SECTION IV

CORPORATE SECTOR – FOREIGN LIABILITIES AND ASSETS

The corporate sector occupied a predominant position in India’s foreign liabilities, constituting 73.6 per cent of the total liabilities of the non-official sector. As on March 31, 1997, foreign liabilities of the corporate sector amounted to Rs.1,71,315 crore as against Rs.1,38,283 crore a year ago which showed an increase of 23.9 per cent compared to the previous year (Table 4.1). These liabilities were of the magnitude of Rs.67,941 crore constituting 58.7 per cent of the total liabilities of the non-official sector as on March 31, 1992.

The total foreign assets of the corporate sector as on March 31, 1997 stood at Rs.8,062 crore as against Rs.7,226 crore as at the end of March 1996. As on March 31, 1992, foreign assets of the corporate sector amounted to Rs.7,483 crore. The share of the corporate sector in the non-official sector’s total assets declined steeply from 52.2 per cent at end-March 1992 to 22.6 per cent at end-March 1997.

The net liabilities of the corporate sector increased from Rs.1,31,057 crore as on March 31, 1996 to Rs.1,63,253 crore as on March 31, 1997 i.e. by 24.6 per cent. The net liabilities of the corporate sector constituted 59.6 per cent of the total net liabilities of the non-official sector as on March 31, 1992 which increased to 75.7 per cent at end-March 1996 and further to 82.9 per cent as on the date of reference. The increase in the share of net liabilities of the corporate sector was on account of continuous rise of liabilities and decline in the assets of this sector in the total non-official sector (Table 4.1).

The corporate sector’s foreign liabilities, in dollar terms, as on March 31, 1996 and 1997 were placed at US $ 40,257 million and US $ 47,727 million, respectively, which recorded an increase of 18.6 per cent, whereas assets were placed at US $ 2,104 million and US $ 2,246 million, respectively. As on March 31, 1992, the foreign liabilities and assets of the corporate sector were placed at US $ 21,758 million and US $ 2,396 million, respectively (Table 4.2).

The major chunk of the foreign liabilities of the corporate sector was in the form of External Commercial Borrowings (ECBs) which accounted for Rs.73,385 crore constituting 42.8 per cent of the total foreign liabilities of the corporate sector at end-March 1997. Foreign Direct Investment (FDI) and portfolio investment were placed at Rs.36,510 crore and Rs.45,619 crore, respectively as on March 31, 1997 constituting 21.3 per cent and 26.6 per cent of the total liabilities of the corporate sector on the reference date. This was in tune with the Government policies of encouraging non-debt creating flows. Other foreign liabilities of short term nature, comprising trade dues, remittable dividends, interest due but not paid, etc., were valued at Rs.15,801 crore which constituted 9.2 per cent of the total liabilities of the corporate sector (Table 4.2 ).

The relative shares of the different types of long term foreign liabilities of the corporate sector are presented in Table 4.3. It is observed that the share of FDI increased gradually from 7.2 per cent as on March 31, 1992 to 19.1 per cent as on March 31, 1996 and further to 23.5 per cent as on the reference date. The share of the portfolio investment also increased significantly from 2.8 per cent at end-March 1992 to 29.1 per cent at end-March 1996 and further to 29.3 per cent at end-March 1997. Consequently, the share of creditor’s liabilities decreased from 90.0 per cent at end-March 1992 to 51.8 per cent at end-March 1996 and further to 47.2 per cent at end-March 1997.

