Managerial Economics and Business Environment Case Studies Answers to Ten Case Studies 1.

. Lev Leviv v/s De Beers (ECO A125)

Ans a. Brief History Until 1870, diamonds were a scarce resource, found only in riverbeds in India and Brazil, whose elevated price was justified by the fact that only a few pounds of gemstones were produced each year. The discovery of the first diamond mine near the Orange River in South Africa, however, resulted in a deluge of diamonds on the market, prompting the mines British investors to quickly realize that their investment was in danger. Precursor to the development of the global diamond market The intrinsic value of diamonds results only from their physical properties, which make them suitable for industrial applications, though this value has been capped by the development of synthetic diamonds that can act as substitutes. In the absence of scarcity, natural diamonds would become no more than another semiprecious gem. Realizing the need to control supply, early investors in the industry, led by Sir Ernest Oppenheimer, formed De Beers Consolidated Mines to control supply. By the 1990s, the supply chain had evolved into four stages, two of which are dominated by De Beers as a monopsony Controlling the buying of raw diamonds, while the final stages are also strongly influenced by De Beers as the dominant seller Structure of the Global Diamond Market The structure of the global diamond market is as follows: It consists of the following segments Mine Producers/ Mine Production or the diamond mining countries viz. Russia, Angola, Namibia etc. with their state or privately controlled mines for mining the rough uncut diamonds viz. Rio Tinto a private company owning Australias Argyle Mine, Russias state controlled diamond mining and selling group called Alrosa etc. Dealers of Rough Gems/ Rough Diamond Distributors -viz. De Beers which purchases the produce of this mines through its marketing arm called Central Selling Organization now renamed as Diamond Trading Center which sells the mined diamond to the sight holders who were basically the intermediaries between the mining companies and the cutters/ polishers of the diamond. Preparing /polishing and the diamond cutting companies which purchased raw uncut diamond from the sight holders for cutting and polishing the diamond on behalf of the sight holders or for the retail merchants eg. Surat based Khimjibhai Diamond Polishers. Retailers/ retail merchants who would act as the marketing arms of the sight holders for retail sale of the polished, finely cutted, high quality diamond. They play an important role in creation of customer awareness through display their retail outlets and, image building of the company, undertake real sale as well as act as a source for the sight holders to gather customized information/ feed back on the product quality, design etc. aspects for it to customized the future diamond jewellery product so that they could fetch attractive revenue to the company. Viz. Tanishqs diamond jewellery range under the Brand Name Nakshatra from the Tata Group. The various market segments are as follows: The diamond market is conventionally divided into three segments: 1

 Industrial Diamondsnatural and synthetic diamonds that are used in a wide range of manufacturing processes for their physical properties Jewelry Diamondsrough diamonds cut for use as gemstones in jewelry Investment Diamondshigh-quality large gemstones, often with special characteristics, purchased for investment. Conclusion Thus it can be seen that the global market for diamond is well segmented and has 4 types of key players. The market initially had a monopoly of De Bears as far as controlling and regulating the supply of rough diamond as per demand in the market was concerned. This helped in maintaining equilibrium prices of the commodity. However, now with the entry of large no. of players in the global diamond market the monopoly of De Bears is waning down. Comparison of Monopoly and Monopolistic Competition The term monopoly has been derived from the greek word monos meaning alone or single + polein , to sell) . Thus in this present diamond market context, the economics definition of monopoly will hold good. Thus market monopoly can be defined as a market /situation wherein ("Pure oligopoly") exists i.e. wheere a specific company or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competion for the good/ service that the monopoly company provides . There is also lack of viable subsitute goods. Thus it leads to the proces of monopolism whereby the firm gains persistently greater market share than what is expected under perfeect competion. In the present context, De-Bears had a clear monopoly in the rough diamond market where its market share was 80% in FY 2000. Thus it maintained a high handed treatment of its sightholder customer viz. Lev Leviev who were offered rough, uncut and unpolished diamonds at take-it-or leave it prices. There was also risk for the sightholder players of being permanently cut off from receipt of raw material in thr form of rough diamond if they resisted from paying the qouted price. De bears had a well designed supply chain management system where by it had monopolism in the supply market threre by artificially keep the pices of diamond stable by matching the supply to the word demand. This was being done through formation of cartel with 10 no. of prominent diamond merchants. Moreover, through its marketing arm DTC, De Bears was able to capture the production of 13 no. of top mines eithr owned or coowned by it which accounted for more than 44% of the production of roughth diamond in the world. Moreover, DTC also purchased the output of diamonds from Canadas Ekati mine and also from Russia which accounted for an additional 25% of the worlds annual output of rough uncut diamond worth US $ 6.80 billion annually. However, there are some negetive aspects of monopolism also. The are as follows: 1. It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. The classic example of the fact was that till 2001 De Beers was only interested in in the trading of rough diamond and had not made any inroads into polishing, cutting and creating a value of the polished diamond through branding and image building. This had lead to commodidification of diamond and the company was not getting proper remuneration of its produce. This also gave an opportunity to Lev Leviev (one of the sightholders to De Bears ) to explore the entire value chain of the diamond market and thereaafter operate across the entire value chain rightfrom mining to cutting , polishing and retailing.

On the contrary Monopolistic competition is a common arket form. Monopolistically competitive markets have the following characteristics:

There are many producers and many consumers in a given market. Consumers perceive that there are non-price differences among the competitors' products. There are few barriers to entry and exit. Producers have a degree of control over price.

The characteristics of a monopolistically competitive market are almost the same as in perfect competion with the exception of heterogeneous products. The monopolistic competition involves a great deal of non-price competition (based on subtle product differentiation). A firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This gives the company a certain amount of influence over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule. A classic example of this is the presence of large number of players in the rough diamond market viz. Leviev, De Bears, Ascorp etc. Moreover, it was the feature of the monopolistic market which allowed De Beras to launch Suuplier of Choice, Forevermark brand of luxry diamond jewellery , thereby focussing on adding value to the diamonds already under its domain through marketing and branding initiatives. This gave the De Bears company a certain amount of influence over the market through brand loyalty. It allowed the company to raise the price of its branded product line viz. Forevermark brand of jewelley without loosing any premium ended customer. The company therefore made higher net earnings of US $ 494 million in FY 2003 vis--vis US$ 439 million in FY 2002. made higher net er, it can raise its prices without losing all of its customers. De-Bears product differentiation in face of increasig competion in the diamond market The process started in FY 2001 when Nickey Oppenhiemer, declared that the company was relinquishing its monopoly on worlds diamond supply and would rather try to focus on adding value to the diamonds already in its domain , through marketing and branding initiatives. Thus the company wanted to retain its core competence of mining and marketing rough diamond but at the same time wanted to build upon the process of consumer branding. Thus the process of product differentaition started with the following initiatives by De Bears. The first was launcing of a new business startegy called Supplier of choice whereby the company focussed on adding value to the diamonds already in its domain , through marketing and branding trademark. It launched a branding initiative in the form of Foreevermark , thereby guaranteeing the integrity of De- Bears diamond. The third was the initiative of promoting the De- Bears name itself through advertising campaign. The company also formed a partnership with french luxary good conglomerate LVMH for development of a retail stargegy for is De- Bears brand of diamond jewellery. It opened De- bears boutique in the process for retailing its branded jewellery. Spent US$ 150 million in FY 2000 itself for advertising cut and polished diamonds and for developing consumer awareness and brand/ image builing in the minds of the cionsumer about its products. 3

The company aggressively promoted by rewarding its sightholders for building strong brands whether by teaming up with established labels or by cretating their own version of product line of branded jewelley as on the line of Hearts on Fire promoted by Glenn Rothmann. The sightholders were also reimbursed a portion of the money spent on customer education, advertising and marketing effort. De Bears also ammended its criteria for selecting the sighholders. Now onwards stres was given to being financialyy sound as well as being market savvy, i..e having knowledge and information about the personalised needs and requirements about the various customer segment, desigining diamond jewellery on thse lines, promoting these customized and branded diamonds through customer awareness and aggressive marketing strategy.

These efforts of product differentaition allowed the company ( De Bears ) to make a impregnation in the mind of its customers about uniqueness of its products which could not be matched by any odf its rivals and cometitors. Moreover, it allowed DeBears to maintain a certain amount of influence over the market; because of brand loyalty for its diamond amongst its valued customer. It therefore could quick sell is products more advatageously by raising the prices of its premium diamond jewellery products without the fear of loosing all of its customers. Ans b. The changing structure of the global diamond market has an effect on the prices of the diamonds. This can be explained by the fact that initially the global market was dominated by De Bears as far as supply and distribution of raw dimond was concerned. Therefore the was a monopoly by a single player .De bears could either fix the price/ or control the supply of the product. This is revealed by the fact when De Bears treated its buyers/ sightholders with high handedness by ffering raw diamonds at take-it-or leave it prices. As there was only one seller the monopolist did not had to spend money on advertisment and marketing. As there was only one firm in the diamond market which had a monopoly on the supply of raw uncut diamonds therefore the market demand curve was represented by the demand curve of the firm. Since this was an imperfect market therefore the marginal revenue of the firm was less than the average revenue at different level of production/ output. De Bears therefore could vary the price/ or the quantity supplied and therefore by varying these parameters could earn high profits. De Bears also resorted to the policy of price discrimination, whereby it differentiated the customers/ sight holders into different groups with different price elasticity of demand and charged different prices from different buyers/ sightholders. However, with the entry of large no of sellers of raw diamond each having its individual product line/ which sold nearly similar products in the diamond market, the the prevelent imperfections in the diamond market took the shape of a monopolistic competition. Therefore the diamond market was similar to a pure competition market where there were large number of firms which operated within the same diamond product market . However, unlike pure competition, the firms produced similar but not identical products, although they were enough alike to be regarded by the public as very close substitutes in use. The diamond jewellery products could be differentiated in fact by color, structure, function, etc., or only in the imagination of the consuming public. Thus monopolistic competition was said to be like pure monopoly in that each seller was a monopolist of his own product design and brand name (hence the "monopolistic" part of the term). 4

Moreover, because of the ease of entry into the monopolistically-competitive market, there was a tendency toward convergence upon a common price. Because of the great number of competitors supplying very close substitute products, the monopolistic competitor's demand curve was highly elastic (though not perfectly elastic as in pure competition). Because of the possibility of differentiating the product/ product differentiation, either physically or only in the perceptions of prospective clients, the monopolistically competitive firm was prone to advertise or otherwise promote his product extensively in the hope of attracting the attention of the consuming public. Therefore because of the highly elastic demand curve of the monopolistic enterprise, the various diamond companies operating in the market were forced to thin down their profit margin by restructuring and realigning the price range of their products as per the market demand. This lead to the process of lowering of the catastrophically high prices being charged by the monopoly group i.e. De Bears to its sight holders. Thus the effect on the change in the structure of the diamond market on the price schedules of diamonds can be fully justified. ______________________________________________________________________

06. Should Energy be subsidized (ECO NO21) Ans 6 a. The issue of energy subsidy and its impact on the economy :
Energy subsidy as defined by OECD is any measure that keeps prices for emery for the Consumers below market levels, or for producers above market levels or that reduces costs for consumers and producers.2 In a similar way, the IEA has defined energy subsidy as any Government action that concerns primarily the energy sector that lowers the cost of energy Production, raises the price received by energy producers or lowers the price paid by energy Consumers.

The various types of energy subsidies are:

Direct financial transfers - grants to producers; grants to consumers; low-interest or preferential loans to producers. Preferential tax treatments - rebates or exemption on royalties, duties, producer levies and tariffs; tax credit; accelerated depreciation allowances on energy supply equipment. Trade restrictions - quota, technical restrictions and trade embargoes. Energy-related services provided by government at less than full cost - direct investment in energy infrastructure; public research and development. Regulation of the energy sector - demand guarantees and mandated deployment rates; price controls; market-access restrictions; preferential planning consent and controls over access to resources. The economic effect of energy subsidy areas follows: The economic effects of energy subsidies and their removal depend very much on their type and size as well as the structure of the economy. The effects also vary over time. Moreover, there is ample evidence that energy subsidies can involve large economic costs in the long run. Subsidies that lower end-use prices, either directly or by lowering the cost of production, always lead to higher energy use (except where supply is rationed) and reduce incentives to Conserve or use energy more efficiently. The extent of the increase in consumption depends on the price elasticity of demand. The elasticities vary across countries, fuels and over time viz. energy subsidies in the Czech and Slovak Republics had undermined incentives to use energy efficiently and encouraged the development of energy-intensive heavy manufacturing industries. Similarly, massive subsidies explain why electricity accounts for such a large share of energy use in the farm sector in India compared to other poor developing countries. Similarly subsidy that reduces the price received by energy suppliers undermines the returns on their investments and, consequently, their ability and incentive to invest in new infrastructure. As a result, subsidies may encourage reliance on out-of-date and dirtier technology. There are many examples of this phenomenon, especially in the developing world. The dire financial state of the state electricity boards in India is an extreme case. A failure to eliminate subsidies by raising prices to full-cost levels has severely curtailed the ability of the companies to finance new investment, which has directly contributed to the poor quality of supply and held back extending the network to remote villages. Similarly, subsidies to producers, by cushioning them from competitive market pressures, tend to reduce incentives to minimize costs, resulting in less efficient plant operation and investments. Moreover, direct subsidies, in the form of grants or tax exemptions, act as a drain on government finances. For example, the IMF estimates that the Iranian Governments direct 6

spending on energy subsidies amounted to $4 billion in 1997 8% of its budget. In the long run, indirect subsidies that reduce economic growth also lead to lower tax government revenues. Similarly, subsidies always have an impact on international trade. Consumption subsidies that increase energy use boost demand for imports or reduce the amount of energy available for export. This harms the balance of payments by increasing the countrys dependence on imports. For example, the massive increase in LPG use in Senegal that resulted largely from subsidies has led to a huge increase in imports. Therefore the above discussion suitably summarizes the issue of energy subsidy and their impact on economy.

