Module –II Advance Financial Management

University of Mumbai M. com Semester IV

Course : Advance Financial Management
Syllabus Module 2
Unit 1
1. Sources of International Finance: Foreign Currency Convertible Bonds,
ADR’s, GDR’s, ECB’s, Euro Bonds and Types: Meaning, Features and Merits
and Demerits.
2. Concept of International Finance Centre: Gift City: Constituents and Benefits
3. Complexities Involved; Challenges confronted in Foreign Investment
Analysis.
4. Use of Capital Budgeting Techniques in following scenarios
 Foreign companies investing in India
 Indian companies investing in foreign companies by raising fund in same
country
 Indian companies investing in foreign companies by raising fund in
different country through GDR’s
Unit 2:
International Working Capital Management
 Cash Flow of a Multinational Company, Accelerating Cash Flows, Leading and
Lagging (Theoretical concepts)
 Netting: Bilateral and Multilateral (Practical Illustrations)
 International Receivable Management (Theoretical concepts)
 International Inventory Management. (Theoretical concepts)

Contents
Syllabus Module 2............................................................................................................................................1
Unit 1.....................................................................................................................................................................1
1. Sources of International Finance: Foreign Currency Convertible Bonds, ADR’s, GDR’s,
ECB’s, Euro Bonds and Types: Meaning, Features and Merits and Demerits...............................2
2. Concept of International Finance Centre: Gift City: Constituents and Benefits...................5
3. Complexities Involved; Challenges confronted in Foreign Investment Analysis.................7
Case Studies.................................................................................................................................................11
4. Use of Capital Budgeting Techniques in following scenarios...................................................11
Unit 2................................................................................................................................................................... 13
1. Cash Flow of a Multinational Company, Accelerating Cash Flows, Leading and Lagging
Leading and Lagging......................................................................................................................................13
2. Netting........................................................................................................................................................17
3. Understanding International Accounts Receivable.........................................................................26
4. International Inventory Management. (Theoretical concepts)...................................................31
Important Questions..............................................................................................................................................40
M.com Semester IV 1 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management

1. Sources of International Finance: Foreign Currency Convertible

Bonds, ADR’s, GDR’s, ECB’s, Euro Bonds and Types: Meaning,
Features and Merits and Demerits.

 FCCBs/ADRs/GDRs
Depository Receipts are – Basically negotiable instruments denominated in U.S. dollars.
Whereby an Issuer or a non-U.S Indian company tap the global equity market to raise
foreign fund thru it’s public listing and trading it in local currency equity shares in form of
“Depository Receipts”
These Depository Receipts may be traded freely on an exchange or an over-the-counter
market.
Depository Receipts can be either “GDRs” which are usually listed on a European stock
exchange, or American Depository Receipts (“ADRs”), listed on the US stock exchange.
To understand the concept of FCCBs/ADRs/GDRs lets first understand the Euro
equity issue first.
Euro equity represents shares that are denominated in dollars and are issued by
either non-American or non-European companies. These shares are then listed on
American and European stock exchanges by complying to their regulations.

Top 3 Goals of floating DR

Diversify investor base, Enhance visibility and global presence, Increase liquidity
4 Different Forms of Euro Equity Issue:
1. Global Depository Receipts (GDR)
2. American Depository Receipts (ADR)- #Popular
3. European Depository Receipts- #Popular
4. Singapore Depository Receipts
It’s just that the name differs but the features are identical for these equities confirming
norms and rules pertaining to respective countries where these are issued and listed.

1: Global Depository Receipts (GDR)

GDR equity shares are denominated in dollar and tradable on a stock exchange in Europe
or USA. For example, a GDR of $100 may comprise of 2 equity shares of $50 each
amounting to whatever the prevailing exchange rate is.

Main features of GDR:

1. GDR represents certain number of equity shares denominated in dollar terms
2. The issuer collects the proceeds in foreign currency
3. GDRs are traded on stock exchanges of Europe and USA
4. And funds are raised from foreign capital market of the USA and Europe
5. All shares to be issued are deposited with an intermediary called ‘depository’
located in the listing country
6. The Depository issues a receipt against these shares
M.com Semester IV 2 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
7. Each receipt has a fixed number of shares usually 2 or 4
8. The shares issued to the depository may be in physical possession of
another
9. Intermediary called ‘custodian’ who acts as depositor’s agent.
10. The equity shares registered in the name of depository are then issued in
form of GDR to the investors of that foreign country
11. The GDR does not appear in the books of the issuing company
12. ADR or GDR holders do not have voting rights and therefore not bound by
strict definition of foreign ownership
13. Two-way fungibility is permitted in GDRs whereby they are freely convertible
into Shares and back into GDRs without restriction to the extent of the
original issue size.
14. The issue of GDR is governed by international laws
15. Since GDR is also denominated in rupees, hence, GDR does not carry any
exchange risk as its face value is protected against the exchange risk
16. GDRs are listed at Luxembourg and traded at two other stock exchanges
namely,
17. The OTC market in London and in the USA by private placement
18. NRIs and foreign residents can buy GDR by using their regular share trading
account
2: American Depository Receipts (ADR)
Devised in the late 1920s to help Americans invest in overseas securities. The main
reason for introducing ADRs were the complexities involved in buying shares in foreign
countries and the difficulties associated with trading at different prices and currency
values.

GDR v/s ADR:

There is not much different between GDR and ADR. Few of the differences
includes- GDR can be issued in the USA and other European countries. It is listed
on the stock exchanges of USA and Luxembourg.
Whereas, ADRs are denominated in US dollars, issued and traded on USA USA
stock exchange only.
Procedural Requirements for a GDR/ADR
1. Legal and accounting due diligence on Issuer in lines of the GAAP accounting
principals accepted in the US
2. Authorization by the shareholders
3. Application for listing the additional shares on the Indian Stock Exchange
4. Filing
5. Facilitate and arrange Legal and Accounting Due Diligence on the Issuer
6. Approval of the Foreign Investment Promotion Board (‘FIPB’)
7. Like ADR and GDR there are”Other depository receipts” depending on the country
where it’s issued. Euro equity issued in European countries is called as European
Depository Receipts (EDRs) #3
In Singapore is called as Singapore Depository Receipts #4

M.com Semester IV 3 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
Debts raised in form of bonds from international capital complying to regulations of the
respective country is called as Euro Debt.

