Professional Documents
Culture Documents
We are grateful to Ms Bindu Chutani for giving us an opportunity to know about the various institutions and types of international finance. During the research work we came across various interesting facts, which were helpful to us in providing relevant information for our project .we are also grateful to Mr.Arun Kumar and Mr. Sanjat panda who helped us in the completion of this project.
INDEX Contents
Introduction Objectives Methodology Types of finance Sources of finance Domestic finance Conclusion Bibliography Annexure
Page No(s).
Objective
To enhance our knowledge in the field of International Financial sources by explaining the central international financial issues involved in each of the major methods of raising capital.
Methodology
Secondary data was collected through various articles in magazines and books. Relevant information was downloaded from various informative websites. We visited the World Bank office, which is in Delhi.
INTRODUCTION
Money (also referred to as capital, funds, and financing) is a critical factor in starting a business. You will need "seed money" to launch the business to cover costs such as vehicles, equipment, machinery, land, building, fixtures, and supplies. Youll also require money for your daily operating expenses inventory, rent, taxes, salaries and wages, advertising, utilities, etc. The world is mainly divided into two blocks developing and developed countries. The developed countries have established various institutes, which lend finance to both developing and developed countries to promote economic progress and growth.
Owners contribute to the financing of the company by subscribing for shares (known as stock in the US). The capital of the company is divided into a number of small units, shares, to allow large numbers of individuals or organisations to participate in the ownership of a particular company. This entitles them to certain rights (e.g. to vote on important matters, such as the appointment of directors) and, at the discretion of the directors; they will be given a share in profits via a distribution of dividends. There are a number of different types of shares (e.g. ordinary shares and preference shares), which carry different rights, risks and rewards. Owners have full participation when they hold equity shares.
Another source of finance that is available to companies comes through borrowing. Companies may take out one or more loans from banks and finance houses. Lenders usually look for some kind of security to guarantee that the loan will be repaid, so the
The higher the ratio, the greater the importance of the equity market compared with loan finance. From the table it seems that at the end of 1995, Germany was most dependent on debt while Malaysia was most reliant on equity.
It is important to consider the different providers of finance, because they have the power to influence the way the organisation is run and to dictate the financial information that is generated to monitor its performance.
To protect investors and the integrity of the market, stock exchanges have regulations to limit the companies whose shares can be listed in the first place and to control and monitor their behaviour after listing. There are also limitations imposed on which individuals may trade on the markets. These regulations apply to both domestic and international companies and investors. Because of the potential impact on a countrys economy, these directions are likely to be strongly influenced by government policies. Oxelheim (1996: 45-6) explains that after the Second World War, policy makers encouraged domestic regeneration by limiting international investment. Liberalisation of cross border transactions began in the 1950s and 1960s. Generally, governments had tried to limit capital outflows to preserve domestic savings for domestic use and to limit capital inflows for monetary control or for political ends to avoid foreign control of key domestic businesses or property.
Foreign exchange controls and tariffs have been important along with limitations of credits and loans, but Oxelheim (1996: 46) points out that the OECD considered the most restrictive measures in the period up to 1990 had concerned the admission of foreign securities into domestic capital markets. Organisations such as the OECD and IOSCO have encouraged deregulation and integration of the worlds capital markets. However, as long as there is competition between nations and the provision of incentives, such as tax incentives, there will effectively be barriers to complete integration of the markets. Nevertheless, there are changes taking place. For example there is an increasing trend towards the issue of capital in a range of exchanges, and there are moves to ensure greater integration of stock exchanges, particularly in Europe and Scandinavia.
The investee country also benefits as jobs may be created and there is an inflow of knowledge, so governments may offer financial incentives to encourage this form of investment. This can be an important source of finance for the investing companies. The North East of England benefited from inward investment from a number of Asian countries through companies such as Nissan, Fujitsu and Samsung. In addition to bringing work and a degree of wealth to an area of high unemployment, the companies also provided training in high technology areas and introduced new management techniques, such as just in time stock control to a wider audience. However, the region was badly affected by economical difficulties in Asia in 1998.