The ultimate beneficiary of such kind of energy subsidy is the Rich, the uncommon man and the well to do off person It is the case of perverse subsidy for the rich. Nobel prizewinning economist Douglass North observed economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth. Producing a set of rational economic rules including purveying energy subsidy is a political rather than an economic process. Frequently basic economic truths are willfully disregarded in a myopic but cynically calculated process of short-term electoral gains. Citing the flawed economic policy on subsidy that the consumers in India enjoy on petroleum, LPG and other oil products can prove the aforementioned statement. The price of a barrel of crude is hovering around US$ 135 a barrel and yet the price of petrol at the pump remains essentially what it was when crude was selling at half that price about a year ago. The resultant gap between the cost and the price has to be bridged through a subsidy that is estimated to be around Rs 70,000 crores/ annum. The case is made that by keeping the price artificially low, the so-called common man benefits. But that is certainly not the case. It is a perverse and regressive subsidy for a number of reasons. It is the uncommon man who actually benefits directly from the subsidy. Because of the greater purchasing power and price inelasticity of income, he captures a larger share of subsidy. Viz. for every litre of petrol or diesel a person consumes, he benefits by around Rs 10/ litre. Secondly, when distorted low prices do not reflect the full costs, it sends the wrong signals and consumption is more than is socially optimal. Price elasticity of demand is marginalized due to presence of oil subsidy. India meets about three-quarters of its petroleum needs through imports at an approximate cost of US$ 50 billion a year. Increased consumption inflates that import bill and is economically wasteful. Thirdly, the burden of the opportunity cost of the subsidy falls squarely on the people who cannot reap its benefits. The resources that the subsidy consumes are not available for services that the poor benefit from such as subsidies for public transportation systems, primary health and education. Fourthly, oil bonds issued to oil marketing companies finance the subsidy on oil. These bonds represent a future liability.

But these subsidies have to be reduced, if not totally abolished overnight. A start could be made immediately to reduce the subsidy to the rich while continuing it for the poor. A mechanism for doing so would be to impose a tax on car owners, which would reflect the full cost of the petrol they use. Depending on the size of the engine and average fuel consumption, an annual fee could be assessed which has been paid to maintain registration. So if a particular make and 7

model of car typically consumes, say, 1,000 litres of petrol a year, the tax could be Rs 10,000. Thus change in attitude and a will to implement a rational economic policy is the need of the hour so as to provide true benefit to the poor and the needy through energy subsidy in India. Ans b. Yes I do believe in providing subsidies to the energy sector because of the following reasons.

Security of supply - subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies. Environmental improvement - subsidies are used to reduce pollution, including different emissions, and to fulfil international obligations viz. Kyoto Protocol Economic benefits - subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries viz. India where kerosene at subsidized rates is being provided to the BPL people through the PDS mode by the Central Govt. Similarly, the Govt. of India is also providing subsidy on LPG cooking gas to the general public at large so that the prices of comodities at large can be stabilized and kept under control. Employment and social benefits - subsidies are used to maintain employment, especially in periods of economic transition.

Yes, I would certainly distinguish between different energy sources when providing subsidy. This will be because of the follwing reasons. 1. Some of the energy subsidies counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment viz. subsidy on the energization of the private as well as state tubewells which supply irrigation water from the depleting ground water sources to the agricultural field. The availability of power from the State Elecricity Board for irrigation purposes at highly subsidized rates have leaded to over exploitation of the critical and over exploited aquifers. The withdrawl rate of ground water far exceeds the recharge rate leading to ground water depletion and an environmental catasprohe in making as the tubewells are run abruptly without giving due consideration to the conjunctive use of water for irrigation purpose. 2. Thus from the above example it can be seen that subsidy on power for irrigation for irrigation impede the expansion of distribution networks and the development of more environmentally benign energy technologies. 3. It will be also ensured by me that energy subsidies are shifted away from mature and established industries viz. coal, natural gas, naptha etc. based power generation plant towards high growth clean energy viz. Wind, solar, hydel and tidal energy sources. I shall also ensure that subsidies are made reliable, longterm and consistent, to avoid the periodic difficulties that the wind industry in the USA has had. 4. Moreover, subsidies supporting fossil fuels, particularly coal and oil, represent greater threats to the environment than subsidies to renewable energy. 5. Subsidies to nuclear power contribute to unique environmental and safety issues, related mostly to the risk of high-level environmental damage, although nuclear power contributes positively to the environment in the areas of air pollution and climate change. 6. I will sseek public openion on the matter. The openion of the experts on the matter will also be sought by me and a mutually acceptable decission will be 8

taken in this regard. Subsidies to renewable energy are generally considered more environmentally beneficial, although the full range of environmental effects should to be taken into account. 7. I will ensure to do the same. Thus by adopting the policy of cross subsidization I will ensure that a level playing field and support to the growing energy sectors, namely solar power, wind power and biofuels is created.

2.

SHARE Microfin (FIN/MM/01)

Limited:

Indias

largest

Micro

finance

Organization

Ans a. Brief History SHARE Microfin Limited (SML) was initially called SHARE. It was established as a non profit society in 1989 by Udia Kumar, its founder for conducting training programmes for the rural entrepreneurs for helping tem develop managerial, technical and social skill, instill the spirit of rural entrepreneurship in them so that they could set up small micro- enterprise and therefore can be gainfully and sustainably employed. Later in 1999, SHARE transformed itself into a public limited company by registering itself as SHARE Microfin Ltd. It helped the company to carry out its microfinance operations. SML was also registered as a NBFC (non deposit mobilizing company). This helped the mFI to carry out its financial operations for receipt of aids and grants for expansion of its loaning operations to the SHG/ JLG groups in a better manner. At a later date it also enabled SML to under the largest and Indias first microfinance securitization transaction with ICICI Bank. SML currently serves more than one million members across the Ten Indian states of Andhra Pradesh, Chhattisgarh, Karnataka, Maharashtra, Madhya Pradesh, Uttar Pradesh, Rajastan, Bihar, Uttaranchal and Jharkhand and has demonstrated healthy growth in the past three years. Presently, SML caters to the needs of poor rural women through its 3,022-plus staff spread across the MFIs 462 branches. It holds a total outstanding loan portfolio of over USD 148 million. The strategy adopted for growth of its outreach is as follows: 1. Geographical Approach through greater horizontal penetration by taking up mFI activities in varied geographical regions, having varied agro-climatic conditions, income levels and degree of poverty of the population residing therein. The strategy was to maintain a balance of its reach in very poor arid areas along with branches in more prosperous areas. Viz. initially the branches were opened in Guntur and Kurnool districts of Andhra Pradesh. Guntur was an agriculturally prosperous district compared to Kurnool. Therefore the scope of development of the micro-enterprise, improvement of living standards, income level etc. is quicker in an agriculturally prosperous district than an arid district. The quick phase of economic wellness among the population of the agriculturally well off district through the purveying of microcredit has a demonstrative and an visible effect on the mindset of the other people residing in nearby and other agriculturally backward districts. The people residing there get motivated / an attitudinal change takes place in them and they become more inclined to take to the formation of the SHGs/ JLGs for initiating the process of self development and poverty alleviation through receipt of mirofinance. 2. Financial Approach; where by SHARE transformed itself into a NBFC. This brought in transparency and accountability in its financial dealings as it came under the direct supervision of the RBI. The various banks and other financial institutions gained confidence in lending to a regulated body. SML has also been able to access diverse sources of funding and reduce the cost of funds and operations to build efficiency. With greater capital and funds inflow from the banks and other FIs, the mFI went into a spree of branch expansion through expanding its outreach apart from Andhra Pradesh into the neighboring states of Karnataka , Chattisgarh, MP and Maharashtra. 3. Human Resource development approach SHARE placed more emphasis on staff training programs for internal capacity building requirements to support growth through motivation and confidence building among the field staff who monitored loan utilization and maintenance of credit discipline among the SHG members receiving microcredit 10

facility from SHARE . Performance based incentives, improvements in staff benefits viz. TV and car loan reduced the attrition rate of the field staff. 4. Institutional development approach This included a culture of openness and accessibility to the management by the staff members, thereby instilling confidence among the staff. Introduction of computerized accounting system for MIS, record keeping and report generation reduced the workload on the field staff. Setting up of 7 no. of regional training centers for improving the quality and ensuring the efficiency of the manpower also ensured availabity of quality, trained and well-motivated staff required for increasing the outreach. Moreover, development of better software module for data base management as well as microfinanace securetization also helped in the process. Last but not the least, development of partnership models with banks and other FIs with SML acting as a mFI for lending the bank loan to the poor and needy through the concept of JLG group also helped in the process. The various principles adopted by SML for growth of its loan portfolio are as follows: 1. Adoption of the Grameen Bank Model Approach JLGs are the central element of the lending methodology adopted by SML, wherein the group lending technique is used to extend loans to poor women members who have formed themselves into groups of 5 each, with the general criteria that they have to be of the same age group, same area, and be known to each other. Family members or relatives cannot be part of the same group. Members of each group receive seven-day training on various aspects of the operating model, during which they learn their own signature and to have an identity for themselves. Eight groups come together at centres for weekly meetings. The members assume the responsibility of approving loans, disbursement, and ensuring repayment. These help in development of knowledge of group dynamism, group cohesiveness, homogeneity as well development of conflict resolution mechanism, thereby ensuring proper utilization of the microcredit at the grassroot level and timely recycling of funds through ensuring timely repayment of the dues. Adoption of for profit approach: These help in creating social returns by channeling funds from development institutions and commercial banks as collateralfree loans to Joint Liability Groups (JLGs). Adoption of Transparency and Accountability in Lending Operations: SMLs members learn about the companys loan delivery method through a public orientation meeting that briefs them on loan disbursements and related procedures. After forming groups of their choice and agreeing on the income generating activity they would like to pursue, SML assists its members by equipping them with basic business development skills such as pricing, marketing, and quality management. Adoption of need based and customized loan products for the JLG members SMLs loan disbursal methodology ensures a personalized service that suits client needs and ensures maximum client satisfaction. Rural poor women are provided loans, primarily for income generating activities, which are repaid in weekly meetings. Adoption of simplified loan Processing Procedures Viz. compulsory group training programme and Group Recognition Test organized by the company. This programme is conducted by the Field Credit Assistant (FCA) or a designated staff member, authorized by SML.This helps in collection of primary data in a prescribed format from borrower/member to comply with the KYC (Know your Customer) norms. The loan appraisal and conveyance of the terms and conditions to the loanee is also done in a simple lucid manner so that the loanee is well aware of his responsibilities and duties viz. amount of loan sanctioned along with the annualized rate of interest and method of repayment of the loan. 11

2. 3.

4.

5.

6.

Adoption of sound loan disbursement, monitoring and loan recovery mechanism The authorized staff of SML verifies the loan application along with all securities, sureties and approvals, which is applicable as per the applicable policy of the company. The field staff of SML monitors the proper end use of the purveyed credit. The company also resists from undue harassment i.e. persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans. Rather stress is given on the concept of group and peer pressure and joint liability for ensuring the timely repayment of the dues. The JLG members are also taught the concept the 5 standing principles of development through recycling of credit as has been conceptualized by NABARD. This helps in recyclation, recirculation of the funds, increase in the loan portfolio of the mFI as well as coverage of large no. of beneficiaries by the mFI.