Types of Euro Debt

 External Commercial Borrowings (ECB)
 Foreign Currency Convertible Bonds (FCCB)- #Popular
 Foreign Currency Exchangeable Bonds (FCEB)
 Euro Bonds
 Foreign Currency Convertible Bonds (FCCB)
Foreign currency convertible bond (FCCB) is a convertible bond issued by an issuer
company in a country whose currency different from its own currency. A company can
raise funds in the form of foreign currency by this instrument.
FCCB are bonds issued in accordance with the scheme defined by Ministry of Finance,
Government of India.

Salient features of FCCB:

1. The bonds are issued in a currency different from that of the issuing country
for the purpose of fundraising.
2. FCCBs can be subscribed by a non- resident in foreign currency
3. They collectively act like debt and equity instruments whereby regular
payment of interest and a principal payment on maturity is made.
4. At the same time, these bonds also give the bondholder the choice to
convert them into ordinary shares, either in whole or in part.
Issuer
A company that plans to tap the foreign market through DRs complying with the global
issue mechanism. The Issuer will, along with the Lead Manager to the issue decide the
following issues, namely: Public-private placement,The number of GDRs/ADRs to be
issued, The issue price
Lead Manager
The lead manager is the person responsible for marketing the issue. He also advises the
Issuer what type of security should be issued like equity, bonds, FCCB along with the rate
of interest as per coupon rate, the price of the security (conversion price), etc.
Co- Managers/ Underwriters
They assist the Lead Manager in fulfilling his obligations
Depository
It is the bank authorized by the Issuer to issue GDRs/ADRs against the issue of ordinary
shares of the Issuer (the “Depository”). It is the overseas agent of the Issuer
Custodian
It is the banking company (situated in India), acting as a custodian for the ordinary shares
of an Indian Company, issued by it against GDRs/ADRs. The Custodian acts in coordination
with the Depository. The physical possession of the shares is with the Custodian.
Legal Advisors

M.com Semester IV 4 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
They assist the Issuer, Lead Manager, Co-Managers and the Underwriters in the
preparation of the prospectus, depository agreement, indemnity agreement and
subscription agreement and help the Issuer to comply with proper disclosures relating to
the issue.
Auditors
The Issuer must appoint auditors who will prepare the auditor’s report for inclusion in the
prospectus, provide requisite consent and comfort letters and reconcile the Issuer’s
accounts with International accounting standards (the “Auditors”)

2. Concept of International Finance Centre: Gift City: Constituents and

Benefits

GIFT City (Gujarat International Finance Tec-City) is India’s first operational

International Financial Services Centre (IFSC), designed to attract global
businesses, financial institutions, and fintech companies.
GIFT City is strategically located in Gandhinagar, Gujarat, along the Sabarmati
River, making it easily accessible from the major cities. The development of GIFT
City was initiated as part of India’s long-term financial sector reforms, focusing on
global trade and economic growth.
Spanning 886 acres, the city is being developed in phases to accommodate
commercial, residential, and social infrastructure. It is designed to support
financial institutions, fintech startups, and IT-enabled services with a futuristic
ecosystem.
It offers world-class infrastructure, smart city elements, and tax incentives, making
it an attractive destination for financial and tech enterprises.
NRIs can benefit from investment opportunities, tax exemptions, and banking
services like IDFC FIRST Bank’s international banking unit in GIFT City.
GIFT City, short for Gujarat International Finance Tec-City, is India’s pioneering
global financial and business hub. Developed as a smart city, GIFT City aims to
provide a conducive ecosystem for financial services, fintech companies, and
global trading institutions.
Established by the Government of Gujarat, it is designed to compete with
international financial hubs like Dubai, Singapore, and London. GIFT City is a part
of India’s vision to transform its financial sector and attract multinational
corporations, startups, and NRIs.
2. Features of GIFT City

The distinct features of GIFT City:

1. World-class infrastructure and facilities, Modern infrastructure
2. Equipped with high-tech facilities, green buildings, and smart city elements.
3. Strategic location between Ahmedabad and Gandhinagar, offering seamless
connectivity.
M.com Semester IV 5 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
4. Global financial hub
5. Hosts banking, insurance, capital markets, and fintech businesses.
6. Regulatory ease Operates under a Special Economic Zone (SEZ), providing
tax benefits and compliance flexibility.
7. High-speed connectivity and a well-planned transportation network.
8. Smart utility services, including automated waste management and district
cooling systems.
9. Financial hub and business opportunities.
10. Home to major banks, insurance companies, and stock exchanges.
11. Presence of global fintech firms and startups in a regulated financial
environment.
12. International Bullion Exchange (IIBX), allowing trading of gold and
other precious metals.
13. 100% income tax exemption for 10 out of 15 years. GIFT IFSC units
have the flexibility to choose any 10 consecutive years from a 15-year time
frame.
2. The leading business opportunities in GIFT City:
1. Financial Services and Banking Institutions
Leading Indian and foreign banks have set up their International Banking
Units (IBUs).
2. IDFC FIRST Bank’s IBU in GIFT City offers seamless banking solutions to NRIs.
3. Opportunities for Multinational Corporations and Startups
GIFT City attracts global enterprises looking for a low-tax, high-growth
business environment.
4. Startups and fintech firms benefit from access to international markets and
regulatory ease.
5. Role of Fintech, IT, and Global Trading Companies
Companies in blockchain, AI, and digital payments find GIFT City attractive
due to its financial regulations.
6. The presence of India’s first international bullion exchange boosts global
trade.
7. Benefits for Businesses Setting Up in GIFT City
No capital gains tax on specific financial transactions.
8. Exemptions on GST for services provided by IFSC units.
9. 100% foreign ownership allowed for businesses.
10. GIFT City is India’s gateway to global financial markets, offering
unparalleled business opportunities, world-class infrastructure, and a
regulatory environment designed to drive economic growth and international
investments.
11. Regulatory framework specific to GIFT City
Governed by the International Financial Services Centres Authority (IFSCA),
ensuring ease of doing business.
12. SEZ regulations allow free movement of foreign exchange, benefiting
global investors.
13. Businesses enjoy simplified compliance requirements.
14. No restrictions on repatriation of earnings for international companies.

M.com Semester IV 6 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management

Opportunities for NRIs to invest in GIFT City :

1. NRIs can invest in real estate, financial instruments, and banking services in
GIFT City.
2. Participation in global stock markets and fintech ventures.
3. Special benefits for NRIs
4. No capital gains tax on specified financial transactions.
5. Simplified tax compliance for international earnings.
6. NRIs can own commercial and residential properties in GIFT City without
restrictions.

