller of a business from competing with the buyer, were allowed. In the

16 17

Hilton Vs.eckersley(1856) 6 E&B 47. Nordenfelt Vs. maxim nordenfelt guns and ammunition co ltd [1891-94] All ER Rep 1.

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19th century, it was settled that a limit of time was not necessary, and contracts for the preservations of trade secrets were held to be outside the rule all together, and finally, the House of Lords declared that there was no hard and fast rule as such, at all. The question is always whether the restraint objected to is reasonable with reference to the particular case, and not manifestly injurious to public interest. This exception enables the purchaser of goodwill of a business to exact a covenant from the vendor of the business and has a limit as to area and as to time. This exception imposes a limit on the area when it provides that it can operate only when the restraint is within specified local limits. This provision, made when general restraints were void under the common law, appears very stringent when under that law, even worldwide covenants have been enforced as reasonable. The third limitation of this exception is that a restraint can operate only so long as the buyer or any person deriving title to the goodwill from him carries on a like business therein. This shows that the benefit of the covenant is assignable and available to the successor in the title of the covenantee. It also provides that the covenant is extinguished once the goodwill comes to an end. The kind of cases covered by this exception may be illustrated by a decision before the act. A covenant by the defendants on the sale of the goodwill of their business of carriers to the plaintiff not to convey passengers to and fro on the road between ootacamund and mettapalayam was not in restraint of trade. So, partial restraint is not really adverse to the interests of the public at large18. The covenant may be justified even when the business is in an embryonic stage. In Chandra kanta Das V parasullah mullick19, a covenantor running a ferry for only a few months in competition with a long established business of the covenantee was held to possess goodwill for the purpose of restraining him from carrying on that business for 3 years. One view is that in a case like Nordenfelt20, where the goodwill was sold by a company, but the restrictive covenant agreed by its managing director, the strict wording of this section should not deprive the covenantee of the benefit of the covenant given by the director21.

18 19

Auchterlonie vs. Charles bill (1868) 4 MHC 77. 48 IA 508. 20 [1891-94] All ER Rep 1 21 Gooderson (1963) 79 LQR 410.

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Limits of Restraint The agreement has to specify the local limits of the restraint. The seller can be restrained within certain territorial or geographical limits and the limits must be reasonable. Reasonableness of restrictions will depend upon many factors, for example, the area in which the goodwill is effectively enjoyed and the price paid for it.22 The seller can only be restrained from carrying on a similar business and also only for such period for which the business sold is actually carried on either by the buyer or by any person deriving title to the goodwill from him. Case laws:

a) Vancouver Malt & Sake Brewing Co v. Vancouver Breweries Ltd23


In this case the Appellants were Vancouver Malt and Sake Brewing Co., Ltd the appellants were incorporated under the Companies Act of British Columbia as a private limited company under the name of the Vancouver Malt and Sake Brewing Company, Limited and the Respondent was Vancouver Breweries, Ltd who purchased the business and goodwill of the appellants. In this case the appellant By virtue of the definitions contained in 5, Excise Act, and this licence authorised them to manufacture beer, ale, porter, lager beer and all other fermented liquor made in whole or in part from malt, grain or any saccharine matter. In point of fact, however, they had never brewed any liquor other than sake, Japanese liquor made from rice, and their plant was adapted to the manufacture of this liquor only. Their business was apparently confined to the Province of British Columbia, where the only permitted customer within the Province was the Government Liquor Control Board. The company entered into an agreement24 with another wine and beer manufacturing company Vancouver Breweries, Ltd by which it sold its business and goodwill of manufacturing wine and beer, but it did not give the other company the right to produce sake.

22

Damodar Laxman Lele v Kashinath Waman lele, (1906) 9 BOM LR 312; Dev Sharma v Laxmi Narain, AIR 1956 punj 49 23 AIR 1934 PC 101 24 As defined 2(e) of the Indian Contract Act, 1872

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The agreement was held to be devoid of any content. The only business in which the appellant was engaged was brewing of sake and the goodwill of its license so far as relating to sake was not included in the sale to the respondents. It had no goodwill to sell so far as regards the brewing of beer. Nothing has been sold. It is simply the case of the appellant undertaking to the respondent in consideration a sum of money that it will not for 15 years carry on a particular branch of business. If there was any sale, it was a sale by the appellant of its liberty to brew beer and a purchase by the respondent of protection against the possible competition of the appellant in the brewing of beer. Lord Macmillan then referred to the judgement of Lord Chancellor Birkenhead in McEllistrim v. Ballymacelligott Cooperative Agriculture & Diary Society25, that the respondents were not entitled to be protected against mere competition, and continued to say that covenants restrictive of competition which have been sustained have all been ancillary to some main transactions, and have been found justified because they were reasonably necessary to render that transaction effective. The seller can only be restrained from carrying on a similar business and also only for such period for which the business sold is actually carried on either by the buyer or by any person deriving title to the goodwill from him.

b) Nordenfelt v. Maxim Nordenfelt Guns and Ammunition co ltd26


This is a 19th century English case decided by the House of Lords. It defines the "blue pencil test" as a method for deciding whether contractual obligations can be partially enforced when the obligation as drafted in the contract has an element of illegality. In this case Thorsten Nordenfelt, a manufacturer specialising in armaments, had sold his business to Hiram Stevens Maxim. They had agreed that Nordenfelt would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way for a period of 25 years. The House of Lords held that: The provision prohibiting Nordenfelt from making guns or ammunition was reasonable.

25 26

(1919) AC 548,563 HL. [1894] AC 535

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The providing banning competition 'in any way' was unenforceable as an unreasonable restraint of trade. The question on severability was whether the reasonable restriction could be enforced when it was in the same contract as an unreasonable and unenforceable restriction. The court used the test of striking out (with a blue pencil) words containing unreasonable provisions would leave behind a contractual obligation that still made sense. If it did, then the amended contract would be enforced by the court. In this case, the unreasonable restraint was severable, and the court enforced the amended agreement that Nordenfelt for the next 25 years, would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way. Conclusion Despite availability of very scarce case law on the issue it can still be concluded, that the position on Section 55 is well settled and that goodwill is a saleable asset at the time of dissolution and renders certain obligations on part of both the buyer and the seller. The restraint under this section is similar to the one under Section 27 of the Indian Contract Act. The situation tackled by this section, is essentially one that falls within the exceptions of section 27. The said provision reads: 'One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein; provided that such limits appear to the court reasonable, regard being had to the nature of the business.' Litigation under this section would essentially involve determination of goodwill and thereafter the duties connected and to ensure that they are in 'consonance with the common understanding of mankind and the rudiments of commercial morality.' The underlying principle of this section is benefit of the buyer of goodwill which here is assured by a relative restraint on trade by the seller.

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DELEVERAGING A FARCICAL OR COGNIZANT REALITY?


MS. ENAKSHI JHA

CHAPTER I- INTRODUCTION1 Deleveraging in the most elementary form can be expressed as the exercise of reducing debt by selling off assets. Due to this very nature deleveraging has often been seen as a practice activated only during times of economic losses2. While this is most often the case, deleveraging can also prove to be very beneficial to a business as it prevents any further losses and can help leverage an already bleeding wound from hemorrhaging. Deleveraging hence can be defined as the process of repaying debts with the help of available assets to benefit an ailing financial burden or loss. In a more complicated and economically relevant context deleveraging refers to the reduction of the relative size of the assets to private equity. It is the process of reducing this ratio.
3

While private equity had seen its golden years, American Household Bubble burst and the

consequent recession arrested its robust growth. Hence the unavailability of private sources of equity generation hit the economy. Along with this while the financial sector in the private spectrum was seeing a catalyzing growth with credit to the private sector exceeding 110 % of the United States of Americas national GDP, there was the cycle of huge debts being undertaken by the private sector. Low savings were

1 2

Author Enakshi Jha , NALSAR University of law Batch of 2012- 17 Definition- Deleverage, Availabe at: http://www.investopedia.com/terms/d/deleverage.asp, (Last accessed on: October 13, 2013) 3 Newton, BNY Mellon Asset Management, A Perspective on Risk and Return in a Deleveraging World, Available at: http://us.bnymellonam.com/core/library/documents/knowledge/Viewpoints/sNewtonPOR.pdf, (Last accessed on: October 12, 2013)

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prominent and deficit spending characterized the economic atmosphere. When the American bubble burst and led to the reign of the catastrophic global financial crisis there was a huge need to let go off such assets to pay debts and this is where the essence of deleveraging lies. In todays troubled days deleveraging has been seen as the salvaging force of the economy. Aims and Objectives This paper seeks to analyze the aspects of deleveraging along with scrutinizing its success and failures by contrasting 4 different economies Spain, Weimar Republic, United States of America and Japan. This research paper attempts to answer the following questions 1. Is deleveraging a universal concept and can it be applied as a thumb rule to all economies? 2. What are the factors that determine the success of deleveraging? CHAPTER II- WHY WE NEED DELEVERAGING? When the economy is growing leveraging accompanies it and helps in financing of projects that would otherwise remain incomplete and unprofitable.4 On the other hand the same leveraging also shows its uglier side with a market downturn. There is a decrease in the value of the assets created and great pressure to repay the huge debt defaults. Deleveraging is needed to reduce the debts on the balance sheet of a leveraged arty to insulate it from market volatility. 5 Deleveraging is needed to raise cash to repay debts in a falling market. This can be done either by selling available assets or by increasing capital available. In certain situation both of which are viable6. This process can be a very tragic moment for a financial body as it is letting go of assets that could be exercised for credit creation to fund bigger projects. 7

Definition- Leverage, Available at: http://www.investopedia.com/terms/l/leverage.asp (Last accessed on: October 13, 2013) 5 Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustment , European Union Economic Papers, pp. 38, (April, 2013), Available at , http://ec.europa.eu/economy_finance/publications/economic_paper/2013/pdf/ecp477_en.pdf , (Last accessed on: October 13, 2013) 6 Adrian Blundell-Wignall, The Subprime Crisis: Size, Deleveraging and Some Policy Options, pp. 11, (2008), Available at http://www.oecd.org/daf/fin/financial-markets/40451721.pdf , (Last accessed on: October 14, 2013)
7

Paul Krugman, Debt, Deleveraging, and the Liquidity Trap: A Fisher MinskyKoo Approach, pp. 25, (February 2011), Available at http://www.frbsf.org/economic-research/files/PKGE_Feb14.pdf, (Last accessed onL October 11, 2013)

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At the national level deleveraging is measured according to the decline in the national Gross Domestic Product.8 Deleveraging at the national level is often accompanied by reducing public spending termed as an austerity measure and has been rejected in economies like the United States of America leading to the Occupy Wall Street Movement .As the Government attempts to reduce its debt it cuts down on its spending and the common man is the first and worst hit.9 Another common attempt is to supply more money into the market so as to ensure that there is more market liquidity thereby reducing the debt ratio. If not checked by the government this can unfortunately lead to hyperinflation in which the value of the money to buy a certain good reduces drastically due to an excess supply of cash in the economy. 10 This has not proved to be a very successful deleveraging process in counties like Chile11 and Zimbabwe. Often when the savings are increased to deal with debt and spending is limited both at the micro and macro level there is a decline in economic expansion, which proves further a recession. This thinking fuels that one mans spending is another mans income and when there is a massive saving drive, there is a lack of available liquid in the economy for any further growth thereby leading to a dwindling spiral. 12 While deleveraging is the consequence of a series of symbiotic economic transactions failing, it can also prove to bring salvation to an economy thereby making it rise and reach its potential in a period of six to seven years after the financial-crisis..
8

Mckisney Global Institute, Debt and Deleveraging : The Global Credit Bubble burst, (January 2010), Available at http://www.thefiscaltimes.com/sites/default/files/pdf/budget_MGI_debt_and_deleveraging01012010.pdf, (Last accessed on: October 11, 2013) 9 Mike Whitney, The Meaning of Austerity Measures in the Eurozone , (April 24, 2012) Available at http://www.globalresearch.ca/the-meaning-of-austerity-measures-in-the-eurozone, (Last accessed on: October 9, 2013) 10 Carmen M. Reinhart and Kenneth S. Rogoff , Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten , pp. 20, (December 9, 2012), Available at http://scholar.harvard.edu/files/brianapendleton/files/financial_and_sovereign_debt.pdf , (Last accessed on: October 15, 2013) 11 The Hyperinflation of Chile: Lessons for us all, Economic Policy Journal, (August 29, 2010), Available at: http://www.economicpolicyjournal.com/2010/08/hyperinflation-of-chile-lessons-for-us.html, (Last accessed on: October 13, 2013)
12

Matthew Whittaker, On borrowed time? Dealing with household debt in an era of stagnant incomes , pp. 14, (December 2012), Available at: http://www.resolutionfoundation.org/media/media/downloads/On_borrowed_time.pdf , (Last accessed on: October 11, 2013)

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CHAPTER III- TYPES OF DELEVERAGING PROCESSES Ugly Deflationary Deleveraging This process is usually characterized by the economy continuing to be in a pitiable state while the debt and income ratio improves. Here there is a fall in the prices of financial assets but due to the shrunk situation of the economy and individual incomes there is a reduction in the debt and income ratio. In the economy the private sector is failed to limit the manufacture of its good and services due to the lack of demand because of the unaffordability in the times of a financial crisis13. Liquidity is very low in these situations and as a result the private sector begins to shrivel up. This dismal situation is caused when financial institutions both at the micro and macro level calculate the real value of assets and the available money to repay debts in the market. When this is insufficient to service debts, deleveraging of this characteristic in undertaken.14 As reiterated in this paper there is a symbiotic relationship between the producer and consumer and when one of them reduces his share in this cycle the market is disturbed and in this situation it begins to shrink. It is the utmost responsibility of the Government fiscal policies to control this debt reduction to ensure it does not slow down the economic transactions at a very fast pace. This is when the governments try to implement their austerity measure plans15. In this process the spending of a consumer is further limited thereby reducing the capital available to the producer and overall it does not help the market. This causes a massive deflationary future for the economy and this process has been termed as the Ugly Deflationary Deleveraging process.

