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1. PRESENTERS- ASHOK RATHORE- N11 JITENDER KUMAR- N73 KHANGLIN KAMSON- N74 RAJU - N43 VIKRANT SINHA - N78 VINAY BIR – N75 UNDER THE GUIDANCE AND SUPERVISION OF PROF. V.K.BHALLA INTERNATIONAL CAPITAL MOVEMENT
2. ICM- an introduction ICM- Factors and Drivers ICM- Regulatory framework-India Perspective. Impact of Capital Movement FDI & FII in India- Some facts and figures. What Future holds?? WHAT TO EXPECT:(CONTENTS)

3. Introduction:

   International Capital Movement - What Does it Mean : Capital Movement is not a new phenomenon. Some Communication and trade existed between distant civilizations too. Since the travels of Marco Polo seven centuries ago, global economic integration—through trade, factor movements, and communication of economically useful knowledge and technology—has been on a generally rising trend. International capital movement ( or Flows) refers to the outflow and inflow of capital from one country to another country. They do not relate to movement of goods or payment for exports and imports between countries. They Refer to the borrowing and lending between countries
4. INTRODUCTION: ….Contd. You must have come across news items like: A Taiwanese bank lends to a Thai firm Japanese residents buy stocks in an Indian listed company. A US private equity firm raising money in the US and investing in India. All these would be examples of Capital Movement. International Capital Market: is the group of closed interconnected markets comprising Government, private and International Agencies, in which residents of different countries trade assets such as currencies, stocks and bonds.
5. THEORIES OF INTERNATIONAL INVESTMENT. Theory of Capital Movement: This theory assumes existence of a perfectly competitive market and considers capital movement as factor movement to take advantage of the differential profit. Market Imperfection Theory: This theory assumes explanation in the monopolistic advantage theory expounded by Stephen in 1960. It says Foreign Direct Investment occurred in Countries with oligopolistic industry rather than those which had near perfect competition.
6. Theories of International Investment. Internalization Theory: An extension of Market Imperfection Theory, this theory states that foreign investment results from the decision of a firm to internalise the firm specific advantage like a superior knowledge of a product. Appropriability Theory: It is similar to the Internalization Theory and states a firm should be able to appropriate the benefits resulting from a technology generated after research and development.
7. THEORIES OF INTERNATIONAL INVESTMENT.Contd… Location Specific Advantage Theory: This theory states that foreign investment is pulled by certain location specific advantages and as per Hood and Young the four factors pertinent are: 1. Labour Costs. 2. Market Factors, viz. Market size, market growth, stage of development and local competition. 3. Trade Barriers 4. Government Policy.
8. THEORIES OF INTERNATIONAL INVESTMENT.Contd… International Product Lifecycle Theory: This theory developed by Reymond Vernon and Lewis T Wells, the production of a product shifts to different categories of countries through the different stages of the product lifecycle. Eclectic Theory: According to John Dunning, in an attempt to formulate a general theory, foreign investment by MNC result from three comparative advantages which they enjoy: Firm specific advantages Internalization advantage Location specific advantage.
9. 1. Direct Movement: The flow of direct capital movement means that the concern of investing country exercise holding a specified position over the assets of other country. setting up a corporation in a investing country for specific purpose for assembling the parent product, its distribution , sale and exports or creation of fixed assets by investing in infrastructures like power, railways and highways etc 2. Indirect Movement/portfolio investment: The movement of indirect capital means investment in other country by purchasing securities, shares or debenture.

