INVESTMENT MANAGEMENT

Investment management is the professional management of various securities

(shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for
the benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes e.g. mutual funds or Exchange Traded
Funds).
Investment management is a large and important global industry in its own right
responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the
remit of financial services many of the world's largest companies are at least in part
investment managers and employ millions of staff and create billions in revenue.
The largest financial fund managers are firms that exhibit all the complexity their
size demands. Assets of the global fund management industry increased for the fourth
year running in 2007 to reach a record $74.3 trillion. This was up 14% on the previous
year and double from five years earlier. This growth has been due to an increase in capital
inflows and strong performance of equity markets.
The US was by far the largest source of funds under management with nearly a
half of the world total. It was followed by the UK with 9% and Japan with 6%. The AsiaPacific region has shown the strongest growth in recent years. Countries such as China
and India offer huge potential and many companies are showing an increased focus in
this region
The various forms of investment management in International Business are as
follows
1. Foreign Exchange Dealings
2. Offshore Banking
3. Foreign Direct Investment
4. Resource mobilization through Portfolio Management, ADRs, GDRs
5. Other options of funding in venture

FOREIGN EXCHANGE DEALINGS

FOREIGN EXCHANGE
Foreign Exchange is the process of conversion of one currency into another
currency. For a country its currency becomes money and legal tender. For a foreign
country it becomes a commodity. Since the commodity has a value its relation with the
other currency determines the exchange value of one currency with the other. For
example, the US dollar in USA is the currency in USA but for India it is just like a
commodity, which has a value which varies according to demand and supply.
Foreign exchange is that section of economic activity, which deals with the
means, and methods by which rights to wealth expressed in terms of the currency of one
country are converted into rights to wealth in terms of the current of another country. It
involves the investigation of the method, which exchanges the currency of one country
for that of another. Foreign exchange can also be defined as the means of payment in
which currencies are converted into each other and by which international transfers are
made; also the activity of transacting business in further means.
Most countries of the world have their own currencies The US has its dollar,
France its franc, Brazil its cruziero; and India has its Rupee. Trade between the countries
involves the exchange of different currencies. The foreign exchange market is the market
in which currencies are bought & sold against each other. It is the largest market in the
world. Transactions conducted in foreign exchange markets determine the rates at which
currencies are exchanged for one another, which in turn determine the cost of purchasing
foreign goods & financial assets. The most recent, bank of international settlement survey
stated that over $900 billion were traded worldwide each day. During peak volume
period, the figure can reach upward of US $2 trillion per day. The corresponding to 160
times the daily volume of NYSE.

FOREIGN EXCHANGE MARKET

The foreign exchange market (currency, FOREX, or FX) is where currency
trading takes place. The foreign exchange market is the mean by which payments are
made across national boundaries, jurisdictions and currencies. This means that the
exchange of one national currency against another. For e.g. An Indian exporter sells
goods to US importer and receives payment for the delivery in US Dollars. The exporter
cannot use the US Dollars directly in India. so there is need to convert the US Dollars
into INDIAN RUPEES and thus foreign exchange market comes into picture.
It can be regarded as the place where banks and other official institutions (e.g.
AD) facilitate the buying and selling of foreign currencies. Although the foreign
exchange market started its working in early 1950s with the establishment of
International monetary fund (Bretton Woods system) but the current market is evolved
more rapidly since 1970s when most of the industrialized countries accepted to gradually
switch to floating exchange rate from their fixed exchange rate regime.

Today, the Foreign exchange market is one of the largest and most liquid financial
markets in the world, and includes trading between large banks, central banks, currency
speculators, corporations, governments, and other financial institutions. The average daily
volume in the global foreign exchange and related markets is continuously growing.
Traditional daily turnover was reported to be over US DOLLAR3.2 trillion in April 2007
by the Bank for International Settlements. Since then, the market has continued to grow.
According to Euromoney's annual FX Poll, The total business placed with the foreign
exchange providers totaled 175.3trn US DOLLAR volumes grew a further 41% between
2007 and 2008.
The purpose of FX market is to facilitate trade and investment. The need for a
foreign exchange market arises because of the presence of multifarious international
currencies such as US Dollars, Euros, Japanese yen, Pounds Sterling, etc., and the need
for trading in such currencies.
Most of the foreign exchange transactions take place through current account and
in a small amount in cash. The current account deposits are also called as demand
deposits. The instructions are sent to the banks involved via check, written transfer order,
phone, telegraphic instructions (wire transfer) and computer internet network. The central
bank of each country maintains an account with other nations central banks. As it is not
economical to have account separate for each currency so generally US DOLLAR is
mostly preferred. The currency which is used as a medium of transaction between two
countries is called as Vehicle currency. For e.g. If Indian importer has to pay to exporters
in Mexico and Uganda then instead of maintaining two separate accounts in the
respective national currencies it is easier to make the payments in US DOLLAR. US
DOLLAR is the most widely used vehicle currency.

REASONS FOR FOREIGN EXCHANGE:

1. Commercial reasons
This consists of foreign travel, purchase of foreign stocks and shares, the sale of a
factory to a company in another currency area, commission or royalties received from
abroad, ordinary payments for imports and receipts of exports.
2. Short term investments in money markets
Due to high interest rates abroad the domestic inventors are attracted to invest in
foreign countries where the interest rates are higher than domestic market.
3. Speculations
Speculations means making investment for something which one desires to have is
good investment but making an investment for something which one does not wish to
have but merely for making profit at some later time

CHARACTERISTICS OF FOREIGN EXCHANGE MARKET:

1. The foreign exchange market is the largest trading market in the world.
2. This market has extreme liquidity
3. The foreign exchange market is geographically dispersed, operational over the entire
world.
4. The market operates 24 hours a day except on weekends (from 22:00 UTC on Sunday
until 22:00 UTC Friday) i.e. longest working hours.
5. The exchange rate depends upon a variety of factors. Thus making the market highly
unpredictable.
6. The market has low margins of profit compared with other markets of fixed income
(but profits can be high due to very large trading volumes).
7. The market makes use of leverage.
According to the Bank for International Settlements, average daily turnover in global
foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main
financial markets accounted for $3.21 trillion.
EXCHANGE RATE
In finance, the exchange rates between two currencies specify how much one
currency is worth in terms of the other. It is the value of a foreign nations currency in
terms of the home nations currency. For example the exchange rate of 48.91 (as on 24 th
June 2009)Indian rupees (INR, Rs.) to the United States dollar (US DOLLAR, $) means
that Rs. 48.91 is worth the same as US DOLLAR 1. The foreign exchange rate indicates
that if a burger in US costs $1 then in India it costs 48.91. The foreign exchange rate of
any two currencies is not constant. In fact they change every minute, every second. There
are mainly two types of exchange rates
1. Spot Exchange Rates
2. Forward exchange rates
SPOT EXCHANGE RATES:
Price of one currency expressed in terms of another currency for a transaction to be
effected within two working days from the deal day.
FORWARD EXCHANGE RATE:
Price of one currency expressed in terms of another currency for the transaction to be
effected at some future date which is essentially beyond two working days.