13

Ray Dalio, An In-Depth Look at Deleveragings, pp. 2, (February 2012), Available at : http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings--ray-daliobridgewater.pdf, (Last accessed on: October 15, 2013) 14 Supra note 5, at pp. 38-39 15 Supra note 9

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Beautiful Deleveraging This is a more pleasant example of deleveraging that is characterized by the reduction in debt and income ratios along with a growth in the economy. This is usually accompanied by an improvement in the prices of financial assets. 16Why is this so? It is possible due to the availability of liquidity in the market. The printing of cash in the market by the Government enables this. It provides for credit support and can thereby keep a check on the deflation in an economically hammered economy. Hence while the reduction of debt is carried on there is also circulation of liquid in the market hence ensuring the economy does not come to a halt.17 However in this process the value of the currency can reduce as compared to the prices in gold, yet this does not cause hyperinflation as the spiked reflation only merely reduces the deflation in the market.
18

This is possible however only when the amount of

cash (liquid) raised by the Central Bank is equal to the amount needed to neutralize the negative credit market collapse so that transactions are encouraged to help the economy. Ugly Inflationary Deleveraging This deleveraging process is accelerated by the over printing of currency in a country to neutralize deflation. Over monetization leads to the reduction in the value of the currency and can cause an ugly inflation in the economy.19 Making thing worse in such situations, the printing of cash is much later in the deleveraging process where markets are already subordinated and the excess printing later on can lead to a deflationary deleveraging. Due to the over printing of currency in the market, its value reduces and causes an inflation during such deleveraging. 20

16

Supra note 13, at pp.3

17

Dealing with debt, The Economist, April 10, 2012, Available at , http://www.economist.com/blogs/freeexchange/2012/04/deleveraging, (Last accessed on: October 12, 2013) 18 Dan Amoss, The Path to $10,000 an Ounce Gold: Revisited, (September 20, 2013), Available at http://dailyreckoning.com/the-path-to-10000-an-ounce-gold-revisited/, (Last accessed on: October 12, 2013) 19 Supra note 13, at pp. 3 20 Morgan Housel, Why its so much better than the great depression?, Daily Finance, April 24, 2012, http://www.dailyfinance.com/2012/04/24/why-its-so-much-better-than-the-great-depression/ , (Last accessed on: October 12, 2013)

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CHAPTER IV- ANALYSIS OF GLOBAL DELEVERAGING PROCESSES JAPAN The Private sector in Japan in 1989 faced a major bubble burst, which is similar to the one, faced by the USA due to the easy availability of loan. There was a decline in the prices of assets in Japan due to this. This led to a real credit crunch in the Japanese Markets to form an acidic bane of economic stagnation in Japan. This was followed by the rise of a Government fiscal expansion operation. Unfortunately this was a protracted affair and it was delayed due to the regulatory authorities of Japan. 21 Under the Basel Committee to which Japan was a signatory the bank ratio of capital to its risky assets was to be a minimum of 8 percent and it left no space for national economic fluctuations. With the fall of the Japanese stock markets there was a hand in hand falls in the cash available to banks as well.
22

This further made prices of property in Japan fall.

Unfortunately there was no printing of currency the central bank or Government. This prevented the nominal interest rates from being higher than nominal interest rates. When printing was undertaken also, it was a very minimal amount and for a limited period of times. This did not help the inflation problem and the burden remained in the economy. Continued deflation has burdened the Japanese economy. However in the private sector things have improved due to real growth and paying of debts (including the interests.)23 UNITED STATES OF AMERICA The USA market also faced a similar situation as faced by Japan in 1989. A household bubble burst along with the fall in share prices and major banks added to a bleeding federal cash reserve burdened with the price of waging multiple wars. Yet unlike the depression in America
21

Masaaki Shirakawa, and Shigenori Shiratsuka, The Asset Price Bubble and Monetary Policy: Japans Experience in the Late 1980s and the Lessons, pp. 396,416, (February 2001), Available at , http://www.quartetfest.ca/documents/4743/jap_bubble.pdf, (Last accessed on: October 13, 2013)
22

Gert Wehinger, Bank deleveraging, the move from bank to market-based financing, and SME financing, OECD Journal: Financial Market Trends, pp. 4, (2011), http://www.oecd.org/finance/financial-markets/Bank_deleveragingWehinger.pdf, (Last accessed on: October 13, 2013)
23

Kazuo Ueda, Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007 , pp. 13, (2011), Available at : http://www.cirje.e.u-tokyo.ac.jp/research/dp/2011/2011cf828.pdf , (Last accessed on: October 13, 2013)

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in the 1930s the economy has waged a better fight this time24. The credit for this is to be given to the Federal Reserve Bank of America that has pushed for the printing of cash to be circulated in the American economy. This has helped individual incomes rise and also lead to a growth although very minimal of the economy. This reflation of the economy has also ensured the reduction in debt by a small margin.25 Post 2009 due to the reflation made possible by the Federal Funding, for alleviating debt incomes have improved. This in turn has helped the credit markets and due to the presence of credit in the system the private sectors situation has improved. The treasury in the USA has been given credit of this successful deleveraging under which it provided money into the system.
26

Money was pumped in by pushing aggressive easing policies like pumping of money into

assets that were risky along with cutting rates at which credit could be borrowed. The Federal bank also bought agency-backed bonds to help this. Government bonds were also bought to pump money in the system until marginal growth rates became a little higher than government growth rates. 27 GERMANYS WEIMAR REPUBLIC While waging war in the 1918, Weimar Republic ended in heavy debts and this was to be repaid to the Allied forces in Gold. In the meanwhile the economy began to collapse. It was then that the country decided to print money to save itself. Unfortunately it was quite the opposite as there was an unchecked printing of cash and the value of the currency dropped. 28This was made worse by the rise in inflation due to fallen value of the currency especially with respect to gold. This did not help the debt in 1918-1920 as that had to repay in gold. However in 1922, any reparation debts were just stopped from repaying. As a result the currency further devalued and most investors chose to move their money away from banks and the national currency to

24

Dean Baker, The Housing Bubble and the Financial Crisis, pp. 73-74, Real World Economic Review, Issue no. 46, (2008), Available at: http://paecon.net/PAEReview/issue46/Baker46.pdf 25 David Wessel, Americas Grand Leveraging, Available at: http://online.wsj.com/news/articles/SB119690409370315239 , (Last accessed on: October 15, 2013) 26 Supra note 19, at pp. 7 27 Ray Dalia, An in-depth look at deleveragings, pp. 5, (February 2012), Available at: http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings--ray-daliobridgewater.pdf, (Last accessed on: October 11, 2013) 28 Ibid

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other safer sources.
29

This made the availability of liquid much tougher and to curb the same

money printing was increased by 1.2 trillion percent in this period. This led to a case of massive hyperinflation.30 The currency absolutely lost its value in this process. SPAIN Spain is another European country that is heavily indebted and due to its limited resource processing it was very badly hit by the 2008 bubble burst and fall of markets globally31. Although the deleveraging process has been comparatively smoother in Spain it is still classified to be an ugly deflationary deleveraging as Spain cannot monetize that is print its own currency to evolve into a beautiful deleveraging.32 This is due to Spain being a member of The European Union whose currency is decided as a union and not by individual nations. However the ECB has pumped in money to Spain by buying its government bonds. Yet interest rates are not as low for nominal growth to be bigger than the nominal growth rate. Along with this debt reduction in Spain are dependent on the austerity measures.33

29

Arguments for Deflation, Washington Blog, (September 22, 2009), Available at: http://georgewashington2.blogspot.in/2009/09/best-recent-arguments-for-deflation.html , (Last accessed on: October 11, 2013) 30 Financial Repression: Developing world deleveraging cycles and their market impact, Balentine, (February 3, 2013) http://www.balentine.com/2013/02/financial-repression-developing-world-deleveraging-cycles-and-theirmarket-impact/ , (Last accessed on: October 12, 2013) 31 Supra note 5, at pp. 18 32 Supra note 8, at pp. 26-27 33 Deloitte Survey Report, 2012, Capital Gain, Asset Loss: European Deleveraging, pp. 12, Available at: http://www.deloitte.com/assets/DcomUnitedKingdom/Local%20Assets/Documents/Industries/Financial%20Services/uk-ind-fs-bank-survey.pdf, (Last accessed on: October 14, 2013)

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CHAPTER V- IS DELEVERAGING A UNIVERSAL PROCESS OR IS IT AN INDEPENDENT PROCESS FOR EVERY ECONOMY? While it may be unfair to state that deleveraging is a universal process that is uniform across the world, it must be noted that in a modern global economy such as ours, every individual economy is interrelated and this makes the process of deleveraging spread across individual economies. After the recent 2008 bubble burst there has been a huge debt crisis across the globe ranging from Dubai to Iceland to the USA and Greece. Another common aspect of the same is that post the 2008 crisis, most indebted economies are only in their early stages of deleveraging and in most countries such deleveraging has been seen first at the household or micro level and later at the national or macro level.
34

Most

economies have faced a liquid crunch along with fall in the prices and value of financial assets that has left many unemployed and millions homeless. This has been accompanied by austerity measures that have not been applauded by the people. Hence it would be safe to say that while deleveraging has common stages in the process along with a few unifying factors that are determined by global economic transactions, it is not a uniform process across the world.
35

However most world leader have tried to get together to protect their economic interests yet

most countries are far from reviving their economic growth. The other side of this coin advocates that deleveraging is an economic centric process which is determined merely by the dealing and economic structures of the country while keeping in mind the primary debt reduction. 36This is what prevents deleveraging from being classified as a universal constant. This is dependent on an array of factors that are exclusive to the specific economy. The state of the banking system and the regulations undertaken by the banking system play a pivotal role in determining the deleveraging. 37While the weakening of the banking system in failing to recognize heavy but dismal corporate loans had led to a complete fall in major banks

34

Peter de Keyzer, Europes Deleveraging and its Political Aftermath , pp. 244, Larcier, (2012)Available at: http://peterdekeyzer.bnpparibasfortis.be/wp-content/uploads/2012/06/BankFinance-2012.pdf, (Last accessed on: October 15, 2013) 35 Roger Baetigg, Euro Crisis: Default, Austerity and Deleveraging, International Business Times, May 1, 2012, Available at: http://www.ibtimes.com/eurocrisis-default-austerity-and-deleveraging-693944 36 David Lipton, Resolving the Crisis and restoring healthy growth: Why deleveraging matters?, (November 12, 2012)Available at: http://www.imf.org/external/np/speeches/2012/111212b.htm , (Last accessed on: October 14, 2013) 37 Supra note 5, at pp. 6

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and stock markets leading to a sad deleveraging, some banks like in Sweden have nationalized and the government has taken over bad loans to help deleveraging.38 The austerity measures adopted by the country also colors the deleveraging process as it is determined by the debt reduction that is allowed after such reforms. While in countries like France and USA many health, education and pension fundings have been cut back there is still a variance due to the policies undertaken by the government in determining what constitutes an essential service that the state is bound to provide to its citizens. Belt tightening has varied due to the population and its demands along with the fiscal reserve of the individual nation.
39

Another

essential factor determining the individual success or failure of a deleveraging is the structural reforms undertaken by the government. In nations where the structural reform is cemented or evolved to improve foreign investment along with providing a regulatory structure to check the interest and flow of capital deleveraging is made easier as there is a reduction in the national debt. 40This however is tailored according to the nature of the national economy and its current needs and this cannot be exclaimed as a universal process. Structural reforms vary long these lines and can range

anywhere from reduction is stringent business laws in Spain to regulating business investments is the USA. Private investment in the economies can also encourage a more holistic deleverage but this is determined by the FDI laws and the nature of the economy. While the private sector is saving rather than investing in the current scenario,
41

it is upon the Government to make laws

more attractive while keeping in mind the fiscal reserve so as to attract private investment even if this is small in terms of investment capital. This too is determined according to the taxation and interest rate laws in the country along with the laws governing private government investment mergers which are different in every economy. 42

38

Carter Doughertey, Stopping the financial crisis: The Sweden Way, New York Times, September 22, 2008, Available at: http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=0 , (Last accessed on: October 13, 2013) 39 Supra note 8 40 Global Financing Report, Restoring Confidence and Progressing on Reforms, pp. 92, (October 2012), Available at: http://www.imf.org/external/pubs/ft/gfsr/2012/02/pdf/text.pdf , (Last accessed on: October 10, 2013) 41 Supra note, at pp. 10 42 Ibid

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Lastly and most importantly it would be erroneous to say that the current deleveraging is a uniform universal process as it is primarily determined by the national debt and the government surplus. While the GDP is determined to fall in the early stages of deleveraging it is upon the countrys fiscal policies to help support the GDP while repaying debts over a prolonged period. Hence the author advocates that while we must recognize the interwoven economic transactions between global economies it is erroneous to claim that this is a universal and uniform process of remedying the financial crisis.43 While the factors discussed above illuminate the individual needs of an economy they are also the factors that determine the success of a deleverage in the national economy. It is dependent on the time period and the quantity invested in the deleveraging. It is dependent on the debt reduction. Debt reduction as analyzed by the study of the economies discussed is determined by the period in which debt is to be reduced and the method and quantity of debt to be reduced. The available reserve and the laws influence this process along with the time period, which determines the long term and short-term evolution of the economy. While in the first stage of deleveraging there is a fall in growth and GDP, deleveraging success is consequently determined by the fiscal policies adopted after this stage.
44

Secondly the austerity measures

undertaken by the government determine the pace of the deleveraging. However the political and social circumstances must be kept in view while determining such economic policies. The availability of resources for such austerity measures determines the deleveraging in the country and is also dependent on the population of the economy and their subsequent liabilities.45 Thirdly debt monetization plays the most crucial role in deleveraging. Debt monetization refers to the printing of currency to encourage liquidity in the fallen markets to promote economic growth while repaying the debt. This monetization must be regulated strictly and

43

Steve Keen, Economics in the age of deleveraging, (February 2012), Available at: http://www.creditwritedowns.com/2012/02/economics-in-the-age-of-deleveraging.html , (Last accessed on: October 13, 2013) 44 David A. Dodge, Deleveraging: The Bumpy Road Ahead , (September 27, 2012), pp. 4, Available at: http://www.bennettjones.com/uploadedFiles/News_and_Events/Conferences/Sept%20%2027%20Powerpoint%20% 20CFA%20Vancouver.pdf, (Last accessed on: October 14, 2013) 45 Supra note, at pp. 1

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controlled in short term phases so as to control the value of the currency and check the inflation in the economy. Debt monetization is helpful provided it is pre determined and calculated to only ease the economic growth and not to devalue the currency of the economy as this will only further increase the debt.46 Not often but available is the transfer of wealth from the haves to the have nots. While this is strong resistance from this method of reducing debt and often it is not the most pragmatic way forward as the wealthy in most nations also from the role of policy makers and put their selfish interests above those of the economy and the masses financial circumstances. Advocating that often increase in luxury taxes and increase in taxation rates over a high income frustrates the potential to promote the limited available investment capital it is resisted and fails to improve the debt of the national economy.47

46

Doug Nolan, The Myth of Deleveraging, Asia Times, October 16, 2012, Available at: http://atimes.com/atimes/Global_Economy/NJ16Dj01.html, (Last accessed on: October 13, 2013) 47 More on New Zealands Deleveraging, February 10, 2011, Available at: http://www.macrobusiness.com.au/2011/02/more-on-new-zealands-deleveraging/, (Last accessed on: October 14, 2013)

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CHAPTER VI- CONCLUSION Hence while this paper has attempted to bring about the anatomy of a deleverage and its practical implementation in the four countries analyzed it elucidates that for deleveraging to be successful and for the markets to improve the responsibility of reducing debt lies not only on the national government but also on the private sector which is a major stakeholder. Also deleveraging at the household level can help reduce the debt burden in the primary stages. The public sector deleveraging can work only after there is some economic growth that is facilitated by the private sector. This ensures that even in times of indebtedness there is no shut down of economic transactions. However it is extremely risky to have public and private deleveraging happening at the same time. This is because the risk of the private sector is shifted to the government who has the responsibly to absorb this debt while reducing other public spending. This in turn slows down the GDP and does little to improve the situation. It can lead to a sovereign default as seen in Greece. Hence its should begin with the households followed by the private sector and ultimately transcend to the public sector in order to pull a successful deleveraging. This should then be followed by structural reforms that look to cover the chances and gaping holes in the economic model to prevent massive financial crisis in the future while engineering the policies need to reduce debt over a period of time.