   TYPES OF INTERNATIONAL CAPITAL MOVEMENT

10. TYPES OF INTERNATIONAL CAPITAL MOVEMENTContd….. Private and Government Capital : Private capital movement means lending to or borrowing from abroad by private individuals and institutions. profit motive is the principal factor behind such investment On the other hand, Government capital movements imply lending and borrowing between governments. Such capital movements are under the direct control of government. in fact government are important international lenders they make stability loan, loan to finance exports and imports and to finance particular projects
11. TYPES OF INTERNATIONAL CAPITAL MOVEMENTContd….. Home and foreign capital: Home capital is concerned with investments made abroad by residents of the country. Thus home capital refers to the out flow of capital, On the other hand, foreign capital implies investments made by foreigners in the country. Foreign capital is concerned with the inflow of capital.
12. TYPES OF INTERNATIONAL CAPITAL MOVEMENTContd….. Foreign Aid: It refers to public foreign capital on hard or soft terms, in cash or in kind and inter- government grants. foreign aid is tied or untied .aid may be tied by project and by commodities untied loan is a general purpose aid and is known as non-project loan Short- term and Long- term Capital: Short- term capital movements are for a period of less than one year maturity while long- term capital movements are of more than one- year maturity.
13. FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTS 1. Interest Rates: The most important factor which effect international capital movement is the difference among current interest rates in various countries. Rate of interest shows rate of return over capital Capital flows from that country in which the interest rates are low to those where interest rates are high because capital yields high return there.
14. FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTS Contd… 2. Speculation: Speculation related to expecting variations in foreign exchange rates or interest rates affect short capital movements. When speculators feel that the domestic interest rates will increase in future, they will invest in short- term foreign securities to earn profit. This will lead out flow of capital. On the other hand if possibility of fall of in domestic interest rates in future, the foreign speculator investing securities at a low price at present. This will lead to inflow of capital in the country.
15. FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTS Contd… 3.Expectation of profits: A foreign investor always has the profit motives in his mind at the time of making capital investment in the other country. Where the possibility of earning profit is more, capital flows into that country. 4. Bank Rate: A stable bank rate of the central bank of the country also influences capital movements because market interest rates depend on it. If bank rate is low, there will be out flow of capital and vice versa
16. FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTS Contd… 5.Production Costs: Capital movements depends on production costs in other countries. In countries where labor, raw materials, etc are cheap and easily available, more private foreign capital flows there. The main reasons of huge capital investment in Korea, Singapore, Hong Kong, Malaysia and other developing countries by MNCs is low production cost there.
17. FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTS Contd… 6. Economic Condition: The economic condition of a country, especially size of the market, availability of infrastructure facilities like the means of transportation and communication, power and other resources, efficient labor, etc encourage the inflow of capital there.
18. FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTSContd… 7.Political Stability: Political stability, security of life and property, friendly relation with other countries, etc. encourage the inflow of capital in the country. 8. Taxation Policy: The taxation policy of a country also affects the inflow or outflow of capital. To encourage the inflow of capital, Soft taxation policy should be followed, give tax relief to new industries and foreign collaborations , etc.
19. FACTORS AFFECTING INTERNATIONAL CAPITAL MOVEMENTSContd… Foreign capital policy: the government policy relating to foreign capital affects capital movements provision of different facilities relating to transferring profits dividend, interest etc to foreign investors will attract foreign capital similarly Fiscal and Monetary policy of a country also affect capital inflow and outflow Marginal Efficiency of Capital: MEC is directly related with the inflow of capital. Investors usually compare MEC in different countries and like to invest in a country where MEC is high comparatively.

20. AGENTS OF THE ICM

    The main Agents are: Commercial Banks Corporations Non Bank Financial Institutions Central Banks and other government agencies.

21. HOW THESE AGENT WORK

    Commercial Banks: the main agents in the capital movement , these act as conduits for incoming and outgoing capital flow. Corporations: they do so via cross border mergers and acquisitions and participation in cross border equity stake. Non Bank Financial Institutions: These assist in cross border deals and Capital movement.
22. Central Governments and Other Government and International Agencies: Governments form policies that govern inflow and outflow based on their socio economic judgments. International Agencies like the World Bank, IMF and Asian Development Bank allocate money into predetermined projects. The money is pooled from different member states. HOW THESE AGENT WORKContd….
23. POLICY INVOLVING ICM Government Policy across nations form the single most important factor in shaping Capital movement flow in and out of the country. Each country tries to regulate Capital flow into and out of the country and has evolved policies for same. The decision is based on the countries socio economic and political considerations. Put in place systems/policies/guidelines to stop money laundering and black money flow.

24. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEAGENCY

25. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVE Section I: Foreign Direct Investment: Who are eligible- investments can be made by non-residents in the shares / convertible debentures / preference shares of an Indian company. Two routes for capital inflow- a) Automatic route- foreign investor does not require any approval for investment from the RBI. b) Government route- prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required.
26. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Prohibition on Investment in India: Foreign Investment in any form is prohibited in the following sectors- (a) Retail Trading (except single brand product retailing) (b) Atomic Energy (c) Lottery Business including Government / private lottery , online lotteries, etc. (d) Gambling and Betting including casinos, etc (e) Business of chit fund (f) Nidhi company (g) Trading in Transferable Development Rights(TDRs) (h) Activities / sectors not opened to private sector investment (i) Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations) (j) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
27. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Type of instruments available for investment in India: Indian Companies can issue equity shares, fully and mandatorily convertible debentures and fully and mandatorily convertible preference shares subject to valuation norms prescribed by the RBI. Issue of other types of preference shares such as non convertible, optionally convertible or partially convertible have to be in accordance with guidelines applicable for External Commercial Borrowing (ECB) For debentures, only those fully and mandatorily convertible into equity within a specified time is reckoned as part of equity under FDI policy.
28. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Some Sectoral Analysis: How much FIIs can invest in Indian Industries. Micro and Small Enterprises: can issue shares to the extent of 24 % of their paid up equity to non resident. 2. Asset Reconstruction Companies: FII is not allowed and FDI upto 49 % of the paid up capital. 3. Infrastructure Companies in the security market: Composite Ceiling of 49 %, FDI limit of 26 %(prior approval of FIPB required) and FII limit of 23 % (only via secondary market). Credit Information Companies: Upto 49 % of the paid up capital with FIPB approval and RBI regulatory clearance. Investment in commodity exchanges: Composite Ceiling of 49 % with FDI limit of 26 % (with prior approval of FIPB) and FII limit of 23% (via secondary market route only). Public sector banks- overall statutory limit of 20% only.
29. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Reporting: An Indian company receiving investment from outside India for issuing shares / convertible debentures / preference shares under the FDI Scheme, should report the details of the amount of consideration to the Regional Office concerned of the Reserve Bank through it’s AD Category I bank, not later than 30 days from the date of receipt in the Advance
30. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Issue of shares by Indian companies under ADR / GDR : Depository Receipts (DRs) are negotiable securities issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs).
31. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. A company can issue ADRs / GDRs if it is eligible to issue shares to persons resident outside India under the FDI Scheme. Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market Proceeds so raised to be kept abroad till actually required. No end use restrictions.
32. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Section II- Foreign Portfolio Investment: Foreign institutional investors (FII) registered with SEBI and NRIs are eligible to purchase shares and convertible debentures issued by the Indian companies under the Portfolio Investment Scheme (PIS).
33. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Investment by FIIs under PIS: (i) Shareholding (a) Total shareholding of each FII/sub-account under this Scheme shall not exceed 10 per cent of the total paid-up capital or 10 per cent of the paid-up value of each series of convertible debentures issued by the Indian company. (b) Total holdings of all FIIs /sub-accounts put together shall not exceed 24 per cent of the paid-up capital or paid-up value of each series of convertible debentures. (c) FIIs are allowed to offer foreign sovereign securities with AAA rating and domestic Government Securities (subject to the overall limits specified by the SEBI from time to time; the current limit being USD 5 billion) as collateral to the recognised Stock Exchanges in India in addition to the cash for their transactions in cash segment of the market.
34. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Investment by Non Resident Indians(NRIs) NRIs are allowed to invest in shares of listed Indian companies in recognised Stock Exchanges under the PIS. NRIs can invest through designated ADs, on repatriation and non-repatriation basis under PIS route up to 5 per cent of the paid- up capital / paid-up value of each series of debentures of listed Indian companies. The aggregate paid-up value of shares / convertible debentures purchased by all NRIs cannot exceed 10 per cent of the paid-up capital of the company / paid-up value of each series of debentures of the company. The NRI investor has to take delivery of the shares purchased and give delivery of shares sold. Short Selling is not permitted.
35. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Section-III : Foreign Venture Capital Investments : Foreign Venture Capital Investor (FVCI) should be registered with SEBI should have approval from the RBI under Foreign Exchange Management Act. FVCI can invest in Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a Scheme floated by such IVCFs subject to the condition that the VCF should also be registered with SEBI. These investments by SEBI registered FVCI , would be subject to the SEBI regulation and sector specific caps of FDI.
36. FOREIGN INVESTMENT IN INDIA: REGULATORY PERSPECTIVEContd…. Investment by Multilateral Development Banks (MDBs) A Multilateral Development Bank (MDB) which is specifically permitted by the Government of India to float rupee bonds in India can purchase Government dated securities.
37. EXTERNAL COMMERCIAL BORROWINGS (ECB)
38. External Commercial Borrowings (ECB) External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years. Amount and Maturity Automatic Route: (without limit under approval route) a) The maximum amount of ECB which can be raised by a corporate other than those in the hotel, hospital and software sectors is USD 500 million or its equivalent during a financial year. b) Corporates in the services sector viz. hotels, hospitals and software sector are allowed to avail of ECB up to USD 100 million or its equivalent in a financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses. The proceeds of the ECBs should not be used for acquisition of land.
39. External Commercial Borrowings (ECB) vi) End-uses not permitted (a) For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc., are also considered as investment in capital markets). (b) for real estate sector, (c) for working capital, general corporate purpose and repayment of existing Rupee loans.