3. Complexities Involved; Challenges confronted in Foreign

Investment Analysis.
1. Definition of International Capital Budgeting

International capital budgeting refers to the evaluation and analysis of investment

opportunities that involve cross-border transactions. It includes assessing the
feasibility, profitability, and risks associated with investing in projects, assets, or
subsidiaries located in foreign countries. The process requires considering various
financial factors specific to international investments, such as exchange rate
fluctuations, regulatory environments, tax implications, and country-specific risks.

2. Importance of International Capital Budgeting

International capital budgeting plays a crucial role in strategic decision-making for
multinational corporations and investors. Some key reasons why international capital
budgeting is important include:

 Expansion and Growth: International investments provide opportunities

for companies to expand their operations, tap into new markets, and achieve
growth objectives. Proper capital budgeting allows organizations to assess
the feasibility and profitability of such ventures.
 Risk Management: International investments are exposed to various risks,
including economic, political, and legal risks specific to each country. Capital
budgeting helps identify and evaluate these risks, enabling effective risk
management strategies to be implemented.
 Resource Allocation: Capital budgeting assists in allocating financial
resources effectively among competing investment opportunities. It helps
prioritize projects based on their expected returns, risks, and strategic fit
with the organization’s objectives.
 Maximizing Shareholder Value: By making informed investment
decisions, companies can maximize shareholder value and achieve long-
term profitability. International capital budgeting ensures that investments
generate adequate returns and align with shareholder expectations.

M.com Semester IV 7 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
3. Financial Complications in International Capital Budgeting
1. Exchange Rate Risk
Exchange rate risk is one of the primary complications in international capital
budgeting. Fluctuations in exchange rates can significantly impact the profitability of
international investments. When cash flows are denominated in different currencies,
changes in exchange rates can affect the conversion of revenues, expenses, and
repatriation of profits. Managing exchange rate risk requires careful consideration of
hedging strategies, currency diversification, and ongoing monitoring of exchange
rate movements.
2. Political and Country Risk
Political and country risk refers to the uncertainties and risks associated with the
political, legal, and economic environments of foreign countries. Political instability,
changes in government policies, regulatory uncertainties, and economic volatility can
pose challenges in international capital budgeting. These risks can impact the
stability of cash flows, the regulatory framework for investments, and the overall
feasibility and profitability of projects. Thorough analysis of country-specific risks is
crucial in decision-making and risk mitigation.
3. Financing Challenges
International investments often come with financing challenges. Accessing capital
and securing funding sources may be more complex and costly in foreign markets.
Differences in financial systems, legal frameworks, and investor preferences can
affect the availability, terms, and cost of financing. Companies need to consider
these challenges and explore various financing options, such as international loans,
equity partnerships, or local financing arrangements, to support their international
projects.
4. Taxation and Legal Considerations
Taxation policies and legal frameworks vary across countries, posing challenges in
international capital budgeting. Tax implications, transfer pricing regulations,
repatriation of profits, and compliance requirements need to be carefully analyzed.
Understanding the tax consequences and legal obligations in each jurisdiction is
crucial for accurate financial projections and maximizing after-tax returns. Seeking
professional advice from tax and legal experts is recommended to ensure compliance
and optimize tax efficiency.
5. Cultural and Market Differences
International investments require navigating cultural nuances and market
differences. Consumer behaviors, preferences, competitive landscapes, and market
dynamics can vary significantly across countries. Understanding local market
conditions, conducting market research, and adapting business strategies to cultural
sensitivities are crucial for accurate revenue projections and market penetration.
Failure to account for cultural and market differences can lead to financial
complications and underperformance of international projects.
6. Financing and Operating Currency Mismatch
Financing and operating currency mismatch is another financial complication in
international capital budgeting. Mismatches between the currency in which the
project is financed and the currency in which revenues are generated or expenses
incurred can create cash flow volatility and expose the investment to exchange rate
M.com Semester IV 8 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
fluctuations. Implementing appropriate currency risk management strategies, such
as natural hedging or currency diversification, can help mitigate these complications
and stabilize cash flows.
7. Risk Management Strategies in International Capital Budgeting
Effectively managing the financial complications in international capital budgeting
requires the implementation of risk management strategies. Some common strategies
include:

1. Hedging: Hedging techniques, such as forward contracts, options, or

currency swaps, can help mitigate exchange rate risk by locking in favorable
exchange rates or limiting potential losses.
2. Diversification: Diversifying investments across different countries,
industries, or currencies can help reduce the impact of country-specific risks
and currency fluctuations.
3. Legal and Regulatory Compliance: Ensuring compliance with local laws,
regulations, and tax requirements is essential to avoid legal complications
and financial penalties.
4. Market Research and Adaptation: Conducting thorough market research,
understanding cultural nuances, and adapting business strategies to local
markets can minimize the impact of cultural and market differences.
5. Strategic Partnerships: Forming strategic partnerships or joint ventures
with local companies can provide access to local expertise, networks, and
resources, reducing risks associated with operating in unfamiliar markets.

 Summary International Capital Budgeting

International capital budgeting involves evaluating investment opportunities in foreign
markets, considering the financial complications that arise in such ventures. Exchange rate
risk, political and country risk, financing challenges, taxation and legal considerations, cultural
and market differences, and financing and operating currency mismatch are among the
common financial complications. Proper risk management strategies, including hedging,
diversification, compliance, market research, and strategic partnerships, can help navigate
these challenges effectively. By understanding the complexities and implementing appropriate
risk mitigation measures, organizations can make informed investment decisions, maximize
profitability, and achieve their international growth objectives.

