UNIT 1

GLOBAL BUSINESS FINANCE

 Business Finance refers to the money and credit used by businesses to carry out their ac vi es.
 It is the process of acquiring, managing, and using funds effec vely to run a business smoothly
 Business finance ensures that a company has enough funds to purchase assets, pay salaries,
manage opera ons, and grow.

Example:
If a company wants to start a new factory, it needs business finance to buy land, build the factory,
purchase equipment, and hire workers.

Types of Business Finance:

1. Short-term finance – For daily opera ons (e.g., working capital).
2. Long-term finance – For fixed assets and expansion (e.g., loans, shares).
3. Internal finance – From within the business (e.g., retained profits).
4. External finance – From outside sources (e.g., bank loans, investors).

Key Components of Business Finance

1. Capital Budge ng (Investment Decisions)
 Deciding where to invest the company's long-term funds (e.g., new projects, machinery,
expansion).
2. Capital Structure (Financing Decisions)
 Deciding the mix of debt and equity to finance business ac vi es.
 Example: Should a business take a bank loan (debt) or issue shares (equity)?

3. Working Capital Management

 Managing day-to-day opera ons and short-term finances like:
o Cash
o Inventory
o Accounts receivable and payable
 Ensure smooth business opera ons
4. Financial Planning and Forecas ng
 Es ma ng future financial needs, costs, and revenues.
 Helps avoid shortage or excess of funds

5. Budge ng
 Crea ng a financial plan for income and expenses.
 Helps control costs and track performance.
6. Risk Management
 Iden fying and managing financial risks like:
o Interest rate changes
o Market fluctua ons
o Credit risks
 Involves using insurance, hedging, and diversifica on.

7. Financial Repor ng and Analysis

 Preparing financial statements like:
 o Balance Sheet
o Income Statement
o Cash Flow Statement
 Used to analyze performance, profitability, and decision-making.
8. Sources of Finance
 Understanding where the money comes from, such as:
o Internal: Profits, owner’s capital
o External: Loans, equity, venture capital, government grants
 Funding and Capital Structure

IMPORTANCE OF BUSINESS FINANCE

1. Helps in Decision-Making
 Finance gives correct informa on about profit, loss, expenses, and income.
Example: If a business wants to open a new shop, financial reports will help decide if it can afford it

2. Proper Use of Money (Resource Alloca on)

 Finance helps in using money where it is needed the most.
 Avoids spending on unimportant things.
Example: A company may decide to invest more in adver sing if it brings more customers.

3. Checks Performance
 By checking financial reports like profit/loss statements, the business knows how well it is
doing.
 It can improve if things are going wrong.
Example: If profits are low, the company can reduce unnecessary expenses or increase sales.

4. Supports Business Growth

 Finance helps in planning future steps like:
o Opening a new branch
o Launching new products
o Buying be er machines
Example: A small bakery using its profits to buy a bigger oven and serve more customers.
5. Reduces Risk
 Finance helps the business prepare for unexpected problems (like losses, delayed payments,
price hikes).
 It shows when to save or when to avoid risky investments.
Example: A company keeping emergency funds to manage during slow months.