40. FORMS OF INVESTMENTS (OUTFLOW) CASE OF INDIA

41. Overseas investment Overseas investments in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognised as important avenues for promoting global business by Indian entrepreneurs. Transfer of technology and skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments. Prohibitions Indian parties are prohibited from making investment in a foreign entity engaged in real estate (meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges) or banking business, without the prior approval of the Reserve Bank.
42. Overseas investment Direct Investment Outside India : Automatic Route an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400 per cent of the net worth2 of the Indian party. The ceiling of 400 per cent of net worth will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. Investment in Equity of Companies Registered Overseas / Rated Debt Instruments Portfolio Investments by listed Indian companies Listed Indian companies are permitted to invest up to 50 per cent of their net worth as on the date of the last audited balance sheet in (i) shares and (ii) bonds / fixed income securities, rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companies.
43. Overseas investment Investment by Mutual Funds Indian Mutual Funds registered with SEBI are permitted to invest within an overall cap of USD 7 billion in : i) ADRs / GDRs of the Indian and foreign companies ii) equity of overseas companies listed on recognised stock exchanges overseas ; iii) initial and follow on public offerings for listing at recognized stock exchanges overseas iv) money market instruments rated not below investment grade; v) government securities where the countries are rated not below investment grade; Domestic Venture Capital Funds registered with SEBI may invest in equity and equity linked instruments of off-shore Venture Capital Undertakings, subject to an overall limit of USD 500 million
44. Overseas investment Reserve Bank would, inter alia, take into account the following factors while considering such applications: a) Prima facie viability of the JV / WOS outside India; b) Contribution to external trade and other benefits which will accrue to India through such investment; c) Financial position and business track record of the Indian party and the foreign entity; and d) Expertise and experience of the Indian party in the same or related line of activity of the JV / WOS outside India.
45. FDIInIndia….
46. Why India…. Largest democracy – political stability & consensus on reforms Fourth largest Economy (PPP) -A safe place to do business Liberal & transparent investment policies Largest reservoir of skilled manpower Second Largest Emerging Market Long-term sustainable Competitive advantage - High growth rate economy Source - www.dipp.gov.in ; Department of Industrial Policy & Promotion Ministry of Commerce & Industry Government of India
47. Budget 2011 More Avenues Opened for FIIs More sectors opened ; Equity caps raised in many other sectors Procedures simplified 2000-09 Up to 100% under Automatic Route in all sectors except a small negative list 2000 Up to 74/51/50% in 112 sectors under the Automatic Route 100% in some sectors 1997 FDI up to 51% allowed under the Automatic route in 35 Priority sectors 1991 Pre 1991 Allowed selectively up to 40% FDI Policy Liberalization
48. BUDGET 2011- Initiatives to Lure FDI & FIIs Infrastructure sector, the FII limit for investment in corporate bonds, issued by companies in the infrastructure sector, has been raised, A sharp rise from $5 billion to $25 billion will not only spur investments in the sector, but will also have a cascading impact on other sectors. FIIs would also be allowed to invests in unlisted bonds with a minimum locking period of 3 yrs Indian funds will be permitted to sell equity schemes to foreigners. Currently, only FIIs, NRIs and sub-accounts registered with Sebi can invest in mutual funds