Ans b. Challenges, regulatory and otherwise to SMLs growth plan and solutions to overcome these challenges 1. The most important regulatory challenge faced by SML was in the year 199 when the structure of the organization saw a complete overhauling. The once SHARE which was established as a non profit making society for imparting micro entrepreneurial skills to the potential entrepreneurs in rural areas into a public limited company i.e. a Non Banking Financial Company- (Non Depository type) for carrying out the activities of a mFI. Thus there was inability of SML for collecting savings and accepting deposits from the public at large because of its registration with RBI as NBFC- ND (Non Depository Type). 2. Difficulty in mobilization of the start up capital base required as per the prevalent statute for equity contribution of the promoters to the newly incorporated NBFC. 3. Inability to mobilize resources initially in the form of debt from the banks and other financial institutions for onward lending operations as collateral-free loans to Joint Liability Groups (JLGs) because the mFI was initially a non registered firm and thus the banks were reluctant to lend to a non registered body fearing loans turning into NPA, degradation of its asset quality and due to the incidence of possible fraudulence and money loitering activities. Moreover, the Societies Registration Act at that time did not recognized societies acting as for profit entities. 4. High rate of attrition and drop out among the field staff due to non-availability of performance based incentives and other associated perks and facilities. The same coupled with high degree of job pressure viz. group formation, imparting training to the group, acting as facilitators for purveying of microcredit , maintenance of records, report generation, MIS generation as well as ensuring timely recovery and repayment of loan dues added to the stress and fatigue of the field level functionaries of the mFI. 5. Lack of proper training, skill development, confidence and level of effectiveness among the staff members due to lack to regional training centers and associated infrastructure. Banks . 6. Lack of computerization, application of IT and associated software for generation of MIS records, maintenance of databases for up keeping the records of the borrowers etc. 7. Inability of the field level officials of SML to address to the issues of the social problems being faced by the members of the JLGs due to their undivided and focused attention to the purveying of microcredit and finance to the members. The solutions for overcoming the problems are as follows: 1. In order to circumvent the difficulty faced in deposit mobilization from the public at large due to the statutory nature of SML, formation of the mutual benefit trusts as 12

2.

3.

4.

5. 6.

well as Mutually Aided Cooperative Societies (MACS) were formed so that members could pool in their savings for mutual borrowing purposes as per the terms and conditions set by the JLG. In order to mobilize and tap funds from the banks, FIs and the financial market at attractive rates for capital infusion to the NBFCs, needed for expanding the outreach as well as loan portfolio, SML entered into innovative deal and partnership structure with these institutions. These included the a. Microfinance securetization deal with ICICI bank by agreeing to pay cash collateral to ICICI bank in case of losses arising due to non-repayment of dues in the form of First Loss Deficiency Guarantee to the extent of 8% of the securetization value. b. Entering in the banking correspondent and facilitator model with ICICI bank as well as HDFC bank where SML will act as a partner/ facilitator to the bank in handling the operational aspects such as monitoring the proper end use of the microcredit for the desired purpose as well as timely repayment of dues/ recovery of loan. Providing performance based incentives to the efficient and motivated staff. Improvement in the perks, allowances and other associated facilities viz. HRA, provident fund, gratuity, medical care, and facilities for availability of personal loans of easy terms and conditions. Reducing the stress level among the field level staff through large scale computerization, application of IT and associated software technology for record keeping, maintenance of data bases, generation of the MIS formats and monitoring the recovery performance of the loan given to the members of the JLGs. Improvement of the training and skill up gradation facility, improvement of the motivation and confidence level amongst the field staff through opening of regional training and skill development and up gradation centers. Brining about a change in the attitude and perception of the field staff to attend to the social needs and problems of the members of the JLGs. This could be done through developing partnership, working relations with NGOS, PVO and other charitable societies working at the grassroot level and attending to various issues related to rural women and poor viz. adult literacy, women and child health care, maternity care, abolition of dowry etc. Dovetailing the mF activities with ongoing state/ centrally sponsored scheme may also be explored viz. SWAJAL Programme,Polio immunization ICH and maternity care development programmes of Min. of Health and Family welfare of Govt. of India, MAHIMA, DWACRA, schemes of NABARD.

___________________________________________________________________________ _

13

15. Wind Energy Industry in US and Canada: A Note on the Regulatory Environment (BENV007) Ans a. The importance of Wind Energy in gaining Energy Self Sufficiency The supply of non-renewable sources of energy viz. crude oil, petro products, coal and natural gas fore power generation, enegization of the transport sector and heating purposes. The situation is quite serious in countries like USA where on a daily basis 13 bcft. (Billion cubic feet of natural gas was consumed for power generation. Moreover the power generation process was a un-ecofriendly, environmentally polluting process, which added to GHG emissions, air pollution and large-scale ecological damage. Moreover, there were serious doubts on the availability and continuous supply of the resources considering their non-renewable nature as well as geo political considerations viz. unstable political climate in the Middle East countries, which were the major oil producers, and suppliers in the world. Considering the above mentioned factors countries like USA and Canada switched off to development and promotion of wind energy technology in order to meet the power requirement. The importance of wind energy can be gauged by the fact that wind power generation capacity in USA and Canada increased from 6692 MW in FY 2003 to 9832 MW in FY 2005 thus showing a 36.86% growth within a span of two years. Moreover, wind power was a renewable source of power where the probability of depletion of the availability of the raw material for power generation i.e. air was virtually nil. Moreover, the process of power generation was clean, safe and environmentally friendly. Thus the above discussion gives an insight into the growing importance of development and promotion of wind power generation for meeting the energy needs. The regulatory frame work adopted by the various govts. Of the countries of the world which are in tuned with the need and aspirations of the people enlarge play an important role in the development and promotion of the wind power. Suitable explanations are as follows: Adoption of the renewable portfolio standards in USA Adoption of advanced energy initiatives in USA Adoption of production tax credit in USA Adoption of feed in tariff, net metering system as well as Wind Power Production Incentives to the wind power producers in Canada

The above regulations adopted by various countries increased the attractiveness of the wind energy sector to the private investors as an investment option. With greater capital flow R&D research development viz. reducing the weight of the wind power generators, setting up of off shore wind farms in the deep waters of the sea, increasing the energy conversion efficiency of the wind power generators thus leading to the overall development of the sector. A brief discussion on the modalities adopted under each of the regulatory mechanism is as follows: 1. The renewable portfolio standards adopted in USA made it mandatory for all power suppliers to include energy generated from renewable sources of energy as part of their overall energy production targets. The energy generated from the renewable energy sources had to meet the prescribed limits set by the energy regulatory authorities. The power generation companies were being awarded Renewable energy credits in lieu of the energy generated from the green energy sources. 14

2. Similarly the advance energy initiative adopted by the US Govt. in 2006 was aimed at decreasing the countrys dependence on foreign oil import through development of cheaper, cleaner and more reliable alternate energy sources. Adoption of the initiative lead to increased funding of the clean energy technology research being carried out by the Department of Energy (DOE) viz. R&D activities in wind energy technologies for alternate power generation for meeting domestic, commercial and transportation applications. R&D research activities were aimed at reducing the overall unit cost of the energy consumption thereby reducing the overall demand of oil, natural gas from the present level of consumption by FY 2025. 3. Similarly adoption of the Production tax Credit Policy by the US Congress as part of the Energy Policy Act, 2005 lead to offering of tax credit to the wind power generators, production companies @ 1.90 cent/ Kwh of wind power generated from the wind turbines during the first 10 years of the economic life of the wind energy generators. This lead to increased demand of wind power generators in the market by the wind by the wing energy producing companied for claiming the production tax credit, thereby increasing their profitability margin on the cost of production of per unit of green power. This also lead to increased wind energy capacity addition to the overall power grid of the country. Thus we find that the need of the hour is that govts should pursue with a consistent, long term renewable energy regulatory framework so that stability and continuity of the execution plans, investment made by the private sector was well as by the Public limited companies for the growth and development of the wind power sector could be ensured. Ans b. In most of the countries, the govts. provide subsidies to companies for development of the alternate energy sources. But opinions vary that providing subsidies may lead to production inefficiencies. The Govt. may tackle the situation and promote non-conventional energy sources in the following manner: 1. Formulation of the wind energy/ alternate energy sources development and promotional policies after a through public debate. The process should be a consultative one where the opinions of the wind energy generators manufacturers, power generation and the distribution companies, consumers and the electricity tax collection agencies is sought. Thereafter a through analysis of the pros- and cons of promotional avenues through subsidy support to the sector enlarge should be thoroughly analyzed. Based on the outcome the developmental and promotional policies through subsidy and other financial incentive support to the sector may be worked out. 2. Formulation of practical, in tune with the present economic environment, implement able and achievable regulatory policies for through regulation of the power generation and distribution activities of the alternate energy sector. 3. Setting up of an independent, autonomous Alternative Energy Sources Regulatory Commission on the patterns of the CERC (Central Energy Regulatory Commission) as has been set up based on the energy reform initiative implemented by the Govt. of India since FY 1991. A prime example of it is the incorporation of the Energy Act of FY 1991 by Govt. of India whereby reforms were initiated by the Central Government in 1991, when it introduced the policy to liberalize the power sector and promote private investments in it considering the fact that huge demand supply gap which existed in the market. This policy focused initially on the generation side of the business. In 1996, the Central Government, along with the state governments, decided on a Common Minimum National Action Plan. The objectives of the plan were to initiate steps required to improve the performance of the sector at the central and state level in a timebound manner. Setting up the CERC (Central Electricity Regulatory Commission) and the SERCs (state electricity regulatory commissions) was a key element of this plan. The central government passed legislation enabling the setting up of independent and autonomous regulatory bodies at the central and state levels in July 1998. These 15

regulatory bodies are expected to promote competition, efficiency, and economy in consumption of electricity, and in investments for the development of the sector. The Act also provides for the establishment of a state commission as an option (not as a mandate) to the state governments. 4. Ensuring consistency of the regulatory framework. This will ensure stability in execution of the wind power developmental projects. 5. Development of a robust monitoring mechanism, through desk monitoring, field visits as well as online surveillance and monitoring of the execution and commissioning of the wind power projects being developed through subsidy and other financial support from the central govt. For this formation of the Centralized as well as State Level Power/ Electricity Regulatory Commission needs to set up. In India MNES and their state agencies may play an active role in implementing the process. The process of submission of the QPR, MIS and the PCRS and the subsidy utilization and adjustment certificates from the wind power generation companies setting up wind power generation projects may be asked for by these alternative power regulation agencies. 6. Adoption of Renewable Portfolio Standards in the Wind Energy Sector. Once the wind power generation project has been commissioned, through the above mentioned principle it may be ensured that minimum amount (in KWh or units) of quality wind power meeting the prescribed power standards viz. voltage, ampere, frequency level are generated on a continuous basis and is wheeled to the power grid for onward distribution. It may also be ensured that the prescribed norms for minimizing the power distribution losses are followed by the wind power generation companies. Any failure on compliance with the abovementioned standards should be dealt seriously by the Alternate Energy Regulatory Body viz. in the form of withholding release of subsidy for the period for which discrepancies were observed, payment of penal interest for the said period etc. The fear of incurring financial losses will instill a desire in the wind power generation companies to comply with the norms of the regulator. 7. Last but not the least, the disbursement of the power sector subsidy may be made back ended so that proper utilization, mishandling and misappropriation of the subsidy amount can be minimized. Thus the above discussion beings out the policies that needs to be incorporated by the govt. for weeding out the deficiencies in the system for disbursement of subsidy for development and promotion of wind power in the country.

16

17. Wal- Marts German Misadventure (BSTR082) Ans a. In my opinion Wal- Marts decision to enter the German Market was an incorrect decision. I fully support the decision of the analysts, that company should have targeted the markets in UK because of the cultural affinity between the countries of USA and UK rather than Germany, which had cultural and ideological differences with USA. The following are the points/ facts for justifying the stance held by me. 1. There was work culture problem between Wal- mart and the German companies viz. Wertkauf and Interspar ( 2 German Companies) which Wal Mart had acquired in Germany. Interspar had a decentralized operation with independent regional units where as Wertkauf had a highly centralized operation with head office making all the decisions. In comparison Wal- Mart had a centralized distribution system. The system was fully automated and had a computerized inventory system which speeded up the checkout and recording of the stocks. The automated distribution system also reduced the transportation costs and time. The system worked on efficient supply chain and vendor relation. However, in Germany the suppliers were not accustomed to the centralized distribution system. Wal-Mart was poor in understanding the German Work Culture. As in the US it discouraged the employees of its German Unit from forming unions. Moreover, after acquiring the companies of Interspar and Wertkauf, Wal- mart prohibited the members of the work councils of the erstwhile 2 separate companies from meeting each other. Wal- Mart after acquiring these companies rarely consulted the elected representatives of the work councils of the erstwhile companies in decision-making process. The high handedness shown by Wal- Mart lead to resentment and frustration among the employees. The employees accused the company for paying low wage rate as well as proving an unsatisfactory working environment. This lead to walk out by the Trade Unions of the erstwhile Interspar and Wertkauf companies leading to bad publicity and defamation of the image of the company in front of the German public at large. There was large-scale language problem between the Managers of the Wal- mart Company as well the local German employees. The top management managers who came from USA showed little appreciation, regard and respect towards the German language and did little to pick up the language so as to spread the message of cultural tolerance among the German employees. On the contrary English language became the preferred official language. This affected the morale of the German staff that considered themselves as second grade citizens and outsiders. This way the top mangers of the company coming from USA alienated themselves from the local German. Thus resentment and frustration grew among the local German employees. The company i.e. Wal-Mart failed to understand the customer service method of retailing goods to the German customer. Wal-Mart was following the famous TenFeet rule i.e. whenever an employee comes within 10 feet of a customer, the employee was supposed to look up to the customer and greet him and enquire if needed any help and service for locating the goods of the display shelves etc. However, this practice was not prevalent in Germany where customers looked upon it as an infringement with their shopping. The German customers needed privacy at the time of shopping at the retail outlets. 17

2.

