MBA-101: Business Environment Ques 3. What is Disinvestment? Explain various challenges to disinvestment programme.

Disinvestments, also known as divestments, are processes utilized by companies when there is a need or desire to initiate a reduction in capital investment. Essentially functioning as the polar opposite of an investment, the process of divestment involves selling off current investments in order to generate assets that can be used to better advantage in some other manner. Businesses sometimes use disinvestment as a means of changing the direction of the company in order to meet changing consumer needs and remain competitive. One of the easiest ways to understand divestment is to think in terms of a company that has successfully produced a product for many years. However, changing technology is shrinking the demand for the companys product. A new product is developed that is anticipated to recapture the interest of consumers. However, this will leave the company with several physical facilities and a great deal of equipment that is not required for the production of the new product. In order to generate revenue that will aid in the manufacturing of the new product, the company will undergo a period of disinvestment. The plants and other facilities that are no longer required for production are sold off, along with the now obsolete equipment. By generating income from the sale of these divested holdings, the company creates resources that constitute a capital investment in the new product. At times, a company may choose to sell off a subsidiary or business unit as part of a disinvestment strategy. Doing so allows the company to begin the migration from focusing on one market sector to a different sector that holds more promise. In some cases, disinvestment involves selling the business unit to another company. At other times, the business unit is spun off into a separate company altogether. Disinvestment can also occur when there is a decision to make changes in the regulation of an industry. Perhaps the most well known example of this type of disinvestment application would be the deregulation of the communications industry in the United States during the 1980s. As part of the process, the Bell System was completely divested and emerged as eight different entities: the new AT&T, and seven regional Bell companies that were known collectively as the Baby Bells. Because disinvestment does involve the sale of resources, companies often look very closely at the process before actually implementing any type of divestiture action. It is important to make sure that the investments that are released are not likely to be required in the future, and that the revenue generated from the sale of the investments is highly likely to result in increased profitability for the company in the long run.

Ques 4 Wrote short notes on the following

a) Monetary policy & its effect on business b) Fiscal policy & its effect on business a Monetary policy & its effect on business: Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves). The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. For example,in the United States, the Federal Reserve is in charge of monetary policy. Monetary policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow. In general, the U.S. sets inflation targets that are meant to maintain a steady inflation of 2% to 3%. How the Board of Governors of the Federal Reserve handle the nation's money supply is known as monetary policy and its effects on everyday life--including business--are profound. Borrowing The Federal Reserve sets the interest rate at which banks borrow money from them. When the Fed lowers interest rates, they make it cheaper for banks to access money, which in turn makes banks more likely to lend to businesses and consumers. Your business's ability to borrow or establish a line of credit can be largely affected by how expensive or cheap it is for banks to get money. Interest Rates The primary thing the Fed controls is the interest rate for banks to borrow money. Not surprisingly, banks turnaround and pass the savings or cost on to their borrowers. When the real interest rate is set low for banks, commercial and consumer interest rates also tend to run lower, making loans more affordable. Foreign Exchange Interest rates and the value of the dollar have a distinct relationship. When the Federal Reserve makes the cost of borrowing cheaper, more money starts flowing in the economy. The more

dollars that are out there, the less each one is worth. The dollar value drops. Often, when the Fed drops interest rates, it intends to lower the dollar's value in order to make U.S. goods more affordable, and therefore, increase U.S. exports, which can foster growth in business and jobs. Inflation During a time of low interest rates and increased money flowing through the economy, inflation can occur if economic production and employment do not increase. Stagnant business, despite increased cash, means that more money is chasing fewer goods and prices rise. One of the goals of monetary policy is to prevent excessive inflation while fostering economic growth. b Fiscal policy & its effect on business Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure. Changes in the level and composition of taxation and government spending can impact the following variables in the economy: Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income.

Fiscal policy refers to the use of the government budget to influence economic activity. Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Fiscal policies often affect the level of taxation faced by business. If government raises taxes, businesses have less money for hiring and investment and might pass the increase on to consumers in the form of higher prices. Undoubtedly, the fiscal policies have tremendous effects on individual behavior and everyday decisions made by households as well as businesses. A change tax schedules has direct effect in cost of production and the bottom-line for corporations or net income for individuals. Fiscal Policies and Employment One of fiscal policy component is taxation. An increase in taxes results in reduced net income. Organizations look into profitability factors and value of labor force in comparison to return on investment for use of technology or outsourcing tasks otherwise performed internally or domestically. Conversely, individuals may perceive an increase in tax as a form of punishment, which can lead to promotion of more black market labor (cash labor). Of course, a decrease in taxes may lead to further domestic hiring and lesser black market labor. Equally, it is important to note that changes in taxation policies, as a part of the fiscal monetary policy, can have significant effects on the intensity of employment market, and overall efficiency and productivity. The fiscal monetary policy of the government plays a crucial role on employment factors. Fiscal Policies and Production Interest rate is another component of the fiscal policy. Adjusting the interest rate can have adverse or favorable impact on production. To clarify, adverse in monetary policy is not negative