1. Regulatory Framework
1. Foreign Exchange Management Act (FEMA): Regulates foreign
investment in India.
2. Foreign Direct Investment (FDI) Policy: Outlines the rules and
regulations for foreign investment in India.
3. Securities and Exchange Board of India (SEBI) Regulations: Regulates
foreign investment in Indian securities.
2. Approval Process
1. Approval from Reserve Bank of India (RBI): Required for foreign
investment in certain sectors.
2. Approval from Foreign Investment Promotion Board (FIPB): Required for
foreign investment in certain sectors.
3. Taxation
1. Tax rates: Different tax rates apply to foreign investors, depending on the
type of investment.
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 Module –II Advance Financial Management
2. Withholding tax: Applies to payments made to foreign investors.
4. Compliance
1. Compliance with Indian accounting standards: Foreign investors must
comply with Indian accounting standards.
2. Compliance with Indian tax laws: Foreign investors must comply with
Indian tax laws.
2. Challenges Faced by Foreign Investors
1. Regulatory complexities: Foreign investors may find it challenging to
navigate the complex regulatory framework in India.
2. Compliance requirements: Foreign investors must comply with various Indian
laws and regulations, including tax laws and accounting standards.
3. Cultural differences: Foreign investors may face cultural differences that can
affect their investment decisions.
3. Complexities and Challenges in Foreign Investment in India
 Foreign Direct Investment (FDI) in India is governed by a mix of liberal
policies and stringent regulations, varying across sectors. While the
government has eased norms in many areas to attract global capital,
investors still face complexities due to regulatory hurdles, compliance
burdens, and sectoral restrictions.
4. Key Challenges:

1. Sectoral Caps & Approval Routes:

1. Automatic Route (No prior approval): Sectors like manufacturing,
telecom (100%), and fintech (up to 100%) allow FDI without government
clearance.
2. Government Route (Prior approval needed): Sectors like defence
(beyond 74%), broadcasting (49-100%), and mining require government
scrutiny.
3. Sector-Wise FDI Limits (2024):
1. Sector FDI Limit Approval Route

2. Defence Up to 74% (Automatic) Beyond 74% (Govt.)

3. Telecom 100% Up to 49% (Automatic)

4. Insurance 74% Automatic up to 49%

5. E-commerce B2B allowed, B2C

100% (Automatic)
(Marketplace) restricted

6. Pharma (Brownfield) 74% (Automatic) Beyond 74% (Govt.)

100% (Automatic for 49% for airlines

7. Aviation
airports) (Automatic)
4. Prohibited Sectors:
 FDI is banned in gambling, lottery, real estate (excluding SEZs), and tobacco.
5. Compliance & Regulatory Hurdles:
 Multiple approvals from RBI, SEBI, and ministries delay investments.
 Frequent policy changes create uncertainty.
6. State-Level Variations:

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 Module –II Advance Financial Management
 Land acquisition, labor laws, and taxation differ across states, complicating
business operations.
7. Taxation & Dispute Resolution:
 Retrospective tax disputes (e.g., Vodafone case) have dented investor
confidence.

8. Best Practices for Foreign Investors

 Conduct thorough research: Foreign investors should conduct thorough
research on the Indian market and regulatory framework.
 Seek professional advice: Foreign investors should seek professional advice
from lawyers, accountants, and other experts.
 Ensure compliance: Foreign investors must ensure compliance with Indian
laws and regulations.

Case Studies
 Vodafone's Investment in India: Vodafone's investment in India was subject to
various regulatory approvals and compliance requirements.
 Walmart's Investment in Flipkart: Walmart's investment in Flipkart was subject
to various regulatory approvals and compliance requirements.
 Amazon's Investment in India: Amazon's investment in India was subject to
various regulatory approvals and compliance requirements.

4. Use of Capital Budgeting Techniques in following

scenarios
 Foreign companies investing in India
 Indian companies investing in foreign companies by raising fund in same
country
 Indian companies investing in foreign companies by raising fund in
different country through GDR’s

FOR PROBLEMS refer https://www.icai.org/post/10984

Summarised form given below:
Capital Budgeting Techniques in Different Investment Scenarios

 Capital budgeting involves evaluating long-term investments using

techniques like NPV, IRR, Payback Period, and Profitability Index. The
approach varies based on the investment scenario, foreign exchange (forex)
risks, and regulatory considerations. Below is an analysis of three scenarios:

1. Foreign Companies Investing in India

(Example: Walmart investing in Flipkart, Tesla setting up a plant in India)
Capital Budgeting Techniques Used:
Net Present Value (NPV): Discount future INR cash flows to USD (or home currency)
using a risk-adjusted discount rate (considering forex fluctuations).
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Module –II Advance Financial Management
Internal Rate of Return (IRR): Compare IRR with the company’s hurdle rate, adjusted
for India’s country risk premium.
Scenario Analysis: Assess political risks (e.g., sudden tax changes), currency
depreciation, and repatriation restrictions.
Forex & Regulatory Considerations:
FEMA (Foreign Exchange Management Act): Governs FDI inflows, repatriation of
profits, and capital controls.
Taxation: Withholding tax on dividends (10-20%) and capital gains tax (if exiting
investment).
Example:
Walmart-Flipkart Deal (2018): Walmart acquired 77% stake for $16B. Had to account
for:
Forex Risk: INR-USD volatility.
Regulatory Risk: FDI in e-commerce (marketplace model restrictions).
Exit Strategy: Future sale subject to capital gains tax.
Relevant Link: RBI FDI Guidelines

2. Indian Companies Investing in Foreign Companies by

Raising Funds Locally
(Example: Tata Motors acquiring Jaguar Land Rover (JLR) via Indian debt/equity)
Capital Budgeting Techniques:
NPV in Foreign Currency: Project JLR’s GBP cash flows, convert to INR using expected
exchange rates.
Cost of Capital: If funded via Indian debt, interest is tax-deductible (lower WACC).
Sensitivity Analysis: Test impact of GBP/INR fluctuations on debt repayments.
Forex & Regulatory Considerations:
RBI’s Overseas Direct Investment (ODI) Rules:
Automatic Route (up to $1B/year), beyond which RBI approval needed.
Repatriation of dividends taxed in India.
Example:
Tata Motors-JLR (2008):
Raised ₹7,200cr in India + $3B bridge loan.
Forex Risk: INR depreciated, increasing debt burden.
Hedging: Used forward contracts to mitigate GBP liability.
Relevant Link: RBI ODI Guidelines

3. Indian Companies Investing Abroad via GDRs (Global

Depository Receipts)
(Example: Infosys issuing GDRs in Luxembourg to fund US acquisitions)
Capital Budgeting Techniques:
NPV in USD/Euro: Since GDR proceeds are in foreign currency, discount foreign cash
flows directly.
WACC Adjustment: Cost of GDRs is lower than Indian equity (due to global investor
base).
Currency Risk: If revenue is in USD but GDRs are in EUR, hedge forex exposure.
Forex & Regulatory Considerations:
SEBI & FEMA Compliance:
GDRs must comply with Issue of Foreign Currency Convertible Bonds (FCCBs) and
Ordinary Shares Scheme, 1993.
Proceeds must be repatriated to India within 15 days.
Example:
Dr. Reddy’s Labs (2015): Raised $500M via GDRs for acquisitions.
Forex Impact: INR depreciation increased repayment burden.
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Module –II Advance Financial Management
Regulatory Compliance: SEBI disclosure norms applied.
Relevant Link: SEBI GDR Regulations