49. Economic times 1st March 2011
50. Economic times 1st March 2011
51. PLANS AHEAD DIPP has invited views/ comments on FDI in Multi-band Retail FDI in Defence Sector FDI in Limited Liability Partnership Firms
52. FDI Inflows… Source: DIPP, Figures in $bn
53. Country-wise FDI Inflows (%)
54. FDI OUT-FLOWS… Figures in $bn
55. Major M&A Deals Undertaken Abroad by India Inc. Bharti’s Acquisition of Zain Telecom USD 10.7 billion Tata Steel buys Corus Plc USD 12.1 billion Hindalco acquired Novelis Inc. USD 6 billion Essar Steel acquired Algoma Steel USD 1.58 billion Suzlon Energy Ltd. acquires REpower USD 1.6 billion United Spirits Ltd. acquired Whyte & Mackay USD 1.1 billion
56. Sector-wise FDI Contribution…
57. Sector Wise Policy….
58. Prohibited Areas…..
59. FII FII means an ENTITY/FUND established or incorporated OUTSIDE INDIA which proposes to make investment in SECURTIES. FII’s are those investors that INDIRECTLY invest into the companies through the STOCK MARKET
60. Features… They can invest in: Equity Debt Derivatives Mutual Funds Dated Government Securities
61. Who can be FII…. Pension Funds Mutual Funds Insurance or Re-Insurance companies Foundations or Charitable Trust Asset Management Companies Portfolio Managers Charitable Trustees Endowment Funds Banks
62. Entry Of Unregistered Investors… FII buy stocks on behalf of the overseas investors who are not registered with SEBI but are interested in taking exposure in Indian securities market. P-NOTE: This was introduced & followed strictly in 2007 but now has been relaxed. FII to issue a Participatory Note (P-Note) to the unregistered investor on the investment amount he provides Introduced by RBI to curb the Money Laundering problems Order Execute Stock Broking firm Registered FII Unidentified Investor P-Note Confirm
63. Limits Of Investment…. 10% of issued capital – Single FII On behalf of each sub-account shall not exceed 10% of total issued capital. Sub-account registered under Foreign Companies, the limit is fixed at 5% of total issued capital. These limits are within overall limit of 24% / 49 % / 74% or the sectoral caps, as prescribed by Government or RBI. INV IN GOVT DEBT- Under 100% Debt Route : US$ 2.0 bn Under 70:30 Route : US$ 0.6 bn INV IN CORPORATE DEBT- Under 100% Debt Route : US$ 1.0 bn Under 70:30 Route : US$ 0.5 bn
64. Regulators…
65. MONITORING OF FII BY RBI : The Reserve Bank of India monitors the ceilings on FII investments in Indian companies on a daily basis. They even publish data regarding the amount of FII inflow & Outflow. A. Caution List When trigger limit which is 2% below the applicable limit, RBI issues notice to all concerned. B. Ban List Once the limit of FII reaches the overall limit, Reserve Bank puts the company under the ban list
66. FII Allowed upto 24% under PIS
67. FII Allowed upto 30% under PIS….
68. FII Allowed upto 40% under PIS….
69. FII Allowed upto 49% under PIS….
70. FII Allowed upto given Limits…. 35% 74% 74% 35% 33% 35% 100%
71. FII v/s Sensex Correlation….
72. Determinants …. MARKET SIZE LIBERALIZED TRADE POLICIES INCENTIVES AND GOOD OPERATING CONDTIONS POLITICAL SCENARIO DISINVESTMENT POLICIES
73. Advantages….. FINANCE ECONOMIC GROWTH BALANCE OF PAYMENTS DEVELOPS RELATIONSHIPS
74. Disadvantages…. ANYTIME WITHDRAWAL OUTFLOW OF MONEY SHORT TERM OPPORTUNITES EASY ROUTE WITHOUT IDENTITY INDIAN MARKET MORE SENSITIVE
75. FDI v/s FII….
76. Difference between FDI & FII… Time frame Management control Employment Stability Procedures Identity Active/Passive