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THE MOST FAVOURED NATION PRINCIPLE


MS. ISHANI ACHARYA AND MR. RAHUL DAS

Abstract:With the rise and increase of globalization, trade has become one of the determining factors for assessing relations between nations. This trade is called the International Trade Law. One of the core areas of this field is the International Investment law. An MFN clause in an investment treaty, which is the usual way of carrying out trade transactions between nations, is an obligation put on each state, who is signatory to a treaty, that neither of the states shall give investors from any third state any favorable treatment than the other states who have been signatories to a treaty. This article is an attempt to explain the relevance and significance of a MFN clause in the scenario of International Investment Law and the exceptions to it. INTRODUCTION:One principal aspect of globalization is the emergence of a global economy in which goods, services and capital progressively cast off territorial ties and circulates increasingly freely across borders. As a corollary, economic activities in a global market bring about the need for legal regulation beyond national borders in order to structure and protect cross-border economic exchange and enhance cooperation. This accounts for the emergence of a growing body of international economic law that encompasses international trade law, international monetary law and international investment law and thereby provides a legal backbone for the global economy. 1 In such a scenario, it is very crucial to protect these international investments to facilitate free trade leading to economic growth and development. The international protection of investments

Stephan W. Schill, Mulitilateralizing Investment Treaties through Most-Favored-Nation Clauses, 27 Berkeley J.

Intl L, 497, 2009.

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is concerned with the safeguarding of foreign investments against interference by the host state.2 The nature and special risks involved in the international investments which involves long duration and capital makes it distinct than the ordinary trade laws. Since, we know that the foreign investor starts falling under the regulations of the host country, once he has done the necessary investments, it is very important to provide him with remedies as a means of protection. But at the same time, the host countrys interests are also to be protected. So, here there has to be a balance as to how protection and justified protection of the foreign investor and at the same time, not interfering in the host countrys sovereignty in employing legitimate regulations. The desire to attract foreign investments had led most countries to frame policies by creating a favourable investment climate. And one of the main ingredients of these policies is the remedy available to the foreign investor. These remedies include both the host countrys internal remedies and international legal guarantees in the form of BITs and multi-lateral investment treaties. The Most-Favoured-Nation (MFN) treatment is a standard of protection (dealt in subsequent Chapters) is a core element of modern BITs.3 Like many standards of investment protection offered under BITs, it is designed to avoid discrimination.4 We can say that MFN treatment standard is a typical substantive commitment of modern international economic law.5 An MFN clause in an investment treaty is basically an obligation put on each state who is signatory to a treaty that neither of the states shall give investors from any third state any favorable treatment than the other states who have been signatories to a treaty. If more favorable treatment is provided to investors from a third state, an obligation arises to provide equivalent treatment to those investors benefiting from the MFN clause.6 The said clause ensures equal

2 3 4

Schreuer, Christoph, Investments, International Protection; page 1 Dolzer, Rudolf; Schreuer, Christoph; 2008; Principles of International Investment Law; page 186. Such as the National Treatment (NT) standard and the Fair and Equitable Treatment (FET) standard. Levent, TDM 3 (2011), Intersections: Dissemblance or Convergence between International Trade

5Sabanogullari,

and Investment Law


6

Stephan W. Schill, Multilateralizing Investment Treaties Through Most-Favored-Nation Clauses, 27 Berkeley J.

Intl L. 496, 502 (2009)

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treatment and also aims to curtail down disputes arising from issues concerning Foreign Investment. It is a means of curbing any sort of discrimination or prejudice in any given market. The modern day trade is synchronized by the International Investment law, which is characterized by fragmentation. This fragmentation is mainly because of the diversity in the terms and conditions of the trade agreements or treaties between different countries. And there is no unified multi-lateral treaty or any customary international law. Therefore, States incorporate a clause which strives to achieve uniformity- the MFN clause.7

SOURCES OF INTERNATIONAL INVESTMENT LAW:The major sources of international investment law are: Multilateral Treaties:The first efforts to create multilateral treaties for investments dates back to 1950s-60s. Between 1995-1998, the Organization for Economic Co-operation and Development (OECD) launched a new initiative to establish a Multilateral Agreement on Investment (MAI). There were several other attempts to create multilateral investment treaties which all failed. Even on the regional level, there was North American Free Trade Agreement (NAFTA) in 1992.8 However, most of the important things covered in these treaties are covered by the BITs. Bi-lateral Investment Treaties:The most important source in contemporary International Investment Law is the BITs. Today, international investment law is enshrined in over 2500 bilateral investment treaties.9 BITs are designed to provide guarantees for foreign investors from the respective countries. They typically contain certain definitions like investors and investments. It also contains certain other guarantees in the form of fair and equitable treatment (FET), national treatment

7 8 9

Tony Cole, Boundaries of Most Favored Nation Treatment, 33Mich. J. Intl L. 538 (2012) Schreuer, Christoph, Investments, International Protection; page 3 Stephan W. Schill, 2009, BERKELEY JOURNAL OF INTERNATIONAL LAW; Mulitilateralizing Investment

Treaties through Most-Favored-Nation Clauses, 27; 498

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principle, guarantee of full protection and security and the principle which is the scope of our discussion, i.e., the Most-Favoured Nation Principle, etc. Customary International Law:Customary international law plays an important role in investment law. It sets international minimum standards for the treatment of aliens which is relevant in a number of contexts including denial of justice. State responsibility is another important area. Nationality of individuals and corporations are important in determining applicability of treaties. 10 Investors and Investments:Investors may be both individuals and companies. An individuals nationality is determined by the law of the country whose nationality is claimed while the nationality of a corporation is determined by the place of its incorporation. Investment usually involves the use of capital, technology and managerial skills and intellectual property.

MOST FAVOURED NATION TREATMENT: A STANDARD OF PROTECTION:The MFN treatment standard is a core element of modern Bi-lateral Investment Treaties (BITs)11. An MFN Clause is contained in every BIT. It is also reflected in Art 10(3) and (7) Energy Charter Treaty and in Art. 1103 NAFTA.12 Like many standards of investment protection offered under BITs, it is designed to avoid discrimination.13 As already mentioned above, the objective of a MFN clause is simply put to provide a mechanism to ensure that the relevant parties do not treat each other less favourable than the treatment offer by them to third parties. As soon as the State confers a relevant benefit, it is automatically extended to the State in whose favor the MFN Clause operates. An MFN Clause, generally, applies to all matters falling within the scope of the treaty containing the Clause. However, the exact scope of the MFN Clause depends upon the wordings and the precise right granted to the investor.
10 11 12

Schreuer, Christoph, Investments, International Protection; page 4 Schreuer, Christoph; 2008; Principles of International Investment Law; page 186. http://www.univie.ac.at/intlaw/wordpress/pdf/investments_Int_Protection.pdf (last accessed on 13th September,

2013)
13

Such as the National Treatment and the Fair and Equitable Treatment principle.

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The MFN treatment provision has the following main legal features14: It is a treaty-based obligation that must be contained in a specific treaty. It requires a comparison between the treatments afforded to two foreign investors in like circumstances. It is therefore, a relative standard and must be applied to similar objective situations. An MFN clause is governed by the ejusdem generis principle, in that it may only apply to issues belonging to the same subject matter or the same category of subjects to which the clause relates. The MFN treatment operates without prejudice to the freedom of contract and thus, States have no obligation under the MFN treatment clause to grant special privileges or incentives granted through a contract to an individual investor to other foreign investors. In order to establish a violation of MFN treatment, a less favourable treatment must be found, based on or originating from the nationality of the foreign investor. There are generally four types of MFN clauses that appear in bilateral investment treaties 15:(1) Clauses that explicitly affirm they are intended to apply to dispute settlement provisions. (2) Broad Clauses that refer generally to all matters, all rights, or treatment, without express mention of dispute settlement provisions. (3) Narrow Clauses containing non-exhaustive lists that make no specific reference to dispute settlement provisions. (4) Clauses expressly prohibiting application to dispute settlement provisions.

There are any numbers of cases that have come up before International Centre for Settlement of Investment Disputes (ICSID) but out of them the most landmark is Maffezini v. Kingdom of Spain16. The case stood up as a result of a treatment offered to Mr. Maffezini from Spanish
14

United Nations Conference on Trade and Development; 2010; Most-Favoured-Nation Treatment; UNCTAD

Series on Issues in International Investment Agreements II; page 13-14.


15

Stephanie L. Parker, 2012, American University Washington College of Law, A BIT at a Time: The Proper

Extension of the MFN Clause to Dispute Settlement Provisions in Bilateral Investment Treaties, vol 2.
16

Emilio Agustin Maffezini v. Kingdom of Spain (ICSID No. Apr/97/7), Decision on Jurisdiction of 25 January

2000 and Award of the Tribunal of 13 November 2000. (www.worldbank.org/icsid/cases)

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entities with regard to the production and distribution of chemical products. And the Spanish government argued that he hasnt exhausted the local remedies. To which, Mr. Maffezini argued that the MFN clause in the Argentine-Spain BIT would allow him to invoke Spains acceptance of ICSID arbitration contained in the Chile-Spain BIT and that none of the exceptions from MFN in the Argentine-Spain BIT applied to the dispute settlement provisions at issue in the case. The MFN Clause the claimant had the right to import the more favourable jurisdictional provisions of the 1991 Chile-Spain Agreement and, as a result, to resort to international arbitration without being obliged to submit its dispute to Spanish courts for a period of eighteen months beforehand. The judgement was in Mr. Maffezinis favour and it was held that MFN Clause can also extend to procedural and jurisdictional aspects. The other side of the argument is that MFN clauses relate to the substantial protections afforded to investors and investments and that, therefore, their reach should not extend to procedural issues such as dispute resolution.17 In Salini Costruttori and Italstrade v. Jordan-Argentina (2004)18, where under the Jordan-Italy BIT, there was an alleged non performance of Jordans obligations under a dam construction project. There was a more advantageous provision in Jordon-US BIT, which provided for approach to the ICSID whereas in the Jordon-Italy BIT, it was said contractual disputes were governed by the dispute settlement provisions of the contract. The ICSID held jurisdictional issues in favor of Salini but also held that as far as the dispute settlement issue is concerned, it cannot avail this. EXCEPTIONS:The GATT provides certain exceptions to the Most- Favored Nation obligation which can be categorized under the following heads:

Regional Integration (GATT Article XXIV): GATT Article XXIV provides that regional integration may be allowed as an exception to the MFN rule only if the following conditions are met.

17

http://kluwerarbitrationblog.com/blog/2011/07/25/most-favoured-nation-clauses-%E2%80%93-no-favoured-

view-on-how-they-should-be-interpreted/ (last accessed on 14th September, 2013)


18

Construttori S.p.A. and Italstrade S.p.A. v. the Hashemite Kingdom of Jordan, (ICSID Case No. ARB/02/13),

available at www.worldbank.org/icsid/cases/awards.htm

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(i) Tariffs and other barriers to trade must be eliminated with respect to substantially all trade within the region. (ii) The tariffs and other barriers to trade applied to outside countries must not be higher or more restrictive than they were prior to establishment of regional integration. However, some have criticized this provision as being ambiguous which has allowed some very loose preferential arrangements to exist and thus it has become a major loophole.19

Generalized System of Preferences (GSP):-

The GSP is a system that grants products originating in developing countries lower tariff rates than those normally enjoyed under Most-Favoured-Nation status as a special measure granted to developing countries in order to increase their export earnings and promote their development. The GSP has the following characteristics. (i) Preferential tariffs may be applied not only to countries with special historical and political relationships, but to developing countries more generally. (ii) (iii) The beneficiaries are limited to developing countries. It is a benefit unilaterally granted by developed countries to developing countries.

Non-Application of Multilateral Trade Agreements between Particular Member

States (WTO Article XIII):This applies when a country does not want to enter into relations with a particular country due to political or other reasons. In the case of non-application, benefits enjoyed by other Members are not provided to the country of non-application, which leads to results that are contrary to the most-favored-nation principle but are consistent with the ground realities of geopolitics.

Other Exceptions:-

Other exceptions relate to various provisions of GATT such as Article XX regarding General Exceptions for measures necessary to protect public morals, life and health, etc., and Article XXI

19

K. Dam, Regional Economic Agreements and General Agreement on Tariff and Trade, Legacy of

Misconception, (1963), University of Chicago Law Review 615

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regarding Security Exceptions. Under WTO Article IX: 3, countries may, with the agreement of other contracting parties, waive their obligations under the agreement.

CONCLUSION:International Investment is one of the most vibrant areas of International Law today. With the burst of economic activities in the modern day, there are numerous issues faced by both the investors, i.e., from the capital exporting country as well as the host capital importing country. The contribution of the international investment tribunal is quite significant. The standards of protection have also improved and form a basic pillar of any investment treaty. The MFN clause, being one of the most important forms of protection, must be used to its proper and full potential, both by tribunals and by treaty drafters. To remove uncertainties and ambiguity, States should clarify the scope of the MFN clauses contained in their BITs. They may elucidate their pose by additional documents. In the future, States may choose to expressly outline the ambit of the MFN clause in the treaty itself. To continue to encourage and increase the flow of foreign direct investment, however, continued favorable treatment towards investors is absolutely necessary. The MFN clause should therefore be treated as a valuable tool that ensures that investors receive the highest available level of treatment. An ideal MFN clause is when it provides investors with the protection they want, and States with the flexibility they need20.

20

Stephanie L. Parker, 2012, American University Washington College of Law, A BIT at a Time: The Proper

Extension of the MFN Clause to Dispute Settlement Provisions in Bilateral Investment Treaties, vol 2.

