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Multi national corporations and forex




                                INTRODUCTION TO MNCS

An enterprise operating in several countries but managed from one (home) country. Generally, any
company or group that derives a quarter of its revenue from operations outside of its home country is
considered a multinational corporation.

There are four categories of multinational corporations:

   1. A multinational, decentralized corporation with strong home country presence,
   2. A global, centralized corporation that acquires cost advantage through centralized production
       wherever cheaper resources are available,
   3. An international company that builds on the parent corporation's technology or R&D, or
   4. A transnational enterprise that combines the previous three approaches. According to UN
       data, some 35,000 companies have direct investment in foreign countries, and the largest 100
       of them control about 40 percent of world trade.
                          INTRODUCTION TO FOREX MARKET

The foreign exchange market is a non-stop cash market where currency of nations are traded,
typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across
local and global markets, hence investments appreciate or depreciate in value based upon currency
movements. Foreign exchange market conditions can change at any time in response to real-time

The need for foreign exchange market therefore arises out of the fact that the power of domestic
legal tender, circulating in the form of currency notes, to redeem commercial liabilities legally, is
limited by national boundaries. Any economic transaction that takes place between residents of two
different countries involves exchange of some currency between those two residents. When these
transactions get executed through the international bank through the intermediation of banks, one
currency gets converted into another. This process is called foreign exchange.

Some of features of the foreign exchange market are,

   1. This market does not involve any physical transfer of currencies in the form of cash.

   2. This market does not have any physical structure

   3. This market helps to establish the rate of conversion between currencies. Conversion rates are
          called foreign exchange rate.

   4. Receipts and payments in foreign currencies take place by way of transfers to and from
          demand deposit accounts at both the ends of the transaction. This process is facilitated by
          international banks through NOSTRO & VOSTRO accounts maintained with correspondent

The foreign exchange currency trading in India is growing at a really good pace however it is said
that the forex market is still in the early phase in India. Nevertheless there are already several big
players in the Indian forex market. Let us find out details on the forex market history in India to
know more about Indian forex market.

The history of forex market in India owes its origin to an important decision taken by the Reserve
Bank of India (RBI) in the year 1978 which allows banks to undertake intra-day trading in foreign
currency exchange. As a result of this step, the agreement of maintaining ‘square’ or ‘near square’
position was to be complied with only at the close of business every day. The history of currency
trading in India also clearly shows that during the initial period when these economic reforms started,
the exchange rate of national currency i.e. Indian rupee used to be determined by the RBI in terms of
a weighted basket of currencies of India’s major trading partners. Moreover, there were some fairly
significant restrictions on the current account transactions.

Then again during early nineties, more economic reforms were introduced which witnessed the
important two-step downward adjustment in the exchange rate of the Indian rupee in order to place it
at a suitable level in line with the inflation differential so that the competitiveness in exports could be
maintained. With these economic reforms which resulted in the unification exchange rate of the
rupee heralded the commencement of the new era of market determined forex currency rate regime
of rupee in the Indian forex history which was based on the demand and supply principle in the forex

Another landmark in Forex history of India came with the appointment of an Expert Group
committee on Forex currency in 1994. This committee was made to study the forex market in detail
so that step can be taken out to develop, deepen and widen the forex market in India. The result of
this exercise was that banks were significant freedom in many of its market operations related to like
forex market development and liberalization. The freedom was granted to banks in term of fixing
their trading limits, allowed to borrow and invest funds in the overseas markets up to specified limits,
accorded freedom to make use of derivative products for asset-liability management purposes.

The corporate were granted the flexibility to book forward cover based on previous turnover and
were given freedom to make use of financial instruments like interest rates and currency swaps in the
international currency exchange market. The other feature of forex history in India is that a large sum
of foreign exchange in India came through the large Indian population working in foreign countries.
However, the common man was not much interested in forex trading. the things are changing now
and with the growing economy more and more people are showing interest in forex trading and are
looking out for hedging currency risks.

National Stock Exchange of India popularly known as NSE was the first recognized exchange in
Indian forex history to launch forex currency futures trading in India. These currency futures are
beneficial over overseas forex trading especially to comparatively small traders and retail investors.
Another important point to know is that before discussing the history of forex market in India, it is
important to know the central government of India has the powers to control transactions in foreign
exchange and hence forex transactions in India are managed by the government authorities.
                                NEED OF FOREX BY MNCS

Arguments for MNCs(The positive role): The MNCs play an important role in the economic
development of underdeveloped countries.

1. Filling Savings Gap: The first important contribution of MNCs is its role in filling the resource
gap between targeted or desired investment and domestically mobilized savings. For example, to
achieve a 7% growth rate of national output if the required rate of saving is 21% but if the savings
that can be domestically mobilised is only 16% then there is a ‘saving gap’ of 5%. If the country can
fill this gap with foreign direct investments from the MNCs, it will be in a better position to achieve
its target rate of economic growth.

2. Filling Trade Gap: The second contribution relates to filling the foreign exchange or trade gap.
An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the
MNCs can generate a net positive flow of export earnings.

3. Filling Revenue Gap: The third important role of MNCs is filling the gap between targeted
governmental tax revenues and locally raised taxes. By taxing MNC profits, LDC governments are
able to mobilize public financial resources for development projects.

4. Filling Management/Technological Gap: Fourthly, Multinationals not only provide financial
resources but they also supply a “package” of needed resources including management experience,
entrepreneurial abilities, and technological skills. These can be transferred to their local counterparts
by means of training programs and the process of ‘learning by doing’.

Moreover, MNCs bring with them the most sophisticated technological knowledge about production
processes while transferring modern machinery and equipment to capital poor LDCs. Such transfers
of knowledge, skills, and technology are assumed to be both desirable and productive for the
recipient country.