VALUE DATE / DELIVERY DATE:

In a foreign exchange transaction first two parties agree to exchange two different
currencies at a specific exchange rate. This date of agreement is termed as contract date.
The date at which the actual transaction of currencies takes place is called as Value date
or Delivery date.
All foreign exchange contracts entered into by two parties are legally binding even
if oral or written &are for specific value date. The contracts can be made for a date which
is a working day in both countries. Foe e.g. A deal can not take place between as
American bank and Indian bank for 2nd October, which is a holiday in India.
PREMIUM AND DISCOUNT
If a currency is more expensive at the forward delivery than at the spot then it is
said to be at PREMIUM where as if the currency is cheaper at the forward delivery than
at spot then it is said to be at DISCOUNT.
CROSS RATES
When one foreign currency is traded for another; other than customers own currency,
the deal is called Cross deal and the price quoted is called as Cross Rates. [5] Thus cross
rate is a rate between third pair of currencies, by using the rates of two pairs, in which
one currency is common. A cross rate is usually constructed from the individual rates of
the two pairs of currencies having one currency common.
ASK RATE & BID RATE
During a foreign exchange transaction the rate quoted by the trader to buy a currency
(e.g. US DOLLAR) from the customer is called Bid rate, where as the rate quoted by the
trader to sell a currency (e.g. Euro) to the customer is called Ask rate. Consider the
following example: An Indian Corporate (customer) approaches a banker (Trader) for a
US DOLLAR quote, then the quote given is 48.9080-48.9120 Rs./$
This quote means following:
1. The quote is in INDIAN RUPEES 48.9080 & 48.9120 is amount in rupees per 1US
DOLLAR
2. The first number 48.9080 is the bid rate of the trader. The trader is ready to pay
48.9080 INDIAN RUPEES to buy 1 US DOLLAR. This is rupees quote to buy dollars
(buy 1 dollar)
3. The second number 48.9120 is the ask rate or offer rate. The trader is asking 48.9120
Rs. for selling 1 US DOLLAR. This is rupees quote to sell US DOLLAR.
4. The difference between bid and ask rate is called bid-ask spread. In the above example
it is 0.0040 Rs. The spread indicates the profit of the dealer.

DIRECT AND INDIRECT EXCHANGE RATE QUOTE:

The foreign exchange rates expressed in terms of domestic currency per unit of
foreign currency is called as direct quote. For e.g. 48.91 Rs./$ is a direct quote in India.
The foreign exchange rate expressed in terms of foreign currency per unit (or per hundred
units) of domestic currency is called as Indirect quote. For e.g. 2.04457 $/ 100 Rs. is a
indirect quote in India.

FOREIGN EXCHANGE DEALINGS

The various foreign exchange dealing products are as follows:
1. SPOT TRADES
Currencies are mostly bought and sold in spot trades. The spot refers to settlement
- payment and receipt of funds in respective currencies. Spot settlement takes place two
working days from the trade date, i.e. on the third day. Currency may also be bought and
sold, with settlement on the same day, i.e. today (TOD), or, on the next day, i.e. tomorrow
(TOM). All the exchange rates quoted on the screen, or in print, are for spot trade, unless
otherwise mentioned. The TOD and TOM rates are generally quoted at a disco, in to the
spot rate, i.e. the rate is less favorable to the buyer of the currency.
All Indian company purchases perfumes made in the United States and
immediately - brings it in India to distribute to its employees In this case it is a spot deal
just like all individual making a purchase in a shop Lind paying immediately. I'll such
transaction; the Indian Company will have to pay the US manufacture in US dollars. To
execute such transaction, this company will have to purchase dollars (ownership of dollar
deposit) in foreign exchange market by paying Indian Rupees.
For this purpose, the Indian Company will inquire in the foreign exchange market
for the price of dollar in terms of Indian rupee. For instance, it will get a quote form
foreign exchange dealer as I US$ = Rs. 45.56, then if the purchase order of perfumes is of
100 USD, then it will pay Rs. 4556, buy 100 dollars (through deposits, of course) and
shall pay the US manufacturer. Since the Dollar-Rupee quote was asked for 'immediate
transaction and dollars were purchased at that rate, such transaction is referred as 'Spot
Transaction'. In practice, transactions take place within two working days, after asking
the exchange quote. The price quote for dollar for such transaction Would be called as
'Spot Rate'.

2. FORWARD TRADES
While spot trade refers to current transaction, forwards refer to purchase or sale of
a currency on a future date. The exchange rates for forward sale or forward purchase are
quoted today; hence such transactions are referred to as forward contracts between the
buyer and seller. Treasury may enter into forward contracts with customers (merchant
business) or with banks (inter bank market) as counterparties Customers. i e importers.

Exporters and others, who expect payments or receipts in foreign currency, cover their
currency risk by entering into forward contracts with their respective banks. Treasury in
turn covers its customers exposure by taking reverse positions in the inter-bank market.
Forward exchange rates are arrived at on the basis of interest rate differentials of two
currencies, added or deducted from spot exchange rate. The difference between spot rate
and forward rate, say, for GBP/US DOLLAR therefore represents the difference in
interest rates in the USA and UK. The interest rate differential is added to the spot rate for
low-interest yielding currency (representing forward premium) and deducted from the
spot rate for high-interest yielding currency (representing forward discount). However,
forward rates fully reflect interest rate differentials only in perfect markets, where the
currencies are fully convertible and where the markets are highly liquid. Since Rupee is
not yet fully convertible, the demand for forward contracts influences the forward
exchange rates more than the interest rate differentials. Consider the following example:
A Company in India places order for a boiler to be manufactured in the United
States. The boiler would be delivered after three months from the date of order. At the
time of delivery the Indian Company has to pay USD 100,000. In foreign exchange
market, price of dollar in terms of rupee changes every minute. Because of this, Indian
Company is not sure how much would it cost after three months to purchase that boiler,
in Indian Rupees. Though price in terms of USD is pre-decided, price in terms of Rupees
is subject market changes.
If the Indian Company wishes to fix the price at which it will purchase dollars
after three months, it has to enter into 'forward contract'. It can get a quote from the
foreign exchange dealer, for the dollar price after three months. Such rate would be
different form Spot Rate and is called as 'Forward Rate'.

3. SWAP TRADES
The spot and forward transactions are the primary products in foreign exchange
market. A combination of spot and forward transactions is called a swap. Buying US
DOLLAR (with Rupees) in the spot market and selling same amount of US DOLLAR in
forward market, or vice versa, constitutes a US DOLLAR/INDIAN RUPEES swap. The
swap route is generally used for funding requirements, but there is also a profit
opportunity from interest rate arbitrage. When we have US DOLLAR funds, but we need
Rupee funds to invest in a commercial paper for 3 months, we may enter into a US
DOLLAR/ INDIAN RUPEES swap deal to sell US DOLLAR at spot rate (converting
into Rupee funds) and buying back the US DOLLAR 3 months forward (with Rupee
funds on maturity of the CP). If the interest earned on CP is higher than the cost of US
DOLLAR funds, the swap results in a profit. The cost of LIDS funds consists of interest
at market rate at forward premium for the 3 month period. The swap route is used
extensively to convert cash flows arising from principal and interest payments of loans
from one currency to another currency, with or without involving actual exchange of
funds. Such products fall under the scope of derivatives. Consider the following example:
One bank enters into an agreement with another bank to buy I million Japanese

Yen for US dollars in spot market and also simultaneously agrees with the same bank to
sell 1 million Japanese Yen for US dollars after 60 days. Exchange rates for both the
transactions are agreed at the time of contract. This is a swap deal.
Most of the forward contracts are accompanied by an equivalent spot deal. Thus
most of the forward contracts are actually part of a swap deal. Forward contracts without
an accompanying spot deal are called as 'outright forward contracts'.
It has been estimated that 65-70% of the turnover in the market is in the spot
segment, 20-25% in swaps and the rest in outright forward contracts.