6. Builds Trust and A racts Investors

 Good financial management shows that the business is stable and growing.
 Investors and banks will be more confident to give money or loans.
Example: A well-managed company gets a bank loan easily compared to one with no financial planning.
7. Legal and Tax Compliance
 Finance helps in paying correct taxes and following government rules.
 Avoids penal es and legal issues.
Example: A business that maintains proper accounts pays the right amount of GST and income tax on
me.
Principles of Business Finance
Principle 1: Time Value of Money (TVM)
 Money now is more valuable than the same money in the future.
 Because money can earn interest over me.
 Tools Used:
o Present Value (PV) – Value today of money to be received later (using
discoun ng).
o Future Value (FV) – Value in the future of money invested today (using
compounding).
Example: ₹100 today is worth than ₹100 a er 2 years because you can invest ₹100 now & earn interest.
Principle 2: Risk and Return
 Higher the risk, higher the expected return.
 Helps investors understand how much risk they are taking for expected profits.
 Key Tool: Standard devia on (measures risk or fluctua on in returns).
 Strategy: Use diversifica on to reduce risk.
Example: Stock market gives higher returns than fixed deposit, but with more risk. Inves ng in mul ple
stocks reduces the risk.
Principle 3: Cost of Capital
 Meaning: The minimum return a company must earn to sa sfy investors.
 Includes cost of:
o Debt (interest on loans)
o Equity (return expected by shareholders)
 Key Tool: Weighted Average Cost of Capital (WACC)
Example: If WACC is 10%, any project that earns less than 10% should be avoided because it won’t cover
the cost of funds.
Principle 4: Capital Structure
 Meaning: The mix of debt and equity used to finance the business.
 Goal: Find the best combina on to reduce cost and maximize profits.
 Affects risk, return, and control.
Example: A stable company like a u lity provider may use more debt. A startup with uncertain income
prefers equity to avoid fixed interest payments.
Principle 5: Financial Statement Analysis
 Meaning: Analyzing financial reports to understand the health and performance of a business.
 Key Ra os:
o Liquidity Ra os (e.g., Current Ra o) – Can the company pay short-term bills?
o Profitability Ra os (e.g., Return on Equity) – Is the company making enough profit?
o Solvency Ra os (e.g., Debt-to-Equity) – Is the company financially strong?
Example: A lender checks a company’s debt ra o before giving a loan to ensure it can repay.

Global Business Finance refers to managing financial ac vi es (like investment, funding, risk, and
budge ng) across interna onal borders for businesses opera ng globally.
It involves how companies raise, invest, and manage money when they are doing business in more than
one country.

Issues and Challenges of Global Business Finance

1. Currency Fluctua ons
 Meaning: Exchange rates keep changing, which affects interna onal payments.
 Impact: Profit can reduce if the value of foreign currency drops.
 Solu on: Use hedging to manage currency risk.
Example: A US company expor ng to India may lose money if the rupee weakens a er a deal is signed.

2. Poli cal and Economic Instability

 Meaning: Unstable governments, war, infla on, or recession in other countries affect business.
 Impact: Opera ons may stop, and demand may fall suddenly.
Example: A company inves ng in a country that suddenly changes import laws may face losses.

3. Regulatory Compliance
 Meaning: Each country has different rules on tax, trade, and finance.
 Impact: Difficult and expensive to stay compliant everywhere.
Example: A mul na onal company must follow both Indian and U.S. financial laws if it operates in both.

4. Cross-border Taxa on
 Meaning: Tax rules differ country to country.
 Impact: Complex tax planning, risk of double taxa on.
Example: A company may be taxed on the same income by both the source country and the home
country.

5. Cultural Differences
 Meaning: People in different countries have different business styles, values, and
communica on methods.
 Impact: Misunderstandings, failed deals, or poor marke ng strategies.
Example: A marke ng slogan that works in the U.S. might offend customers in Japan.

6. Supply Chain Disrup ons

 Meaning: Natural disasters, wars, pandemics, or trade restric ons can block the flow of goods.
 Impact: Delayed produc on, increased costs, lost revenue.
Example: COVID-19 lockdowns delayed shipments and hurt businesses globally.

7. Access to Capital
 Meaning: It’s harder to get loans or investments in some countries.
 Impact: Slower growth or missed opportuni es.
Example: A company may struggle to raise funds in a country with poor banking infrastructure.

8. Cybersecurity Risks
 Meaning: Global businesses use digital systems that are open to cyber-a acks.
 Impact: Financial losses, data the , damaged reputa on.
Example: Hackers stealing customer credit card info from a global e-commerce website.

9. Emerging Market Risks

 Meaning: New markets offer opportuni es but come with high uncertainty.
 Impact: Risk of currency crash, law changes, or poor infrastructure.
Example: A business entering a developing country may face unexpected government restric ons.
 Global Business Services (GBS)

Global Business Services (GBS) is a model where a company combines its support func ons like: Finance,
HR, IT, Procurement and Customer Service into one centralized unit to reduce cost, improve efficiency,
and offer be er services across all departments or branches worldwide.
Key Features of GBS
1. Centraliza on
o All support func ons are grouped in one place.
2. Standardiza on
o Uniform processes, rules, and systems across departments.
o Example: All employee records are maintained in same format using same so ware.
3. Shared Services
o Specialized units provide services for the en re organiza on.
o Example: A finance center manages billing, payments, and accoun ng for all
departments.
Benefits of GBS
 Reduces duplica on of work.
 Cuts opera onal costs.
 Improves coordina on and service delivery.
 Supports decision-making with consistent data.