3.

4.

5.

6.

7.

Wal-Mart had also initially kept greeters at its stores in Germany for greeting and welcoming the customers and for assisting in opening the doors. The same was the custom in USA. However, when Wal-Mart tried to implement the same concept in its stores in Germany the German public did not like it, as they were not used to this kind of culture. Moreover, the customers also considered it as a wasteful expenditure and considered that the cost for hiring these greeters was somewhere hidden in the EDLP (Every day Low Price) of the retail goods. The customers were therefore of the opinion that the cost was being recovered from them and therefore considered themselves cheated. The German customer attached more value to price of the good/ commodity rather than to customer services. Moreover, due to cultural reasons they were less friendly and less outgoing compared to the US and the British customers. Wal-Mart failed to realize these cultural aspects of the German Customer. Wal-Mart also could not offer loyalty cards to its selective niche segment of customers as it was doing in USA because they were banned in Germany because the German customers felt it as an infringement towards tracking down their purchasing pattern by the retailing company.

Therefore it can be concluded that in a hurry to tap the opportunity and the vast potential of the global market, Wal-Mart without proper market survey, gaining full market intelligence entered into the German Market, which was the most price, sensitive one in Europe against the advice of the trade advisers. It would have been advisable to the strategists and managers of the company in USA to study the cultural regulations of Germany before making a foray into the retailing segment in that country and thereafter burning ones fingers. Ans b. Analysis of the reasons for Wal- Marts problems in German Market The reasons for Wal- marts problems in Germany may be categorized into the following broad headings: 1. Entry stage problems

The choice of acquisition of Interspar and Wertkauf (the two German companies and their stores) did not led to the geographical coverage of the entire German State and give Wal- Mart the desired market penetration that it was looking for in Germany. This was because Wertkauf stores were located in the southwestern part of Germany. Moreover, the stores were selling only food and general merchandise items instead of the entire gamut of the product items being offered by Wal- Mart in USA. Moreover, the acquisition of the Interspar stores was not proper as the brand had a poor image in the minds of the people. Moreover, the company was making heavy losses. Moreover, the design and layout of the stores were not in line with these of Walmarts. These stores were of varied sizes and formants and were located in interior areas where customers were purchasing general grocery items. This was in contrary to Wal- marts retailing structure where it had exclusive retailing as well as specialty divisions. 2. Problems in the operating environment

Wal- Mart was quick in putting up its brand name in the refurbished stores that it had acquired from Interspar and Wertkauf without putting into palace a well entrenched supply chain management system for consistent supply of retail goods to these shops. This increased its cost of sale of the goods and at the same time increased the losses to the company. Moreover, the company had to face stiff competition from the other local bands/ competitors and thus could not cash upon its EDLP concept of selling retail products. There was also lack of an efficient supply chain and vendor relationship management in Germany. Wal-Mart was used to a 18

centralized distribution system but in Germany the suppliers were comfortable with this management concept. Wal- Mart also faced inventory problem as it had only one stockroom which stocked all merchandise. This increased the shipment and reordering cost as well as hampered with the efficient stock management system as stocks had to be supplied to all the stores located in different regions from a single outlet. Wal-Mart was poor in understanding the German Work Culture. As in the US it discouraged the employees of its German Unit from forming unions. Moreover, after acquiring the companies of Interspar and Wertkauf, Wal- mart prohibited the members of the work councils of the erstwhile 2 separate companies from meeting each other. Wal- Mart after acquiring these companies rarely consulted the elected representatives of the work councils of the erstwhile companies in decision-making process. The high handedness shown by Wal- Mart lead to resentment and frustration among the employees. The employees accused the company for paying low wage rate as well as proving an unsatisfactory working environment. This lead to walk out by the Trade Unions of the erstwhile Interspar and Wertkauf companies leading to bad publicity and defamation of the image of the company in front of the German public at large.

3.

Regulatory and other external problems

Wal Mart was also accused on legal fonts for violating strict German Laws i.e. Section (IV) 2 Of Act Against Restraint of Companies and section 335 of the Commercial Act. In the former case Wal- mart was accused of selling its products art a price which was lower than the cost of produce. This was leading to a price war, unfair competition with the other German Retailers of the goods and was in the process hurting the small and medium sized retailers. On the second aspect the company was sued for not publishing its financial statements viz. Profit and Loss Account. Income Statement and Balance Sheet of its operations in Germany inspite of the fact that it was a limited company. The matter is sub-judice. 4. Cultural mismatch The lack of understanding of the German Culture was the most important factor that led to the failure of the companys performance in Germany and lead to incurrence of continuous losses on retail sale of goods. Had the company and its top officials from USA respected and appreciated the German Culture and its traditions it could have gained the faith and confidence of the local German workers. This would have lead to creation of a positive image in the minds of the German Public and could have lead to brand creation. Appreciation would have flowed in. The employees would have found themselves attached with the company. This could have avoided the walkouts and strike by the Employees Union in July 2002. The company also could have solved its image of being a bad employee and poor wage payer had it been tolerant to the German Culture, its Language and Traditions. It could have been in a better position to negotiate a deal with the Employees union to curtail down the high personnel cost (which accounted for 17% of the sales and was pushing up the companys losses) in an amicable and mutually beneficial manner rather than freeze on further recruitment in a country where already the rate of unemployment was quite high. The company had to face its consequences when it faced difficulty in hiring personnel for manning its stockroom due to low wage rate it was offering so as to curtail the high personnel cost the company was incurring. Though there was other been problematic areas, which lead to the German misadventure, however these issues could have been sorted out amicably with the support, help and cooperation of the German Workers.

19

08.

Bolivia Nationalizes The Oil and Gas Sector (BENV006)

Ans a. The benefits and drawbacks of Nationalization Definition of Nationalization Nationalization is the act of taking an industry or assets into the public ownership of a national government. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, corporations, panchayati raj Institutions in India etc. The reverse of nationalization is usually called privatization or denationalisation, but may also be called municipalization. Motives behind nationalization The motives for nationalization areas follows: 1. 2. Gaining political milage For economic gainds and well being of the nation at large. It is the central theme of certain brands of 'state socialist' policy that the means of production, distribution and exchange, should be owned by the state. Socialists believe that public ownership enables people to exercise full democratic control over the means whereby they earn their living and provides an effective means of redistributing wealth and income more equitably.

The benefits arrising out of Nationalization are as follows: 1. Better Performance through protection of the nations natural assets and working towards fulfillment of the social objectives:. A democratically elected government is accountable to the people through a legislature, congress or Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to fulfillment of the basic social objectives, viz. equipotential distribution of wealth, sustainable development, upliftment of the poorand the socially backward classes of the society, development of the backward and the remote areas of the country. A prime example of this reasoning was the nationalization of the estwhile privartely owned commercial banks in 1969. The benefits arising out of the same were: a. The ownership of the State gave a new confidence to the savers and being backed by a sovereign the normal suspicions associated with the capabilities of the bankers in the private sector were gone. b. Banking ceased to be selective. The entry barriers that existed for customers to bank, social economic and political were lowered. This resulted in a massive quantitative expansion of the bank customer base as well as in the nature of services provided. c. The reach of banking widened. Absence of concern for profitability and targeting made banks to expand rapidly in un-banked areas thereby the entire country was linked to banking activity. 20

d. The expansion of banks also expanded the economy. The entire infrastructure that required was built by themselves or by the citizens for their use. e. A large employment base was created. Young men and women mostly from middle and poorer sections of society but qualified with the requisites got into the banking system and we see the results today. f. The customers got acquainted with banking practices faster than it would otherwise have taken. g. The well-intentioned policies of the state channeled through the banks helped the borrower clientele with a generous disposition. h. The savings of the community had an efficient channel which otherwise would not have had the benefit of aiding transactions. Another example of the case whereby nationalization has helped in the pretection and judicious use of the national resoures is ONGC and GAIL. The oil exploration and drilling for crude oil is done in a very transparent and accountable manner in consultaion with the Office of the Director General Hydrocrabons, Min. of Oil , Natural Gas ans Petroleum, GoI. During the oil exploration and subsequent crude oil production phases , due care is given to the protection of the ecology and environment. 2. 3. Improvements in the exisiting system: the PSUs and other nationailzed bodies are motivated for performance improvements as well run businesses which can contribute in a better manner to the State's revenues. Greater accountability, transparency and lowering of corruption: Government agencies and the civil servants appointed therein to govern the govermental bodies are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. Therefore it leads to operationalization of a transparent, accountable and corruption free administrative system. Moreover, in a nationalized body the public has direct control and oversight of company which otherwise it would have lacked had it been a privateluy owned body corporate. Protection of the civil-liberty concerns: A nationalized body/ firm/ enterprises is fully owned and aministered and managed by the state. The management of the nationalized firm reoports to the state govt./ central govt. Therefore the democratically elected government is accountable to the people through a parlimanent and whernever there is a case of infringement of the demecratic civil liberties as well as voilation of the fendamental rights, it can intervenene and settle the issue. Eg. Implemetation of the Tdes Union ism Act, Minimum Wage Guarantee Act, EPF Act etc. are some of the positive developments in this regard. Fulfillment of social goals and objectives, exercising political influence, prevention of concentation of wealth in a few private hands, breaking of natural monopoly : The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole. Viz. Indian railways which has done yoemans job in providing employment oppertunities to millions in India. The development of the railway infrastructure in the far flung areas of the countruy has helped in mobilization of goods and people leading to equitable regional development of the country. Moreover, with nationalization of the body corporates, the governments can more easily exert pressure on state-owned firms to help implementing government policy. Viz. Govt. can put pressure more easiliy on Indian Airlines to run services on the non metro, non profitable feeder routes especially in the NE states so as to fulfill the social objective of providing air connectivity to the NE with the rest of the nation. Similarly, profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good if the entreprises/ units/ firms are in private hand. Therefore nationalization is required. 21

4.

5.

6.

7.

8.

Doing away with profitability motives: Private companies often face a conflict between profitability and service levels, and could over-react to short-term events. A state-owned company might have a longer-term view, and thus be less likely to cut back on maintenance or staff costs, training etc, to stem short term losses. Many private companies have downsized while making record profits. Moreover, Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic. Thus in a mnationalized entity fulfillment of the broader national and social objective is the mission statement. Nationalized industries, are basically charged with operating in the public interest, may be under strong political and social pressures to give much more attention to externalities. They may be obliged to operate some loss making activities where social benefits are clearly greater than social costs - for example, rural, postal and transport services viz. the U.S. Mail is guaranteed its nationalised status by the Constitution. The government has recognized these social obligations and, in some cases, provides subsidies for such non-commercial operations. Ease and freeness of capital mobilization: Governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises. Since the nationalised industries are state owned, the government is responsible for meeting any debts incurred by these industries. The nationalized industries do not normally borrow from the domestic market other than for short-term borrowing. Need for maintenance of essential services to the nation: The governments may choose to keep certain companies/industries under public ownership because of their strategic importance or sensitive nature eg. Defence, nuclear power supply etc. therefore nationalization of the enterprises working in these sectors of the economy is desirable. Viz. VFJ ( Vehicles Factory , Jabalpur manufacturing army trucks) and BARD, Mumbai in the Atomic Energy Field. Moreover, if a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable.

Thus the above discussion summarizes the benefits of nationalization. Similarly the drawbacks of nationalization and the samultanoes need for privatization of the body corporates/ firms / units and enterprises functioning in the country can be accounted for to the following reasons: 1. Lack of incentive for growth and development : The basic economic argument given towards drawback of nationalization is that governments provide very few incentives so as to ensure that the enterprises they own are well run. One problem is the lack of comparison in state monopolies. It is difficult to know if an enterprise is efficient or not without competitors to compare against. Viz. the Aviation Sector,. Initially Indian Airlines and Air India ( 2 state owned enterprises) had monopoly in the sector. Only after the liberalization and opening up of the sector to private enterpreneurs did Jetairways, Kingfisher Airlines etc. made a foray. With increased competion on important fronts viz. airfares, PLF (Passenger Load Factor), Aircraft Utilization Efficiency, Ground Handling and Baggaage Clearance Efficiency, could, thre defficiencies lying in the system being followd by IA and AI could be probed into for taking suitable corrective measures. Lack of initiation of the evaluation process: Similarly, another disadvantage of nationalization is that the public who own the nationalized enterprises have difficulty evaluating the efficiency of numerous and very different nationalized enterprises. On the contrary, a private owner, often specializing and gaining great 22

2.