The country-wise distribution of the long term foreign liabilities of the corporate sector, which constituted about 90 per cent of the total as on March 31, 1997, are presented in Table 4.4. The USA was the most important creditor as far as long term liabilities of the corporate sector are concerned accounting for 12.8 per cent (Rs.19,957 crore) of the total closely followed by the UK at 11.5 per cent (Rs.17,858 crore) and Japan at 9.4 per cent (Rs.14,695 crore) as on March 31, 1997. Japan maintained its position as the leading source of external long term liabilities up to March 1996. Long-term liabilities owed to Japan as on March 31, 1992 amounted to Rs.12,264 crore, accounting for 22.9 per cent of the total long term foreign liabilities of the corporate sector. The UK maintained its position as the second largest source of all the creditors’ claims amounting to Rs.8,015 crore (14.9 per cent) as on March 31, 1992. Long-term liabilities owed to the international institutions declined drastically to Rs.1,470 crore as on March 31, 1997 from Rs.6,503 crore as on March 31, 1992 recording a steep decline of 25.7 per cent during the period.

Table 4.5 presents the industry-wise distribution of long term foreign liabilities of the corporate sector. It may be observed from the table that, as on March 31, 1997, manufacturing sector accounted for more than one fourth of the total long term liabilities (26.5 per cent) of the corporate sector followed by services sector at 15.0 per cent, utilities at 7.0 per cent, petroleum industries at 6.3 per cent and transport sector at 5.1 per cent. Among the manufacturing sector, chemicals and allied products accounted for 5.9 per cent, metals and metal products at 4.5 per cent, electrical goods & machinery at 3.2 per cent and textile products and transport equipment at 2.5 per cent each as on the reference date.

The detailed discussion on the major components of foreign liabilities and assets of the corporate sector is set out below.

In the wake of economic crisis of 1991, the country adopted structural adjustment programme. As the follow up of the same, foreign investment policy was liberalised which aimed at having a gradual shift towards a more concerted policy initiative both for technological upgradation as well as generation of foreign exchange. Special incentive measures were devised to encourage investment from overseas corporate bodies to augment the capital inflows. The ongoing measures are focussed towards a virtual elimination of barriers to foreign investment and a growing market integration with the rest of the world in tune with the broader macroeconomic objectives. The non-resident investment discussed in the census is classified into two categories viz., direct investment and portfolio investment. Direct investment reflects the objective of obtaining a lasting and controlling interest in the enterprise in which investment is made. The lasting interest implies existence of a long term relationship and significant degree of influence over the management of the enterprise. In the case of portfolio investment, on the other hand, the investor is basically guided by considerations such as return, safety and liquidity of his investment. Portfolio investment does not bestow the investor with any form of effective voice in the management.

FDI in India included net investment in (i) branches of foreign companies operating in India and (ii) investment in Foreign Direct Enterprises. Direct investment include equity capital and a portion of the re-invested earnings of the company allocable to the foreign investors on the basis of proportionate share of foreign equity held by them in the total equity of the Indian company. In the case of the branches of foreign companies operating in India, their net position was taken as foreign direct investment.

The foreign companies in India and their investments in Indian companies were being regulated by the Foreign Exchange Regulation Act (FERA) 1973. Over the years, restrictions under FERA have been diluted considerably. As a part of the ongoing process of liberalisation culminating in current account convertibility and given a gradual and cautious approach to capital account convertibility, it was felt necessary to repeal the FERA and enact a new legislation compatible with the economic realities. Effective June 1, 2000, the FERA has been replaced by Foreign Exchange Management Act (FEMA) with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange markets in India.

Non-residents were permitted to invest funds in industries, which required modern technology. For technology transfer, RBI is giving approval to the core companies included in the third schedule of the industrial policy 1992-97, to acquire foreign investment under its automatic route. Secretariat for Industrial Approvals (SIA) and Foreign Investment Promotion Board (FIPB) are giving approvals for collaboration in Indian industries. Further, Board for Industrial and Financial Reconstruction (BIFR) also gives permission to acquire shares of the sick industrial companies by the foreigners.

Prior to the formation of new industrial policy, 1992-97, the level of equity participation was permitted initially up to 40 per cent of the total equity. However, where the required foreign technology was of a highly sophisticated nature or where the project was predominantly export oriented, foreign equity participation at a higher level was considered on merits of each case upto 55 per cent, 74 per cent, etc. The policy relating to foreign investment in Free Trade Zones (FTZs) and 100 per cent Export Oriented Units (EOUs) was relatively liberal, and foreign equity upto 100 per cent was permitted in these areas.