DIGITAL TOOLS FOR BUSINESS

Digital tools are so ware pla orms or apps that make business tasks easier, faster, and more efficient.
Rise of GAFAM
Most businesses today use tools from the tech giants:
 Google
 Apple
 Facebook (now Meta)
 Amazon
 Microso
These tools help in storage, communica on, collabora on, marke ng, and more.

Basic Digital Tools & Their Uses

Tool Name Purpose Simple Example
Microso Teams Team communica on & mee ngs Like a virtual office with chat, video calls & file sharing.
Zoom Video conferencing Used in online classes, mee ngs.
WhatsApp Business Customer communica on Businesses send product catalogs & updates to clients.
Zendesk Customer support Helps track and respond to customer queries.
Sage Cloud Accoun ng Business accoun ng Tracks sales, expenses, and invoices.
Google Workspace Email, storage, docs Share files on Drive, write Docs, join Google Meet.
Dropbox File storage Save and share files online securely.
Google Marke ng Pla orm Digital marke ng Run ads and track performance.
Google Data Studio Data analysis Turn numbers into simple charts & reports.
MailChimp Email marke ng Send newsle ers and offers to customers.
Tool Name Purpose Simple Example
WordPress Website crea on Build blogs, business sites easily.
HubSpot CRM + marke ng + sales tools All-in-one tool to manage customers.
Instagram Digital marke ng Promote brand visually through posts & stories.
PayFit Payroll management Automates salary calcula on & payslips.
Twi er (X) Business updates & communica on Post quick updates to customers/followers.

GLOBAL DELIVERY MODEL (GDM)

 GDM is a strategic method where companies deliver services or projects using teams spread
across different countries.
 It ensures 24/7 produc vity, cost savings, and access to a global talent pool.
 Most popular in IT, BPO, KPO, and GBS sectors.
“Work happens across the world—while one team sleeps, another team works.”
Core Components:
Component Meaning
Onshore Work done in the same country as the client (for client interac on).
Nearshore Work done in nearby countries (same/similar me zone, easier travel).
Offshore Work done in distant countries (e.g., India, Philippines) to save cost.

Features of GDM:
 Geographic Spread: Teams in various global loca ons.
 24x7 Opera ons: Different me zones = con nuous work cycle.
 Talent Access: Hire skilled people from anywhere in the world.
 Cost-Effec ve: Offshore teams reduce costs.
 Scalable: Easily increase/decrease team size based on demand.
 Standardized Processes: Uses tools like Agile, Six Sigma.
 Risk Diversifica on: Opera ons not affected by local disrup ons.

Real-Life Example: Infosys/TCS

 Onshore (USA): Talks to clients, gathers needs.
 Nearshore (Mexico): Tests so ware with mezone alignment.
 Offshore (India): Codes, maintains, supports systems.

Benefits:
 Lower cost
 Faster delivery
 24/7 customer support

Advantages of GDM:
Advantage Descrip on
Cost Efficiency Labor costs are cheaper in offshore countries.
Time Zone Use "Follow-the-sun" model = con nuous work.
Talent Availability Access to wide and skilled global workforce.
Risk Reduc on If one loca on fails, work con nues elsewhere.
 Advantage Descrip on
Faster Delivery Round-the-clock collabora on speeds up project melines.

Challenges of GDM:
Challenge Solu on
Communica on Gap Use tools like Zoom, Teams, Slack.
Time Zone Issues Use overlapping work hours or rota onal shi s.
Cultural Differences Provide cultural training and adopt a unified work culture.
Data Security Ensure compliance (e.g., GDPR), use strong governance policies.

GDM in Global Business Services (GBS)

 GDM helps GBS centers deliver HR, Finance, IT, Procurement globally.
 Offers central governance with local customiza on.
 Promotes digital transforma on through tools like:
o SAP
o Oracle
o Salesforce

GDM + Digital Tools = Next-Level Delivery

Technologies used:
 Cloud compu ng
 Ar ficial Intelligence (AI)
 Robo c Process Automa on (RPA)
 Cybersecurity frameworks
Helps in:
 Crea ng remote, agile teams
 Suppor ng hybrid work models
 Con nuous service improvement
GDM means “different parts of a company’s work are done in different parts of the world to save me
and money.”