3.

4.

5.

6.

7.

8.

knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently. Political Influnce: The nationalized industries are prone to interference from politicians/ political or populist reasons. Eg. making an industry buy supplies from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment etc. Development of unfair trade practices and market distortion, lack of market discipline and development of a protectionist attitude by the state: The governments can raise money by taxation or simply printing money should revenues be insufficient, unlike a private owner. Moreover, if there are both private and state owned enterprises competing against each other, then the state owned may borrow money more cheaply from the debt markets than private enterprises, since the state owned enterprises are ultimately backed by the taxation and printing press power of the state, gaining an unfair advantage leading to market distortion and unfair trade. Moreover, the governments have had the tendency to "bail out" poorly run businesses, often due to the sensitivity of job losses, when economically, it may be better to let the business fold. Thus a protectionist attitude develops which wanes down the financial efficiency as well as efficacy of the nationalized enterprise. Similarly tate protection to these nationalized entities lead to development of market indiscipline as poorly managed state companies are insulated from adherence to discipline compared to private companies, which could go bankrupt, have their management removed, or be taken over by competitors. Private companies are also able to take greater risks and then seek bankruptcy protection against creditors if those risks turn sour. Lack of Free Market Competition: It is believed that due to nationalization the efficient delivery of many goods and services are hampered due to the lack of growth of free marketcompetition. It is generally viewed that over time this will lead to lower prices, improved quality, more choices, less corruption, less red tape, and quicker delivery. Lack of Performance: State-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed easily by another regime. Conversely, the government may put off improvements due to political sensitivity and special interests even in cases of companies that are run well and better serve their customers' needs. Proparagtion of Corruption: A monopolized and nationalized state enterprise and its functioning process is prone to corruption. Viz. the presence of corruption in the SEBs ( State Eleccity Boards) whose main responsibility is to ensure generation as well as distribution of hassle free power supply to the public. Hoever, due to corruption, the entire system has become defunt and the SEBs are incurring huge losses. The decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones. Lack of Accountability: Managers of privately owned companies are accountable to their owners/shareholders and to the consumer, and can only exist and thrive where needs are met. Managers of publicly owned companies are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas.

Thus the above discussion summarizes the drewbacks of nationalization . 23

Ans b. The future outlook of the Bolivian Oil and Gas Gas Sector: Given the background information, in my openion the future outlook of the for the Bolivian oil and gas sector seems grim and is far from satisfactory. This is because the aggressive manner in which the oil and the natural gas sector was nationanalized by President Morales was an undemocratic, unconstitutional and one.The sending of the army to the oil fields with nationalistic banner potrayed Bolivia as a totalitarian state where the democratic principles of mutual discussion/ negotiation across the table has been done away with. The process of nationalization was initiated on the basis of a national referundum where majority of the Bolivians had voted in favour of state control on hydrocarbons once they reaches the ground as well as need for payment by multimationals @50% of the projected profit for the rights to exploit Bolivian Gas so that the govt. could invest the recovered profits economic benefits and social welfare viz. health, education, infrastructure development that that same could be shared with the Bolivian govt. However, the mannerism and the draconial rules and regulatory frame work promulgated by the Bolivian Govt. (viz. hike in tax and royalty from 50% to 82% on companies operating in the oil filds whose registered production average was more than 100 million cubic feet/ day ( as in 2005); total control of the bolivian govt. on all aspects of oil production and distribution through capture of 51% of the shares from 5 big private companies viz. Petrobras, Respol-YPF and Total) under the aegis of nationalism on the exisiting foreign and other multinational oil and natural gas production companies operating in Bolivia did more harm than good. This was because : The imposition of heavy taxation of the sector has made oil and gas exploration and prduction an unprofitable venture.This wiold desist the foreign oil companies to further invest in the sector in Bolivia. Moreover, the existing oil companies working in Bolivia would be trying to protect their exisiting investments and profit margin. Thus they may like to sell off thir present investments once they break even and then move out of the country by seeling off their business rather than incurring further losses. This is corroborated by the fact that Petrobras ( a brazilian oil company) which was the biggest stake holder in the oil reserves with 41% control on the oil reserves in Bolivia proposed to freeze all future investment in Bolivia after nationalization of the oil sector so as to protect ther present level of investment in Bolivia. The Bolivian govt. wants the state sponsored oil Company YPBF to reclaim the ownership of the oil and gas fields from the foreign companies. However, the state controlled oil company i.e. YPBF is perceived to be lacking in having the adequate management capacity and infrastructure available with it for handing the responsibility of solelty carrying out the task for enhances oil and natural gas exploration as well development of technologiess for its exploitation thus regulated production. The capital base of the company is expected to be weak for it to make sizable capital investment required for development of the suitable infrastucture for oil exploration. This is corroborated by tehe fact that when foreign oil companies viz. Petrobras, Respol YPF was operating full swing in Bolivia i.e. between FY 2000-2004, the proven reserves vis-vis production had increased tremendiously. Moreover, the net exportable quantity of oil and natural gas had also seen a quantum jump. Moreover, it is presumed that the Venezulean oil company PDVSA with whom YPFB had signed an agreemnt for training of its personnel and for seeking technical help and assiatnce for oil exploration, refining and production as well as setting up of petrochemical plant was not have the required technical competence the other Brazilian, spanish of the argentine oil companies had. 24

Thus with the freezing of future FDI by the foreign oil exploration, refining and manufacturing companies means freeze on the free flow of the latest technologies, techniques and proinciples for oil and gad exploration and production. The free flow of modern technology would have helped Bolivia to increase its current level of oil and natural gas production for meeting domestic consumption needs as well as for export especially to the countries viz. Brasil and Argentina with which it had signed original contracts. This also means huge revenue loss to the Bolivian Govt. which it need for socio-ecomic development and welfare of the Bolivian people. .

Further lack of investment will lead to shoratge in gas production which in turn will lead to shortage of gas on the domestric front. In order to meet the domestic needs, the Bolivian Govt. would be therefore need to import @ 12000 barrels of natural gas / day by 2010 for which it needs huge capital. Thus with the drying up of investment oppertunities by the foreign companies in Bolivia, the capital inflow to the country and to the govt. corres through profits from the sale of oil and gas will dry down. Without capital, the govt. will not be in a position to import oil abd gas for its own people. This will affect the national prdictivity of Bolivia and it is expected that the GDP growth rate will fall below 4% (as in FY 2005) in near future. With the domestic scarcity of oil and natural gas it is presumes that poverty will incease and the percentage of the population residing BPL will increase to more than 64% (as reported for FY 2004). Given the present scenario, the Bolivian Govt. neither has the requisite capital base nor the technology, techniques and the scientific persuit to develop the oil sector of its country on its own and thus play a leading role in the global oil market as a major oil producing nation of the world as is being done by Saudi Arabia and other countries in the middle east. The breach of contract and seizure of the assets of the foreign oil comnies in Bolivia on the pretext of nationalization will force the existing foreign oil companies to look forother avenues and greener pastures. This is corroborated by the fact that Brazil which imported more than half of its natural gas needs from Bolivia sought other alternatives with Brazilain President Lula Da Silva convening a meeting with the CEO of Petrobras and other senior officials from the energy department to discuss the impact of the announcement of nationalization odf the oil and natural gas sector on Brasilian economy. Moreover, faliure to honour contract , will down grade the reliability quotent of Bolivia with the international community. The international buyer will turn elsewhere and this will lead to erosion of Bolivias forein earnings. The process of nationalization is also expected to lead to the development of imbalences in the existing regional alliances, distortions in the regional power balance in the region (Latin America) which may lead to geo political instability as the major economic power houses i.e Brasil and Argentina are democtaric nations and both these countries may be skeptical about the formation of a Leftist / Socialist Alliance in the region which might hinder the economic prosperity of the region in the global era of globalization and economic reforms.

Thus the need of the future for the growth of the oil and natural gas secor in Bolivia is adherence to a middle parth by the Morales Rgime, whereby it initiates the progess of dialogue and mutual discussion with the foreign oil companies operating in the country so that a middle path is found which protects the nationalistic ferver of the Bolivian pople and at the same time is to the best of the interest of MNC and other foreign oil companies. Adherence to the 25

democtaic principles of dialogue/ discissions and path breaking negotiations rather than a totalitarian appreach is the need of the hour

18. Carrefours Exit from South Korea ( BSTR241) Ans a. The business environment in South Korea is quite bright and favorable. The country was on the path of economic reforms, financial sector restructuring, globalization and was trying to integrate its national economy wit that of the global community. The watershed year, which brought about a turn around in the economic policies being implemented by the Govt. of Korea, was FY 1997-98, when the South Korean economy was liberalized and was opened to foreign direct investment. Prior to FY 1997-98, the Korean Govt. was following a protectionist policy. The economy was a closed door one. South Korea did not encourage FDI and there were many restrictions on foreign ownership. The economic development of South Korea was based mainly on Korean conglomerates popularly known as Chaebol who were strongly supported by the state. However, with the onset of the South Korean economic crisis which lead to the deterioration of the value of the Korean National Currency Won vis--vis USD in the global market, and with the consequent bail out package provided by the IMF, the country had to toe with the economic policies advocated by IMF. The Govt. of South Korea therefore incorporated the policies of trade liberalization, elimination of the trade related subsidies, elimination of the restrictive import licensing policies, as well as diversification of the import basket of the country. As a fallout of these developments the Foreign Investment promotion Act, 1998 was enacted by the South Korean Govt. As per the act, the FDIs were given several incentives for increasing investment in the country. Some of them were: Reduction in corporate tax Reduction in domestic taxes related to acquisition and registration of assets purchased in Korea Reduction in property tax Exemption of the MNCs from payment of customs duty for import of goods to South Korea as well as excise taxes Exemption from payment of VAT (Value Added Taxes) on capital goods sold by MNCs in South Korea Barring a few sectors where FDI has been totally restricted viz. Postal Services and on 27 sectors of the Korean Economy where the policy of partial restriction was being followed, all other sectors of the economy had been opened to FDI. 26

Due to the enactment of the Foreign Investment Promotion Act in 1998, large foreign companies have made sizable FDI in the country viz. between 1998-2002 i.e. within a span of 4 years, FDI to the tune of USD 35 billion had been made in the country and the GDP growth rate had touched 4.7% p.a. As far as the business environment and trade prospective in the retail sector of the Korean Economy was concerned, the country has several types of retail formats, viz. departmental stores, discount stores, super and the hyper market, traditional markets (mostly mom and pop stores) etc. working in the market. However, the traditional market was still in vogue in the country and the same accounted for more than 50% of the total retail sales in the country. Tough the Korean Govt. has withdrawn the restrictive trade practices by allowing construction of the hypermarkets in the quasi industrial zones, relaxation in the restrictions pertaining to the retail industry / establishment of the retail stores in the green belt, abolitions of the regulations on floor space as well as no. Of retail stores to be opened, but the federal govt. has given into the demands of the local governmental bodies and public outcry for reintroduction of protectionist policy measures for protecting the interest of the local small and medium retailers. Accordingly, the Govt. of South Korea came up with a revised bill in FY 2004, which aimed at imposing restrictions in opening of large retail outlets in the neighborhood where mom and pop stores existed and allowing the local govt. to form a committee to look into the matter. Other restrictions and regulations have also been put in place such as zoning and cumbersome application process and prolonged process for getting approvals for setting up new retail stores. However, in spite of putting into place such restrictive polices in the retail sector, South Korea boasts of a strong economy (being 10th largest in the world) as well as a high standard of living with per capita GDP of USD 16,308 in FY 2005, which was among the top performing economies in Asia. There is large growth expected in the infrastructure sector of the economy in South Korea. Moreover, between FY 2005 to FY 2009, the country is expected to witness large-scale growth of super as well as hypermarkets. Therefore, it can be very well summarized that with adoption of suitable marketing policies viz. customizing the foreign goods and products as per local Korean demands, adjusting the business format and strategies to the Korean taste and through development of partnership with local Korean companies, a foreign company/ business house can establish itself successfully in the Korean Market and thereby earn large scale net profits. Therefore, last but not the least; the business environmental is favorable in South Korea. With a small change in the globally accepted business policy, management principles etc. a foreign company can go a long way in reaping large scale profits in the liberalized economy of South Korea. Ans b. The reasons for Carrefours failure in South Korea may be attributed to the following reasons: Initiation of Improper marketing strategy

Carrefour tried to incorporate the globally accepted practice of bulk sale of discounted quality products. However, the Koreans believed in the concept of EDLP (Every Day Low Pricing) quality product but shopped frequently. Because of the wide use of the available public transport as well as due to limited ownership of private vehicles, the average size of the shopping basket was quite small in comparison to the global standards, which Carrefour was practicing in its shops in Korea. Thus the marketing concept that was adopted by Carrefour was wrong. It could not attune its marketing strategy with that of the Korean Customer per se. 27