4. OPTIONS TRADES
In finance, a foreign exchange option is a derivative financial instrument where
the owner has the right but not the obligation to exchange money denominated in one
currency into another currency at a pre-agreed exchange rate on a specified date.
Consider the following example:
A GBP-USD FX option might be specified by a contract giving the owner the
right but not the obligation to sell 1,000,000 and buy $2,000,000 on December 31. In
this case the pre-agreed exchange rate, or strike price, is 2.0000 USD per GBP (or 0.5000
GBP per USD) and the notionals are 1,000,000 and $2,000,000.
This type of contract is both a call on dollars and a put on sterling, and is often
called a GBPUSD put by market participants, as it is a put on the exchange rate; it could
equally be called a USDGBP call, but market convention is quote GBPUSD (USD per
GBP).
If the rate is lower than 2.0000 come December 31 (say at 1.9000), meaning that
the dollar is stronger and the pound is weaker, then the option will be exercised, allowing
the owner to sell GBP at 2.0000 and immediately buy it back in the spot market at
1.9000, making a profit of (2.0000 GBPUSD - 1.9000 GBPUSD)*1,000,000 GBP =
100,000 USD in the process. If they immediately exchange their profit into GBP this
amounts to 100,000/1.9000 = 52,631.58 GBP.

OFFSHORE BANKING

All over the world the business community is in search of locations where their
investments are safe and the funds can be taken out without any barriers and invested
comfortably for any ventures in any part of the world. Currently, Mauritius, Cyprus,
Seychelles and Hawaii are few centers attracting offshore banks. It has been estimated
that 65% of the worlds hard currency is held in offshore banks and that around 40% of
world trade in goods are transacted through offshore finance centers.
Offshore companies and/or offshore trusts are not the illicit hideaways that many
would have you believe. They can in fact provide you with enormous tax savings and
asset protection in a legal manner if setup correctly. They can also afford the ultimate
beneficial owner a certain amount of anonymity.
Offshore banks are banking units set up by foreign banks in territories where the
restrictions and regulations are limited and the interventions of the country of the location
is minimal. Offshore banking units bring foreign currency funds from non-residents and
the international money market, and invest them in the host country or in projects set up
by the host country in a third country.
Offshore banking is an important part of the international financial system. Experts
believe that as much as half the world's capital flows through offshore centers. Tax
havens have 1.2% of the world's population and hold 26% of the world's wealth,
including 31% of the net profits of United States multinationals.
Since 2003, the Government of India has permitted banks to set up offshore
banking operations in Special Economic Zones (SEZ). Hence the system of Offshore
Banking has become a part of the international business.
When you transfer money or assets to any international bank, situated in a district
outside your land of residence and decide that they would be handled by banking
establishments in that country you are doing offshore banking. The term offshore was
coined to name the British Channel Islands, which physically are located miles away
from the main land. These islands were picked out for investment purposes, because their
systems were free from any tax revenue, which can be a load on any investor. Being dutyfree, these islands soon attracted the attention of various banks that settled there to take
their share of the investment pie.
It may depend on your chosen banking path but the primary deposit needed by
offshore banks have touched rock bottom where it could be zero to even one dollar. The
documentation requirement in some banks is very little, with often only one document
needed.
One such reputed bank in this sector is HSBC, whose advertising slogan is worlds
local bank and their customers can operate their accounts, via online banking services,
sitting in any location in the world. HSBC has earned a reputation of being one of the
friendliest and service oriented overseas banking establishments in the world and this
makes them a favorite with customers all over the world.

Offshore banking forms a major chunk of the financial industries in the world,
with trillion of dollars being handled every day. In this intensely competitive market,
banks are doing everything they can to persuade customers and offering them increasing
benefits for free, and they are reaching out to all customers regarding their wide range of
benefits.
The origin of the offshore banking units can be traced to the growth financial
activity in tax havens. A tax haven is a place where non- residents can receive income or
own assets without paying high taxes. Some such places are Bahamas, Bermuda, HongKong, Panama and Switzerland.

OPERATIONS OF OFFSHORE BANKING:

Offshore banking centers are an integral part of the foreign currency market.
Therefore, the banking units set up at these centers compromise foreign currency
transactions, in form of accepting and placing of funds in foreign currency outside the
country of issue. The functional offshore centers engage in the issue and placement of
foreign currency certificates of deposits, loans/credits and bonds.
These centers contribute to the economic development of the host country in the
following ways:
1. The offshore banking units can raise foreign currency loans and bonds for the host
country at reasonable interest rates, due to their connections with well known
international banks. These foreign currency funds can be lent to the host countries or
invested in the onshore projects or even projects in the third country. Indirectly, the
host country gains better access to international capital markets.
2. The functional offshore centers contribute to the foreign exchange income of the host
country through local operating expenditure, such as rent paid on leased property,
salary paid to the local staff, and license fees/taxes recovered from the offshore units.
3. The presence of the functional units speed up the communication and transport
network in the host country, which helps to upgrade local skills and technology and
constitutes productive assets to the host country.
4. The onshore banking industry in the host country is compelled to improve its
efficiency and skills in order to retain its competitive edge.
5. The local staff employed at the centre develops sophisticated international banking
skills and this pool of highly trained personnel can be brought in to the host country
to attain a faster growth level.
Once an offshore centre consistently offers an attractive package of incentives, the
above benefits will accrue to the host country, which will be able to induce more and
more reputed foreign banks to set up banking units in its territory.

10

OFFSHORE BANKING METHODS OF OPERATION:

Offshore banks deal mostly with the other financial institutions and transact
wholesale business in currencies other than that of the country hosting the OFC. Offshore
banking is carried out typically through offshore establishments that are offshore
branches. Offshore branches are legally indistinguishable from parent banks onshore,
which facilitate intra- branch transfers. Offshore activities may also take place through
what are called parallel owned banks. These are banks established in different
jurisdictions having same owner, but at the same time they are not subsidiaries.
Offshore banks are mainly engaged in three types of transactions: Foreign
currency loans and deposits, the underwriting of bonds, and Over the Counter (OTC)
trading in derivatives for risk management and speculative purposes. Foreign currency
transactions form the bulk of offshore banking operations. They include transactions
between banks and original depositors, between banks and ultimate borrowers, and
between banks themselves on the inter bank market. Underwriting of bonds floated in the
international capital markets is also a significant part of the offshore banking activities.