Key Takeaways:
Scenario Technique Forex Risk Regulation Case Study

FEMA, RBI Walmart-

FDI in India NPV, IRR INR volatility
FDI Flipkart

Indian FDI via RBI ODI

NPV, WACC Repayment risk Tata-JLR
Local Funds Rules

NPV, Cost of Dual currency Dr. Reddy’s

GDR-Funded FDI SEBI, FEMA
GDRs exposure GDRs
For deeper insights, refer to:
RBI Master Direction on FDI (2023)
SEBI GDR Framework

Unit 2
1. Cash Flow of a Multinational Company, Accelerating Cash
Flows, Leading and Lagging Leading and Lagging

Meaning : Leading and Lagging

Leading and lagging are two different forms of indicators that help in the
assessment of the current state of any business and the prediction of its future
conditions. The lagging indicators assess the current state of the business,
whereas the leading indicators predict the future state of affairs. The two
indicators help in the measurement of performance and management in an
organization. They help any organization to achieve what the management has
planned or predicted. The management gets to know the current business
environment and trends. It also helps them analyze if the company is on the right
track in converting its goals and plans into reality.
A company uses leading and lagging indicators to create an optimum mix of
backward-looking indicators and indicators that are future-oriented or forward-
looking. We assess whether the plans were achieved or not by using the lagging
indicators. The leading indicators are forward-looking and focus on future events
and results. In other words, they are the indicators that result in the performance
of lagging indicators sometime in the future. Leading indicators are the drivers of
key results and decide the future performance of any business.
Lagging indicators are usually focus-oriented.
They focus on results that the company can achieve at the end of a certain period
of time. They are the Key results indicators or KRI, focusing on making the
business faster, better, and more efficient. We can easily identify and capture
them. They lack the power of prediction because they are based on current and

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Module –II Advance Financial Management
past events. Also, we cannot easily improve them or influence them since they
usually occur/derived/calculated after the happening of an event or an activity.

The Lagging Indicators

 Companies use metrics like revenue and profits, consumer behavior and
participation, expenditure, renewals, etc., to arrive at the lagging
indicators. We can undoubtedly say that the key lagging indicator is
revenue that the company manages to generate over a period of time. We
can use key performance indicators or KPIs such as net revenue, EBITDA or
EBIT, ARR, ROI, ROCE, ROE, etc., to measure the company’s financial
performance.
 In terms of measurement of performance, we can use indicators such as
number of customers attended, number of calls completed over a particular
time period, number of leads and contacts generated, no. of conversions
from the leads, etc. We can use brand recall and recognition as a metric to
evaluate the results of our marketing efforts.
 Lagging indicators do not tell us how the management or teams are
handling a current project. These indicators only give us results after the
completion of a project. And therefore, it is basically a postmortem of the
activity. But these measures are an accurate way to determine the actual
impact of the business. Also, they tell us how successful and effective the
policies and programs of the business are. But they also take time to give
results or measure, and the answers are not spontaneous. Also, these
indicators give us the final outcome of a project or an event. They do not
tell us anything about the variables that have led to the particular outcome.
Thus, they may not help us in problem-solving without going in for a
detailed analysis of all the ingredients.
Key Leading Indicators
 Leading indicators act as “leads” to help us meet our business goals and
objectives. They define the requisite actions that the management needs to
take to meet its goals. They set benchmarks, and businesses should meet
M.com Semester IV 14 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
them to be in line with achieving their KPIs. These indicators are predictive in
nature. Organizations can make adjustments on the basis of results so that
they do not deviate from the correct path, and any deviation could be
rectified immediately.
 Leading indicators are not absolutely accurate, being predictive in nature.
They tell us what can and may happen, but not with complete surety. These
indicators do not guarantee the occurrence of any future event or outcome;
instead, they talk about the likely outcome based on the sample data of
performance. Also, they are usually unique to businesses and vary from one
company to another. Hence, they are difficult to understand and identify. It is
hard to benchmark them across companies or industries.
 In terms of revenue generation for a company, the leading indicators can be
the volume of sales or deals about to be finalized, the number of customer
complaints, customer footfall, new market development, the introduction of
new products, new applications development, etc. These indicators can
affect the future performance of any organization. We can adjudge customer
loyalty and their retention by the metric of customer satisfaction. Similarly,
staff retention activity can be gauzed by employee satisfaction and
motivation. This directly impacts the productivity levels within the
organization and, subsequently, its revenue.
Summary: Leading and Lagging
 Any organization uses both the lagging and leading indicators in tandem or
simultaneously. For example, revenue from sales in an organization is a
lagging indicator as it is a measure of what has already occurred in the form
of sales. Lagging indicators usually become the base or reference pointers.
And on those lagging indicators, we build further plans and budgets using
the Leading Indicators. We continuously work to improve our sales revenue
to improve our leading indicators. We will focus on methods to improve our
sales pipeline. Also, it will be an indication of whether we will be able to
achieve our future goal of sales targets or not. Especially looking from the
past experience and current developments going on. If the management
feels that the target is tough to achieve, it can take corrective steps to
increase sales.
 Leading indicators keep changing frequently. Hence any organization has to
check and keep track of them often. Lagging indicators are more stable and
change relatively less often; hence, the company need not frequently track
and check them. Companies need to develop a framework for performance
management. On the one hand, they need to assess whether the company is
on its path to achieving the quantifiable metrics such as sales targets,
profits, etc. On the other hand, the management needs to ensure that they
pay attention to indicators such as customer satisfaction, employee
satisfaction, market penetration, etc. A company can perform well and
develop achievable KPIs only when we have a balance between the leading
and lagging indicators.
https://www.mbaknol.com/international-finance/centralized-cash-management-
operations-of-multinational-corporations/
M.com Semester IV 15 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
Centralized Cash Management System