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STRUCTURED SETTLEMENTS
MS. NEHARIKA SOBTI

Introduction James Walter worked in a computer factory and was standing on a ladder installing new hardware for the company. When he slipped and succumb to an untimely death the court had ruled that the factory was negligible in his death. His wife Diane instead of receiving a lump sum payment by the defendant, agreed on getting periodic payments under the system of structured settlement. The factories insurance company agreed to pay out for the next 30 years, $3,500 a month just above what Jonathon was bringing in at the factory each month. Well, this classic case clearly brings out the notion of an undiscovered system of financial settlement which until now is mostly prevalent in the West blooming in the USA. Regarded as the greatest breakthrough policy initiative by the veteran Jerry Sullivan and the Congress great bipartisan framework of 1980s, structural settlement protects the needy from the greedy! Being a $6 billion business in the USA, lets dig a little deeper as to what is this unique system all about and what relevance it may have in countries like India. Meaning and Relevance Structured settlements are an innovative and voluntary agreement between the plaintiff (injured victim or his insurer) and the defendant to compensate the plaintiff by paying him a stream of tax free periodic payment specifically designed to meet the plaintiffs needs over a mutually decided specific period of time . Under a structured settlement, the injured victim doesn't receive compensation for his or her injuries in one lump sum. Rather, he receives an array of tax-free payments tailored to meet future medical expenses and basic living needs that provide them with ultimate safeguards to guarantee long term financial health to the victims harmed accidents. A structured settlement

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may be agreed to privately (for example, in a pre-trial settlement) or it may be required by a court order, which often happens in judgments involving minors. Reason behind its creation Historically, damages paid due to injury lawsuits were in the form of lump sum payment which was a problem for both the defendant as well as the plaintiff. The defendant had to arrange the huge sum immediately after the courts judgment which was taxed in the hands of the plaintiff and the plaintiff had no choice to accept the present sum irrespective of the future expense that injury would bring to him or his dependents .The major trouble was that the court while deciding the compensation only kept in mind the present claims like surgery or medical expenses but did not consider the after effects of such an injury would have on the plaintiff. Thus , provide a smart solution by incorporating the concept of Present value of future cash flows paid over a specified period of time, The Periodic Payment Settlement Act of 1982 , was formed that recognized and encouraged the use of structured settlements in physical injury cases. Features of Structured settlements Exempt from federal & state income taxes Tailored to the specific needs Meets ongoing financial needs of the victim or their dependents Protection against premature dissipation Caters to med claims , replacement incomes , non- qualified structures Guaranteed to arrive on time and in full Funded by a fixed annuity backed by insurance companies Understands the value of life using the concept of benefits Compensates the loss through amicably smart solutions Provides financial security at large Advantageous to both the victims & defense council Works for all sides of disputes Resolves intricate injury claims quickly

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Mechanism and Functionality The mechanism on which this system works is simple and party friendly. Unlike , the traditional settlement system , the plaintiff demands on receiving periodic payments over a specified time but doesnt rely upon the defendant creditworthiness and commitment to honor the promise to pay damages , rather he consents on a third party assignment company , usually an insurance company to become the sole obligator the dealing on the behalf of the defendant .The assignment company purchases the annuity policy which would name the plaintiff as the beneficiary but not the owner that implies that the plaintiff cannot delay, accelerate , pledge or alienate any right to any portion of the amount. Just like the old system, the defendant will make a single payment to settle the case, but not the plaintiff, but instead to the third-party assignment company. The assignment company receives the cash in exchange for its commitment and will make periodic payment to the plaintiff. In virtually every case, this third-party assignment company will be an affiliate of a major U.S. life insurance company engaged in writing annuities.The assignment company will use the cash it receives from the defendant to buy an annuity that will track the periodic payments to the plaintiff that are required by the terms of the settlement agreement. Thus, by now the defendant has paid all cash to settle the legal dispute. BUT the issue arises whether the amount received by the company is taxed on CASH basis or ACCRUAL basis periodically? To that end, income is considered constructively received by a taxpayer when it is set aside, may be drawn on, or is otherwise made available to the taxpayer. When a taxpayer has an unrestricted right to receive funds immediately, the taxpayer must recognize those funds as gross income. However, income is not constructively received when the taxpayers control over its receipt is subject to substantial limitations or restrictions, or, even if the taxpayer has released all conditions and restrictions, when the taxpayer receives only an unsecured promise to pay. But what if the plaintiff at some point of time wishes to receive the entire amount in a lump sum due to some unforeseen circumstances? This calls for yet another new jargon called the settlement factoring transaction under which the plaintiff gets the right to sell his structured settlement payments and receive them in a lump sum in order to meet their short term needs. An example would be the payment of personal injury damages over time instead of in a lump sum at settlement. The reasons are varied but can

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include unforeseen medical expenses for oneself or a dependent, the need for improved housing or transportation, education expenses and the like. To meet this need, the structured settlement recipient can sell all or part of their future periodic payments for a present lump sum. Many people who have obtained structured settlements through their personal injury or workers' compensation claims wonder if they should try to sell their settlement in return for a lump sum payment. This may be a relatively modest curiosity, piqued by an advertisement announcing "It's your money!" and promising cash payment. Or it may be based upon an immediate need for funds. However, selling a structured settlement is not always possible, and it is not necessarily an economically wise decision. Benefits of a structured settlement over a lump-sum payment A long-term structured settlement which is considered to be an intelligent and pragmatic solution offers a gamut of benefits both to the plaintiff, defendant and the third party also. It provides long term financial security by guarantying periodic payments over the time which enables the victim or his family to recover without spending time and resources determining investment strategies. Secondly, it provides 100 percent tax exemption of every structured settlement payment from federal and state income taxes. The federal government makes structured settlement financially appealing by exempting the payments on taxes, dividends, interest and capital gains along with rebated from being considered against Medicaid and SSI income limits. Thirdly, these structures are exceptionally flexible and can be designed for virtually any set of needs. Yet payments need not be in equal amounts. Someone who will need a new wheelchair every three years might elect to receive a larger payment every 36 months to help defray the cost. Structured settlement's inherent flexibility means that they are well-suited to compensate people for a wide variety of injuries. Yet, it also provides a major relief to the victim by protecting it from the short term risk and volatility by investing in policies. Suitability Structured settlements can be ideally suited for many types of cases, including: Persons with temporary or permanent disabilities; Guardianship cases that may involve minors or persons found to be incompetent; Workers compensation cases; Wrongful death cases where the surviving spouse and/or children need monthly or annual income;

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Severe injury, especially with long-term needs for medical care, living expenses and support of family; Independent surveys show that the more serious the injury, the greater the likelihood that a structured settlement will be used.

Statutory requirements to become a qualified assignment? In order to protect the public, Congress specified in Section 130 the requirements to establish a qualified assignment: The assignee assumes the liability from the defendant; Both the victim (and his/her attorney) and the defendant agree that the payment schedule cannot be "accelerated, deferred, increased or decreased"; The payment stream may be excluded from the recipient`s gross income for tax purposes; The injury must be a physical sickness or injury; and A highly secure funding asset (such as an annuity or U.S. Government obligation) must be used to fund the payments.

The Flip side Just like every dark cloud has a silver lining, structured payments are in its evolutionary stage and suffers from certain inherent limitations like Exorbitant Commissions The commission charged in setting up structured settlement exceeds the principal amount which leads to loss to the defendant. Inflated Value - Sometimes, after negotiating a particular settlement amount, the defense will overstate the value of a structured settlement. As a result the plaintiff, in accepting the settlement, in fact obtains a significantly lower dollar value than was agreed upon. Self-Dealing - There have been cases where the plaintiff's lawyer is also in the insurance business, and sets up a structured settlement on behalf of a client without disclosing that the attorney is purchasing the annuities from his own business, or is pocketing a large commission on the annuities or without disclosing that the financial planner will be paying the attorney a referral fee in relation to the client's account.

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Life Expectancy - Many people who receive large personal injury or workers' compensation settlements will have a shortened life expectancy as a result of their injuries, thus, ignorance of this facts leads to unnecessary longer payment cycle. THE WAY AHEAD The basic concept behind the use of structures or periodic payment is to provide long term sustainable protection for injured parties. This system hold great potential for solving scores of pending litigation cases involving not just physical injuries but also non-qualified settlements in populous countries like India where due to lack of accountability and proper governance the cases are pending since a decade long. Adoption of such a system will prove to be a win -win situation for both the judiciary and plaintiff a further will strengthen the system of insurance linked settlements in India. Thus, structured settlements if backed by adequate support of the judiciary and awareness amongst the masses will surely be a golden step in the history of finance.

Bibliography
1. The American Association of People With Disabilities 2. National Organization on Disability 3. Structured Settlement financial definition of Structured Settlement. Structured Settlement finance term by the Free Online Dictionary 4. "What a Life Contingent Payment Is". 5. www.indeed.co.uk/Structured-Settlement-Analyst-jobs-in-East-India-and 6. www.lexisnexis.com/store/catalog/.../productdetail. 7. www.forbes.com/sites/robertwood/2010

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A TAP AND A FUMBLE: LESSONS FOR INDIA IN THE GMR-MALDIVES FIASCO


MR. SIDDHARTHA SRIVASTAVA

INTRODUCTION The unilateral termination of the airport modernization contract between the GMR-MAHB consortium and Maldivian Government once again raised the contention of propriety and legality of the conduct of sovereign parties in a contract with parties off the shore of the mainland. The whole hysteria started when there was a change of guard in the island nation of Maldives and Mohammed Waheed became the new President. The apple of discord between GMR and the Maldivian government was that GMR had imposed an airport development charge at $25 per passenger and $2 per passenger insurance surcharge. Before the charge could be levied a local civil court in Maldives nullified the proposal. The earlier government of Maldives, headed by Nasheed agreed to compensate GMR against the levy. However, the new government headed by president Mohammed Waheed, arguing that contract was signed under dubious conditions and was void, everted this decision of the previous regime. The matter finally ended when Singapore Court of Appeal, which was acting as an arbitrator, superseded the Singapore High Court order and dictated that the government of Maldives has the power to do what it wants, including expropriating the airport. The court also acknowledged the fact that the wrongful taking of the airport would amount to an act of expropriation for which the respondent (GMR-led consortium) would be entitled to be compensated in accordance with the agreement. Now the issue stands that Maldives is a small island country with population less than half a million and GDP of around a billion dollars. On the assumption that the legal issue of compensation is resolved quickly, the Maldives government would hardly have the wherewithal

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to pay the compensation at one go to GMR, however reasonable the compensation may be. And if the court decides to award $800 million which GMR is claiming then one can be certain that Maldives government would be making EMI payments spread over a number of years. So there are certain lessons for prospective investors. Corporates must understand that the struggle for power and politics take precedence over markets and economics. So, they should not venture into countries where there is even some semblance of strife or even where there is the slightest possibility of same in the future. And if one is investing in such countries one should opt for political risk coverage insurance policy. In any case whatever be the levels of risks of operating in a foreign country, without exception the foreign operations must be insured against all political risks. In fact The Export Credit & Guarantee Corporation (ECGC) insurance policies are specifically designed for exporters for covering political risks. As the GMR-Maldives story unfolds, this is a high time for Indian investors to think about how to manage political and regulatory risks in transnational investment projects. Investors need to understand that economic environment is an integral part of political environment, so in the lure of making profits they must not dilute the concern for managing various political risks. In fact exploiting business opportunities in challenging environments is easier when one is prepared for the risks involved. Steel Magnate Lakshmi Niwas Mittal said Sometimes, the local governments may create a problem, but then we have to learn how to manage them. In other words, investors must learn to manage the various political risks associated with investment in foreign country. THE DISPUTE In June 2010, a tripartite agreement between the Maldives government, the Maldives Airports Company Limited (MACL) and GMR-MAHB Consortium was signed to develop and run the Ibrahim Nasir International Airport at Mal, the capital of Maldives. The process of privatisation of the Mal International Airport was conceptualised and implemented with MACL, being a 100% owned company of the government of Maldives, assuming the role of Grantor while the

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government remains as the Guarantor.1 Six consortiums GMR+MAHB, Reliance +ASA, Zurich+GVK, ADPe, TAV, Vienna+SNC Lavlin were pre-qualified to participate in the bidding process, which was conducted by International Financial Corporation (IFC), the private sector arm of World Bank, and three bidders GMR+MAHB, Zurich + GVK and TAV+ADPe submitted their bids from whom the final bidder, GMR+MAHB consortium was chosen.2 Under the terms of the contract GMR was allowed to levy an Airport Development Charge (ADC) on departing passengers, which was later turned illegal by the local Maldivian court order. In the absence of such charge the government allowed GMR to deduct the ADC revenues from the revenue share of the government. This charge would have been legalised if the countries Majlis would have approved the charge. But before this could happen, there was a change of guard in the island nation and Mohammed Waheed became the new President. The new government headed by president Mohammed Waheed, arguing that contract was signed under dubious conditions and was void, everted the decision of the previous regime of allowing GMR to deduct the ADC revenues from the revenue share of the government. The matter went to the Singapore High Court, which was acting as an arbitrator under the contract, who granted injunctive relief to GMR and stayed the unilateral termination of the contract. However, the Singapore Court of Appeal superseded the Singapore High Court order and dictated that the government of Maldives has the power to do what it wants, including expropriating the airport. The court also acknowledged the fact that the wrongful taking of the airport would amount to an act of expropriation for which the respondent (GMR-led consortium) would be entitled to be compensated in accordance with the agreement. Now the issue stands that Maldives is a small island country with population less than half a million and GDP of around a billion dollars. On the assumption that the legal issue of compensation is resolved quickly, the Maldives government would hardly have the wherewithal to pay the compensation at one go to GMR, however reasonable the compensation may be. And if the court decides to award $800 million which GMR is claiming then one can be certain that

Mihir Mishra, GMR-Maldives Row: Where the dispute lie, The Indian Express, December 07, 2012, Page no. 1, http://www.indianexpress.com/news/gmrmaldives-row-where-the-dispute-lies/1041498, accessed on October 17, 2013 2 Ibid.

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Maldives government would be making EMI payments spread over a number of years. 3 So there are certain lessons for prospective investors which will help them to manage the political risks associated with investment in distant country.

GUIDELINES TO BE KEPT IN MIND BEFORE PLUNGING INTO A DISTANT COUNTRY Bilateral Investment Treaties (BIT) has become a popular way of protecting the interest of the nationals of a country investing in another country. These are agreements between two Countries (States) for the reciprocal promotion and protection of investments in each other's territories by individuals and companies situated in either State. The treaties generally provide the assurances concerning the protection of a states investors interests in the other state. BITs contain provisions of fair treatment and prohibit unlawful expropriation of investors assets. They may also provide for indirect expropriation or regulatory expropriation. The provision of dispute resolution in BITs as a measure of protection, or as a guarantee, of investors interests has also attracted considerable attention. So, investors should primarily invest in countries which have Bilateral Investment Treaties with the host countries and if not, they can structure the investment through a third country that has a BIT with the hosts. India signed its first BIT with the United Kingdom in the year 1994 and till now it has done the same with 82 other countries.4 However, for the few countries that do not have BITs with any other country (e.g., Maldives), Political Risk Insurance Coverage and other protections are critical.5

Leoiyer, Lessons from GMR-Maldives Episode, 17th December 2012, http://www.logisticsaide.com/site/air14122012-1, accessed on October 18, 2013. 4 Nandan Nelvigi & Aditya Singh, Perils of Investing Abroad: Take away from GMR-Maldives, The Economic Times, January 14, 2013, Page No. 5, http://articles.economictimes.indiatimes.com/2013-0114/news/36331848_1_indian-investors-investment-arbitration-political-risk, accessed on October 19, 2013. 5 Ibid.