UNIT 2
Interna onal Financial Ins tu ons and Instruments
Mul na onal Bank
 A Mul na onal Bank is a banking organiza on that operates in mul ple countries through
physical branches, subsidiaries, or representa ve offices.
 These banks offer financial services such as deposits, loans, trade finance, and currency
exchange in the countries where they operate.
 These banks that have offices and do banking in more than one country.
Difference Between MNBs and Interna onal Banks:
Feature Mul na onal Bank Interna onal Bank
Opera ons Physical presence in many countries No physical branches in other countries
Services Offers local and interna onal banking Only cross-border banking via HQ
Example HSBC, Ci bank, Standard Chartered Bank that offers foreign services from HQ
Key Features of Mul na onal Banks:
 Global Presence: Operate in several countries with branches/subsidiaries.
 Full Banking Services: Provide local banking, loans, deposits, currency exchange, trade finance.
 Compliance with Local Laws: Follow banking regula ons in every country they operate in.
 Diversified Risks: Spread across regions to reduce business risk.
 Supports MNCs: Help mul na onal corpora ons manage global financial transac ons.
 Currency Services: Offer forex services for individuals and businesses.
 Technology Driven: Use advanced technology for secure, global transac ons.

Examples of Mul na onal Banks:

1. HSBC – Headquartered in the UK, operates in over 60 countries.
2. Ci bank – US-based, operates globally with local branches.
3. BNP Paribas – French bank with opera ons in 70+ countries.

FUNCTIONS OF MNBs:
 Facilita ng Interna onal Trade and Payments
 Foreign Exchange Management
 Cross-border Investment Services
 Global Risk Management
 Offering Trade Finance and Le ers of Credit
 Providing Interna onal Loans and Credit Facili es
 Advisory Services for Interna onal Business
 Suppor ng Mul na onal Corpora ons (MNCs)

World Bank
 The World Bank is an interna onal development organiza on owned by 187 countries.
 Main aim: Reduce global poverty by providing loans, knowledge, and training to help
developing na ons improve their economies and standard of living.

Func ons of the World Bank

1. Lending to Poorer Countries
o Gives financial assistance to governments of developing na ons.
o Focus areas: Infrastructure, educa on, health, agriculture, water supply, etc.
2. Research & Knowledge Sharing
o One of the world’s largest research canters in development topics.
o Offers advice on: Health, Educa on, Finance, Law and jus ce, Nutri on, Environment
3. Training and Capacity Building
o The World Bank Ins tute trains government officials globally.
o Training is delivered through local ins tu ons and research canters.

History of the World Bank

 Established: In 1944, during the Bre on Woods Conference.
 Purpose (originally): To rebuild Europe and Japan a er World War II.
 Official name: Interna onal Bank for Reconstruc on and Development (IBRD).
 Started opera ons: In 1946 with 38 member countries.
 Now: Has 187 member countries.

Organiza on Structure – World Bank Group

The World Bank consists of 5 organiza ons, together known as the World Bank Group:
Organiza on Role
IBRD Lends to middle-income and low-income countries
IDA Provides loans to low-income countries (with low or no interest)
IFC Supports private sector development
MIGA Encourages foreign private investment by offering guarantees
ICSID Resolves investment disputes between investors and countries

Decision-Making Structure
The World Bank works like a coopera ve:
 Each member country is a shareholder.
 More shares = more vo ng power.
 Shares depend on economic size.
Major Shareholders:
 United States (largest)
 Japan
 Germany
 United Kingdom
 France
Governance Bodies
1. Board of Governors
o Top-level decision makers.
o Usually the Finance Ministers or Development Ministers of member countries.
o Meet once a year at Annual Mee ngs.
2. Execu ve Directors
o Handle day-to-day opera ons.
o Each country is represented:
 5 largest shareholders appoint one Execu ve Director each.
 Other 182 countries are represented by 19 Execu ve Directors in groups.

Annual Mee ngs (With IMF)

 Held once a year with the IMF.
 Discuss:
o Global development priori es
o Strategies to reduce poverty
o World economy focus areas

INTERNATIONAL MONETARY FUND (IMF)

 The IMF is an interna onal organiza on with 190 member countries.
 Works to promote global monetary coopera on, financial stability, economic growth, and
employment.