ADVANTAGES OF OFFSHORE BANKING:

The following are the various advantages of the offshore banking:
1. Offshore banks can sometimes provide access to politically and economically stable
jurisdictions. This will be an advantage for residents in areas where there is risk of
political turmoil, who fear their assets may be frozen, seized or disappear (see the
corralito for example, during the 2001 Argentine economic crisis). However,
developed countries with regulated banking systems offer the same advantages in
terms of stability.
2. Some offshore banks may operate with a lower cost base and can provide higher
interest rates than the legal rate in the home country due to lower overheads and a
lack of government intervention. Advocates of offshore banking often characterize
government regulation as a form of tax on domestic banks, reducing interest rates on
deposits.
3. Offshore finance is one of the few industries, along with tourism, in which
geographically remote island nations can competitively engage. It can help
developing countries source investment and create growth in their economies, and can
help redistribute world finance from the developed to the developing world.
4. Interest is generally paid by offshore banks without tax being deducted. This is an
advantage to individuals who do not pay tax on worldwide income, or who do not pay
tax until the tax return is agreed, or who feel that they can illegally evade tax by
hiding the interest income.
5. Some offshore banks offer banking services that may not be available from domestic
banks such as anonymous bank accounts, higher or lower rate loans based on risk and
investment opportunities not available elsewhere.
6. Offshore banking is often linked to other structures, such as offshore companies,
trusts or foundations, which may have specific tax advantages for some individuals.

11

7. Many advocates of offshore banking also assert that the creation of tax and banking
competition is an advantage of the industry, arguing with Charles Tiebout that tax
competition allows people to choose an appropriate balance of services and taxes.
Critics of the industry, however, claim this competition as a disadvantage, arguing
that it encourages a "race to the bottom" in which governments in developed countries
are pressured to deregulateate their own banking systems in an attempt to prevent the
off shoring of capital.

DISADVANTAGES OF OFFSHORE BANKING:

Offshore Banking also has some disadvantages. Following are some of the
disadvantages of offshore banking:
1. Offshore bank accounts are less financially secure. In banking crisis which swept the
world in 2008 the only savers who lost money were those who had deposited their
funds in an offshore banking centre (the Isle of Man).
2. Offshore banking has been associated in the past with the underground economy and
organized crime, through money laundering. Following September 11, 2001, offshore
banks and tax havens, along with clearing houses, have been accused of helping
various organized crime gangs, terrorist groups, and other state or non-state actors.
However, offshore banking is a legitimate financial exercise undertaken by many
expatriate and international workers.
3. Offshore jurisdictions are often remote, so physical access and access to information
can be difficult. Yet in a world with global telecommunications this is rarely a
problem for customers. Accounts can be set up online, by phone or by mail.
4. Offshore private banking is usually more accessible to those on higher incomes,
because of the costs of establishing and maintaining offshore accounts. However,
simple savings accounts can be opened by anyone and maintained with scale fees
equivalent to their onshore counterparts. The tax burden in developed countries thus
falls disproportionately on middle-income groups. Historically, tax cuts have tended
to result in a higher proportion of the tax take being paid by high-income groups, as
previously sheltered income is brought back into the mainstream economy. The Laffer
curve demonstrates this tendency.
5. Offshore bank accounts are sometimes touted as the solution to every legal, financial
and asset protection strategy but this is often much more exaggerated than the reality.

12

ROLE OF THE OFFSHORE BANKS AND INVESTMENTS:

In todays highly integrated global network international Offshore Financial
Centers (OFCs) have come to play a vital role in facilitating investment worldwide. An
offshore centre exists for comfort and convenience. OFCs are jurisdictions where
offshore banks are exempted from a wide range of regulations, which are normally
imposed on the onshore institutions. Specially, deposits are not subject to statutory
reserve requirements. Bank transactions are mostly exempted from tax or treated under a
favorable fiscal regime and they are free of interest and exchange control restrictions. In
many cases, offshore banks are exempted from regulatory scrutiny with effect to liquidity
or capital adequacy.
An important activity in OFCs is the offshore banking, which is the cross border
intermediation of funds and provisions of services by banks residing in OFCs to the nonresidents. Offshore banking is an increasingly attractive alternative to heavily regulated
financial markets of the emerging economies. They exploit the risk return trade off by
being more profitable than the onshore banks and in many instances they have more
leverage.
OFFSHORE BANKS IN SINGAPORE:
Singapore is an established financial centre. The financial service sector is
supported by sound economic and financial fundamentals and attractiveness as a base for
financial institutions. This has been aided by its geographical location in a fast growing
area that bridges the gap between the time zones of the North American and European
financial markets, political and financial stability, a skilled labor force and significant
government incentives.
In Singapore, offshore banking is carried out by separate book-keeping entities
known as Asian Currency Units. ACUs do not have the right to incur assets and liabilities
in Singapore dollars but can engage in all types of banking transactions in other
currencies. Various incentives have been given to encourage the development of ACUs,
the most important of which is that ACUs face a tax on profits of only 10% as compared
with the standard corporate rate of 27% and are not subject to reserve and liquidity
requirements. ACUs have functioned in the region primarily as a centre for routing
capital from markets in Europe, North America and the Middle East to the fast growing
regions of Asia.

13

FOREIGN DIRECT INVESTMENT

It is defined as a company from one country making a physical investment into

building a factory in another country. It is the establishment of an enterprise by a
foreigner.
Foreign direct investment (FDI) occurs when an investor based in one country (the
home country) acquires an asset in another country (the host country) with the intent to
manage the asset.
Its definition can be extended to include investments made to acquire lasting interest
in enterprises operating outside of the economy of the investor. The FDI relationship
consists of a parent enterprise and a foreign affiliate which together form an international
business or a multinational corporation (MNC)
HISTORY OF FDI
Foreign direct investment (FDI) is a measure of foreign ownership of
productive assets, such as factories, mines and land. Increasing foreign investment can be
used as one measure of growing economic globalization. Maps below show net
inflows of foreign direct investment as a percentage of gross domestic products (GDP).
The largest flows of foreign investment occur between the industrialized countries
(North America, North West Europe and Japan). But flows to non- industrialized countries
are increasing.
US International Direct Investment
Flows Period
1960-69 1970-79 1980-89 1990-99 2000-07 Total -

Total
$ 42.18 bn =
$ 122.72 bn=
$ 206.27 bn =
$ 950.47 bn =
$ 1,629.05 bn=
$ 2,950.69 bn=

FDI Outflow
$ 5.13 bn
$ 40.79 bn
$ 329.23 bn
$ 907.34 bn
$ 1,421.31 bn
$ 2,703.81 bn

+
+
+
+
+
+

FDI Inflows Net

$ 37.04 bn
$ 81.93 bn
$ 122.96 bn
$ 43.13 bn
$ 207.74 bn
$ 246.88 bn

TYPE OF FOREIGN DIRECT INVESTORS

A foreign direct investor may be classified in any sector of the economy and could be
any one of the following:
1. An individual
2. A group of related individuals an incorporated or unincorporated entity
3. A public company or private company
4. A group of related enterprises
5. A government bodies an estate (law)
6. Trust or other societal organization
7. Any combination of the above
14

METHODS OF FOREIGN DIRECT INVESTMENTS

The foreign direct investor may acquire 10% or more of the voting power of an
enterprise in an economy through any of the following methods:
By incorporating a wholly owned subsidiary or company
By acquiring shares in an associated enterprise
Through a merger or an acquisition of an unrelated enterprise
Participating in an equity joint venture with another investor or enterprise

THE IMPORTANCE OF FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) provides a major source of capital which
brings with it up-to-date technology.
It would be difficult to generate this capital through domestic savings, and even if it
were not, it would still be difficult to import the necessary technology from abroad, since
the transfer of technology to firms with no previous experience of using it is difficult,
risky, and expensive.
Over a long period of time FDI creates many externalities in the form of benefits
available to the whole economy which the TNCs cannot appropriate as part of their own
income. These include transfers of general knowledge and of specific technologies in
production and distribution, industrial upgrading, work experience for the labor
force, the introduction of modern management and accounting methods, the
establishment of finance
related and trading networks, and the upgrading of
telecommunications services.
FDI in services affects the host country's competitiveness by raising the
productivity of capital and enabling the host country to attract new capital on favorable
terms. It also creates services that can be used as strategic inputs in the traditional export
sector to expand the volume of trade and to upgrade production through product and
process innovation.