As on March 31, 1997, total FDI in India amounted to Rs.36,510 crore as against Rs.24,020 crore and Rs.3,840 crore as at the end of March 1996 and 1992, respectively. The FDI, during 1992-97, rose by 56.9 per cent and during 1996-97 it increased by 52.0 per cent (Table 4.2). The reform process in post crisis period clearly indicated the shift in favour of non-debt creating flows.

The country-wise FDI investment in Indian industries is given in Table 4.6. FDI from Mauritius was the highest at Rs.6,546 crore as on March 31, 1997, followed by the USA at Rs.5,019 crore. Other countries having substantial share in direct investment in Indian industries in the order of importance were the UK, Germany, Japan, Netherlands, Switzerland, Singapore, Canada, Hong Kong, France and Sweden.

Industry-wise distribution of FDI is presented in Table 4.7. Manufacturing industries accounted for the highest share of 48.0 per cent of the total FDI followed by the services sector accounting for 8.0 per cent as this sector attracted the global market in the recent period.

Among manufacturing industries, chemicals and allied products recorded the highest share of 8.9 per cent, followed closely by electrical goods and machinery at 8.1 per cent and transport equipment and food and beverages at 6.7 per cent each.

In recent years, the policy towards direct investment in Indian industries has been encouraged with a view to transform the Indian industries as competitive as possible in the globalised environment and also to acquire valuable foreign exchange for the development of the industry. In addition to FDI, portfolio investment has also been encouraged to attract more capital flows in the economy. Foreign Institutional Investors (FIIs) including pension funds, mutual funds, investment trusts, university funds, endowments, foundations or charitable trust or charitable societies, etc., have been permitted to invest in equity shares, debentures, right renunciations, warrants, dated securities, treasury bills and units of domestic mutual fund schemes in the primary and secondary markets. FIIs are required to register themselves with Securities and Exchange Board of India (SEBI) before they invest in the Indian capital market. Furthermore, Indian corporates (including banks and financial institutions) have been permitted to raise funds abroad through issuance of FCCBs, GDRs and ADRs and companies are allowed to repatriate the proceeds according to their requirements. The restrictions on the end use of the GDRs and ADRs have been removed.

As a result of liberalisation in the policy initiative towards portfolio investment, total portfolio investment increased substantially from Rs.1,483 crore as at the end of March 1992 to Rs.36,624 crore as at the end of March 1996 and further to Rs.45,619 crore as on March 31, 1997 which showed an increase of 98.4 per cent during 1992-97 and 24.6 per cent during 1996-97. The share of portfolio investment in total liabilities of the corporate sector increased about ten folds from 2.2 per cent at end-March 1992 to 26.6 per cent at end-March 1997.

External Commercial Borrowings (ECBs) is one of the major sources of raising capital abroad which include buyer’s credit, supplier’s credit for imports, lines of credit obtained by financial institutions, euro-currency loans and financial instruments such as Floating Rate Notes (FRNs), bonds etc. The reliance of corporate units on raising funds abroad till early nineties was predominantly through ECBs. During the recent years, however, the share of ECBs in total long term liabilities declined considerably from 71.1 per cent as on March 31, 1992 to 42.8 per cent as on March 31, 1997. The declining trend was mainly due to shift towards non-debt creating flows by way of acquiring capital through FDI and portfolio investments.

The USA was the largest lender of ECBs at end-March 1997 with a share of 19.6 per cent at Rs.14,392 crore closely followed by the UK at 17.6 per cent, Japan at 17.3 per cent, and Hong Kong and Germany at 8.7 per cent each (Table 4.8). Japan was the most important creditor for the corporate units in India upto end-March 1996, but lost its position to the USA during 1996-97. Lending by the international financial institutions declined steeply from Rs.6,503 crore as on March 31, 1992 to Rs.1,470 crore as on March 31, 1997.