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Corporate must opt for Political Risk Insurance Cover Policy. It is an insurance policy bought by companies to cover losses arising out of adverse political developments in foreign countries where they have their projects or businesses. While premiums for PRI can be expensive, this provides coverage against risks such as expropriation, adverse regulatory changes, political violence, civil disturbance, licence cancellation, government frustration or repudiation of contracts, and currency inconvertibility. In any case whatever be the levels of risks of operating in a foreign country, without exception the foreign operations must be insured against all political risks. The benefit of politicalrisk cover is most evident when firms have long-term commitments in emerging markets: in project-finance loans, for instance, risk guarantees can reduce costs.6 The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, is an international financial institution which offers political risk

insurance guarantees to investors. According to the 2012 report of Multilateral Investment Guarantee Agency (MIGA) on World Investment and Political Risk, demand for Political Risk Insurance has increased sharply since 2005. In India the Export Credit Guarantee Corporation, a government enterprise, provides political risk insurance cover, any company investing outside India can buy a risk cover from ECGC, it bears 85% of the loss, which is part of a comprehensive cover.7 However, ECGC cannot provide cover to overseas companies investing in India as it cannot cover sovereign risk. Corporates may take help of Political Risk Analysts, who may give there valuable advices and save investors from stacking their money in a volatile and probably crippling territory. The purpose of Political Risk Analysis is to identify, analyze and predict major risks before actual investment or commitment, and to offer risk-minimization strategies and options.8 In India various organizations like Business Foundations9 provide this service. Before investing, corporates must examine the Public Relation of the foreign country with the host country. They should not invest into countries where the Public Relations
6

Satoshi Kambayashi, Of Coups and Coverage, April 4, 2007, http://www.economist.com/node/8967224?story_id=8967224, accessed on November 4, 2013. 7 The Economic Time, December 26, 2012, http://articles.economictimes.indiatimes.com/2012-1226/news/36007987_1_political-risk-ecgc-export-credit-guarantee-corporation, accessed on November 4, 2013. 8 Official Website Business Foundations, http://www.indiastrategy.com/polrisk.htm, accessed on November 5, 2013. 9 Official Website Business Foundations, http://www.indiastrategy.com/index.htm, accessed on November 5, 2013.

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between foreign country and host country are bitter, and even if they do they must beforehand opt for Political Risk Insurance so that their assets can be retrieved to some extent. Corporates must show some diligence on the states assets before entering into a private contract.10 They must seldom invest in countries which do not have the proficiency to pay back the legally decided compensation. Corporates must understand that Politics and power strife take precedence over economic issues. So, they should not venture into countries where there is even some semblance of strife. No investment in banana republic should be made, howsoever commodity or mineral rich they may be. No one would have ever surmised that Maldivian government would boot out, that too unceremoniously, a company which had pumped in the highest FDI USD 530 million into their country.11 Provisions must be made, in the contract, for a neutral dispute resolution mechanism with the seat of arbitration outside the territory of the host country. Thought, the doctrine of sovereign immunity prohibits the national courts of one state from exercising jurisdiction over other states, as no state may exercise authority over another. But, the earlier view of absolute immunity of states stands diluted by the recent restrictive theory of sovereign immunity which prescribes that the immunity may not be available when a state engages in commercial activities that could be performed by private parties. Nevertheless, defence of sovereign immunity remains available to states against whom an execution of an arbitration award is brought before the courts of another state.12 Lastly, the contract should be drafted in such a manner that it is not perceived to be iniquitous by either party. It must be drafted in an articulate and coherent manner. In GMR case the contract was perceived to be vicious both by the Maldivian government

10

Dhirendra Negi & Mayank Mishra, Lessons from GMR- Maldives episode, The Hindu Business Line, January 2, 2013, Page No. 7, http://www.thehindubusinessline.com/opinion/lessons-from-gmrs-maldivesepisode/article4265775.ece , accessed on November 4, 2013. 11 Supra 3 12 Supra 7

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and its people. GMR was made to look more like a plundering party sucking out the resources from Maldives.13 CONCLUSION Foreign Investment is widely viewed as beneficial for growth and development in destination countries as it finances domestic investment and can be a vehicle for productivity growth through the use and dissemination of advanced production techniques and management skills, but at the same time investors should take certain cautions and wariness beforehand so that they may remain protected from the cataclysms in foreign countries. In this paper, we have tried our best to give various considerations and guidelines to investors, who want to plunge into distant countries, so that they may not suffer any setback or bring down situations. So, investors should mainly invest in countries which have Bilateral Investment Treaties with the native country, and they should always, without exception, opt for Political Risk Coverage Policy so that whatever may be the case, they could be reimbursed to some extent. They may also take advices from Political Risk Analysts, who may tell about the prospective effects of their investment and thus save from investing into a volatile or probably crippling country. In India various organizations like Business Foundations14 provide this service. Apart from these, they should always scrutinize and analyze about the foreign countries assets and its Public Relations with the host country, and must seldom venture into countries which do not have the adequate assets to pay back the cost of legally determined compensation or which have sour Public Relations with the host country. When it comes to business, politics is difficult to ignore, and going by the recent experience of many Indian companies hoping to set foot abroad, now, even more so. They must keep in mind that political affairs take precedence over economic affairs, so they should not pursue their investments in banana republics or in countries where there is even a minuscule indication of strife. Thus, investors must make proper assessment and research before investing in any country, so that they can be saved from barren or fruitless investments.

13 14

Supra 3 Supra 10

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LIBERALIZATION AND FOREIGN DIRECT INVESTMENT SHAPING UP THE THREE SECTORS OF THE ECONOMY
MS. SMRITI TRIPATHI

Chapter 1: Introduction India today is the second fastest growing economy in India. A market where companies want to build the goodwill and then enjoy its fruits. The population which is a like a curse for the environment, for the employment schemes. The population which puts a burden on to the policies of the Government; it proofs to be a boon for the companies and traders in India. As it is one of the few places where demand seems to be never ending and their produce never goes waste. The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture, services are a growing sector and are playing an increasingly important role of India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support. India is a major exporter of highly-skilled workers in software and financial services, and software engineering. But was it always like this? Was India always a thriving, open, and inviting market? The answer lies in almost every economics book we pick up. Before 1991 India was a closed economy. India was experiencing deep fiscal imbalances. Imports reached the skies and exports slumped, investors lost the trust in the Indian market and pulled out their money, depreciation started, inflations rocked the lives of the consumers, Gulf War further increasing the problems

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made oil imports even more costlier. India was about to sink into its one and only Financial Emergency till date. It was in 1991, the then Finance Minister brought in the LPG model. The policies relived India from its crisis in a short span and it was well on track. But the key question remains as how did the three word turned around the economy? Before 1991, Indian Market was a difficult market to enter into. It promoted its indigenous industries while discouraging the foreign companies. Licence Raj in India was predominantly a method for the huge well connected companies to exploit the weaker ones. Moreover, the government had control over a huge section, leaving only a few areas for the private companies to work upon. After the reform the one word which changed the economy was Liberalization. It connects itself with Globalization and Privatization as without it they were also not possible. Liberalization primarily meant making the economy liberal towards the outside or the indigenous invertors/companies, etc. The excessive tariff on products which helped the smugglers thus adding to the black economy was reduced making smuggling of no use at all. Thus the tariff on the exports which were earlier evading the economy became a part of it. The consumers who were not getting the desired products due to the non competition and the obsolete technology suddenly could get their hands on to the latest stuff without reducing their pockets by a huge margin. This also increased the competition for the Indian companies forcing them to supply better products. License Raj was abolished making the laws liberal for the companies. All these changes were fantastic but the most needed change was to increase the flow of money in the economy to control the depreciation. The step to make this happen quickly was to increase the Foreign Direct Investment. Earlier this was very difficult the companies which came into India had to come in with a collaboration with some indigenous company. The foreign Shareholding was limited to only 40%. The companies were not comfortable with it due to which companies like IBM and Coca Cola had pulled out from India. All these were improved with the liberalization of the FDI policies in India. Many constraints that had historically been imposed on portfolio and direct investment were removed. The approval process for technical and financial collaborations was completely revamped. For many industries, the Reserve Bank of India (RBI) would give an automatic approval.

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Indian law does not differentiate between an Indian and foreign owned company once it has been incorporated in India. The same procedures govern Indian and foreign owned companies alike. Like Indian companies, foreign owned companies also do not now require a license for production in most manufacturing sectors. As a result the FDI in India which was just 500 Crores at the time of the introduction to 5000 crore in 1992. Chapter 2: Objective How did the Policies which came into effect in 1991 change the Indian Economy. Were the policies especially Liberalization and FDI a boon for the Indian Economy or just a desperate measure to save a sinking battle. Was it really the silver lining or was it a last resort. This paper tries to study the effects of FDI and Liberalization and how it helped to shaped up various sectors of the economy. Chapter 3: Hypothesis H: FDI tends to add new and better frontiers into the economic sectors. Chapter 4: Research Methodology The research methodology followed requires gathering relevant data from the specified documents/sources and analyzing the material and arrive at a more complete understanding of historical backdrop and the road ahead for FDI in all three sectors. We hope to shed light on the following questions through the research: 1. How the economy was before coming of FDI in India. 2. How did FDI shaped the economic sector. 3. The road ahead for FDI.

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Chapter 5: Analysis of data PRIMARY SECTOR: AGRICULTURE Agriculture forms a major part of our economy. It had a contribution of 13.9% in our economy for the year 2011-12, with further growth of 2.9% for the first quarter of 2012-131. The Indian economy had always been an agriculture based one . It was the principal activity/occupation people were involved in. But the true value of it was recognized only after the green revolution. Post the green revolution, the valuable utilization of agricultural produce was very low. This sector was not given proper importance, as such. The first introduction of modern High Yielding Variety seeds from Mexico and modern equipments in the 1960s gave this sector a good boost. It was now being recognized for having good potential for the betterment and up liftment of the economy. The History India had, in the past always been a little liberal with its trade issues. It used to The Agriculture sector has seen a good bump in the past. It rose from minimal to its peak and then fell down to the scales it is surviving on today, with little fluctuations. The sector which was having trouble breathing saw a good bump in the 1960s with the coming of green revolution. To sum it up, green revolution was the coming in of High Yielding Variety seeds which could now produce more of the crop. Then there were fertilizers which boosted the production. Modern irrigation techniques were followed. All this resulted in what seemed to be better quality and quantity. But, this soon faded away as he issue of chemical fertilizers not being healthy came into light. This was when this sector came to a big jolt. The modern methods stayed but some of them had to go away. Now, this sector, however flourishing, still faces the trouble. The Present Agricultural market of India is highly fragmented and unorganised. Given the various changes like virtual collapse of rural credit in organized sector, especially for small and marginal farmers, continuous increase of input cost and stagnant crop price, profit potential of agricultural sector has declined substantially. Farmers are still kept on tenterhook, not knowing how to manage their
1

http://ficci.com/spdocument/20155/Economy-Watch-Jul-Aug-12.pdf, Table 4

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economy, except to play it by years[3] (Gupta,2005). If production is good then there is glut and prices fall. When there is crop failure farmers hardly get any compensation in terms of higher price. The FDI Cap/Equity is 100% in Agriculture at present and the route is automatic.2 It was recently announced by Amway that it will utilize Rs 250 crore worth of land for organic farming in India for its products.3 This, for sure means a lot of cash and jobs. This is a clear example of what FDI can do to this sector. FDI, will definitely negate the role of middlemen and produce more jobs. The Future The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By partially opening this sector, the government can reduce the pressure from its trading partners in bilateral and multilateral negotiations and can demonstrate Indias intentions in liberalising this sector in a phased manner. Permitting foreign investment in agricultural retailing is likely to ensure adequate flow of capital into rural economy in a manner likely to promote the welfare of all sections of society, particularly, farmers and consumers. It will bring about improvements in farmer income and agricultural growth and assist in lowering consumer price inflation. SECONDARY SECTOR: AUTOMOBILE The Automobile Industry has come a long way since the first cars started to ply 1898 in the streets of Bombay. When India gained Independence automobile was a toy of the rich. Affordable only by the Government and a select few. Before the policies of LPG in 1991, the Indian Market was a closed market with great dominance over each and every sector of the economy. The basic motive of the Indian Economy was to

2 3

http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513#T3 http://www.financialexpress.com/news/Amway-to-buy-organic-farms-in-India/835496

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create a atmosphere in which the Indigenous could grow while it discouraged the foreign markets. The coming in of firms was very difficult so as a result Hindustan Motors manufacturing the car Ambassador along with Maruti Suzuki's Maruti 800was the only prominent Indian car the rest were imported. Even Maruti Suzuki Ltd was a coalition between the Government's United Front (India) and Suzuki Ltd . During these times only 6 firms were operational in India. It was only after 1991 that the policies of liberalization made trade easier and initiated and encouraged the companies to come into the Country. A table is shown belowPhase 1: 1947-1983 Closed market Growth of market limited by domestic supply Very few innovations, outdated model, fuel inefficient Number of firms: 5 Phase 2: 1983-1993 Joint Venture between Government of India and Suzuki to form Maruti Udyog Number of firms: 6 Phase 3: 1993 Industry delicensed in 1993 Major MNC Original Equipment Manufacturers (OEMS) commenced assembly in India Implementation of the Value Added Tax (VAT)

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Imports allowed from April 2001 Number of firms: >35 Source: India Brand Equity Fund (2010)

Table 1: Three phases in the evolution of Indias Automotive Industry Today India Is the Largest producer of tractors, second largest producer of two wheelers, fifth largest producer of commercial vehicle and eleventh largest producer of cars. Majority of growth has been possible after the policies of liberalizations were adopted. The allowing of foreign companies to invest brought in several benefits for the consumers as well as the economy. The main being in form of foreign currency and technology. Today, due to the advancement in Research and Development India not only is the producer of the $2500 car but also has started to produced some of the most expensive car in India like the Land Rover and the Jaguar XF in the Tata Motors plant in Pune.

Changes in the Trends of Production Before in Policies of FDI and liberalization were introduced in India the majority of the cars were imported. The Import duty on the cars ranged from anything from 95 to 105%. Even today the car like General Motor's Hummer has a import duty of 105%.

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This was done by the Government to earn a high custom duty and encourage the market for the domestic car market. But gradually the Financial Crisis started to kick in which subsequently lends to the bringing of the LPG policies. The companies were allowed a FDI of 51% which caused massive growth. The cheap labour and availability of a ready market was the best points about the Indian Market. Mercedes Benz which entered India as a subsidiary company of Daimler Chrysler in 1994 was one of the first luxury companies to step into the market. The production level since has grown at a tremendous pace and shown in Table 2. Except for the slight dip during the recession period of 2008-09 the India Automobile Market has never trembled. Changes in Export and Import In the paragraph mentioned above it was clearly explain as to how various MNC's entered into the Economy. India, from a dumping ground for obsolete products transformed itself to a countries where production grew. All factors of production - Capital, Labour, Land and Entrepreneur was available that too at a cheaper rate. The companies found it cheaper to produce and export their produce to nearby countries like Singapore from India than from their European hubs. Change in the structure After the policies on 1991 the Automobile Industry has changed tremendously. The first joint venture between the Union Government and Suzuki which formed Maruti Suzuki diluted its shares towards the parent company. The domestic companies which faced no competition from their foreign competitors started to face the heat. They could no longer pass their obsolete produce to the Indian public as the competitors would offer better products at a cheaper price. As a result massive investment were

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started to be made in the purchase of technology and Research and Development. The result was safer, efficient and much comfortable car, and commercial vehicles. Innovations in the Automotive Industry There have been many instances of new product development in the Indian automotive industry. To name a few: The development of the Nano, the innovative US$2,250 car, has showcased Indias

ability to innovate and design; Reva, Indias first electric car, is also an example in this case; Companies like M&M and the Hero Group are planning to develop electric vehicles; In the commercial vehicles space, Tata Daewoo, a subsidiary of Tata Motors, has recently developed an LPG-based MCV (4.5 ton), the Novus, which conforms to Euro V emission norm; Ashok Leyland has developed Indias first six-cylinder CNG engine for buses, which uses the multipoint fuel injection system and conforms to Euro IV emission standards ; and Two-wheeler manufacturers Bajaj Auto, Hero Honda and Mahindra are in discussions with Energtek, a provider of absorbed natural gas products, for technology that will enable two-wheelers to run on natural gas instead of gasoline. The Future The Government permitted 100 per cent foreign direct investment (FDI) in the automobile and component sectors under the automatic route, as part of its much-delayed and watered down Automobile Policy. Until now, 100 per cent FDI in this sector was allowed only on a case-by-case basis, while automatic approval in the sector was granted only for FDI with a maximum equity participation of 51 per cent.