Absence of local partner

In the absence of tie up with a local Korean partner Carrefour was not able to gain a fair understanding of the methodologies of functioning of the Korean market. Therefore it failed to customize its products and services as per the needs and requirements of the Korean Public. Instead it tried to introduce the global and internationally popular management practices and standardized operations, retail products and services without ascertaining the Korean taste and localizing them. This lead to the company investing heavily in procurement of land for construction of the super and the hypermarkets in inconvenient locations, which did not appeal to the Korean public. Moreover, due to the absence of a local partner, Carrefour had to face anti- foreign biases amongst the customers. Had it adopted the business strategies that of the Tesco group wherein it had tied up with a local partner and had also retained the name of the local retailer, Carrefour would have evaded the negative attitude of the local Korean Customers towards Foreign Retailers. Improper store layout and ambience

Carrefour was unable to understand the attitude and the marketing principles of the general Korean Customer. The Korean customer looked for more than just price discount on quality products. The customer gave higher value and weight age to better store presentation, layout, ambience, and availability of branded products, availability of wide range of fresh fruits and vegetables, meat, fish and other food products with superior customer service. Some of the shortcomings on these accounts were as follows: The layout of the Carrefours stores resembled the old warehouses. They were simple and functional in appearance with exposed pipes and ceilings. The shops had concrete flooring with any coverings on them. On the contrary, Korean customers liked well-designed stores, which reflected the ambience of high-end stores. Therefore the Korean customers who wanted better shopping experience were turned off by the interiors of the Carrefour stores. The height of the store shelves, which were 2.2 mts high, was too high for the average Korean customer. They found it difficult to access the goods displayed on the shelves. The Korean customer on the contrary desired shops with covered floorings, decorated ceilings, lower shelf height and spacious layouts. The stores of Carrefour in Korea lacked all these features. The shops of Carrefour also lacked adequate no. Of tasting stands where shoppers could taste and subsequently buy the products of the vendors. The Korean customer was used to retailers displaying the products in eye-catching formats with sales assistants hawking the products. Thus they needed to be pampered by the vendors. However, the products in Carrefour stores were sold in boxed and were openly displayed. The stores were perceived to be generally noisy, without orderly display of goods. The customers also found the shopping trolleys to be of inferior quality. The shops were considered to be dirty, lacking rest areas, insufficient number of billing counters, which increased the waiting time at the billing counters, poor and misleading advertising, customer care as well as product guidance system. These all added to the development of feeling of resentment among the potential customers to the store. 28

Therefore the potential customers developed a negative perception about the stores in general and avoided purchase of goods from these stores. Choosing of wrong product and services The Korean customer demanded high degree of freshness and product quality for fruits, vegetables, meat, fish and other food items. Thus the retailers had to restock these produce more than 2 times a day so as to retain the freshness of the produce. However, in Carrefour stores, these items were being sold in packaged or prepacked formats with longer shelf life. This product marketing strategy did not appeal to the Korean Customer. Moreover, the Korean customer was attuned to EDLP concept, wherein they liked to purchase quality produce at discounted prices. However, Carrefour carried the High Low Pricing System, due to which there was huge difference between the regular prices of the goods and the discounted prices. This concept did not appeal to the customers, as the customers felt that by adopting this marketing policy Carrefour was maintaining high profit margin which otherwise should have been shared with the customers. The customers also found the employees of the Carrefour stores to be rude, unkind, and uncooperative and were ignorant about the details of the stores, the various products that were stored in the shop, their location as well as the promotional policies of the stores to sell the goods and products at discount to the customers.

Implementation of improper HR practices

Carrefour tried to adopt the Global Employee management practices without adopting the South Korean labor laws and principles. Therefore, the French Managers and store directors could not maintain cordial working relationship with the local Korean employee/ staff recruited for manning the retail outlets. Due attention was not given to the maintenance of features like status, class, education and age amongst the staff, which was the practice as per the Korean Culture. Carrefours management also did not recognize the Local Labor Unions, which lead to strikes and lockout of the stores in FY 2003. Due to labor unrest/ resentment, the Carrefour group had to face huge financial losses as the stores had to be closed abruptly. Problems in Supply Chain Management Practices

There was lack of cooperation and closeness between Carrefour and its suppliers/ vendors/ manufactures. Because of the lack of close contact and cooperation, Carrefour failed to maintain continuous supply of fresh foods, especially, meat, fish, fruits and vegetables in the retail stores at competitive prices. The failure to maintain the continuity allows the competitors to eat into the market share of Carrefour and break away its customer followings. Similarly Carrefours attempt to introduce best principles and practices of global supply chain management without understanding the prevalent system and procedure in Korea also backfired miserably. This was because unlike in France the retail market in Korea was highly fragmented and no single retailer had complete hold over the suppliers. On the contrary it was the suppliers/ manufactures/ vendors who dictated the terms to the retailers as regards the quantum, quality and the price of the goods/ product supplied for retail sale to the customers.

29

With the vendors/ manufacturers/suppliers holding an upper hand in the supply chain management system, it was improper on part of Carrefour asking them to supply goods/ products without extra transportation and loading charges, demand of hefty fees for shelf display of their manufactured/ produced goods at Carrefours stores etc. These incidents further lowered the reputation of Carrefour in the eyes of the local Korean Suppliers/ manufacturer/ supplier/vendor, thus leading to the failure of the company in South Korea. Thus the above discussion suitably summarizes the reasons for Carrefours failure to make a big headway into the retail market segment in Korea inspite of operating that country for more than 10 years continuously i.e. from 1996 to 2006.

16. Googles Problem in China (BENV001) Ans a. Legal and Regulatory Environment in China and its implication for the Chinese Media are as follows: 1. China is a communist country and the media including the Internet market is under strict control, regulation and surveillance of the state. The state regulates the media decides over the contents to be displayed and broadcasted to the public at large. The state determines the contents of the publication to be shown online as well as access to such material. The legal environment and the laws are suppressive in nature, which restricts freedom of speech and access to information. 2. The legal and the regulatory environment is too complex in nature viz, there is lack of a single statute which describes the manner in which filtering of the contents of the Internet is being done by the state and its associated agencies. There are a multifarious laws regulating the media and protecting the state secrets. 3. There are a number of state controlled regulatory bodies which administer the prohibitions and the legal regulations related to internet and media viz. Central propaganda dept, Dept. of Telecommunications, GAAP, Min. of Culture, Min. of Public Security, Public Security Bureau etc. 4. These regulatory bodies administer several laws and regulations enacted by the Chinese Govt. for controlling the print and the mass media in general and Internet contents in particular. Some of them are as follows: a. The regulation introduced in 1994 gave the Min. of Public Security the responsibility of supervising the Internet content. b. Another set of regulations introduced in 1997 specified the regulations for the Internet Service Providers. c. Similarly there is the State Secrets Law, which governs the Internet Content Control in China. The law stipulates and categorically defines the topics and information related to such topics that are considered as State Secret. These topics are information related to social development, technical innovation in China, and international relationship of China with other nations of the world, Chinese Defense and Chinese Economy. d. Subsequently the Chinese Govt. introduced regulatory laws in 2000, which prohibited distribution of state secrets through the Internet. 30

e. Similarly, laws enacted by the state in 2001 legalized corporal punishment i.e. death sentence to individuals who leaked state secrets and other classified documents to overseas, foreign organizations. f. Similarly regulations enacted in 2002 made it mandatory for the ISP to monitor the Internet usage carefully. g. Similarly, in order to regulate the contents of the Audio Visual programmes over the Internet, the Chinese Govt. enacted a regulation in FY 2003. Thus we find that in China the media is bound by a wide no. ad range of regulations. Similarly, we find that a wide range of topics is considered sensitive or controversial by the government. The media are heavily controlled and journalists are frequently punished for publishing information or stating positions that deviate from official Communist Party doctrine. Moreover, organized dissent and criticism of the policies and developmental initiatives of the Chinese Communist Party are not tolerated. Similarly, coverage of any group that can organize large numbers of people is considered threatening by the Chinese State viz. the Falun Gong spiritual movement, in particular, has been targeted for repression in recent years. Thus it can be concluded that in general, China attempts to suppress publication of information related to subversive political movements and controversial state actions, including the Tiananmen Square uprising, support for a free Tibet, the Falun Gong spiritual movement, independent news media, pro-democracy / pro-Western commentary etc. The Journalists who report on unfavorable events or question the party line are often jailed on fabricated charges meant to discredit them. Additionally, the state actively suppresses inappropriate material including pornography, sex-related information, and obscenity. Moreover, methods of circumventing Internet filters and content restrictions are also censored. Thus it can be concluded that the Chinese State through strict legal and regulatory mechanism still tightly controls the media Sector. How the media industry is getting affected due to the restrictions imposed by the Chinese Govt. on Internet Access. Background on Internet Access Regulation China implements access controls for ISPs, ICPs, Internet subscribers, and cybercaf users. Access control has always been part of Chinas Internet filtering system. In February 1994, one year before the Internet became commercially available to Chinese users, the State Council gave the Ministry of Public Security the overall responsibility for supervision of the Internet. With the passage of time many regulations have been promulgated by the Chinese Govt. from time to time and as on date regulation of Internet access has grown more comprehensive, specific, and extensive. Because of the same, the media is getting affected in the following manner. Means by which Media is getting affected: The media has lost its freedom of speech, autonomy and independence. The Chinese Govt. through its complex regulatory mechanism, laws and govt. orders have infringed into the domain and the sphere of work of the media. The media is therefore forcibly made to tow the line of the Chinese Govt, and has to filter and self censor the contents that are considered as state secrets or are considered against the policies and principles of the Communist Chinese State from being displayed for viewer ship. There is a strict state lisencing regime and the Ministry of Information Industry (MII) of the Chinese Govt. has the responsibility for control of the Internet content provider licensing. All internet providers have to invariably obtain lisence from the MII. Similarly, the Ministry of Public Security is responsible for general regulation of 31

1. 2. 3. 4. 5. 6. 7. 8. 9.

Internet access.The State Secrecy Bureau classifies state secrets, which all internet service providers including the media are required to "safeguard. Finally, the Central Propaganda Department ensures that Chinese media display those contents and news/ information only that are consistent with the Communist Party's ideology. The ISPs that want to provide service in China must obtain an operating license from MII. The access providers are also required to maintain records of the customer's account number, phone number, and IP addresses. Thus the media has to act as a policing agent of the state and has to spy sureptitiously on its viewers and has to provide and share all personal details of its viewers to the state. The ISP/ media are legally responsible for content they display and ISPs that fail to follow the law face revocation of their business license and arrest of company staff. Because of these laws, ISPs often implement their own monitoring and censoring functions. This further limits and regulates the subscribers' access to information available on the net. Thus only filtered information has to be made available to the subscribers by the media. China maintains extremely strong controls over the material that users are allowed to post and to access on the Internet. These include long, complex, and expensive licensing requirements; mandatory registration and inspections; prescribed minimums for available capital and the number of employees; and broad restrictions on permissible types of content. Since in China there is complete regulation of the Intertnet content providers by the State vide State Council Order No. 292, promulgated in September 2000, therefore the Media as ICP are responsible for ensuring the legality of any information disseminated through their services and are required to track and maintain records of user activity for 60 days.Moreover, the Chinese Govt. has specified nine restricted, relatively vague categories of information that cannot be produced, copied, published, or disseminated, comprising data. They are as follows: Which are against the principles prescribed in the Constitution; Which endanger the security of the State, divulge the secrets of the State, overthrow the government, or damage the unification of the state; Which harm the dignity and interests of the State; Which instigate hatred, discrimination among the ethnic groups, or destroy the unity of nationalities; Which break the religious policy of the State, spread evil cults or feudal superstition; Which spread rumors, disturb the social order, and damage the social stability; Which spread pornography, sex, gambling, violence, murder, terrorism or abetment; Which insult or slander others and thus infringe upon others' lawful rights and interests; or Which involve other contents prohibited by the laws and administrative rules.

Thus ICPs have to be careful that their services donot contain material related to the abovementioned topics. Moreover through the promulgation of GAAP i.e, the General Administration of Press and Publishing (GAPP) , the Chinese Govt. has tried to reconcile controls over on-line publishing with those for print publications, and to unify Internet regulation and supervision efforts across agencies.