IMPACTS OF FDI
1. Availability of scared resources
2. Social
3. Economical
4. Revenue to Government
5. Relationship with the world
6. Positioning in global market

15

ADVANTAGES OF FDI
FDI ensures a huge amount of domestic capital, production level, and employment
opportunities in the developing countries, which is a major step towards the economic
growth of the country. Advantages of FDI as following
1. Economic growth
This is one of the major sectors, which is enormously benefited from
foreign direct investment. A remarkable inflow of FDI in various industrial units in
India has boosted the economic life of country.
2. Trade
Foreign Direct Investments have opened a wide spectrum of opportunities in the
trading of goods and services in India both in terms of import and export production.
Products of superior quality are manufactured by various industries in India due to greater
amount of FDI inflows in the country.
3. Employment and skill Levels
FDI has also ensured a number of employment opportunities by aiding the setting up
of industrial units in various corners of India.
4. Technology Diffusion and knowledge Transfer
FDI apparently helps in the outsourcing of knowledge from India especially in the
Information Technology sector. It helps in developing the know-how process in India in
terms of enhancing the technological advancement in India.
5. Linkages and Spillover to Domestic Firms
Various foreign firms are now occupying a position in the Indian market through
Joint Ventures and collaboration concerns. The maximum amount of the profits
gained by the foreign firms through these joint ventures is spent on the Indian market.

DISADVANTAGES OF FDI
The disadvantages of foreign direct investment occur mostly in case of matters related
to operation, distribution of the profits made on the investment and the personnel.
1. Foreign direct investment may entail high travel and communications
expenses.
2. The differences of language and culture that exist between the country of the investor
and the host country could also pose problems in case of foreign direct investment.
3. The disadvantages of foreign direct investment occur mostly in case of matters related
to operation, distribution of the profits made on the investment and the personnel.
4. Sort of national secret something that is not meant to be disclosed to the rest of the
world.

16

FDI IN MAJOR SECTORS

The major sectors of the economy that have benefited from FDI:
1.
2.
3.
4.
5.
6.

Financial sector (banking and non-banking)

Insurance
Telecommunication
Hospitality and tourism
Pharmaceuticals
Software and Information Technology.

17

RESOURCE MOBILIZATION THROUGH PORTFOLIO

MANAGEMENT, ADR, GDR
Resource mobilization is a sociological theory that forms part of the study of
social movements. It stresses the ability of movement's members to acquire resources and
to mobilize people towards the furtherance of their goals.
PORTFOLIO MANAGEMENT:
If the foreign investor has only a sort of property interest in investing the capital
in buying equities, bonds, or other securities abroad, it is referred to as portfolio
investment. That is, in the case of portfolio investments, the investor uses his capital
in order to get a return on it, but has no much control over the use of capital. Portfolio
investments, which can be liquidated fairly easily compared to FDI are influenced by
short-term gains. Portfolio investments are generally much more sensitive than FDIs.
Direct investors have direct responsibility with the promotion and management of the
enterprise. Portfolio investors do not have such direct involvement with the promotion
and management.
Since the economic liberalization of 1991, there has been a surge in the FDI and
portfolio investments in India. There are mainly two routes of portfolio investments
in India viz., Foreign Institutional Investors (FIIs) like mutual funds and
through global Depository Receipts (GDRs), American Depository Receipts (ADRs)
and foreign currency Convertible Bonds (FCCBs).
GDRs/ADRs and FCCBs are instruments issued by Indian companies in the
foreign markets for mobilizing foreign capital by facilitating portfolio investment by
foreigners in Indian securities. Since 1992, Indian companies, satisfying certain
conditions, are allowed to access foreign capital markets by Euro issues.
PORTFOLIO INVESTMENTS
Portfolio equity flows to developing countries was conspicuous by their
absence prior to 1982. The average annual portfolio flows to developing countries which
was $ 1.3 billion during 1983-1990 shot up substantially in the 1990s.the portfolio
inflows are likely to significantly increase in future, supported by such factors as
further capital market liberalization and reforms in developing countries,
growth in global financial assets, growth in developing countries exports and
capacity to service foreign liabilities, industrial and general economic growth in
developing countries, increased diversification of investor portfolios growing resources
of the investors and faster equity market capitalization in developing countries.
The fact that this very small share of the total investment by the developed
countries portfolio investment would amount to large chunk of` investment in
the developing country markets has serious implications because of the high sensitivity
and volatility in portfolio management.

18

EURO/ADR ISSUES
As mentioned earlier, since 1992-1993, Indian companies satisfying certain
conditions, are allowed to access foreign capital markets by Euro-issues of global
Depository Receipts (GDRs) and Foreign Currency Convertible Bonds.
"A depository Receipt is basically a negotiable certificate, denominated in US
dollars, that represents a non-US company's publicly-traded Local currency (Indian
Rupee) equity shares. DRs are created when the local currency shares of an Indian
company (for example) are delivered to the depositorys local custodian bank, against
which the Depository Bank (such as the Bank of New York) issues DRs in US dollars.
The Depository Receipts may trade freely in the overseas markets like any other dollar
denominated security, either on a foreign stock exchange, or in the over-the counter
market, or among a restricted group such as qualified institutional buyers.
The prefix global implies that the ADRs are marketed globally rather than in a
specific country or market.
Companies with good track record of three years may avail of Euro issues for
approved purposes. According to the revised guidelines issued in November 1995
companies investing in infrastructure projects, including power, petroleum exploration
and refining, telecommunications, ports, roads and airports are exempted from the
condition of three-year track record. It is expected to help companies in the infrastructure
sectors to access cheap overseas funds. Earlier companies had to keep the funds raised
through Euro issues in foreign currency deposits with banks and public financial
institutions in India to be converted into Indian rupees as and when required for
expenditure approved end uses up to 25 per cent of the Euro-issue proceedings for
meeting corporate restructuring and working capital requirements. Companies are also
permitted to raise funds through issue of Foreign Currency Convertible Bonds (FCCBs)
and ADRs.

FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB)

Foreign Currency Convertible Bonds (FCCB are debt instruments issued in a
currency different than the issuers domestic currency with an option to convert them in
common shares of the issuer company. Its a quasi debt instrument to raise foreign
currency funds at attractive rate. FCCB acts like a bond by making regular coupon and
principal payments; and also gives the bondholder an option to convert the bond into
stock. Foreign Currency Convertible Bonds are attractive to both investors and issuers.
The investors receive the safety of guaranteed payments on the bond (if interest payment
is involved) and are also able to take advantage of any price appreciation in the
companys stock. Bondholders take advantage of this appreciation by means of warrants
attached to the bonds, which are activated when there is substantial price appreciation of
the stock. Due to the equity side of the bond, the coupon payments on the bond are lower,
thereby reducing its debt financing costs for the issuer.

19

FCCB have been extremely popular with Indian Corporate for raising Foreign
Funds at competitive rates. FCCB are treated as Foreign Direct Investment (FDI) by
Government of India. The Government has also liberalized FCCB guidelines from time to
time to give impetus to infrastructure development and expansion plan of Corporate
India. Indian companies that raised FCCBs from the market in the year 2005 included
Tata Chemicals, Jaiprakash Associates, Glenmark, Tata Power, Bharat Forge, Amtek Auto
and Ballarpur Industries. Corporates that hit the market in the first half of last year
included Reliance Energy, Indian Hotels, Bharti Tele, and Ashok Leyland.
AMERICAN DEPOSITORY RECEIPT
An American Depository Receipt (or ADR) represents the ownership in the
shares of a foreign company trading on US financial markets. The stock of many non-US
companies trades on US exchanges through the use of ADRs. ADRs enable US investors
to buy shares in foreign companies without undertaking cross-border transactions. ADRs
carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares
of US-based companies.
Each ADR is issued by a US depository bank and can represent a fraction of a
share, a single share, or multiple shares of foreign stock. An owner of an ADR has the
right to obtain the foreign stock it represents, but US investors usually find it more
convenient simply to own the ADR. The price of an ADR is often close to the price of the
foreign stock in its home market, adjusted for the ratio of ADRs to foreign company
shares. Depository banks have numerous responsibilities to an ADR holder and to the
non-US company the ADR represents. The first ADR was introduced by JP Morgan in
1927, for the British retailer Selfridges & Co. The largest depository bank is the Bank of
New York Mellon.
Individual shares of a foreign corporation represented by an ADR are called
American Depositary Shares (ADS).
ADR is a security issued by a company outside the U.S. which physically remains
in the country of issue, usually in the custody of a bank, but is traded on U.S. stock
exchanges. In other words, ADR is a stock that trades in the United States but represents
a specified number of shares in a foreign corporation.
Thus, we can say ADRs are one or more units of a foreign security traded in
American market. They are traded just like regular stocks of other corporate but are
issued / sponsored in the U.S. by a bank or brokerage. ADRs were introduced with a view
to simplify the physical handling and legal technicalities governing foreign securities as a
result of the complexities involved in buying shares in foreign countries. Trading in
foreign securities is prone to number of difficulties like different prices and in different
currency values, which keep in changing almost on daily basis. In view of such
problems, U.S. banks found a simple methodology wherein they purchase a bulk lot of
shares from foreign company and then bundle these shares into groups, and reissue them
and get these quoted on American stock markets. ADRs are listed on the NYSE, AMEX,
or NASDAQ.

20

Among the Indian ADRs listed on the US markets, are Infy (the Infosys
Technologies ADR), WIT (the Wipro ADR), Rdy(the Dr Reddys Lab ADR)

GLOBAL DEPOSITORY RECEIPT

A Global Depository Receipt (GDR) is a certificate issued by a depository bank,
which purchases shares of foreign companies and deposits it on the account. GDRs
represent ownership of an underlying number of shares. Global Depository Receipts
facilitate trade of shares, and are commonly used to invest in companies from developing
or emerging markets. Prices of GDRs are often close to values of related shares, but they
are traded & settled independently of the underlying share. Several international banks
issue GDRs, such as JP Morgan Chase, Citigroup, Deutsche Bank, Bank of New York.
They trade on the International Order Book (IOB) of the London Stock Exchange.
Normally 1 GDR = 10 Shares, but not always Global Depository Receipt (GDR) certificate issued by international bank, which can be subject of worldwide circulation on
capital markets. GDR's are emitted by banks, which purchase shares of foreign
companies and deposit it on the accounts. Global Depository Receipt facilitates trade of
shares, especially those from emerging markets. Prices of GDR's are often close to values
of related shares. Very similar to GDR's are ADR's.
Bajaj Auto , Dr. Reddys , HDFC Bank, Hindalco ,ICICI Bank , Infosys
Technologies ITC , L&T , MTNL , Ranbaxy Laboratories , State Bank of India ,VSNL,
WIPRO has the GDRs issued in the market.
EUROBOND
A Eurobond is an international bond that is denominated in a currency not native
to the country where it is issued. It can be categorized according to the currency in which
it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be
traded throughout the world - for example in Singapore or Tokyo.
Eurobonds are named after the currency they are denominated in. For example,
Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars
respectively. A Eurobond is normally a bearer bond, payable to the bearer. It is also free
of withholding tax. The bank will pay the holder of the coupon the interest payment due.
Usually, no official records are kept.
The majority of Eurobonds are now owned in 'electronic' rather than physical
form. The bonds are held and traded within one of the clearing systems (Euroclear and
Clearstream being the most common). Coupons are paid electronically via the clearing
systems to the holder of the Eurobond (or their nominee account).

21

RECENT DEVELOPMENTS:
ADR, GDR norms further relaxed by RBI as follows
1. Indian bidders are allowed to raise funds through ADRs, GDRs and external
commercial borrowings (ECBs) for acquiring shares of PSEs in the first stage and
buying shares from the market during the open offer in the second stage.
2. Conversion and reconversion (a.k.a. two-way conversion or fungibility) of shares of
Indian companies into depository receipts listed in foreign bourses, while extending
tax incentives to non-resident investors, allowed. The re-conversion of ADRs/GDRs
would, however, be governed by the Foreign Exchange Management Act notified by
the Reserve Bank of India in March 2001.
3. Permission to retain ADR/GDR proceeds abroad for future foreign exchange
requirements, removal of the existing limit of $20,000 for remittance under the
employees stock option scheme (ESOP) and permitting remittance up to $ 1 million
from proceeds of sales of assets here.
4. Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR
issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies
and direct investments in joint ventures and wholly-owned subsidiaries overseas.
5. Any Indian company which has issued ADRs/GDRs may acquire shares of foreign
companies engaged in the same area of core activity up to $100 million or an amount
equivalent to ten times of their exports in a year, whichever is higher. Earlier, this
facility was available only to Indian companies in certain sectors.
6. FIIs can invest in a company under the portfolio investment route up to 24 per cent of
the paid-up capital of the company. It can be increased to 40% with approval of
general body of the shareholders by a special resolution. This limit has now been
increased to 49% from the present 40%.
7. Two way fungibility in ADR/GDR issues of Indian companies has been introduced
subject to sectoral caps wherever applicable. Stock brokers in India can now purchase
shares and deposit these with the Indian custodian for issue of ADRs/GDRs by the
overseas depository to the extent of the ADRs/GDRs that have been converted into
underlying shares.
Earlier, once a company issued ADR / GDR, and if the holder wanted to obtain the
underlying equity shares of the Indian Company, then, such ADR / GDR would be
converted into shares of the Indian Company. Once such conversion took place, it was
not possible to reconvert the equity shares into ADR / GDR. The present rules of the RBI
make such reconversion possible, to the extent of ADR / GDR which have been
converted into equity shares and sold in the local market. This would take place in the
following manner:
1. Stock Brokers in India have been authorized to purchase shares of Indian Companies
for reconversion
2. The Domestic Custodian would coordinate with the Overseas Depository and the
Indian Company to verify the quantum of reconversion which is possible and also to
ensure that the sectoral cap is not breached.