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The new automobile policy, announced by the Minister for Department of Heavy Industries and Public Enterprises, Mr Manohar Joshi, does not prescribe any minimum investment norms. Earlier drafts of the policy were planning to impose a minimum investment criterion of $100 million for projects to make four-wheelers and $25 million for projects to make 2-3 wheelers. But no Minimum Investment Norms were setup due to to highly competitive nature of the Indian Automobile Market. Case Study: Hyundai Hyundai Motor India Limited (HMIL) is a dominant passenger car manufacturer in India, controlling 14% market share in the passenger vehicles segment. It is the largest passenger car exporter and the second-largest car manufacturer in India. The company sold a total of 6,16,039 vehicles 201011. It has a fully integrated, state-of-the-art manufacturing plant near Chennai and has also set up a modern multi-million dollar R&D facility at Hyderabad. HMIL currently exports cars to more than 115 countries across the EU, Africa, the Middle East, Latin America and Asia-Pacific. It further plans to invest USD 250 million by 2013 its cumulative investment in India by then will touch USD 1 billion. TERTIARY SECTOR: INSURANCE History of Insurance The word Insurance was first seen in India as a mention in Manusmriti. It talks of re-distribution and pooling of resources in times of calamities like fire, flood, famine etc. 1818 saw the first Life Insurance Company being setup in India by the name of Oriental Life Insurance Company in Calcutta which failed and had to shut down in 1834. After this, several other companies like Madras Equitable, Bombay Oriental and Empire of India started to function. But the dominance of the foreign insurance companies like Albert Life Assurance, Royal Insurance were causing difficulties for the Indian Companies. In 1914, after publishing the returns of the Life Insurance Companies, the first statutory provision came into force in the form of The Indian Life Assurances Companies Act,1912. After this, next significant change was seen in 1950. During this time the Principal Agencies were abolished, but still the competition was very high. Many small Insurance companies had JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB

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started to mint money through malpractices and they became fronts of money laundering. In a effort to curb these, the Government of India decided to nationalise the Insurance sector. In 1956, an amendment in the Insurance Amendment, 1950 nationalized the sector and the Life Insurance Corporation of India was born. LIC absorbed 154 Indian, 16 non-Indian and 75 provident societies. The LIC enjoyed monopoly in this sector until late 90's when final the Insurance sector was opened for the private sector. The Present The Insurance Sector in India has now been open for about 12 years after the amendment in the Insurance Regulatory and Development Authority Act in 1999. India today is a bright sector for the Insurance Companies as when compared to the Western market the India has much high capacity to invest. The Insurance sector stabilizes the economy of any country as it invests in the long term Infrastructural Sector. Today the India Insurance Sector in India is a 221,400 crore rupee industry. With e Foreign Companies eyeing it as a low insurance penetration, Rising level of income in the middle class family and the awareness about the sector in also growing. Today 22 out of 24 life insurance players and 18 out of 27 non life insurance players have foreign partners. The premium collection of general companies in India saw increase of 24.7% year on year and saw a figure of 6059.02 crores in September 2012. The total premium collection stood at 34,001.09 crores in April- September 2012 according to the report of the Insurance and Development Authority. In terms of premium collections for life insurance segment, private players collected Rs 7,095 crore (in April-September 2012 period while state-owned Life Insurance Corp of India recorded a remarkable 24 per cent y-o-y growth in premium collections at Rs 15, 532.7 crore during the period. LICs support helped the industry post a 15 per cent growth in premium collected in the first half of 2012-13. Presently the norms allow for 26% FDI in the Insurance sector but the Capital Hungry Market is ready for more. The IRDA has ready accepted the increment of FDI quota to 49%. To quote the

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chairman of the IRDA, J Hari Narayan, "Absolutely (in favour of hike in FDI limit). I think unless we go for 49%, we will not have the kind of capital required to underpin the growth of insurance industry." The policies of liberalization shall also help the market grow recently the Finance Minister Mr.Chitambram revealed a number of policies which allow speedier clearance of new product and policies, tax rebate for the investors etc. The Main stumbling block for the FDI in the Insurance sector is the Insurance (Amendment) Act pending in the parliament. Which unless passed can't doesn't allowed any reforms in the Insurance Sector Chapter 6: Conclusion Thus, it is evident that FDI, had played a major role in helping the three sectors shape themselves up. However low the allowed cap maybe, has only helped in betterment of the condition. FDI definitely brings in more jobs and more capital.. Foreign Direct Investment is important for the development of the Economy as it brings in the Foreign players who tend to boost the economy of their country along with their respective profits. The increase in competition makes the domestic players improve their products and finally it is the consumer who benefits. But, apart from the economy and the product the biggest development which comes to the country is in form of the Intellectual Property as the companies take a lot of trouble to study the country's environment and develop themselves accordingly. The trickle down affect of the economy is from the top industrialists to the worker class as the get employment, better wages and proper working conditions.

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RETAILING IN INDIA: THE NEW ECONOMIC MANTRA


MR. VAIBHAV GOYAL AND MS. VIBHUTI KHETAN

INTRODUCTION India is a developing ECONOMY which liberalized its economy in 1991 with the introduction of New Economic Policy. Retailing is one the most developing factor in Indian economy in accounts for 15% of its GDP. As a reference made in a leading case, the term retail is interpreted by the high court of Delhi as the sale of good or commodities to ultimate consumers, as opposed to the sail of further distribution.1 Thus, retailing can be define as the place where the seller i.e. retailer and ultimate consumer met for selling of goods for final their consumption in contrast to wholesaling , which is regarded as the selling of merchandise to any other retailer. Indian retail market is vast, and has huge potential for growth and development. It accounts for 14-15% of its GDP and is estimated to be US $450 billion with expectation to reach US $804.06 billion in 2015 and one of the fastest growing retail market in the world with three year compounded annual growth rate of 46.46% and second largest employer after agriculture, employing 40 million or 3.3 % of Indian Population2. Organised retailing refers to trading activities conducted by licensed retailer, i.e. those who are registered for Sales-Tax, Income-Tax, etc. These include the hypermarkets, retail chains and privately owned large retail business, whereas, unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing. These comprises of local kirana shops, paan/beedi shops, convenience stores, pavement vendors, etc. These generally do not pay government duties and taxes.3 Organised retail in India is on a developing step amounting only to 3-4% of total retailing and growing at 15-20% and expected to reach US $100 by 2015. Indias economy grows at an estimate of 8% per year, making retail

1 2

Federation of association of Maharashtra vs. union of India and others(2005(79)DRJ 426) National Sample Survey Organization (NSSO) 2009-10 3 www.Investopedia.com

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sector the most fertile and profitable to the foreign and domestic investors. In India Foreign Direct Investment is defined, as an investment by non-resident entity/person resident in capital of the Indian companies under Schedule 1 of FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations 2000. To put it in a more simple term, FDI is the capital inflow from abroad that is investment by the foreign investors in the economy, other than to which they belong. As per the valuation done by U.S. India Business Council (USIBC), single brand retail market is valued at US $ 27 billion and likely to grow to reach a value of US $ 100 billion in next five years. FDI in single-brand retail was adopted to allow the Indian consumers to have an access to foreign brands. At the initial level 51% was allowed in 2006 but later raised to 100% in 2011. Since the liberalization of the economy there has been a visible impact on the income level of the middle class, which as a whole is upwardly mobile, with a huge disposable income in hand. The huge proportion of young population in India implies a demographic dividend for the retail sector since this portion of the population is more brand conscious and ready for spending more on consumer goods. As against this view, the critics of this emerging phenomenon point to the inevitable negative impacts of organized chains on the unorganized and small retailers who are under the threat of simply being wiped out by the powerful organized networks of giant retail chains. The livelihood of five crore traders across the country is at stake if the government does not rethink the retail strategy says MohanGurnani, President of the Federation of Associations, Mumbai who is a leading protestor against the government policy to slowly facilitate the boom of organized retail.

Retailing
The word retailing has its origins in the French verb retailer, which means to cut up, and refers to one of the fundamental retailing activities which is to buy in larger quantities and sell in smaller quantities. For example, a convenience store would buy tins of beans in units of two dozen boxes, but sell in single-tin units. However, a retailer is not the only type of business entity to 'break bulk'. Wholesalers also buy in larger quantities and sell to their customers in smaller quantities. It is the type of customer, rather than the activity, that distinguishes a retailer from other distributive traders; the distinction being that a retailer sells to final consumers, unlike a wholesaler who sells to a retailer or other business organizations. A generally accepted definition

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of a retailer is 'any establishment engaged in selling merchandise for personal or household consumption and rendering services incidental to the sale of such goods'.4 An important aspect of the current economic scenario in India is the emergence of organized retail. There has been considerable growth in organized retailing business in recent years and it is poised for much faster growth in the future. Major industrial houses have entered this area and have announced very ambitious future expansion plans. Transnational corporations are also seeking to come to India and set up retail chains in collaboration with big Indian companies. However, opinions are divided on the impact of the growth of organized retail in the country. Concerns have been raised that the growth of organized retailing may have an adverse impact on retailers in the unorganized sector. It has also been argued that growth of organized retailing will yield efficiencies in the supply chain, enabling better access to markets to producers (including farmers and small producers) and enabling higher prices, on the one hand and, lower prices to consumers, on the other. In the context of divergent views on the impact of organized retail, it is essential that an in-depth analytical study on the possible effects of organized retailing in India is conducted.5 TYPES OF RETAIL Organised Traditional retailing has established in India for some centuries. It is a low cost structure, mostly owner-operated, has negligible real estate and labour costs and little or no taxes to pay. Consumer familiarity that runs from generation to generation is one big advantage for the traditional retailing sector. However this is set to change with the entry of the corporate sector into the retail domain. Unorganised A large number of small retailers consisting of the local kirana shops, owner-manned general stores, chemists, footwear shops, apparel shops, paan and beedi shops, hand-cart hawkers,
4 5

http://www.iilm.edu/iilm-online/Retail%20Management%20Self-Learning%20Manual.pdf Working Paper No. 222 Impact of Organized Retailing on the Unorganized Sector Mathew Joseph Nirupama Soundararajan Manisha Gupta Sanghamitra Sahu September 2008; INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS ; http://www.icrier.org/pdf/Working_Paper222.pdf

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pavement vendors, etc. which together make up the so-called unorganized retail or traditional retail.6 Difference between Organised and Unorganised Retail The Organised retailing refers to the trading activities undertaken by licensed retailers that are those who registered themselves for sales tax, income tax, etc. These include the corporate backed hypermarkets and retail chains and also the privately owned large businesses. The various forms of organized retail are a) Hypermarkets: They store products of multiple brands comprising food items and non-food items) Supermarkets: These are self service stores selling food and personal care products. E.g. Subhiksha c) Departmental Stores: Retails branded goods in non-food categories.E.g. Shoppers stop. d) Speciality Chains: These focus on branded product or product category. E.g. Bata Convenience Stores. e)Malls: A huge enclosure which has different retail formats. E.g. Pantaloon Retail7 .Whereas, Indian retail is dominated by a large number of small retailers consisting of the local kirana shops, owner-manned general stores, chemists, footwear shops, apparel shops, paan and beedi shops, hand-cart hawkers, pavement vendors, etc. which together make up the so-called unorganized retail or traditional retail. Organized retailing is based on the principle of unity and unorganized retailing is based on the principle of singularity 8.Both organized and unorganized retailing is found in most of the countries throughout the world. India and China are strong examples of countries in which unorganized retailing dominated their markets. Today these countries have a growing economy because of the influx of organized retailers into their markets. The last 3-4 years have witnessed the entry of a number of organized retailers, opening stores in various modern formats in metros and other important cities. The growth in organized retailing in recent years can also be gauged by the rise of shopping malls as well as the rising number of modern retail formats.9

6 7

Retail Management, Levy and Weitzs ICRIER journal paper, September 2008 8 http://www.fibre2fashion.com 9 P. Goswami M. Mishra,2009, Would Indian consumers move from kirana stores to organised retailers when shopping for groceries, Asia Pacific Journal of Marketing and Logistics, vol.20, No. 1

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Advantages of Organized Retail in India1. Enhanced Welfare Gains for Consumers- The emergence of organized retail undoubtedly gives consumers a wider choice of goods, more convenience, and a better shopping environment, among other benefits. This is feasible because organized retail can take several formats, from small neighbourhood stores in densely populated cities with high real estate prices to large airconditioned malls in the periphery where real estate is cheaper. Organized retail can appear small but spread in all local markets, providing the convenience of a neighbourhood kirana store but with procurement on a mass scale that keeps prices low and provides greater variety. 2. Gains for Farmers- Organized retail will result in a complete revamp of the agricultural supply chain in the country. A recent study by CRISIL has estimated a current annual total loss of about Rs. 1,000 billion in the agricultural supply chain, 57 per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions (CRISIL Research, June 2007). Organized retailers have already started procuring fruit and vegetables from farmers directly bypassing the various intermediaries who add more costs than value to the food chain. They are investing heavily on logistics in the form of centralized warehousing and distribution centres, transport and cold storage, either directly or through engaging third party logistics companies. They are also employing a large number of unskilled workers for sorting, grading, packaging and labelling. All these will enhance farmers realizations, improve quality of products at the shop and reduce the ultimate consumer price. 3. Link with Manufacturing-The Planning Commission has identified four sectors as the major employment generating sectors for the Eleventh Plan period, 2007-12. They are: (i) food processing industry; (ii) textiles and clothing; (iii) tourism; and (iv) construction. Of these sectors, all except tourism are getting a fillip with the growth of organized retail. Again, the small and medium industry (SMI) sector is getting advantages with the emergence of organized retailers by becoming their suppliers. Modern retail will catalyze the development of the SMI sector in the country. 4. Boost to Exports- Organized retails link with exports comes through foreign players. International retailers look for sources around the world and a country in which they operate

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Becomes a source for their global sales. Some of the international retailers that have plans for India in the future have already developed suppliers in the country and have started exporting from India. For example, Wal-Mart exported an equivalent of US$ 600 million, and IKEA about Euros from India in 2006-07. 5. Impact on Growth and Productivity- Organized retail will enhance the growth and productivity of India by helping the farmers, consumers and other sectors by providing high quality products. Organized retailing will remove various inefficiencies that characterize the present Indian distribution system, which in turn will provide better price for the farmers and suppliers on the one hand, and lower prices for consumers, on the other. 6. Improvement of Government Revenues- Another significant advantage of organized retailing is its contribution to government revenues. Unorganized retailers normally do not pay taxes and most of them are not even registered for sales tax, VAT, or income tax. Organized retailers, by contrast, are corporate entities and hence file tax returns regularly. The growth of organized retail business will be associated with a steady rise in tax receipts for the central, state, and local governments. 7. Impact on Employment and Prices- The growth of organized retail will enhance the employment potential of the Indian economy. While providing direct employment in retail, it will drive the growth of a number of activities in the economy which in turn will open up employment opportunities to several people. It may adversely affect employment in unorganized retail and the trade intermediaries associated with the traditional supply channels but the additional jobs created will be much higher than those that are lost. An important point to be noted is that while the jobs that organized retail displaces are the low-end, low-quality, underproductive ones, the new jobs created are the high quality, productive ones. It also generates a number of jobs for unskilled labour for the tasks of sorting, grading, labelling, etc.10