Thus we can conclude that freedom of press and the print media especially as regards to freedom of thought, speech and expression, as it exists out here in a decocratic country like ours is completely absent in China. The media has to abide by the excessive regulations and controls of the State and have thus to work within a predeermined domian dictated by the Chinese Govt. 32

Ans b. Comments on Goole agreeing to censor its search content. Was Google right in taking this step ? I certainly feel that Google was correct in agreeing to censor its search content and agreeing to the Chinese Govts terms and conditions which included Chinas local content restrictions as well as deciding at a later date to officially launch the Chinese version of the google search engine called google.cn. My observations are based on the following facts: 1. China was emerging as the 2nd largest and the fastest growing Internet market in the world. The no. Of Internet user in the country was about 105 million in 2006, which was expected to increase to 185 million by 2008 and further swell to 250 million by 2050. Therefore it provided a huge untapped market, which had the potential for future growth and expansion. Google.com being a US based MNC certainly would not have liked to be left behind from tapping this huge untapped market in whatever available ways even if it meant deviating from its Corporate mission or taking a beating of its corporate image. 2. Even if Google had unaccepted the terms and conditions of self restriction dictated by the Chinese Govt., the internet content were being filtered at the local level by the Chinese State sponsored ISP. Thus the viewers could only access those news/ contents/ information/ etc. that were approved by the Chinese Govt. 3. Since Google was not adhering to the restrictive regulatory controls of the Chinese Govt., its websites were being blocked by the IP filters intermittently by the Chinese Regulatory authorities. Thus the quality of its services became slow and unreliable and its users faced problems with the search engine. This lead to its fall in market share from being the leader in Chinas search engine market with a market share of 34.8% in 2003 to less than 30% by 2005. This allowed its competitors viz. Baidu to grow and become the market leader with a market share of 46% in 2005 vis--vis of only 30% of that of Google. Thus by not adhering to the policy of self-restriction, Google was loosing market share. 4. By agreeing to censorship, removal of certain sensitive information and contents from its search engine that was objectionable to the Chinese Govt., Google was able to make its services more accessible to the Chinese public. Though the services were not available at its 100% content level but it made sense because providing at least some information to the customer even tough filtered in nature was better than providing no information at all. Had it not towed the line of the Chinese Govt., its website could have been permanently blocked by the local ICPs/ ISPs using sophisticated filtering mechanisms. 5. Moreover, Google in the past had adopted the practice of censorship of the internet search results in many other countries viz. in Germany it followed the orders of the German Govt. in restricting references to the sites that denied the Holocaust. Similarly, in France Google censored the sites that encouraged the practice of racial hatred. Thus by accepting censorship of its internet search engine in China, Google was moving ahead with its accepted management and global marketing principal of customizing its internet search engine and its contents as per the regulatory norms of the host country. 6. Even after agreeing to the principles of censorship of its Internet search engine in China, Google tried to maintain with its business ethics on protecting user privacy. Therefore, as a matter of principle the user generated e-mail, chats and blogs were not made available on google.cn site so that Chinese Govt. may not track down the identity of the user and take punitive actions. Therefore it tried to avoid disclosing user information to the Chinese authorities. As a follow up of its commitment to its valued users, Google decided to store the search records 33

generated from google.cn outside China so as to prevent the Chinese Govt. from accessing the date without its consent. 7. Similarly, Google was of the opinion that even after accepting the censorship requirement, only 2% of the total websites were to be censored on google.cn. This was because political and other information considered sensitive by the Chinese Govt. formed a very small part of the total information available on the web. 8. Lastly, the majority of the Internet users in China were the Student Community. This customer group was interested in searching for information related to Educational institutions, availability of educational loans, scholarships, entertainment viz, online music etc, rather than politically sensitive news and information. Thus acceptance of censorship of its Internet search contents by Google in China would not have hampered the Internet searching habbit/ pattern of majority of the Internet users in China.

Thus the decision taken by Google in China seems logical and made business sense.

07. The US Steel Industry in 2004: Still in need of Protection (ECON006) Ans a. From the data and the associated information available at my end, I believe that US Trade Industry needs to switch over the new regime of free trade. My observations are based on the following reasoning: From the data available with the American Iron and Steel Institute, the domestic production accounts for approximately 73% of the sources of the steel used in the US as in FY2000. The imports account for only 27% of the steel used in the US. The share of imports further fell to 21% in 2001. Therefore imposition of restrictive trade practices viz. imposition of tariff measures @8-30% ad valorem duty on various imported steel products could provide protection to a small minority segment of the US steel consumption market. The tariff measures that were imposed under section 201 through a Presidential degree were discriminatory in nature. The tariff rates, which were to range from 8% to 30% on various imported steel products, were to be applicable for 3 years with tariff rated linked to the various slabs meant for steel import were not applicable to Canada, Mexico, Israel and Jordan, which were USAs free trade partners. Moreover, most of the developing countries were also excluded from these measures provided their share of total imports during 1996-97 was less than 3%. The section 201 tariff measures were primarily imposed in countries viz. European Union, Japan, Brasil and South Korea. From the given data it may be observed that in Dec 2002 out of 2274000 MT of imports of finished steel mill products by USA; the imports from EU, Japan and other countries on whom tariff u/s 201 had been imposed accounted for 670000 MT (29.46%) while imports from Canada, Mexico and other free trading partners of USA accounted 523000 MT (23%). Tough a year later i.e. in December 2003 there was a sharp drop of 42% in the imports of cold rolled mill products by USA i.e. from 2274000 MT in Dec 2002 to 1318000 MT in Dec 2003, however, the share of imports from the free trading partners of USA i.e. Canada, Mexico and other countries accounted for 516000 MT (39.18%) of the total imports. Correspondingly, the share of imports from EU, Japan, Korea and other countries fell to 459000 MT (34.83%). Thus we find that in actual as well as in percentage terms the imports from EU, Japan, 34

Korea and other countries on which tariff barriers were imposed was far less than from USAs free trade partners viz. Canada, Mexico etc. Thus it could be inferred that US steel industry was indulging in free trade practices tough on a smaller scale. The above facts contradict the very essence of Article 201 under which tariffs were imposed as per WTOs agreement on safeguards based on absolute increase in imports. It is because of this reason that when EU appealed to the WTO Appellate body against USAs tariff measures, USA could not prove that imports had increased. Consequently, the WTO gave its ruling against USA and ultimately in December 2003, USA had to lift the tariffs imposed under the veil of anti dumping duties. This fact that tariff measures were not solving the root problem of the US Steel industry could be buttressed by the fact that after imposing tariffs u/s 201, in FY March 2002 the US govt. decided against imposing the anti dumping duty on cold rolled steel from 5 countries in August 2002 and further announced to increase the number of steel products exempted from the tariffs to 178. Similarly, WTO Appellate Bodys ruling that the tariffs imposed by USA were illegal highlighted the inefficiency of the measures. Moreover, imposition of tariffs under the anti dumping laws, could not lead to corresponding increase in the demand of steel. On the contrary, the small mini steel mills with their cost effective and technologically advanced production techniques had increased the productivity level of the steel in USA and were competing with the integrated steel mills. This lead to increase in production level from 400 MT in 10990 to 600 MT in FY 2000. Considering the fact there was no corresponding increase in demand in steel, the various steel companies in order to marginalize their production and operational cost had resorting to job cuts and reduction in labor force. Thus the efficacy of the protectionist measures turning futile could be seen vividly. Similarly, it was because of high tariff rates and other protection measures that many US industries viz. Automobile industry, which used steel as a basic raw material for manufacture of passenger cars, found it difficult to meet higher operational/ production cost due to increased cost of the basic raw material. It order to curtail their higher operational cost, the automobile and other industries dependent on steel resorted to large-scale job cuts. This added strain to the economy. The problem of the US steel industry was on account of the spillover of the global phenomenon of worldwide excess steel capacity and over production that had been fuelled through subsidies and other protectionist measures by the respective govts. Of each of the countries. This can be corroborated by the fact that US steel industry received subsidies to the tune of US$ 1 billion in a single year only vis--vis receipt of average subsidy of US$ 10 million per annum by the global steel industry. It is because of the receipt of subsidy which marginalized the operational cost that global steel producers including those in USA somehow or the other were resorting to excess steel production, which were much higher than the demand. Tough cheap import of steel from outside countries was one of the reason for the problems that the steel industry in USA faced which lead to loss of its competitiveness, other domestic factors also contributed to the same. This could be attributed to that fact that economies of scale in the name of acquisition of small steel companies by the big ones did not happen in the USA. On the contrary the existing large integrated steel companies acquired additional separate production facilities and added to their existing facilities. Instead of leading to higher economics of scale, it lead to lowering of the managerial cost and financial savings through higher managerial efficiencies, reduced corporate staffing need and renegotiation of labor agreements. Thus poor economics of scale coupled with the global phenomenon of over capacity and over production were leading were the root cause of the problem and to the protectionism in the form of subsidies and trade distorting tariff barriers were further fuelling the crisis. The solution therefore lies in free trade provided free trade is carried out in a just and fair manner. The same can be corroborated by the fact that out of the market share of 27% 35

of the US domestic steel consumption market, the share of steel imports from the free trade partners of USA i.e. Canada, Mexico which had formed NAFTA (North Atlantic Free Trade Zone) was at a high of 7% compared to EU which was reeling at 5%. This proved the fact that USA was an advocacy of free trade and had opened its steel sector to its free trade partners. It is desirable that US follows the same trade policy with the rest of its global trade partners.

Ans b. Analysis of the impact of the Govt. intervention on the US steel Industry Background The Place of steel and associated steel industry is quite high in the US Economy. Steel is the 2 nd most important commodity after oil in the US economy. Steel has been the source of political as well as economic strength in USA. The steel sector had been seeking govt. intervention in the form of protectionist measures in the form of anti dumping duties and higher tariff rates for curbing cheap imports and trade destabilizing subsidy being provided by the exporting countries.

First stage of Govt. Intervention and its impact The first Govt. intervention was in 1980s when it imposed import quotas and restricted imports to 20% of the US Domestic Consumption Market. The Govt. also imposed voluntary restraint agreements on import of cheap and subsidized steel products. This lead to increase in the market share of the domestic industry as a source of steel used in the US to 73% in FY2000. Correspondingly, there has been a steady decline in the import of steel and the market share of the foreign steel products fell from 28% in 1998 to mere 21% in 2001. In real terms the imports of steel fell from approx. 3500000 MT in Feb 1998 to approx. 2750000 MT in Dec2001. The protectionist policy of the state allowed the steel sector to modernize itself. The US steel industry spent US$ 23 billion in modernization of its Open Hearth Furnace into Basic Oxygen Furnace and Electric Arc Furnace. It also allowed the steel plants to install the continuous casting process line by replacing the old ingot/ slab process. The continuous casting process reduced the operating cost by US$ 30 / tonne compared to the ingot/ slab process. 2nd stage of Govt. intervention and its impact Later in 1990s the Clinton administration imposed a 12-point plan to protect the domestic industry from dumping of cheap steel by countries like Japan. Due to continuous cheap import of steel, the competitiveness of the US steel industry was eroded. The domestic price of steel came down to unsustainable level i.e. the sale price per unit of imported steel was less than the cost of production per unit of steel in the domestic market. Therefore profit margins nose-dived and nearly 35 steel companies went bankrupt. Moreover, nearly 50,000 jobs losses and reduction in capacity utilization by 20 million tonnes was there. Therefore in order to order to overcome this problem, US Govt, imposed tariffs under the anti dumping laws of the state. The revenue earnings from the imposed tariffs allowed the 36

Federal Govt. in funding the legacy cost of the industry i.e. where govt. funds were used to meet the cost of pension benefits of the steel plant employees, providing health care benefits and other providing other associated benefits to the steel plant employees who had lost their jobs after various small steel production companies filed for bankruptcy and shut down of plants due to unsustainable prices of steel products in the domestic market. The approximate cost was estimated @ US$ 10-13 billion/ annum Moreover, the US steel industry went into a consolidation spree where the major large integrated steel companies operating in the domestic steel market acquired small independent mini mills. As a result of the acquisition spree approximately 38 million tones of production capacity (which accounted for 31% of the total installed capacity in the entire US Steel Industry) was acquired by the large integrated steel plants from the small mini mills and other associated small independent firms. Viz. acquisition of the assets and the production capacities of 3 small mini mills/ bankrupt companies by International Steel Group (ISG) leading to an additional production capacity of 20.1 million tones. This also added to the managerial and the financial savings of the large integrated steel plants due to increased managerial efficiencies, reduced corporate staffing needs, renegotiation of the labor agreements, flexibility in staffing patterns etc. 3rd stage of Govt. intervention and its impact This was initiated in June 2001 by the then President of USA, George Bush in the Form of the Steel Programme. It consisted of 3 parts namely; negotiating with the trading partners to eliminate the inefficient excess production capacities existing in the worldwide steel industry; negotiating with the trading partners to eliminate the market distorting practices viz, subsidies that distorted the excess capacity and lastly start investigation under section 201 for determining whether the US industry was harmed by low priced steel imports and accordingly impose tariff barriers. Consequent to the discussion the govt. officials of 37 major steel producing countries of the world inclusive of US had in December 2002 at Paris under the aegis of OECD for elimination of inefficient excess steel production capacity, the US Steel industry might foresee global assistance from the international community in the form of Capacity Closure Fund for undertaking feasibility studies options for plant closures as well as much required international funding / financial assistance for meeting the cost associated with permanent plant closures considering the fact that capacity utilization of the steel plants in the USA was quite low and there existed inefficient production capacity in the country. One of the drawbacks of the US Govt. intervention was that inspite of imposition of tariff measures, there was no corresponding increase in demand of steel in the domestic steel market. On the contrary, the market share of the domestic steel manufactures in US steel market increased and that of the foreign countries exporting steel to USA decreasing. This was because of the increase in productivity of the mini mills operating in the USA. Thus the tariff measures imposed under section 201, in consonance with WTOs Agreement on Safeguards Article 8.2. by the US Govt. failed to serve its purpose. This was further corroborated by the fact that when EU was irked by the imposition of unwarranted tariff barriers by USA and moved to the WTO Appellate Body, the USA could not prove that the imports were increasing and relief measures were more than what was required to prevent the damage. Thus in December 2003 the tariff barriers were completely lifted.