Money (also referred to as capital, funds, and financing) is a critical factor in starting a business. You will need "seed money" to launch the business to cover costs such as vehicles, equipment, machinery, land, building, fixtures, and supplies. Youll also require money for your daily operating expenses inventory, rent, taxes, salaries and wages, advertising, utilities, etc. You can finance your business through debt (borrowed money) and equity (invested money). The type of financing you seek depends upon how much you need, how you plan to use it, how long you need it and how youll pay it back. In most cases, a combination of debt and equity is the most effective way to go. Debt financing and equity financing come in several forms and are used for a variety of purposes. Demand/Short-term loan A demand loan is usually a short-term loan that carries a floating rate of interest (it varies according to the prime rate). Business owners use short-term loans to cover cash-flow shortages, to purchase inventory, or to take advantage of supplier discounts. The loans are usually repaid within 30 to 180 days. A personal guarantee or company assets secure a short-term loan, or it may be extended solely on the basis of the companys financial statements, track record, and ability to repay the loan. By definition, a demand loan can be called at any time. This means you must pay back the loan on demand from the lender. Integration and associated globalization of capital market has open up vast array of new sources and form of projects financing. Todays corporate surers of large domestic as well multinational corporations can assess foreign capital market an easy as those at home. This consider these broadened opportunities by explaining the central international financial issues involved in each of the major method of rising capital. We consider the international aspects of raising capital, stock bonds parallel loan between corporation between bank and corporations and loan from host government and development banks .the importance of exchange rate risk, taxes, country risk, and issuance cost for the form of financial chosen.
Equity financing
The main international financial question concerning equity financing in which country stock should be issued. A second question concern the legal vehicle that should be used for raising equity capital.
Multicurrency bonds
Not all the bonds are dominated in a single currency. Rather, some Eurobonds are Multicurrency bonds. Some Multicurrency bonds give the lender the right to request repayment in one or two or more currencies. The amount of repayment are often set equal in the value at the exchange rate if effect when the bonds is issued. If, during the life of the bond exchange rates change, the lender will demand payment in the currency that has appreciated the most or depreciated the least. This reduces the risk to the lender in that it can help him or avoid a depreciating currency. It does however; add to the borrower's risk.
We have stated that gains on selling equity in one market rather than another or simultaneously in several markets-euro equities-depend on the segmentation versus integration of markets. We have also stated that bonds may be sold in a foreign currency denomination in the using that currency (foreign bonds) or in countries not using the denomination currency (eurobonds). The ability to select the currency of issue can lower borrowing costs but can also introduce foreign exchange exposure and risk because forward market are generally not available for hading on bonds. However a firm might actually reduce foreign exchange exposure and risk by borrowing in a foreign currency if it has an income in that currency. A large part of the financing of foreign subsidiaries of MNC's involving neither bonds nor equity. According to the survey by the US department of survey, approximately half of the financing of US based MNC's was generated inside the corporation.
Parallel loans
different countries, with the exchange reversed at a later date. There is no exchange rate risk or exposure for either firm, because each is borrowing and repaying in the same currency. Each side can pay Interest within the country where funds are lent according to the going market rate. The advantage of parallel loans over bank loans are that they can circumvent foreign exchange controls and that they avoid banks' spread on borrowing versus lending and on foreign exchange transaction. The problem with parallel loans is locating the two sides of the deal. As in other barter deals, the needs of the parties must be harmonious before a satisfactory contract can be achieved. While the banks might well know of financing needs, which are harmonious, they have little incentives a deal, which avoids their spreads. Consequently, houses rather than banks arrange a large portion of parallel loans.
institution to contribute for economic social progress in developing countries improve their living standard and productivity
Public Area
1) Judicial System 2) Bank Supervisory Authority 3) Laws governing inheritance
Private Area
1) Chambers of commerce
The World Bank helps India in different sectors. Some of them are as follows :-
Education
The World Bank aid to India began in 1972 and technical education projects in the late 80s. For the basic/primary education infrastructure in U.P and some other states, $165 million US dollars was given to Govt. of India. It covered 50 districts if U.P,12 districts in Gujarat, Himachal Pradesh and Orissa. For the development of technical education in India, WB provided $210 million US dollars.