10

http;// ssrn.com/abstract=994238

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B. Advantages of unorganized retail 1. Employment Impact- According to ECR report, unorganized retail outlets employ more family labour than hired labour; on an average they employ 1.5 persons per shop from the family, and hired employees of 1.1 persons in India. It is a way of livelihood for Indian people. 2. Location Advantage for the Unorganized Retailers- Location is a comparative advantage for unorganized retailers as the mean distance to the residence for consumers at unorganized outlets is 1.1 km compared to 2.6 km for consumers at organized outlets. A majority of consumers walk to traditional retailers because it is convenience to reach. 3. Credit Facilities- Consumers get credit facilities in small unorganized retail stores and can make a deferred payment which is not possible in organized retail stores. 4. Purchase of small quantities- Its a typical attitude of Indians to purchase in small quantities of various goods which they can purchase from small shops than organized retail stores.11 IMPACT OF ORGANISED RETAIL OVER UNORGANISED RETAIL Independent stores will close, leading to massive job losses. In Organised retail few thousand jobs may be created but millions will be lost. They have efficiency at supply chain management leads to "direct" procurement of goods from the supplier. In addition to eliminating the "middle-man", due to its status as the leading retailer, suppliers of goods also bends over backwards to drop prices in order to assure consistent cash flow. There is the fear that this may not benefit the farmer, or the suppliers of these malls and retail stores.12 The small retailer and the middle man present in the retail industry plays a large part in supporting the local economy, since they typically themselves procure goods and services from the area they have their retail shops in. This leads to increased economic activity, and wealth redistribution. With large, efficient retailers, the corporate profits are not spent in the areas where they're generated, hence killing the local economy.13

11 12

ICRIER journal paper, September 2008 Marketing Management in India Perspective, V.S. Namakumari 13 www.retailindia.net

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They will lower prices to dump goods, get competition out of the way, become a monopoly, and then raise prices. We have seen this in the case of the soft drinks industry. Pepsi and Coke came in and wiped out all the domestic brands. India doesn't need foreign retailers, since home grown companies and traditional markets may be able to do the job. Work will be done by Indians, profits will go to foreigners. Remember East India Company. It entered India as a trader and then took over politically. There will be sterile homogeneity and Indian cities will look like cities anywhere else. The government hasn't built consensus.14

SAMPLING DESING 1. Sampling unit Respondents of (few malls) 2. Size of sample 100 respondents 3. Sample Method Random Sampling 4. Types of questionnaire Close ended

ANALYSIS OF DATA Data collection through questionnaire is being processed. This processed data is: A. Age wise distribution a) <20 [12 RESPONDENTS]

b) 20-29 [45 RESPONDENTS] c) 30-39 [25 RESPONDENTS] d) >40 [18 RESPONDENTS] On the basis of above respondents the figure shows that maximum respondents i.e. 45 out of 100 are young age people. It means maximum no. Of customers belong to young age group.

14

www.bussinessworld.in

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RESPONDENTS
60 40 20 0 <20 20-29 RESPONDENTS 30-39 >40 RESPONDENTS

B. Gender wise distribution a) MALE [58 RESPONDENTS]

b) FEMALE [42 RESPONDENTS]

On the basis of above respondents the figure shows that maximum respondents i.e. out of 100 are males. It means maximum no of customers are male in mall due to family responsibility.

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RESPONDENT

MALE FEMALE

C. Education wise distribution a) HIGH SCHOOL b) LESS THEN GRADUATION c) GRADUATION d) POST GRADUATE [08 RESPONDENT] [12 RESPONDENTS] [32 RESPONDENTS] [32 RESPONDENTS]

e) PROFESSIONAL QUALIFICATION [16 RESPONDENTS] On the basis of above respondents the figure shows that maximum respondents i.e. 32 out of 100 are graduate and 32 out of 100 are post graduate. It means maximum no of customers are educated and aware about retail store.

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RESPONDENT
35 30 25 20 15 10 5 0

RESPONDENT

D. Income wise distribution a) LESS THEN Rs 20,000 [28RESPONDENTS]

b) BETWEEN Rs 20,000 TO 35,000 [48RESPONDENTS] c) BETWEEN Rs 35,000 TO 50,000 [20RESPONDENTS] d) MORE THEN 50,000 [12RESPONDENTS]

On the basis of above respondents the figures show that maximum respondents i.e. 48 out of 100 are having monthly income between Rs 30,000 to 40,000. It means maximum no. of customer are belonging to upper middle class.

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RESPONDENT
50 40 30 20 10 0 BETWEEN Rs 20,000 TO 35,000 BETWEEN Rs 35,000 TO 50,000 MORE THEN 50,000 RESPONDENT

1. Which type of place do you visit frequently for your shopping needs? a) Supermarket [80 respondents] b) Wholesalers c) Local Stores [8 respondents] [12 respondents]

On the basis of above respondent the figure shows that maximum respondents i.e. 80 out of 100 are agree that they visit frequently shopping malls for their shopping neends. It means maximum no of customers are preferred shopping malls for purchasing.

RESPONDENT
80 70 60 50 40 30 20 10 0

RESPONDENT

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2. From where you would prefer to buy products? a) single brand stores b) multi brand stores c) factory outlet d) local big retail store [24respondents] [60respondents] [4 respondents] [12 respondents]

i.e. 60 out of 100 are preferred multi branded store for shopping. It means maximum no of customers are time conscious and desired for many brand under one roof.

RESPONDENT

SINGLE BRAND STORE MULTI BRAND STORES FACTORY OUTLETS LOCAL BIG RETAIL STORE

3. Which one from malls/ local stores (kirana stores) is more convenient for all your shopping needs? a) Malls [72 respondents]

b) Local stores [28 respondents] i.e. 72 out of 100 are preferred shopping in malls for all their shopping needs. It means maximum no of customers are feel good in shopping for their needs in malls because they cant get everything from there under one roof.

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RESPONDENT

MALLS LOCAL STORE

4. What are the prime factors for shopping in malls? a) Variety in product [10 respondents] b) Serviceability c) Discount d) Mode of payment e) All [90 respondents] I.e. 90 out of 100 are preferred shopping in malls because of the various factors which make the whole shopping experience good.

RESPONDENT
100 80 60 40 20 0 RESPONDENT RESPONDENT

5. What are prime factors for shopping in kirana stores?

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a) Emergency buying [30 respondents] b) For grocery items only [25 respondents] c) Discounts d) Serviceability [30 respondents] [15 respondents]

i.e. people prefer shopping from kirana stores just when they need something urgent and grocery items only. It shows the limited shopping experience one customer have with these stores.

respondents
30 25 20 15 10 5 0

respondents

6. What do you look for in a product during your purchase? a) Price b) Brand name [60 respondents] [12 respondents]

c) Customer service [16 respondents] d) Variety availability [12 respondent] i.e. 60 out of 100 preferred price during their purchasing. It means maximum no of customers are price conscious so maximum customers belong to middle class.

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RESPONDENT

PRICE BRAND NAME CUSTOMER SERVICE VARIETY AVAILABILITY

7. When do you prefer to shop most in store? a) During sales [54 respondents]

b) During fresh season stock [18 respondents] c) During discount d) When required [24 respondents] [4 respondents]

On the basis of above respondent the figures shows that maximum respondent i.e. 60 out of 100 are preferred shopping during sales. It means maximum no of customers did not compromise quality with discount and offers.

RESPONDENT

DURING SALES DURING FRESH STOCK DURING DISCOUNT WHEN REQUIRED

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8. How frequently you visit the stores. a) <15 days b) 15-30 days c) 1-2 months d) >2 months [60 respondents] [28 respondents] [4 respondents] [8 respondents] On the basis of above respondents the figure shows the maximum respondents i.e. 60 out of 100 are visited the store within one month. It means maximum no of customers are visiting the stores monthly.

RESPONDENT

<15 15-30 DAYS 1-2 MONTHS >2 MONTHS

FINDINGS Customers preferences for grocery shopping are gradually shifting from local kirana stores to organised convenience stores. Age is one of the most important factors responsible for changing preferences of customers Payments through credit cards is increasing purchases from convince store

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Brand choice of customers is changing and this is also influencing shift from kirana to convenience store. Maximum no of customers is are male in mails due to family responsibility It means maximum no of customers having nuclear family. Maximum no. of customers is belonging to upper middle class. Maximum no of consumers are price conscious so the maximum no. of consumer belong to the middle class. Maximum no. of customer did not compromise with quality with discount and other offers. Limitations Every report has its pros and cons so mine also have some limitations.

They can be pointed as: Sample size restricted to 100 only which was very less according total population. The responses given by respondent were not always accurate because the respondent gave the response according to their understanding. Survey is the time consuming process but the time to collect the data for research was very less. Sometimes the respondents are not willing to fill the questionnaire and hence the resultant may not be correct.

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CONCLUSION The past 4-5 years have seen increasing activity in retailing. And, various business houses have already planned for few investments in the coming 2-3 years. And though the retailer will have to face increasingly demanding customers, and intensely competitive rivals, more investment will keep flow in. And the share of organised sector will grow rapidly. Retailing in India will surely poised for a takeoff and will provide many opportunities both to existing players as well as new entrants. The country is witnessing a period of boom in retail trade, mainly on account of a gradual increase in the disposal incomes of the middle and upper class households. More and more corporate houses including large real estate companies are coming into the retail business, directly or indirectly, in the form of mall and shopping centre builders and managers. New formats like super markets and large discount and department stores have started influencing the traditional look of bookstores, furnishing store and chemists shop. The retail revolution, apart from bringing in sweeping, positive changes in quality of life in the metros and bigger towns, is also bringing in slow changes in life style in the smaller towns of India. Increase in literacy, exposure to media, greater availability and penetration of a variety of consumers goods into the interior of the country, have all resulted in narrowing down the spending difference between the consumer of larger metros and those of smaller towns. Lastly I want to conclude my project in some points The consumer are attracting towards shopping malls and retail outlets. The shopping malls and retail outlets are targeting to middle class customer because the purchasing power of this class is rapidly growing as well as the class is also growing. The young generation in fashion and show off conscious so retail outlet are mainly focus on them. Most of the family wants to purchase from big showrooms and malls because there are no bargaining system so they have a trust that there is no cheating. The main strength of most of the retail outlets are providing attractive offers to attract customers. Big retail is running customer loyalty programme which has increased profit and no of customers.

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BANCASSURANCE THE INDIAN SCENARIO


MR. VINAY KUMAR SOLANKI

INTRODUCTION The life insurance industry in India has been progressing at a swift pace since opening up of the sector in 2000. The size of the country, a diverse set of people combined with problems of connectivity in rural areas makes insurance selling in India a very difficult proposition. Life insurance companies require enormous distribution of strength and tremendous manpower to reach out to such a huge customer base. This distribution has undergone a paradigm shift as various insurance companies are proposing to bring insurance products into the lives of the common man by making them available at the most basic financial point, the local bank branch, through Bancassurance. The Bank Insurance Model ('BIM'), also sometimes known as 'Bancassurance', is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products. The authors have tried to analyse the concept of financial supermarket. Therefore this research paper has been divided into three broad topics. Firstly, What Bancassurance Means. The authors will deal with the definition of Bancassurance along with the historical evolution of the Insurance Market in India. Secondly, A SWOT (Strength, Weakness, Opportunities and Threats) Analysis of the Bancassurance System with a detail studies of the scope of Bancassurance in India. Lastly, the authors will present their Views about Bancassurance and what the customers should expect from Bancassurance along with the Bankers and Insurers perspective.

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I.

THE MEANING OF BANCASSURANCE

A. Background Of The Recent Developments In The Insurance and Banking Sector

The New Economic Policy (NEP) was introduced in India in June 1991 by the then newly elected government and thus, the process of liberalization of Indian financial sector started. The main thrust of reforms in the financial sector was the creation of efficient and stable financial institutions and markets. Reforms in the banking and non-banking sectors focused on creating a deregulated environment, strengthening the prudential norms and the supervisory system, changing the ownership pattern, and increasing competition. The main idea was Globalization, Privatization, Deregulation and Liberalization1. In India, the reforms in the insurance sector (Life and General) commenced with the setting up of the Committee on Reforms on Insurance Sector under the chairman-ship of Dr.R.N.Malhotra, the ex- governor of RBI, by the Government of India in April 1993 for examining the structure of insurance industry. The recommendations of the Committee was submitted in 1994 which was accepted in principle by the government which started implementing the recommendations since December 1999, thus heralding an era of liberalization in the countrys insurance sector. The setting up of Insurance Regulatory and Development Authority (IRDA) and opening up of Insurance Business (life and general) to foreign capital up to 26 per cent were the initial steps in this direction. It is widely acknowledged that the opening up of the insurance sector has been aimed at ushering in greater efficiency in the insurance business by maximising productivity and minimising transaction cost. Competition is believed to bring a wider choice of products at lower prices to the consumers, larger coverage of population, better customer service, superior information technology, higher returns to the policyholders, and so on. At present there are 21 private life insurers operating in the Indian life insurance market along with the only state owned life insurer Life Insurance Corporation of India (LICI). The total volume of premium reached to Rs. 221,791 crore in 2008-2009 from Rs. 24,630 crore in the year 1999-2000 which is little more than 800% increase by 22 numbers of insurers (including LICI)
1

Does the insurance reform promote the development of life insurance sector in India? An empirical analysis. Dr. Amlan Ghosh International Journal of Multidisciplinary Research,Vol.1 Issue 7, November 2011.