37

Thus we can conclude that Govt. intervention had lead to consolidation of the US Steel Industry, its technological upgradation of the Blast Furnaces leading to increased productivity as well as adjustment and rationalization of the production capacity in consonance with the demand of steel in the domestic market vis--vis imports of cheap and subsidized steel from foreign countries.

10. The Fall of D Long (BENV 009) Ans a. The Role played by Govt. and Govt. Institutions in the rise and fall of D Long Role played by the govt. and govt. institutions leading to the Rise of DLong Group of Companies: The decision of the Chinese Govt. for allowing the state owned enterprises to sell the share owned by the Central Govt. to other companies in general and the private companies in particular. In China the majority of the shares owned by the central govt. in the state owned enterprises were issued to the agencies on behalf of the central and the local Govt. With the decision to allow these agencies to sell the shares to other companies allows DLong to purchase the shares of many of this top performing listed companies. Viz. in 1996 DLong purchasing the shares (10% equity stake) in Tuhne a govt. owned Cement Company and increasing it to 40% by 1998. Similarly, in June 1997 and in November 1997, DLong purchased the shares and with it the 29% equity stake in Shenyang Hejin- a state owned motor tools manufacturing company and similarly 26% equity stake in Torch Automobile- an automobile component manufacturer. Later these shares which acted as equity stake of DLong in the in the listed companies were used by it as pledged collateral security to the banks for obtaining bank loans for funding its various capital intensive projects, expanding its business into various unrelated sectors of the Chinese economy vis-a-vis the core competency of the companies whose share DLong had purchased. Moreover, in some cases these stocks were being resold to the general public at a higher price/ premium and the funds mobilized through this resale option were reinvested in the stock markets for 38

purchasing shares of diversified listed companied by DLong for expansion of the business. Moreover, the govt. policy and that of the govt. controlled banks was biased in favor of the state-owned companies. Private Companies in general and DLong in particular lacked regular access to bank loans and the opportunity to raise long-term capital on the stock and bond markets. Therefore, in order to finance its growth opportunities, DLong began acquiring control over formerly state-owned companies whose shares were already listed on the stock exchange. Through a complex web of transactions between listed and non-listed subsidiaries, DLong manipulated the share prices of these listed firms and used them to raise cash from investors and obtain bank loans. These funds were circulated to other firms in the group, providing DLong with capital for expansion but leaving its listed firms vulnerable to the groups hidden debts. Secondly, the Chinese Security Regulatory Commission (CSRC) had not put in place a sound and foolproof regulatory and supervisory mechanism of its financial sector in general and the stock markets in particular. This allowed DLong group to continue and diversify its business into many sphere by opening subsidiary companies, stocking holding companies with complex and complicated interlocking shareholding patterns, diffused ownership etc. Thus transparency and accountability of the source as well as utilization of the funds could not be maintained properly. This also allowed DLong to take advantage of the poorly regulated financial sector for mobilization of huge amount of public investment through establishment of 7 nos. of NBFCs, 5 nos. of Brokerage firms and 7 nos. of investment trust companies. Strong public allurement was given by assuring minimum guaranteed return on their investment some times as high as @22% p.a. No efforts were made by any state controlled regulatory authority to ascertain the financial structure, capital base, financial health, sources and utilization of the funds by these private NBFCs/ investment trust companies etc. Moreover, the improper regulation of the financial markets allowed DLong which was basically controlled by a non listed parent company, to control several listed and unlisted companied through a mechanism of highly complex and complicated stock holding structure. Thus transparency and accountability in the financial transactions/ dealings were done away with and it was difficult to classify the standard assets of each of the companies and to ascertain the financial health and profitability of each of the group company. The Peoples Bank of China had, not put proper regulatory and supervisory system of the various banking companies and the banking sector, into place. Because of this reason the City Commercial Banks were starved of capital. Their capital base was weak. They were in search of sources for raising their capital base. Moreover, the Loans issued by these state controlled banks to various govt. enterprises were turning into bad debts. Thus in order to diversify their investment portfolio the Banks were interested in lending to the private companies likes DLong. DLong group of companies took advantage of these situations and thus acquired major controlling stake in 4 nos. of CCBs. Moreover, in light of the poor regulatory mechanism, DLong after acquiring the banks, made the banks to sanction banks loans to its various subsidiary companies/ holding companies and using a large chunk of the bank loan for making investment in the stock market. for repurchasing the shares of its sister and other group companies and thereby artificially jacking up the share prices of its listed companies. Borrowing from the banks for making stock investments was a major financial crime and the Chinese govt, and the govt. lead banks and other financial institutions failed to notice these financial irregularities, which allowed DLong to grow in an unrighteous manner. Moreover, the issue of regulation of private investment in the CCBs was yet to be addressed by the Chinese Central Bank and a regulatory mechanism was yet to be put in place. DLong utilized the loophole in the system created by the Govt. and the govt. controlled institutions. 39

This also allowed DLong in obtaining bank loan through debt guarantees, These guarantees were being provided by sister concerns / subsidiary companies/ trusts of the DLong Group. In most of the cases these third party guarantors were themselves in a financially weak position as DLong pledged most of their assets and equity with other banks for obtaining additional bank loan. Therefore their asset base were not free of encumbrances and because of their financially weak position, they were not in a position to repay the debt / bank loan borrowed by DLong. This in turn increased the vulnerability of the banks acquitted by DLong. However, in the absence of a regulatory mechanism, the loophole in the system allowed DLong to Lastly, due to the difficulty of the private companies like DLong in obtaining long term funds from the state owned banks for long term financing of its business ventures, it resorted to alternative means of obtaining finance viz. bank loans through listed subsidiaries, loan guarantees etc. Role played by Govt. and its agencies leading to the fall of the DLong Group of Companies: These include strict scrutiny by the Regulators i.e. Chinese Security Regulatory Commission when it tried to probe scandals in the Chinese stock markets. It started minutely scrutinizing the transactions of firms who were suspected of manipulating the stock market, which included the DLong Group of Companies. CSRC based on the probes did not allow DLong to raise money from the stock market by floating rights issue of its listed companies. This severely affected the fund-raising mechanism of the DLong Company, as the stock markets were its major source of fund mobilization. The company therefore resorted to raising funds through bank loans based on loan guarantee/ debt guarantee in the form of 3rd party guarantee provided by its other companies/ sister concerns/ subsidiary companies of the group etc. The shares of the listed companies of the group were also pledged as collaterals. However, considering the fact that the bank loans were of short duration, where as the investment made towards business expansion into capital intensive projects had long gestation period with long repay back periods, asset liability mismatch took place, which further worsened the liquidity position of DLong. Further, the constitution of the China Bank regulatory Commission (CBRC) in April 2003, which acted as an independent regulatory and supervisory body for the regulation of the banking sector. It took over itself the responsibility of the Peoples bank of China (The central Bank of China). The investigations by CBRC only revealed that fact that DLong had mobilized large amount of bank borrowings from the commercial and the CCBs to the tune of Yuan 26 billion as on December 2003 through bank loan with 3rd party guarantee being provided by the sister companies/ other companies/ subsidiaries from the D'Long Corporate Group only. This raised doubts about the efficacy/ genuineness of the 3rd party guarantee. This CBRC disallowed DLong for further acquisition in the banking and the financial sector. Later in December 2003, the Chinese govt. on its part tried to tighten the bank credit flow for regulating and slowing down the economic growth. This govt. decision affected DLong. Moreover, in March 2003 the directives issued by CBRC to the banks and other financial institutions to restrict sanctioning loans to ten high risk companies inclusive of DLong based on the complexity of the share holding pattern of the patent body further worsened the situation for DLong as most of the banks demanded repayment of the bank loans disbursed to DLong and its sister concerns. Thus the credit worthiness of the group was suspected. The banks got strict with scrutinizing the loan proposals from the DLong group. Since most of the bank loans had been obtained on the basis of debt guarantee / 3rd party guarantee given by other companies/ sister concerns of the DLong Corporate Group, the banks in order to secure their loan and 40

from preventing its loan to turn into NPAs started demanding higher value collaterals for loans with 3rd party guarantees. This affected the profitability of the DLong group as it had to pledge large amount of shares of its group/ sister companies with the banks and at the same time had to repurchase the shares/ stocks from the open market at higher price so as to jack up the prices of the stocks so as to maintain the desired value of the collaterals pledged with the banks. Moreover, the funds to drive up and purchase the groups sown stock were obtained from the funds raised by groups sister concerns/ agencies viz. NBFCs, trust companies and brokerage firms in the form of public investment. Due to diversion/ siphoning of the funds from these companies into the stock market, no additional funds were available with Long group to repay back the debts owned to the general public. Thus the above factors lead to the bankruptcy of most of the D'Long group companies leading to the down fall of the corporate group as a whole leading to Govt intervention in the form of bridge loan for revival of the group. Thus the above discussion ably summarizes the role played by the govt. and other govt. owned institutions in the rise and fall of DLong group. Ans b. Analysis of the Macro-economic conditions in China that could have contributed to the rise and the subsequent fall of DLong Factors leading to the rise of DLong The macro economic policy of China, which showed Govt.s systemic bias against private firms. The Govt, controlled commercial banks as well as the CCB preferred the politically safe route of lending to SOEs, whose debts carried an implicit government guarantee, rather than taking the risk of losing state funds on loans to private firms. In 1998, private firms accounted for 27% of Chinas GDP, but received only 1% of bank loans. Surveys conducted in 2003 reported that only 10% of private firms had access to bank credit, with self-financing providing the majority of entrepreneurs capital. Only a few larger private firms had somewhat greater access to bank credit, but were still reliant on working capital loans with short-term maturities (i.e., less than two years). These were no substitute for the long-term capital that businesses in every economy needed to grow, but which in China was generally unavailable. Thus DLong lacked regular access to bank loans and the opportunity to raise long-term capital on the stock and bond markets. To finance its growth, in FY1996 the firm began acquiring control over formerly state-owned companies whose shares were already listed on the stock exchange. Through a complex web of transactions between listed and non-listed subsidiaries, DLong manipulated the share prices of these listed firms and used them to raise cash from investors and obtain bank loans. These funds were circulated to other firms in the group, providing DLong with capital for expansion but leaving its listed firms vulnerable to the groups hidden debts. This was the strategy that was followed by DLong group of companies for its unprecedented but fragile growth.

Factors leading to the downfall of DLong They are the macro controls of the economy initiated by the Chinese Govt. It consisted of the following action plans: The regulators increased scrutiny of the groups activities and financial structure

41

The financing banks own growing concern over loans outstanding to DLongs companies; the continued poor performance of DLongs industrial operations, which failed to generate enough cash flow to repay creditors A general tightening of bank credit due to the contractionary measures taken by the central government to slow Chinas overheated economy. According in 2002, private banks began to curtail lending to DLong and related parties, wary of the groups creditworthiness. The banks established a computer network to share information on loans to the related companies of borrowers, which probably helped reveal the full extent of the outstanding liabilities of DLong and other groups. In October 2003, the collapse of Xinjiang Hops Co., a firm unrelated to DLong, attracted increased attention to the dangers of debt guarantees. They started demanding DLong to put up more collateral for loans guaranteed by third parties, with this collateral usually in the form of shares of the groups public companies. Particularly after December 2003, DLong pledged growing amounts of shares for collateral, a sign of banks growing nervousness. Crucially, these events took place at the same time as a general tightening of bank credit in China, the result of the central governments attempts to cool down the overheating economy. This round of macrocontrols began in 2003, when the economy rebounded more quickly than expected from the effects of the South Asian Regional (SARS) crisis. To restrict growth in fixed investment, the government instituted a series of measures limiting the extension of bank credit, which had the adverse result of cutting off credit almost entirely to private firms. Though it is likely that the groups worsening financial situation and increased scrutiny by creditors and regulators would eventually have caused its collapse anyway, macrocontrols seem to have played a role in triggering DLongs liquidity crisis and subsequent collapse.

42