77. SHORT TERM CAPITAL MOVEMENTLONG TERM CAPITAL MOVEMENT:-- ADVANTAGE & DISADVANTAGES

    Impacts of International Capital movement on an economy
78. Effects of Short-Term Capital Movement Capital movement in the short-term affect the monetary supply in an economy Primary Expansion or contraction Primary expansion or contraction in money supply is directly due to surplus or deficit in the current account of balance of payments. When exports exceed imports of country, the quantity of money increases with the exporters. On the contrary, when imports exceed exports, the quantity of money decreases with the importer because they are required to pay to the exporters more than what they receive. As a result, net supply of money declines. Secondary change The secondary changes in the money supply as a result of short-term capital movements are due to the impacts of reserves of banks. When exports exceed the imports of the country, payments are made by foreign monetary institutions in the central bank of the country which increase the deposits of national banks. On this basis, these bank lend more which leads to secondary expansion in money supply or credit. On the contrary, when import exceed exports, net result is decline in monetary supply in economy. Tertiary Effect When reserves of the central bank increase and if it purchases securities through open market operations, the expansion of money that takes place is called the tertiary effect. On the contrary when the reserves declines and if it sells securities, the supply of money falls.
79. LONG-TERM CAPITAL MOVEMENTSBENEFITS & ADVANTAGES Balancing Balance of Payment: Long-term capital movements are needed for balancing deficit or surplus in the balance of payment of a country. with the inflow of capital, the BOP deficit of the borrowing country improves, while that of the lending country may become adverse. But the lender country gains when its starts receiving interest, dividend, royalty, etc. which it can utilize to fill its current account deficit in balance of payment. ______________________________________Balance of Payment Account_________________________________________ Credits (+) /(Receipts) Debits (-)/ (Payments) _______________________________________________________________________________________________________ Current Account ExportsImports (a) Goods (a)Goods (b) Services (b)Services (c) Transfers Payments (c)Transfers Payments Capital Account (a) Borrowing from Foreign Countries (a) Lending tom foreign countries (b) Direct Investments by Foreign Countries (b) Direct Investment in Foreign Countries  Official Settlement Account (a) Increase in Foreign Official Holdings (a) Increase in Official Reserve of Gold and foreign Currencies Errors and Omissions __________________________________________________________________________________________________________
80. 2. Improving Terms of Trade: When with the inflow of capital, output increases, its export may increase and imports may decline in the long run. As a result term of trade may improve in relation to the capital lending country.
81. Long-Term Capital MovementsBenefits & Advantages Meeting Developmental Requirements: They are also needed for meeting the financial, industrial and development related requirements of the people living in the creditor and debtor countries. Increasing output, Income & Employment: The long-term capital movements helps in the process of capital formation and thereby increase output, income and employment. When a borrower country uses the foreign loan to establish an industry or start a capital project, there is increase in output, income and employment in the country.
82. 5. Changing factor proportions: the long-term capital movements also bring about changes in factor proportions of the country to which they flow. The capital-labour ration changes with the import of more capital.
83. 6. Maximizing Welfare: There is more and better utilization of the country’s resources. Modern government which borrows long-term capital from private and international financial institutions see to it that the borrowed capital is utilized in proper works, project and industries. Thus capital moves in those directions where it maximizes welfare.
84. Long-Term Capital MovementsBenefits & Advantages Equalizing Interest rates: There is a tendency for interest rates to equalize between countries involved in international capital movements. If there are no restrictions in international capital movements, capital moves from capital surplus country to capital scarce country because the interest rate is high in the latter. Ultimately, the interest rate increases in the capital exporting country and falls in the capital importing country. 8. Narrowing Technological Gap: When capital moves from one country to another, technologies from the lending country are transferred along with plants, equipment, etc. to the borrowing country. This tends to upgrade technologies in the latter country and the technological gap between the two countries is narrowed down.
85. Long-Term Capital MovementsBenefits & Advantages 9. Other Benefits: Higher real wages for domestic labour Increase in consumer welfare Increase in government fiscal revenue External economies Spillovers effect Production linkages
86. Limitations Absorptive Capacity: One of the important limitations to utilize the foreign capital is the absorptive capacity of the recipient country, i.e. the capacity to utilize the foreign capital effectively. Some of the important factors that affect the absorptive capacity are: Lack of infrastructure facilities Technical know-how Personnel Inputs Markets Feasible projects Inefficiency or inadequacy of administrative machinery.
87. Disadvantages Of Foreign Capital Capital tends to flow to high profit areas rather than to priority sectors Technologies brought in may not be appropriate Unfavorable effect on the Balance of payment Interferes in the national politics 5. Unfair & unethical trade practices
88. Disadvantages Of Foreign Capital 6. May lead to destruction & weakening of small & traditional enterprises 7. May result in creation of monopolies & oligopolistic structure Can displace domestic producer Private capital flows are not reliable source of financing for development 10. Costs associated with encouraging foreign Investment can have adverse effects on economy