Health
Since 1991,WB has increased its emphasis on health care in India. Some of the ongoing WB projects are as follows: 1) The National AIDS Control Project (1992) 2) The National Leprosy Elimination Project (1993) 3) The Andhra Pradesh First-referral Health Systems Project (1994) 4) The Tuberculosis (TB) Control Project (1997)
Nutrition
WB has assisted $32 million US dollars only for Tamil Nadu Integrated Nutrition Project (TINP) 1,TINP-2, Integrated Child Development Services (ICDS) 1991. The objectives of these projects are as follows: 1) Improve child nutrition and health practices. 2) Increase the range, coverage and availability of general nutrition and health services. 3) Promoting community involvement, etc.
Power
The WB assistance to the power sector mainly focuses on supporting reforms at levels(state as well as nation) to support State Electricity Boards (SEBs) which form the foundation of Indias power system.
Other sectors
The WB has also given loans to India in other major projects such as: 1) Narmada Dam Project 2) Sewage Disposal Project (Mumbai) 3) Herakud Dam Project
Since 1999 the World Bank has had a new approach to eradicate poverty, which is the comprehensive development framework. The framework seeks to improve development effectiveness by balancing macro economic factors with the structural, human and physical aspects of development. The framework principles are: 1) A long-term, comprehensive vision of development requirements and solution. 2) Greater country ownership of development strategies based on participation and inclusion. 3) Increasing the strategic partnership coordination among stakeholders. 4) Accountability for developmental outcomes through measurement of results.
Long-term sources
Ordinary shares
The risk capital of the company No guaranteed return, but potential is unlimited. High risk requires a high rate of return.
Issuing shares
Right issue
Offer existing shareholder the require to acquire new shares in exchange for cash. The law! (Preemptive) Proportionally allocated. Often offered at a lower than market value. Very common-low expenses. The investment already suites the risk/return requirements of investor.
Bonus issue
Involves the issue of new shares to existing shareholder proportionally. Effected by transferring a sum from reserves into paid-up share capital, and issuing share equivalent to the amount transferred. Reduce the reserve available for dividend. Reason for enacting bonus issues include: Stabilizing or reducing share prices.
Lender confidence (by increasing permanent capital). Market signals (it is the information contents of the bonus issue, rather then the issuer it self, which may generate an increase in wealth).
As an alternative dividend.
Public issue
Company makes a direct invitation to the public to purchase shares in the company. (Newspapers ad) Issuing house may be involved in helping to set the initial prices
Placing
Instead of a public issue, share are placed with selected investors, Eg: a bank Can be quicker and cheaper. Avoid concentration ownership of the company in just a few hands.
Many companies rely on loan capital for finance. Contract entered into specifying rate of interest, date of interest an capital repayment, term, security for loan etc Convertible loan to reduce lenders risk. Loan covenants allow the lender to impose certain obligation and restrictions on the borrower. Interest payments are tax deductible.
Finance leases
Essentially other type of loans A financial institution buys an asset and then leases in to the company. Ownership remains with the lesser (fin.inst), but risks and rewards are associated with the lessee. Easy to obtain, moderately cost effective, flexible, good for cash flow. Not tax efficient.
Short-term sources
Bank overdraft
A flexible form of borrowing (subject to bank agreement). Bank may require forecast or security. Repayable on demand forever.
Debt factoring
A service offered by some financial institutions Factor assumes responsibility for debt collection.
The factor makes the advance to the company of 80%-85% approved trade debtors. Rate charged by a factor tends to be similar to that charged on overdraft. Highly convenient in certain circumstances. May have an adverse affect on confidence in the company.
Invoice discounting
Involve a company approaching a financial institution for loan based on a proportion of the face value of outstanding credit sales. Responsibility credit sales. Responsibility for collection remains with the business. A more important source of fund than factoring because it is cheaper and more confidential.
Bibliography