Main Objec ves / Missions

1. Promote interna onal monetary coopera on
2. Facilitate balanced growth of interna onal trade
3. Promote exchange rate stability
4. Support economic growth and reduce poverty
 5. Avoid compe ve currency devalua on
History
 Formed in 1945 under the Bre on Woods Agreement (signed in 1944).
 Originally created to maintain a fixed exchange rate system.
 A er collapse of Bre on Woods in the 1970s, shi ed to a floa ng exchange rate system.

Key Ac vi es
1. Surveillance (Monitoring)
o Tracks global and na onal economies.
o Publishes World Economic Outlook reports.
o Advises governments on fiscal and monetary policy.
2. Capacity Building
o Provides training and technical support in areas like:
 Tax policy
 Sta s cs
 Financial regula on
 Governance
3. Lending
o Offers financial help to countries facing economic crises.
o Loans come with condi ons (reforms, austerity measures).
o Includes Structural Adjustment Programs (SAPs).

Sources of Funds
 Funded mainly through quotas from member countries.
 Quota = Member’s contribu on based on economic size.
 Example: The U.S. has the largest quota as it has the biggest economy.

Organiza on and Structure

 Board of Governors: Top decision-making body; includes finance ministers/central bank
governors of all member countries.
 Execu ve Board: Manages daily opera ons.
 Managing Director: Heads the IMF.
Cri cism
 SAPs o en cri cized for:
o Increasing poverty
o Favoring Western countries
o Forcing austerity on poor countries

Example
 If a country is in financial crisis (e.g., can't repay debts), it may borrow from the IMF.
 IMF helps by giving funds with condi ons like:
o Reducing government spending
o Increasing taxes
o Liberalizing trade

Difference Between IMF and World Bank

 Aspect Interna onal Monetary Fund (IMF) World Bank
Ensures global financial stability and monitors Focuses on poverty reduc on and economic
Main Focus
exchange rates development
Provides short-term financial assistance to stabilize Provides long-term loans and grants for development
Primary Func on
economies projects
Target Countries Countries facing economic crisis Developing and underdeveloped countries
Formed In 1945, as part of Bre on Woods Agreement 1944, also part of Bre on Woods
Stabilizing currency, suppor ng reforms, Infrastructure, educa on, health, agriculture, social
Funds Used For
financial monitoring welfare
Type of Help Loans with condi ons (Structural Adjustments) Loans or grants, o en interest-free or low-interest
Funded by capital from member countries and
Source of Funds Quotas from member countries
financial markets
IMF helps a country facing currency crisis or
Example Use World Bank funds a road project in a poor country
debt default
Headquarters Washington, D.C., USA Washington, D.C., USA

EXIM Bank (Export-Import Bank of India)

 EXIM Bank is India’s leading export financing ins tu on.
 It helps promote and support India's interna onal trade and investments.
 Established: 1982, under the Export-Import Bank of India Act, 1981.
 Owner: Wholly owned by the Government of India.
 Headquarters: Mumbai, Maharashtra.
 Current MD: Ms. Harsha Bangari.
Latest Context
 The Government of India will infuse ₹1,500 crore into EXIM Bank in the upcoming financial
year.
 This supports ini a ves like:
o Growth of the tex le industry
o Promo on of foreign policies
o Concessional finance schemes for developing countries

Func ons of EXIM Bank

🔸 A. Financial Products

Func on Explana on
Buyer’s Credit Provides loans to foreign buyers to purchase goods from Indian exporters. Helps SMEs.
Corporate Banking Offers finance to Indian companies to enhance export compe veness.
Lines of Credit (LOC) Offers long-term credit to Indian exporters to enter new interna onal markets.
Overseas Investment Finance Loans to Indian firms to invest in foreign joint ventures or subsidiaries.
Supports Indian companies to execute contracts abroad (like infrastructure, engineering
Project Exports
projects).

🔸 B. Services
 Service Purpose
Marke ng Advisory Services Helps exporters find overseas partners, distributors, or explore project opportuni es.
Research & Analysis Conducts research on interna onal trade, risk analysis, and country profiles.
Gives advice to improve exporter’s compe veness, manage risks, and seize
Export Advisory Services
opportuni es.