89. Gain from trade

    International portfolio diversification can allow residents of all countries to reduce variability/risk of their wealth.- international capital market makes this diversification possible. International portfolio diversification can be carried out through exchange of : >Debt Instruments- Bonds and Bank Deposits >Equity Instruments- A share of stock.
90. Sovereign Wealth Funds
91. Sovereign wealth fund (SWF) is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments.
92. Sovereign wealth funds are, broadly defined, entities that can manage the national savings for the purposes of investment.These are assets of the sovereign nations which are typically (but not necessarily) held in domestic and different reserve currencies such as the dollar, euro and yen.The names attributed to the management entities may include central banks, official investment companies, state pension funds, sovereign oil funds and so on.
93. There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. The former can be characterized as maximizing long term return, latter serving short term currency stabilization and liquidity management.
94. Nature and PurposeSWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel it into consumption immediately. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds.
95. Other reasons for creating SWFs may be economical, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf War managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation is partially the expression of a desire to create an international finance center. The Korean Investment Corporation has since been similarly managed.
96. There are several reasons why the growth of sovereign wealth funds is attracting close attention. First, as this asset pool continues to grow in size and importance, so does its potential impact on various asset markets. Second, and relatedly, some critics worry that foreign investment by sovereign wealth funds raises national security concerns because the purpose of the investment might be to secure control of strategically-important industries for political rather than financial gain. Third, sovereign wealth funds are not nearly as homogeneous as central banks or public pension funds. Fourth, are central bank reserve managers – at least those among them who have accumulated massive foreign exchange reserves in recent years – starting to act more like sovereign wealth managers? What precisely is the difference between the two, and how can we expect them to develop and relate to one another in the future?