5.Other Beneficial Roles: The MNCs also bring several other benefits to the host country.
(a) The domestic labour may benefit in the form of higher real wages.
(b) The consumers benefits by way of lower prices and better quality products.
(c) Investments by MNCs will also induce more domestic investment. For example, ancillary units
can be set up to ‘feed’ the main industries of the MNCs
(d) MNCs expenditures on research and development(R&D), although limited is bound to benefit the
host country.


                                           NEED FOR


                        INWARD FDI
                      International Equity Route

                      International Debt Route
                      International Loan Syndication
Industry/                                                                                Sector:

                      International Trade Credit

Type:                          Listed on bourses (Publicly limited)

Presence:                      More then 16 nations world wide.

Strategy used for Expansion: Uses Mergers, acquisitions, alliance, minority stakes and JVs

Outward FDI:                   Ranks next to Sun Pharma in Pharma sector
                               (As far as outward FDI is concerned)


Origin:                        India

Industry/Sector:               Steel manufacturing

Type:                          Listed (Publicly Ltd)

Presence:                      Pre acquisition only Asia
                               Post acquisition Asia & Europe

Strategy used for expansion: Acquired a company which has manufacturing capacity ten times more
                             than the acquiring company (Tata Steel)

This acquisition was one of the historic once, rarely do we find a small company acquiring a larger
one. Tata steel financed the major part of the deal through Debt (junk bonds).

Till present date we find the interest and debt of this deal on the balance sheets of Tata steel.



Origin:                        Japan
Industry/Sector:              Pharmaceutical and drug formulation

Type:                         Listed (Publicly Ltd)

Presence:                     Presence in all continents

Strategy used for expansion: Acquired majority stake in Ranbaxy in India which was one of the
                             largest pharmaceuticals company of India.

It was started by Malvinder and Shivinder Singh.


Balance of payments (BOP) accounts are an accounting record of all monetary transactions
between a country and the rest of the world. These transactions include payments for the country's
exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts
summarize international transactions for a specific period, usually a year, and are prepared in a single
currency, typically the domestic currency for the country concerned. Sources of funds for a nation,
such as exports or the receipts of loans and investments, are recorded as positive or surplus items.
Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit

When all components of the BOP accounts are included they must sum to zero with no overall
surplus or deficit. For example, if a country is importing more than it exports, its trade balance will
be in deficit, but the shortfall will have to be counter-balanced in other ways – such as by funds
earned from its foreign investments, by running down central bank reserves or by receiving loans
from other countries.

Components of the BOP account:
BOP account has three components:
a) Current Account
b) Capital Account
c) Reserve Account

The current account of the BOP is made up of three balances namely- Visible balance, Services
balance, Unilateral Transfers balance. Effectively it reflects the net flow of goods, services and
unilateral transfers (gift, donations, legacies etc.) The current account thus records all ‘receivable and
payables’ which would impact the demand- supply equilibrium in present.

The Capital account records all international transactions that involve creation of assets and
liabilities in foreign currency. These transactions involve a reverse flow e.g. loan taken in foreign
currency creates a ready inflow with corresponding future liability/payable. On maturity of the loan,
the (reverse) outflow would take place. The capital account thus records all ‘receivable and payables’
which would impact the
                                                          Imports and Exports.
                Balance Of Payment
                                                           Imports leads to out
                 (If there is surplus
                                                              flow of home
                    then need for
                                                            currency, Exports
                  imports and vice
                                                            leads to inflow of
                                                            foreign exchange.

                                     Helps in establishing
                                       foreign exchange
                                     rate. It also helps in
                                        getting depth in
                                      forex markets and
                                     managing volatility.

                      Demand-Supply equilibrium of currency in the future

How Balance of Payment helps in Stabilizing currency?

Balance of payment can be positive as well as negative. When Exports of the country exceeds its
imports, the Balance of payment is Positive, and in case Imports of the country exceeds its export,
the Balance of Payment is negative. In each of these two cases the currency of a country fluctuates.

In case of Surplus Balance of payment, the exports of the country is more than imports, hence the
demand for the currency increases which results in appreciation of the domestic currency, on the
contrary in case of negative Balance of payments imports are more than exports hence demand for
foreign currency is more than domestic currency which results into depreciation of domestic

To avoid such Appreciation & depreciation in the currency, government of the country always tries
to balance the Balance of Payments, so as the domestic currency can remain more or less unchanged.
However in real life situation Balance of Payment never balances, hence accommodating
transactions are undertaken by government. Accommodating transactions are undertaken with the
specific intension of balancing BOP. For e.g. in case of deficit Balance of Payment, to earn more
foreign exchange government issues Bonds & Treasury bills to other countries, so as to balance

Some of the measures used to Adjust Balance of Payment Imbalances are:

   a) Increase in interest rates (cost of money increases)

   b) Increase cash reserve ratio or Statutory Liquidity ratio (reduce credit creation)

   c) Issue government treasury bills, bonds & securities by way of open Market operation (reduce
       money in circulation)

   d) Increase Margin requirement.

The ultimate effect of these policies is that the money with the public reduces and the market
velocity reduces. When the money with the public reduces, the consumption expenditure also
declines thus reducing BOP deficit.

How does Multinational Companies help in Balancing BOP?

   (1) In case of deficit Balance of Payments, MNCs help country to export in large & earn more
       foreign exchange revenue, thus balancing exports with imports.

   (2) MNCs also helps country to match import with exports as to manufacture more companies
       require raw-materials which may be imported from foreign country. Hence it helps import –
       exports are match & adjust the Balance of Payments.

   (3) MNCs deals in large, hence they helps market to establish currency rate through demand-
       supply equilibrium.

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