 Accomplishing the first goal requires establishing accurate, timely

forecasting and reporting systems, improving cash collections and
disbursements, and decreasing the cost of moving funds among affiliates.
The second objective is achieved by minimizing the required level of cash
balances, making money available when and where it is needed, and
increasing the risk-adjusted return on those funds that can be invested.
Restrictions and typical currency controls imposed by governments inhibit
cash movements across national boundaries. These restrictions are different
from one country to other. Managers require lot of foresight, planning, and
anticipation. Other complicating factors in international money
management include multiple tax jurisdictions, multiple currencies, and
relative absence of internationally integrated interchange facilities for
moving cash quickly from one place to other. However, by adopting
advanced cash management techniques MNCs are able to take advantage of
various opportunities available in different countries. By considering all
corporate funds as belonging to a central reservoir or ‘pool’ and managing it
as such, overall returns can be increased while simultaneously reducing the
required level of cash and marketable securities worldwide.
Advantages of Centralized Cash Management System
 When compared to a system of autonomous operating units, a fully
centralized international cash management program offers a number of
advantages, such as;
 The corporation is able to operate with a smaller amount of cash; pools of
excess liquidity are absorbed and eliminated; each operation will maintain
transactions balances only and not hold speculative or precautionary ones.
 By reducing total assets, profitability is enhanced and financing costs
reduced.
 The headquarters staff, with its purview of all corporate activity, can
recognize problems and opportunities that an individual unit might not
perceive.
 All decisions can be made using the overall corporate benefit as the
criterion.
 By increasing the volume of foreign exchange and other transaction done
through headquarters, banks provide better foreign exchange quotes and
better service.
 Great expertise in cash and portfolio management exists if one group is
responsible for these activities.
 Less will be lost in the event of an expropriation or currency controls
restricting the transfer of funds because the corporation’s total assets at
risk in a foreign country can be reduced.
 The foregoing benefits have long been understood by many experienced
multinational firms. Today the combination of volatile currency and interest
rate fluctuations, questions of capital availability, increasingly complex
organization and operating arrangements, and a growing emphasis on

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Module –II Advance Financial Management
profitability virtually mandates a highly centralized international cash
management system.
 There is also a trend to place much greater responsibility in corporate
headquarters. Centralization does not necessarily imply control by corporate
headquarters of all facets of cash management.
 Instead, a concentration of decision making at a sufficiently high level within
the corporation is required so that all pertinent information is readily
available and can be used to optimize the firm’s position.

2. Netting
 In a typical multinational family of companies, there are a large number of
intra-corporate transactions between subsidiaries and between subsidiaries
and the parent. If all the resulting cash flows are executed on a bilateral,
pairwise basis, a large number of currency conversions would be involved
with substantial transaction costs. With a centralized system, netting is
possible whereby the cash management center (CMC) nets out
receivables against payables, and only the net cash flows are settled among
different units of the corporate family.
 Payments among affiliates go back and forth, whereas only a netted amount
need be transferred. For example, the German subsidiary of an MNC sells
goods worth $1 million to its Italian affiliate that in turn sells goods worth $2
million to the German unit. The combined flows total $3 million. On the net
basis, however, the German unit need remit only $1 million to the Italian
unit. This is called bilateral netting. It is valuable, though only if subsidiaries
sell back and forth to each other. But a large percentage of multinational
transactions are internal — leading to a relatively large volume of inter-
affiliate payments — the payoff from multilateral netting can be large,
relative to he costs of such a system.
 The netting center will use a matrix of payables and receivables to
determine the net payer or creditor position of each affiliate at the date of
clearing.
Cash Pooling
 The CMC act not only as a netting center but also the repository of all
surplus funds. Under this system, all units are asked to transfer their surplus
cash to the CMC, which transfers them among the units as needed and
undertakes investment of surplus funds and short-term borrowing on behalf
of the entire corporate family. The CMC can in fact function as a finance
company which accepts loans from individual surplus units, makes loans to
deficit units and also undertakes market borrowing and investment. By
denominating the intra-corporate loans in the units’ currencies, the
responsibility for exposure management is entirely transferred to the
finance company and the operating subsidiaries can concentrate on their
main business, viz. production and selling of goods and services. Cash
pooling will also reduce overall cash needs since cash requirements of
individual units will not be synchronous.

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Module –II Advance Financial Management
Reinvoicing Centre
 The concept of CMC can be combined with that of a reinvoicing centre.
Under this system, notionally, all subsidiaries sell their output to the
reinvoicing centre, which is located in a lowtax country. The sales are
invoiced in the selling company’s currency. The reinvoicing centre takes title
to the goods and in turn sells to third party customers, as well as other
members of the corporate family which may be production and/or sales
subsidiaries. The actual deliveries are made from the selling units to the
buying units. For intra-corporate sales, the buying units are invoiced in their
respective currencies. Thus the entire currency exposure is transferred to
the reinvoicing centre which can use matching and pairing to minimise
recourse to forward markets or other hedging devices. Also, the reinvoicing
centre can access foreign exchange markets more efficiently than individual
subsidiaries. Leading and lagging can be used to transfer funds from cash-
surplus units to cash-deficit units. CMCs, finance companies, and reinvoicing
centres are generally located in major money market centres where active
markets in foreign exchange and a variety of money market instruments are
available. Also, the presence of an efficient banking system can facilitate
speedy settlement of receivables and payables.
Issues of Centralized Cash Management System
 Some important issues have to be sorted out before setting up a centralised
cash management system with netting and cash pooling. If the CMC uses a
single currency as the common denominator to compute net positions, this
will lead to transactions exposure for individual subsidiaries. Hence the
choice of the common currency must be made in the light of local
currencies of the individual divisions, existence of sufficiently active forward
markets and other hedging products between these currencies and the
common currency and so forth. The second issue is related to rules
governing settlement of debts within the system. If an individual subsidiary
has a net debtor position, how much time should it be given to settle, how
much interest should it be charged on overdues, how should it prevent a
subsidiary from arbitraging between its local money market and the CMC
(e.g.if a subsidiary can earn a much higher rate in the local money market
than what it has to pay on overdues to the centre, it will have incentive to
delay payments) are among the considerations which must be thoroughly
analysed.
Disadvantages of Centralized Cash Management System
 Despite these advantages, complete centralisation of cash management and
funds holding will generally not be possible. Some funds have to be held
locally in each subsidiary to meet unforeseen payments since banking
systems in many developing countries do not permit rapid transfers of
funds. Also, some local problems in dealing with customers, suppliers and so
on, have to be handled on the spot for which purpose local banks have to be
used and local banking relationships are essential. Each corporation much
evolve its own optimal degree of centralisation depending upon the nature
M.com Semester IV 18 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
of its global operations, locations of its subsidiaries and so forth. Further,
conflicts of interest can arise if a subsidiary is not wholly owned but a joint
venture with a minority local stake. What is optimal with regard to cash and
exposure management from an overall corporate perspective need not be
necessarily so from the point of view of local shareholders.
Collection and Disbursement of Funds
 Accelerating collections both within a foreign country and across borders is a
key element of international cash management. Considering either national
or international collections, accelerating the receipt of funds usually
involves the following:
 defining and analyzing the different available payment channels,
 selecting the most efficient method (which can vary by country and
customer),
 giving specific instructions regarding procedures to the firm’s customers and
banks.
 Management of disbursements is a delicate balancing act of holding onto
funds versus staying on good terms with suppliers. It requires a detailed
knowledge of individual country and supplier policies, as well as the
different payment instruments and banking services available around the
world. A constant review on disbursements and auditing of payment
instruments help international firms achieve better cash management. The
following questions may help international firms to find suitable
methodology.
Management of the Short-term Investment Portfolio
 A major task of international cash management is to determine the
levels and currency denominations of the multinational group’s investment
in cash balances and money market instruments. Firms with seasonal or
cyclical cash flows have special problems, such as spacing investment
maturities to coincide with projected needs. To manage, this investment
properly requires (a) a forecast of future cash needs based on the
company’s current budget and past experience and (b) an estimate of a
minimum cash position for the coming period.
Common-sense guidelines for globally managing the marketable
securities portfolio are as follows.
 Diversify the instruments in the portfolio to maximize the yield for a given
level of risk. Don’t invest only in government securities. Eurodollar and
other instruments may be nearly as safe.
 Review the portfolio daily to decide which securities should be liquidated and
what new investment should be made.
 In revising the portfolio, make sure that incremental interest earned more
than compensates for such added costs clerical work, the income lost
between investments, fixed charges such as the foreign exchange spread,
and commission on the sale and purchase of securities.