connotation, and favorable is not a positive suggestion. In the monetary policy when market is collapsing too fast the government may want to have an adverse result to bring the market under control. Change in interest rates alters velocity of "cash." Meaning, when interest rates hike, cash becomes scarce and credit tightens, as a result, monetary expansion becomes limited and production decreases. On the other hand, when interest rates decline, cash becomes more available and credit loosens, as a result, monetary expansion becomes more vibrant and production increases.

Ques5 What is Foreign Direct Investment? Explain its importance. Explain government policies regarding FDI. Foreign direct investment (FDI) is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. The accepted threshold for a foreign direct investment relationship, as defined by the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company. An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile. Importance of FDI: Foreign direct investment (FDI) provides a major source of capital which brings with it up-todate 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 labour force, the introduction of modern management and accounting methods, the establishment of financerelated 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 favourable 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.

The significance FDI is that such investments are risk free to the country and bring with it the advantages of advanced technology, management practices and assured markets. In due course there is a technology transfer as the local workforce gains knowledge of the manufacturing processes and management practices. The value added in these industries is a contribution to GDP and foreign exchange earnings. Therefore FDI contributes to foreign exchange earnings, employment creation and increases in incomes, especially of skilled and semi-skilled workers in these industries. POLICY ON FOREIGN DIRECT INVESTMENT IN INDIA Procedure under automatic route Procedure under Government Approval Prohibited Sectors General permission of RBI under FEMA Industrial Licensing Procedure for obtaining an industrial license Small Scale Sector Locational restrictions Environmental Clearances

India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following, which require prior approval of the Government:Sectors prohibited for FDI Activities/items that require an industrial license Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted) All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed. After the grant of approval for FDI by FIPB or for the sectors falling under automatic route, FDI could take place after taking necessary regulatory approvals form the state governments and local authorities for construction of building, water, environmental clearance, etc. Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors. Procedure under Government Approval FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB). Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion. Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI. Prohibited Sectors The extant policy does not permit FDI in the following cases: Gambling and betting Lottery Business Atomic Energy Retail Trading Agricultural or plantation activities of Agriculture (excluding Floriculture,Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations) General permission of RBI under FEMA Indian companies having foreign investment approval through FIPB route do no require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional Office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

Industrial Licensing With progressive liberalization and deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. At present, industrial license is required only for the following: Industries retained under compulsory licensing Manufacture of items reserved for small scale sector by larger units When the proposed location attracts locational restriction The following industries require compulsory license: Alcoholics drinks Cigarettes and tobacco products Electronic aerospace and defense equipment Explosives Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates of hydro carbon and derivatives Procedure for obtaining an industrial license Industrial license is granted by the Secretariat for Industrial Assistance in Department of Industrial Policy and Promotion, Government of India. Application for industrial license is required to be submitted in Form FC-IL to Department of Industrial Policy and Promotion. Small Scale Sector An industrial undertaking is defined as small scale unit if the capital investment does not exceed Rs. 10 million (approximately $ 222,222). The Government has reserved certain items for exclusive manufacture in the small-scale sector. Non small-scale units can manufacture items reserved for the small-scale sector if they undertake an obligation to export 50% of the production after obtaining an industrial license. Locational restrictions Industrial undertakings to be located within 25 kms of the standard urban area limit of 23 cities having a population of 1 million as per 1991 census require an industrial license. Industrial license even in these cases is not required if a unit is located in an area designated as an industrial area before 1991 or non-polluting industries such as electronics, computer software, printing and other specified industries. Environmental Clearances Entrepreneurs are required to obtain Statutory clearances, relating to Pollution Control and Environment as may be necessary, for setting up an industrial project for 31 categories of industries in terms of Notification S.O. 60(E) dated 27.1.94 as amended from time to time, issued

by the Ministry of Environment and Forests under The Environment (Protection) Act 1986. This list includes petrochemicals complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, papers etc., However, if investment in the project is less than Rs.1 billion (appox. $ 22.2 million), such Environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries. Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range, coastal areas, Doon Valley, Dahanu etc.) are guided by separate guidelines issues by the Ministry of Environment and Forests.