22

The Domestic Custodian would then inform the Overseas Depository to issue ADR /
GDR to the overseas Investor
.
Earlier, Indian Companies required approval of the Government of India before issue
of Foreign Currency Convertible Bonds (FCCBs). The RBI, has vide FEMA Notification
No: 55 dated March 7th 2002, liberalized these rules. Accordingly:
1. Indian Companies seeking to raise FCCBs are permitted to raise them under the
Automatic Route upto US 50 Million Dollars per financial year without any approval.
2. The FCCBs raised shall be subject to the sectoral limits* prescribed by the
Government of India.
Maturity period for the FCCBs shall be at least 5 years and the "all in cost" at least
100 basis points less than that prescribed for External Commercial Borrowings.
Some restrictions had been imposed previously on the number of issues that could
be floated by an individual company or a group of companies during a financial year.
There will henceforth be no restrictions on the number of Euro-Issues to be floated
by a company or a group of companies in a financial year
.
GDR end-uses will include:
1. financing capital goods imports;
2. Capital expenditure including domestic purchase/installation of plant, equipment and
buildings and investments in software development;
3. Prepayment or scheduled repayment of earlier external borrowings;
4. Investments abroad where these have been approved by competent authorities;
5. Equity investment in JVs/WOSs in India. However, investments in stock markets and
real estate will not be permitted. Up to a maximum of 25 per cent of the total
proceeds may be used for general corporate restructuring, including working capital
requirements of the company raising the GDR.
Currently, companies are permitted to access foreign capital market through Foreign
Currency Convertible Bonds for restructuring of external debt that helps to lengthen
maturity and soften terms, and for end-use of funds which conform to the norms
prescribed for the Government for External Commercial Borrowings (ECB) from time to
time. In addition to these, not more than 25 per cent of FCCB issue proceeds may be used
for general corporate restructuring including working capital requirements.
FCCBs are available and accessible more freely as compared to external debt, and the
expectation of the Government is that FCCBs should have a substantially finer spread
than ECBs. Accordingly, the all-in costs for FCCBs should be significantly better than the
corresponding debt instruments (ECBs). Companies will not be permitted to issue
warrants along with their Euro-issue. The policy and guidelines for Euro-issues will be
subject to review periodically.

23

OTHER OPTIONS OF FUNDING IN VENTURES

There are various option available for investment management in International
Business as follows
1. ASIAN DEVELOPMENT BANK (ADB)
ADB or the Asian Development Bank is an international financial institute
operating since 1966. ADB provides financial assistance to its member nations for
poverty reduction and improvement in the quality of life. To finance its projects, ADB
issues bonds and also leverages the contributions made by participant countries.
The organization was started with the following objectives:
1. The social and economic development of the Asian and Pacific countries.
2. To boost cooperative and simultaneous regional growth among member countries.
As of early 2007, ADB had 67 members, with 48 regional and 19 non-Asian
members. Since Japan has been the largest shareholder, the bank has always been
governed by a Japanese President. ADB is headquartered at Metro Manila, Philippines.
FUNCTIONS
The main functions of ADB are:
1. Technical assistance provided to members, so that they can plan and execute
development strategies and projects.
2. Assistance to DMCs (Developing Member Countries) to coordinate policies designed
for development.
3. Equity investments and loans to member nations.
4. Encouragement to member nations to invest private and public capital for
development.
ACHIEVEMENTS
Asian and Pacific countries have shown considerable transformation in terms of
modernization. Till the end of 2007, 1,106 projects funded by ADB were evaluated. Out
of these, 65% were rated as successful and 27% partly successful. Some of the highlights
of the Asian Development Bank are:
1. Funding projects led by the Utah State University to bring labor skills to Thailand.
2. ROC Ping Hu Offshore Oil and Gas Development.
3. Technical assistance grant of US$2 million to Bangladesh to overcome the challenges
linked to climate change.
4. Trans-Afghanistan Gas Pipeline Feasibility Assessment.
5. Greater Mekong Subregional Program.
6. Loan of $1.2 billion to bail Pakistan out of an impending economic crisis.
7. Contributions towards the development of solar energy in India.
8. Strategic Private Sector Partnerships for Urban Poverty Reduction in the Philippines.
9. Earthquake and Tsunami Emergency Support Project in Indonesia.

24

CHALLENGES
Poverty is still one of the main challenges faced by ADB. The 2009 global recession
has severely impacted ADBs poverty alleviation goals. The following situations pose
major challenges for ADB:
1. Safe water is still not available to 60% of the people in the member countries.
2. Improved sanitation facilities have still not reached 70% of the people.
3. Out of every 100 children, 40 die before they reach the age of 15. Infant mortality rate
is very high.
4. Half of the undernourished population of the world lives in Asia.
5. Rising inflation has adversely impacted growth rates in Asia.
2. IMF, INTERNATIONAL MONETARY FUND
The International Monetary Fund or IMF came into existence in 1945, after the
end of World War II and at the beginning of the Cold War. Currently, the IMF has its
headquarters in Washington, D.C. and comprises 185 member nations. Considering its
growing relevance as an international lender that offers financial and technical aid to its
member nations, understanding the IMF is key understanding modern global economics.
Reasons for Founding the IMF
In an American town called Bretton Woods in New Hampshire, representatives of 45
western countries, led by the US and UK, and not including the Soviet Union and
communist bloc countries, agreed to establish a global economic institution. Of these, 29
countries signed the Articles of Agreement that included the following objectives:
1. Eliminate any disastrous repetitions of the Great Depression.
2. Facilitate global financial stability by stabilizing prevailing exchange rates.
3. Reduce poverty so that economic growth is triggered.
4. Increase international trade and employment.
MAIN COUNTRIES IN THE IMF
The main member of the IMF is the US, which also enjoys exclusive veto power.
Other countries that enjoy voting rights are Japan, Germany, France, China and the UK as
its main member. Based on the quota system, the IMF assigns each member country with
voting power, subscriptions and special drawing rights (SDRs).
Presently there are memberships of 184 countries over the world and a staff of
approximately 2,680 from 139 countries. Total Quotas to the extent of $312 billion (as of
8/31/05). Loans outstanding $71 billion to 82 countries, of which $10 billion to 59 on
confessional terms (as of 8/31/05) and technical Assistance provided 381 person years
during FY2005.Surveillance consultations concluded 129 countries during FY2005, of
which 118 voluntarily published information on their consultation.

