Equity as a Source of External Finance Equity has become an increasingly important source of external finance for developing countries Annual foreign investment worldwide totals $ 2 trillion currently. The erstwhile highly restrictive policies followed by India have been reversed in recent years. Other Asian and Latin American countries, and the post- communist countries in east Europe, are far more aggressive. Equity investments in individual south East Asian countries like Indonesia and Thailand are estimated at several billion dollars a year. Mainland China has in recent years been attracting equity inflows on an even bigger scale - $ 45 bn in 1998. Foreign Equity Investments can be of Three Types Foreign Direct Investments (FDI) Equity investments in new projects or for takeover of existing units, accompanied by technology and management from the foreign investors are referred to as FDI; this is by far the largest element of equity funds for some country Portfolio Investments These are aimed at capital appreciation and portfolio investors have little say in management of the invested companies. They also do not bring in any technology. Portfolio investments are of four types: • Close-ended country funds floated abroad • These operate like domestic mutual funds. Close-ended funds have a specific maturity date and the fund manager is under no obligation to buy the units from the subscribers during the currency of the fund- the holders are however free to sell to foreign buyers at the market price, which depends on the demand and supply, and often varies widely from the net asset values. All the initial India funds floated abroad were close-ended ones. • Open ended country funds • These too are mutual funds but with no specific maturity date. Also, the fund manager is obliged to quote bid and offered prices, depending on the net asset value of the fund; and any investor is free to buy or sell at these prices. Several open- ended India funds have been floated in the last few years. • Foreign Institutional Investors (FIIs) Directly Investing in the Local Stock Market India has recently permitted many FIIs to do so. They purchase rupees against foreign currencies for making in-vestments at market prices and are free 10 sell when they choose; the resultant rupees, after payment of any local taxes, can then be used to buy fore in the market for repatriation of the investments.
13 INTERNA TIONAL FINANCE MANAGEMENT • Equity (or convertible bond) issues in foreign markets • Recently, several Indian companies have made such issues. Private Equity In recent years, private equity investments are taking place in India. These are undertaken by large institutional investors acting on their own, or through private equity funds managed by reputed fund managers. Several such funds are managed by major international investment or commercial banks. Typically such investments are made in young but not green field companies with strong growth prospects, which are not
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