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in India. In India, private life insurers are slowly gaining the momentum to penetrate the market with their new products, services and the global knowledge of expertise in doing life business. This can be witnessed from their growing market share statistics which shows nearly 30 percent of the market are in their hands at the end of 2008-09 financial year. Most important aspect is that their acceptability is on the rise though it is an urban phenomenon. The prominent private players operating actively are ICICI Prudential Life (6.92%), Bajaj Allianz Life (4.79%), SBI Life (3.25%), HDFC Standard Life (2.50%), Birla Sun Life (2.06%), Reliance Life (2.22%), Max New York Life (1.73%), and TATA AIG Life Insurance Company (1.23%)2 In India, ever since espousing of financial reforms following the recommendations of First Narasimham Committee, the contemporary financial landscape has been reshaped. Banks, in particular, have stride into several new areas and are offering innovative products, viz., merchant banking, lease and term finance, capital market / equity market related activities, hire purchase, real estate finance and so on. Thus, present-day banks have become far more diversified than ever before. Therefore, their entering into insurance business is only a natural corollary and is fully justified too as insurance is another financial product required by the bank customers. The Reserve Bank of India being the regulatory authority of the banking system, recognising the need for banks to diversify their activities at the right time, permitted them to enter into insurance sector as well. Furtherance to this line, it issued a set of detailed guidelines setting out various ways for a bank in India to enter into insurance sector. In the insurance sector, the Insurance Regulatory and Development Authority (IRDA), despite its recent origin in 2000, avowed to regulate and develop the insurance sector in India through calibrated policy initiatives.3

B. Bancassurance: What It Means. Bancassurance - a term coined by combining the two words Bank and Insurance (in French) connotes distribution of insurance products through banking channels. Bancassurance encompasses terms such as Allfinanz (in German), Integrated Financial Services and

www.irdaindia.gov.inAnnual Report of IRDA, (2000-2001) and (2007-2008), IRDA, Hyderabad, India Assessed on : 015-09-13. 3 Karunagaran, A. , Bancassurance A Feasible Strategy For Banks In India, Reserve Bank of India Occasional Papers, Vol. 27, No. 3, Winter 2006

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Assurebanking. This concept gained currency in the growing global insurance industry and its search for new channels of distribution. Banks, with their geographical spread and penetration in terms of customer reach of all segments, have emerged as viable sources for the distribution of insurance products. Presently, theres more activity here than anywhere else. And everyone wants to jump onto the bandwagon for a piece of the action cake. Bancassurance is a long-standing dream of offering a seamless service of banking, life &non-life products. India, being the one of the most populous country in the world with a huge potential for insurance companies, has an envious chain of bank branches as the lifeline of its financial system. Banks with over 65,000 branches & 65% of household investments are the backbone of the Indian financial market. In India, there are 75 branches per million persons. Clearly, thats something insurance companies - both private and state-owned -would find nearly impossible to achieve on their own. As a channel for insurance, it gives insurance an unlimited exposure to Indian consumers. Banks have expertise on the financial needs, saving patterns and life stages of the customers they serve. Banks also have much lower distribution costs than insurance companies and thus are the fastest emerging distribution channel. For insurers, tying up with banks provides extensive geographical spread and countrywide customer access; it is the logical route for insurers to take. However, the evolution of Bancassurance as a concept and its practical implementation in various parts of the world, have thrown up a number of opportunities and challenges. Aspects such as the most suited model for a given country with its economic, social and cultural ramifications interacting on each other, legislative hurdles, and the mind set of persons involved in this activity, have dominated the study and literature on Bancassurance.4

C. Important Bancassurance tie-up in India: The essential feature of the Bancassurance sector is the tie-ups between banks and insurance companies. In India also a few Banks have tied up with the insurance companies and these tieups have proved beneficial for both the sectors. A few examples of such tie-ups in India are as follows:

Sethi Naveen ,Bancassurance An Emerging Concept In India, Reflections, IBEXI Solutions. Available at www.ibexi.com/papers/Bancassurance.pdf, accessed on 2013-09-20.

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1. LIC: The insurance company LIC of India has tie-up with the following bank for Bancassurance Corporation Bank Indian Overseas Bank Centurion Bank Sahara District Central Co-operative Bank Janta Urban Co-operative Bank Yeotmal Mahila Sahakari Bank Vijaya Bank, and Oriental Bank of Commerce

2. SBI-Life Insurance Co.: The SBI life Insurance Co. Ltd. is starting and running its Insurance business with the help of SBI. 3. Bajaj Allianz general Insurance Co. Ltd.: In the field of general Insurance the Bajaj Allianz General Insurance Co. Ltd., has tie-up with Karur Vysya and Lord Krishna Bank. 4. Birla Sun Life Insurance Co. Ltd.: The Birla Sun Life Insurance Company has a tie-up with the following bank for the insurance purpose: Bank of Rajasthan Andhra Bank Development Credit Bank Bank of Muscat Dutch Bank, and Catholic Syrian Bank.

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II.

SWOT ANALYSIS
A. Strengths

In a country like India of one billion people where sky is the limit there is a vast untapped potential waiting for life insurance products.5There are more than 900 Million lives waiting to be given a life cover (total number of individual life policies sold in 1998-99 was just 91.73 Million). The insurance companies worldwide have an eye on it.

Banks have the integrity established with their constituents because of a variety of services and schemes provided by them. They also enjoy good will among the masses because of their prolonged presence and persistent image.

Bankers are well acquainted with the psychology of the customers because of the daily interaction with them and therefore they can guess the diverse needs and demands of the customers hence contributing to the sale of personal line insurance products

The Bank Network is spread in the remotest of the areas which helps in taking up and executing large scale tasks easily all around the country.

The other major strength that both the Insurance as well as the Banking sector enjoys is the large no. of skilled professionals involved in these sectors who can easily be relocated to any Bancassurance venture. LIC and GIC both have a good range of personal line products already lined up; therefore R & D efforts to create new products will be minimal in the beginning. B. Weaknesses

The Bancassurance does not only come with Strengths. It has its own weaknesses that hinder its growth as a major force in the Indian Economic Sector. A late awakening seems to have dawned upon but it is a case of too late and too little.

In spite of growing emphasis on total branch mechanism and full computerization of bank branches, the rural and semi urban areas have still to see Information Technology as an enabler. . Elementary IT requirement like networking (LAN) is not in place even in

http://www.einsuranceprofessional.com/artbuzz.html ,Accessed on : 019-09-2013.

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the headquarters of these institutions, when the need today is of Wide Area Network (WAN) and Vast Area Network (VAN). Internet connection is not available even to the managers of operating offices. There is lack of personalized services because the traditional insurance agent is considered a member of the family and hence is able to render a personalized service during and after the sales process. However that may not be the case in regard to a bank employee. There are many differences in the ideological approaches of the banks and the insurance companies. Where, banks are traditionally Demand driven organizations, with a reactive selling philosophy, the Insurance Companies are Need driven institutions, having an aggressive selling philosophy. The middle class population that the banks have an eye on is today overburdened, first by inflationary pressures on their pockets and then by the tax net. There is no money left to think of insurance.6 Fortunately, LIC schemes get IT exemptions but personal line products from GIC (medi-claim already has this benefit) like householder, travel, etc. also need to be given tax exemption to further the cause of insurance and to increase domestic revenue for the country. The practical problem that may arise is that the customers visit the banks to have simple transactions-money deposit or withdrawal. They do not have time to have a discussion on long term durable purchases of insurance products over the counter. Also, the facilities like ATMs and E-banking have further restricted the visits to the urban or metro branches. Another drawback is the inflexibility of the products, i.e., it cannot be tailor made to the requirements of the customers. For a Bancassurance venture to succeed it is extremely essential to have in-built flexibility so as to make the product customer centric and appealing. To indulge into the sale of insurance products the bank employees have to undergo a certain kind of training for a specific period of time followed up by a test to get them licensed. In the recent past the standard of the test has been raised and hence it has
6

http://www.articlesbase.com/business-articles/bancassurance-a-common-platform-for-future-of-banking-andinsurance-industry-915057.html, Accessed on : 016-09-2013.

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become difficult to clear thereby becoming a major weakness of the Bancassurance concept. C. Opportunities The database of the Indian banks is huge but so is not the case with their goodwill when compared to their European counterparts. This database has to be dissected variously and various homogeneous groups are to be churned out in order to position the Bancassurance products. With a good IT infrastructure, this can really do wonders. There is already an atmosphere created in the country for liberalisation and there appears to be a political consensus also on the subject. Therefore, RBI or IRDA should have no hesitation in allowing the marriage of the two to take place. This can take the form of merger or acquisition or setting up a joint venture or creating a subsidiary by either party or just the working collaboration between banks and insurance companies.

The scope of the life insurance sector is vast an needs to be mined carefully. There are more than Nine hundred million lives waiting to be given a life cover (total number of individual life policies sold in 1998-99 was just 91.73 million)7.

The numbers of people who are still unaware about the risks covered by the life insurance sector in India are many and they are still waiting for someone to come and inform them about it.

The scope to market the property related insurances like fire insurances, medi-claim insurances can be enhanced by cross selling them with the banks core products and selling them as value added products with credit cards, debit cards, etc.

Banks database is enormous even though the goodwill may not be the same. This database has to be dissected and various homogeneous groups are to be churned out in order to position the Bancassurance products. With a good IT infrastructure, this can really do wonders.

Another area that could be of interest to bankers is to exploit the corporate customers and tie-up for insurance of the employees of corporate clients, which would be an avenue with easy access. In most cases Banks provide salary disbursement and loan facilities but here they can provide insurance cover as well.

http://www.lawyersclubindia.com/articles/Bank-Assurance-and-Personal-Insurance-Cover-An-Analytical-studyon-Nationalised-Banks-3266.asp#.T_1w-4-3OP4,Accessed on : 017-09-2013.

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D. Threats

Success of a Bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved. Our work force at every level is so well entrenched in its classical way of working that there is a definite threat of resistance to any change that Bancassurance may set in. Any relocation to a new company or subsidiary or change from one work to a different kind of work will be presented with vehemence.

Insurance in India is perceived more as a saving option than providing risk cover, so this may create an adverse feeling in the minds of the bankers that such products may lessen the sales of regular bank saving products like investment and good return products (e.g., Fixed Deposit).

There would be a problem of Reputational Contagion, i.e. loss of market confidence towards one in a venture leading to loss of confidence on the other because of identical brand recognition, similar management and consolidated financial reporting, etc.

The investors in the capital may turn their face off in case the rate of return on capital falls short of the existing rate of return on capital. Since banks and insurance companies have major portion of their income coming from the investments, the return from Bancassurance must at least match those returns. Also if the unholy alliances are allowed to take place there will be fierce competition in the market resulting in lower prices and the Bancassurance venture may never break-even.8

The most common obstacles to success of Bancassurance are poor manpower management, lack of a sales culture within a bank, no involvement by the Branch Manager, insufficient product promotions, failure to integrate marketing plans, marginal database expertise, poor sales channel linkages, inadequate incentives, resistance to change, negative attitudes toward insurance and unwieldy marketing strategy.

Another possible threat may come from non-response from the target customers as happened in USA in 1980s after the enactment of Garn - St Germaine Act. A rush of joint

http://www.einsuranceprofessional.com/artbuzz.html, Accessed on : 16-09-2013.

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS


ventures took place between banks and insurance companies and all these failed due to the non-response from the target customers.

III.

LEGISLATIONS FOR BANCASSURANCE

A. Guidelines given by RBI: The Reserve Bank of India has given certain guidelines for banks entering into the insurance sector. They are as follows: Any commercial bank will be allowed to undertake insurance business as the agent of insurance companies and this will be on fee basis with no-risk participation. The second guideline given by the RBI is that the joint ventures will be allowed for financial strong banks wishing to undertake insurance business with risk participation. The third guideline is for banks which are not eligible for this joint venture option, an investment option of i) Up to 10% of the net worth of the bank or ii) Rs. 50 crores. Whichever is lower is available. The bank that wants to enter in participates in the insurance industry they have to follow the above guidelines given by the Reserve Bank of India.

B. Guidelines given by IRDA: The Insurance Regulatory and Development Authority have given certain guidelines for the Bancassurance which are as follows: 1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance Executive to handle all the insurance matters and activities. 2) Mandatory Training: All the people involved in selling the insurance should undergo mandatory training at an institute determined (authorized) by IRDA and pass the examination conducted by the authority.

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS


3) Corporate Agents: Commercial banks, including co-operative banks and RRBs may become corporate agents for one insurance company. 4) Banks cannot become insurance brokers.

C. Issues for regulation: Certain regulatory barriers have slowed the development of Bancassurance in India down which have only recently been cleared with the passage of the Insurance (Amendment) Act 2002. Prior it was clearly an impractical necessity and had held up the implementation of Bancassurance in the country. As the current legislation places the: 1) Training and examinations requirements: Upon the corporate insurance executive within the corporate agency, this barrier has effectively been removed. Another regulatory change is published in recent publication of IRDA regulation relating to the licensing of Corporate Agents
2) Specified person to satisfy the training and examination: According to new regulation of

IRDA only the specific persons have to satisfy the training and examination requirement as insurance agent. CONCLUSION A. Restrictive feature: A restrictive feature of Bancassurance is that it limits the ambit of corporate agents to commission based earning and rules out the possibility of profit sharing in the company. Hence it affects the basic mindset of the already working bank employees thus acting as a restrictive feature. Another restrictive feature is that the products sold through bank channels/ networks can be highly profitable and so such agreement with banks is highly beneficial for banks only and therefore the interests of the insurance sector is shaken. B. Advantages of Bancassurance: Bancassurance has its own shortcomings but undoubtedly if implemented properly it may change the face of Indian economy for its own good. Bancassurance is a tool which is beneficial to bank,

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS


customer and insurer at the same time. It is Win Win Situationfor everyone. The advantages of Bancassurance from different points of view have been discussed below: i) From the Banks point of view: It will enhance the income of the Banks if they will sell the insurances through their own channels hence adding up to the gross profit of the sector. Due to the huge customer database of the Banks they need not to go anywhere to sell the policies. They have a face to face contact with the customers and hence the sale of such products becomes easy and profitable as well. The bankers have extensive marketing skills therefore they can easily attract the customers as the banks possess goodwill in the minds of the customers. Banks use different value added services like E-banking, Tele-banking, Direct mail and so on. They can also use all the above mentioned facility for Bancassurance purpose with customers and non-customers.9 ii) From the Insurers point of view: The Insurance companies can really mine the huge customer database of the banks for the sale of their policies. By cutting cost, insurers can serve better to customers in terms lower premium rate and better risk coverage through product diversification. iii) From the Customers point of view: Product innovation and distribution activities are directed towards the satisfaction of needs of the customers. Bancassurance model assists customers in terms of reduction price, diversified product quality in time and at their doorstep service by banks. In the current scenario of high interest rates banks are looking to find new avenue to increase their profitability; going in this direction banks are focusing to increase their fee based income. To increase their fee based income banks are eagerly waiting for the Insurance Regulatory and Development Authority (IRDA) to open up Bancassurance which will allow them to tie up with

Dr. Dwiwedi Amit, Bancassurance in India : Issues and Implications, available at http://www.indianmba.com/Faculty_Column/FC814/fc814.html, accessed on 16- 09-2013.

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS


four insurance firms in life, non-life and health segment; at present banks are allowed to tie up with one insurer in each Life and non-life segment. However banks do not hold similar views on the opening up of Bancassurance as small banks which do not have direct presence in insurance sector are in favour of it while banks who have their insurance subsidiaries are not in favour of it; small banks in support of their views says that as interest rates have been hiked 10 times and increase in interest rates on saving account from 3.5% to 4% will contract their margins hence it has become essential for them to focus on non-interest income; they also say that as insurance sector is a capital intensive sector which require long term investment hence tying up with more insurance companies will help them to grow their fee based income.10 On the contrary banks which have their insurance subsidiary are not in support of this move as they argue that this will increase the competition which will result in rivals offering more incentive and commission to lure the customers and this may also result in mis-selling of the products as insurance products are complex products and banks staff may not be highly trained to explain the difference in the features of the products to the customers correctly.

10

http://www.policymantra.com/blog/news/contradictory-views-of-banks-on-bancassurance/ Assessed on :16-09-2013.

JOURNAL ON CONSENTIA ON COMMERCE AND ECONOMICS VOLUME 1 | ISSUE 1 | OCTOBER 2013 RESEARCHERS CLUB