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Module –II Advance Financial Management
 If rapid conversion to cash is an important consideration, then carefully
evaluate the security’s marketability (liquidity). Ready markets exist for
some securities, but not for others.
 Tailor the maturity of the investment to the firm’s projected cash needs. Or a
secondary market with high liquidity should exist.
 Carefully consider opportunities for covered or uncovered interest arbitrage.
Cash Transmission
 An important but easy to overlook aspect of cash management is minimizing
the unnecessary costs in the process of collecting cash from debtors and
making payments to creditors. These costs arise from the so called “float”.
A debtor issues a cheque or a draft in favor of the firm, but funds do not
become available to the firm till the instrument is cleared through the
banking system. This delay is the float. The treasurer must try and minimize
the float in the cash collection cycle and take advantage of the float in the
cash payment cycle.
 The banking systems in various countries have evolved clearing mechanisms
which aim at reducing the delays between a payment instruction being
received and the payee actually being able to apply the funds. The CHIPS in
the US, CHAPS in the UK are examples of such systems. SWIFT is an
electronic network for cross-border funds transfers. A treasurer operating in
a multinational framework needs a good working knowledge of these
systems. Similarly banks around the world offer various facilities to their
clients to speed up funds transfers. Direct debits, lock-box facilities and
other such devices can help in cutting down these delays often enabling
realization of value the same day. With the rapid strides in technology of
banking and innovations like internet banking, it may be possible to virtually
eliminate the delays and effect instant cash transfers from the payer to the
payee.

Netting: Bilateral and Multilateral (Practical Illustrations)

https://www.wallstreetmojo.com/bilateral-netting/
 Bilateral netting refers to a situation where parties to a contract combine
swap deals and turn it into a single deal, creating a single net payment
stream instead of many individual ones.
 It helps simplify operations and mitigates risks for parties to these contracts
while promoting stability and efficiency in financial markets.
 It offers a focused solution for individual agreements, while multilateral
netting provides a broader network-based approach to risk mitigation and
settlement efficiency.
 Bilateral netting in financial transactions offers parties reduced credit risk,
lower operational costs, and more efficient capital usage by matching up
obligations between them, resulting in a single net amount being marked
due for processing.
 What Is Bilateral Netting?

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Module –II Advance Financial Management
 Bilateral Netting is a sophisticated financial technique where two parties
protect their financial interests by combining their swap agreements to form
a master agreement and offsetting relevant receipts and payments against
each other. This simplifies settlements, reduces costs, and lowers credit risk
for both parties, leading to hassle-free transaction processing.