Term Deposit Scheme

 EXIM Bank also offers term deposit op ons, providing safe and stable investment op ons for
individuals or ins tu ons.
EXIM Bank is like a financial bridge between Indian exporters and the global market. It supports
exports, finances overseas investments, and helps India grow globally.

Global Depositary Receipt (GDR)

A nego able financial instrument issued by a depositary bank represen ng shares in a foreign
company. GDRs are traded on stock exchanges outside the company’s home country.
Key Features:
 Enables companies to raise capital in interna onal markets.
 Mostly denominated in USD or Euro.
 Traded on European stock exchanges like London, Luxembourg, Frankfurt, Singapore.
 Investors gain access to foreign equi es without opening foreign accounts.
 GDRs are backed by actual shares held by a custodian.
Purpose:
 Used for private placements or public offerings.
 Enhances global visibility and capital access.

American Depositary Receipt (ADR)

A nego able cer ficate issued by a U.S. bank represen ng shares in a foreign company. Traded in U.S.
markets like NYSE, NASDAQ.
Key Features:
 Denominated in U.S. dollars.
 Pays dividends in USD.
 Enables U.S. investors to invest in foreign companies easily.
 Listed as Level I (OTC), Level II (listed but no capital raise), Level III (listed with capital raise),
Rule 144A (private placement to QIBs).
Types:
 Sponsored ADR: Issued in partnership with the foreign company. Registered with SEC.
 Non-sponsored ADR: Created without the foreign company's involvement. Only traded OTC.
Purpose:
 Taps into U.S. capital markets.
 Increases investor base and share liquidity.

GDR vs ADR
Feature GDR ADR
Full Form Global Depositary Receipt American Depositary Receipt
Issued In Europe, Asia United States
 Feature GDR ADR
Currency USD, Euro, GBP USD
Target Investors Global (ins tu onal) U.S. retail & ins tu onal
Exchanges London, Frankfurt NYSE, NASDAQ, OTC
Regulatory Authority Local market regulators U.S. SEC
Compliance Less strict Must follow US GAAP & SEC
Purpose Raise interna onal capital Raise U.S. capital
Depository Banks Deutsche Bank, HSBC JPMorgan Chase, BNY Mellon
Examples Infosys (GDR), Wipro Infosys (ADR), HDFC Bank

External Commercial Borrowing (ECB)

External Commercial Borrowing (ECB) refers to loans or borrowings made by Indian companies from
non-resident lenders in foreign currency.
Purpose:
 Used by Indian firms to expand capacity or fund new investments.
 Helps bring foreign capital into the Indian economy.
Sources of ECB:
 Foreign Currency Conver ble Bonds (FCCBs)
 Foreign Currency Exchangeable Bonds (FCEBs)
 Commercial bank loans
 Buyers’ and suppliers’ credit
 Securi zed instruments
 Bonds issued abroad
🔹 Minimum average maturity: 3 years
Routes to Avail ECB:
Route Descrip on
Automa c Route No prior approval required if condi ons (amount, sector, end-use) are met
Approval Route RBI/government approval needed for sensi ve sectors or special cases

✅ Advantages of ECB
1. Lower interest rates (especially from countries like the USA, Eurozone)
2. Access to large foreign capital markets
3. No equity dilu on (no vo ng rights to lenders)
4. Diversified investor base
5. Global exposure and opportuni es
6. Supports na onal development – e.g., SME and infrastructure sector funding
7. Enhances profitability if managed properly

❌ Disadvantages of ECB
1. Over-borrowing risk due to low-cost funds → increased debt burden
2. Nega ve impact on credit ra ng if debt levels rise
3. Currency risk – loan and interest repayment in foreign currency may incur exchange rate
losses
 4. Hedging costs to manage forex risk can be high
5. Market image risk – possible fall in share value due to over-leveraging

Example:
A company in India wants to expand its manufacturing unit. It raises $50 million from a European bank
at a low interest rate under the automa c ECB route. The funds are used to buy imported machinery.
However, due to a fall in the Indian Rupee, it has to pay more in INR terms during repayment → this is
forex risk.

Foreign Currency Conver ble Bond (FCCB)

An FCCB is a conver ble bond issued by a company in a foreign currency (not the currency of the
issuing country).
 It starts as debt: The company borrows money and promises to pay interest (coupons) and
repay the money later.
 It can turn into equity: The bondholder (investor) has the op on to convert the bond into
shares of the issuing company.
 Since it's in foreign currency, both interest and final repayment are made in that currency.