25

RESPONSIBILITIES OF IMF
Article 1 sets out main responsibilities of IMF which are as follows,
1. Promoting international monetary cooperation.
2. Facilitating the expansion and balanced growth of international trade.
3. Promoting exchange stability.
4. Assisting in the establishment of a multilateral system of payments and
5. Making its resources available (under adequate safeguards) to members experiencing
balance of payments difficulties.
Generally, the IMF is responsible for ensuring the stability of the international
monetary and financial system - the system of international payments and exchange rates
among national currencies that enables trade to take place between countries. The Fund
seeks to promote economic stability and prevent crises; to help resolve crises when they
do occur; and to promote growth and alleviate poverty. It employs three main functions:
1. Surveillance:
This involves collaboration between the IMF and its member nations. The IMF
continues to assess the economic conditions of its members and offers in-depth advice
to help them formulate sound economic policies.
2. Lending:
Financial aid is provided to member countries who are struggling with balance of
payment problems. Through Exogenous Shocks Facility (ESF) and the Poverty
Reduction and Growth Facility (PRGF), the IMF helps its members and even
collaborates with the World Bank to lend money to them.
3. Technical Assistance:
The IMF offers technical assistance in areas such as banking, fiscal and economic
policies as well as exchange rate policies. It also helps its member nations to fight
threats such as terrorism and money-laundering.

ACHIEVEMENTS AND CHALLENGES OF THE IMF

It would take an entire book to cover all the achievements of the IMF but here are
some that are worth recollecting:
1. The IMF triggered Polands economic transition. The transition included institution
building, liberalization, and macro-economic management.
2. Initiatives by the IMF initiatives triggered economic growth, liberalized prices and
the spread of democratic institutions in countries like the Czech Republic, the Slovak
Republic the Baltics and Hungary.
3. In 2008, the Asia Pacific region made considerable progress in addressing downside
risks to economic growth.
Gaining sufficient political muscle to grapple with issues that affect economic
prosperity, offering speedy solutions to crises and ensuring economic transition for
developing nations are some of the challenges ahead for the IMF.

26

Critics of the IMF say that its policies often make economic crises worse because of
the severity of some of the austerity measures it imposes. As the global lender of last
resort, sovereign nations will normally try to find any other means they can of solving
their own problems before turning to the IMF. Whichever way you look at it, with the
growing risks in the global financial system, the Fund is going to be busy in the coming
years, and will continue its supporting role to help countries stabilize their commodity
and oil prices, pursue expansionary policies and reduce inflation.

3. IFC, INTERNATIONAL FINANCE CORPORATION

The International Finance Corporation (IFC) is a Washington, DC-headquartered
organization that promotes private sector investments in developing countries. To obtain
assistance from the IFC, countries must become its members. The organization has a total
of 181 members. TO become a member of the IFC, a country has to be a member of the
World Bank. It is also required to sign the Worlds Articles of Agreement and deposit its
Instrument of Acceptance at the Corporate Secretariat of the World Bank Group. The
primary objective of the IFC is the same as that of the World Bank.
WHAT IS THE IFC?
The IFC was founded in 1956 and is a member of the World Bank Group. It
provides investments to promote the private sector in developing countries. The
organization also provides technical assistance and consultations to businesses and
government. This is done with the aim of enhancing the standard of living of the people
in these nations. The IFC's advisory services focus on access to finance, business
enabling environment, environmental & social sustainability, infrastructure advisory, and
corporate advice.
IFC: HOW IT WORKS
The organization provides loans and equity financing for private sector industries
in developing nations. The equity investments are funded from the organizations retained
earnings and paid-in capital. The IFC also helps private companies mobilize financing in
the international financial markets. This is made possible because of the IFCs triple-A
ratings, strong shareholder support and considerable capital base.
IFC: MAIN COUNTRIES INVOLVED
Countries that actively contribute to the efficient functioning of the IFC include
Australia, Austria, Belgium, Canada, France, Greece, India, Switzerland, the United
Kingdom and the United States. Besides these countries, other government entities also
support the IFC.

27

IFC: ACHIEVEMENTS
The IFC has successfully launched and promoted projects in different countries.
Some of these are the Bujagali Hydro Project, Azerbaijan Advisory Projects, IFC against
AIDS, Russia Corporate Governance and the WorldHotel-Link project.
IFC: Pipeline
Some of the important projects in the IFCs pipeline as of May 2009 are:
1. Assistance to Saudi Banks to cope with risks
2. Investment in Kazakhstan retail to create jobs and fuel growth
3. Trade finance expansion with the Banco de Credito of Bolivia
4. Launch of National Strategy for business inspection improvement in Jordan

4. FII,( FOREIGN INSTITUTIONAL INVESTOR)

One who propose to invest their proprietary funds or on behalf of "broad based" funds
or of foreign corporate and individuals and belong to any of the under given categories
can be registered for FII.
1. Pension Funds
2. Mutual Funds
3. Investment Trust
4. Insurance or reinsurance companies
5. Endowment Funds
6. University Funds
7. Foundations or Charitable Trusts or Charitable Societies
8. Asset Management Companies
9. Nominee Companies
10. Institutional Portfolio Managers
11. Trustees
12. Power of Attorney Holders
13. Bank
An application for registration has to be made in Form A, the format of which is
provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned
documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and
sent to the following address within 10 to 12 days of receipt of application.

SUPPORTING DOCUMENTS REQUIRED ARE

Application in Form A duly signed by the authorized signatory of the applicant.
Certified copy of the relevant clauses or articles of the Memorandum and Articles of
Association or the agreement authorizing the applicant to invest on behalf of its clients
Audited financial statements and annual reports for the last one year , provided that the
period covered shall not be less than twelve months.

28

A declaration by the applicant with registration number and other particulars in

support of its registration or regulation by a Securities Commission or Self Regulatory
Organization or any other appropriate regulatory authority with whom the applicant is
registered in its home country.
A declaration by the applicant that it has entered into a custodian agreement with
a domestic custodian together with particulars of the domestic custodian.
A signed declaration statement that appears at the end of the Form.
Declaration regarding fit & proper entity.
ECONOMIC FIGURES
In 2004, FII investments crossed $9 billion, the highest in the history of Indian
capital markets.
The total net investment for the year up to December 29 stood at US$9,072
million while foreign investors pumped in about US$2,113 million in December.
Korea and Taiwan have always been the biggest recipients of FII money. It was only in
2004 that India managed to receive the second highest FII inflow at over $8.5bn.
In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities.

29

CONCLUSION
In todays world of Globalization, the world has become a global village. The
International Business has become of paramount importance. Thus the investors now
have the wide range of options for investment not just in the domestic country but across
globe. Also all over the world the business community is in search of locations where
their investments are safe and the funds can be taken out without any barriers and
invested comfortably for any ventures in any part of the world. Due to this the Investment
management has become a well known term among investors. There are various ways in
which the Investment management is done in the international business.
The Foreign exchange dealings not only allow investors to invest in foreign
countries but also provide the countries where they invest the necessary foreign exchange
reserves. Offshore banking units bring foreign currency funds from non-residents and the
international money market, and invest them in the host country or in projects set up by
the host country in a third country. Foreign Direct Investments has provides the
developing countries with the necessary funds required for its development. The portfolio
management ensures safety of investors funds due to wide range of securities
investment. The ADRs and GDRs allow companies to raise funds directly from foreign
countries for their various purposes. Also various international financial institutions like
Asian development bank, International Monetary fund provides necessary funds for the
development of countries in the entire world.

30