How It Works
1. Issuer: A company (usually Indian) issues FCCBs in a foreign market, like in dollars or euros.
2. Investor: A foreign investor buys the bond, gets regular interest, and can choose to convert it
into shares of the issuing company later.
3. Conversion: If the company’s share price increases, the investor can convert the bond into
shares and make a profit.
4. If not converted: The investor will just get the interest and principal repaid in foreign currency.

Key Features
Feature Explana on
Currency Issued in foreign currency
Nature A mix of debt (bond) and equity (conver ble to shares)
Conversion Op on Investor can convert bonds to shares at a predetermined price
Used By Companies needing foreign investment
Investors Mostly foreign ins tu ons or hedge funds

Advantages of FCCBs
 Cheaper borrowing: Interest rates may be lower than domes c loans.
 No immediate equity dilu on: Shares are issued only if converted.
 A racts foreign capital: Helps Indian firms access global funds.
 Flexible for investors: If shares rise, they profit via conversion.
Disadvantages of FCCBs
 Currency risk: Since repayment is in foreign currency, if rupee weakens, the company pays
more.
 Debt burden: If bonds aren't converted, the company must repay full amount.
 Dilu on risk: If many bonds are converted, exis ng shareholders' ownership reduces.
 Market dependency: If share prices stay low, no one converts, and the company just pays
debt.
 Example:
An Indian tech company issues FCCBs worth $10 million in the US market.
 It promises 5% annual interest and a conversion price of ₹100 per share.
 If, later, the company’s share price rises to ₹150, the bondholders may convert their bonds into
shares and gain profit.
 If the price stays below ₹100, the bonds are not converted, and the company must repay $10
million with interest.

UNIT 3
FOREIGN DIRECT INVESTMENT AND FOREIGN INDIRECT INVESTMENT

FOREIGN DIRECT INVESTMENT (FDI)

Foreign Direct Investment (FDI) is when a company or individual from one country invests money
directly into a business or project in another country.
 It means buying or se ng up a business (like factories, buildings, or equipment), not just
buying shares in the stock market.
🔹 Example: If a U.S. car company sets up a manufacturing plant in India, that’s FDI.

Features of FDI:
Feature Explana on
Long-term investment FDI is made for long-term control and profit, not for quick returns.
Control and ownership Investor o en gets ownership and control of the business.
Physical assets Investment includes land, buildings, machines, etc.
Cross-border transac on It happens between two countries.
Profit repatria on Investor can send back profits to their home country.
Brings technology O en includes modern tools, methods, and training.

Importance of FDI:
1. Job Crea on – Helps generate employment opportuni es in the host country.
2. Infrastructure Growth – Boosts the development of roads, factories, IT parks, etc.
3. Economic Growth – Increases capital flow and helps GDP growth.
4. Global Rela ons – Strengthens interna onal business and diploma c es.
5. Technology Transfer – Brings advanced techniques, be er management prac ces.
6. Improves Compe veness – Encourages domes c companies to improve quality.
Advantages of FDI:
Advantage Explana on
Boosts Economy Injects foreign capital and increases produc on.
Creates Jobs New businesses need local employees.
Access to New Tech Foreign companies bring in modern technology.
Improves Exports Helps produce goods that can be exported.
Increases Compe on Leads to be er services, prices, and product quality.
Improves Skills Local workers get trained in interna onal prac ces.
 Example: When Apple opens a manufacturing unit in India, it creates jobs, increases exports, and
boosts local skill development.

Disadvantages of FDI:
Disadvantage Explana on
Profit Repatria on Profits may be sent back to the foreign country, not reinvested locally.
Loss of Local Businesses Big foreign firms may kill small domes c players.
Cultural Influence May affect local tradi ons, values, or consumer preferences.
Over-dependence Relying too much on foreign companies may hurt local independence.
Environmental Impact Some companies exploit resources or damage the environment.

Example for Be er Understanding:

Let’s say Amazon (USA) invests ₹1000 crore to open new warehouses in India:
 They hire 10,000 people → Job crea on ✔
 Introduce advanced logis cs tech → Technology transfer ✔
 But send profits back to the U.S. → Profit repatria on ❌
 Local retailers may suffer → Loss of small business ❌