 It optimizes swap management by consolidating agreements into a single

master contract. This eliminates unnecessary payment streams,
minimizing transaction costs and administrative troubles. Furthermore, it
mitigates credit risk for both parties by netting out opposing positions,
enhancing financial stability and market confidence. Though this method is
widely used to streamline payments through swap agreements, it can also
be applied to other financial instruments.
Bilateral Netting Explained
 Bilateral Netting, a cornerstone of financial markets, offers a potent
combination of operational efficiency and risk mitigation. By consolidating
multiple swap agreements between two counterparties into a single master
agreement, it dramatically reduces the number of individual transactions,
streamlining settlements and minimizing associated costs. This translates to
lower administrative overheads, reduced fees, and a more streamlined
workflow.
 However, the true power of netting lies in its ability to manage risk. In the
unfortunate event of one party's bankruptcy, netting safeguards both sides
from selective payment defaults. Instead of cherry-picking profitable swaps,
the bankrupt company can only collect on in-the-money swaps after settling
all out-of-the-money obligations. This ensures a fair and balanced outcome,
protecting both parties from significant financial losses.
 The benefits of such netting extend beyond bankruptcy scenarios. By netting
out opposing positions, it reduces overall credit exposure and
M.com Semester IV 21 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
promotes financial stability within the market. This enhanced confidence
fosters increased liquidity and facilitates smoother trading activity.
 In essence, bilateral netting is a powerful tool that revolutionizes swap
management, offering a delicate balance of operational efficiency and risk
mitigation. Its widespread adoption underpins the stability and resilience of
modern financial markets.
 Since the mitigation of counterparty credit risks is a major advantage of
using this method, it can be applied to settle payments in financial markets
using different financial instruments. For instance, options, forwards, and
futures can be settled via bilateral netting.
 Bilateral netting protects the financial interests of all the parties involved in
a contract. It streamlines operations, reduces costs, and, most importantly,
safeguards against the risks inherent in complex financial contracts. It
ensures efficiency and stability, underpinning the smooth functioning of
modern financial markets.
Example #1
 Suppose investment banks, Cloud Coin Bank and FinLight Bank, frequently
engage in swap agreements to manage their respective interest
rate exposures. Over time, multiple individual contracts emerge, creating
several complex obligations and corresponding settlements.
 The banks decided to employ the bilateral netting system. Cloud Coin Bank
and FinLight Bank agree to consolidate all their outstanding swaps into a
single master agreement. This agreement nets out opposing positions,
meaning in-the-money swaps for one party automatically offset out-of-the-
money swaps for the other.
 With this, a dramatic reduction in individual transactions is seen. Instead of
settling each swap separately, Cloud Coin Bank makes a single net payment
to FinLight Bank, reflecting the overall difference in their positions. This
streamlined process cuts administrative costs, reduces paperwork, and
improves operational efficiency for both parties.
 Besides convenience, bilateral netting promotes risk mitigation. Assume
FinLight Bank faces financial distress. Without netting, FinLight Bank could
cherry-pick profitable swaps, leaving Cloud Coin Bank exposed to significant
losses. However, with netting in place, FinLight Bank can only collect on its
in-the-money swaps after settling all its out-of-the-money obligations to
Cloud Coin Bank. This ensures a fair and balanced outcome, protecting both
parties from potential losses due to a counterparty's financial distress.
Example #2
 Suppose two manufacturing giants, Acme Steel and BoltCo, are both facing
rising interest rates. Acme, with hefty fixed-rate loans, worries about
increasing costs. BoltCo, with floating-rate debt, fears a drop in profitability
as rates climb. To hedge their bets, they enter into a series of interest rate
swaps.
 Acme agrees to pay BoltCo a fixed rate of 5% in exchange for a floating rate
tied to the LIBOR. BoltCo, in turn, pays Acme a fixed rate of 7% for a floating
M.com Semester IV 22 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
LIBOR rate. Over time, several such swaps accumulate, creating a tangle of
individual contracts.
 This is where bilateral netting helps. Acme and BoltCo decide to consolidate
all their outstanding swaps into a single master agreement. The agreement
nets out their opposing positions, meaning:
 Acme's 5% fixed-rate payments offset BoltCo's 7% fixed-rate payments.
 Both companies' floating LIBOR payments cancel each other out.
 Instead of multiple individual settlements, Acme simply pays BoltCo the
difference between their fixed-rate payments, effectively a net payment of
2%. This significantly reduces transaction costs and administrative hassles
for both companies.
 If BoltCo faces financial difficulties, they could choose not to honor their out-
of-the-money swaps (where LIBOR is lower than 7%) in the absence of
netting, leaving Acme exposed. However, with netting, BoltCo can only
collect their in-the-money swaps (where LIBOR is higher than 7%) after
settling all their out-of-the-money obligations to Acme. This protects both
parties, ensuring a fair settlement even in the face of financial hardship.
Example #3
 A December 2021 article explains how bilateral netting works when two
financial institutions plan to settle payments, keeping the settlement risk to
a minimum. Wells Fargo & Company and HSBC Bank PLC settle their foreign
exchange transactions through a netting system powered by blockchain
technology.
 All matched foreign exchange transactions pertaining to multiple cross-
border payments between these entities are settled in this manner. The
objective is to boost settlement speed, efficiency, timeliness, and accuracy.
 These organizations have agreed upon a settlement strategy, which allows
them to handle and process bilateral financial obligations during the day
without additional intervention. In this way, the two financial institutions are
able to leverage each other’s strengths in various markets and grow their
businesses.
Benefits
1. Bilateral netting in financial transactions offers several benefits. They have
been discussed below.
2. Risk Reduction: It minimizes credit risk by offsetting obligations between
parties, reducing the exposure to potential losses in case of default. Risks
associated with counterparty default, settlement, and delivery are
considerably reduced.
3. Capital Efficiency: It optimizes capital usage by allowing firms to calculate
their obligations on a net basis, requiring less capital to cover transactions.
Companies can continue to go about their business activities without
pumping in more capital.
4. Liquidity Management: It helps in managing liquidity efficiently by
consolidating multiple transactions into a single net position, reducing the
need for excessive funds to be tied up in transactions.
M.com Semester IV 23 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
5. Transaction Cost Reduction: Bilateral netting contracts enable entities with
high transaction volumes to deal with multiple transactions at once,
reducing their transaction costs through fewer settlements than those seen
in the regular course of business.
6. Operational Efficiency: It streamlines operations by simplifying the number
of transactions, reducing administrative workload, and lowering operational
costs (staff, IT equipment, software systems, etc.).
7. Regulatory Compliance: It can facilitate compliance with regulatory
requirements, especially capital and risk management guidelines, by offering
a clearer view of exposures and obligations.

Difference Between Bilateral And Multilateral Netting

The differences between bilateral and multilateral netting are listed in the table
below.

Key Points Bilateral Netting Multilateral Netting

It encompasses multiple
It is restricted to two
counterparties within a
counterparties, offering
centralized pool,
1. Scope a targeted approach for
facilitating efficient
streamlining individual
settlements across a
contracts.
network.

It requires only mutual It requires a

2. agreement, minimizing robust clearing
Requirements the need for complex house or exchange to
for execution infrastructure or third- manage the pool and
party involvement. track net positions.

M.com Semester IV 24 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management

Key Points Bilateral Netting Multilateral Netting

This involves dealing This involves dealing

with a single specific with several entities
3. Relevance
entity acting as a until settlements take
counterparty. place.

Netting or “Intercompany Netting” is the process of reducing the risk of financial

contracts by combing two or more swaps resulting in final payment between the
parties.
 Benefits of netting:
 Reduce credit risk
 Reduce settlement risk
 Reduce liquidity risk
 Reduce systemic risk
There are different types of netting like Payment Netting, Novation Netting,
Bilateral Netting, Close-Out Netting, and Multilateral Netting. The types which will
be discussed in detail are Bilateral and Multilateral Netting.
Bilateral netting
 Bilateral Netting involves two parties (supplier and the client). It the process
of aggregating invoices between the parties to one single agreement so that
only one net payment stream is made. It decreases the number of
transactions between the parties and also reduces the cost of accounting
activities like bank fees. It adds security by ensuring that both account
payables (AP) and Account Receivables (AR) are paid and thus minimizes the
risk. In the case of bankruptcy, it ensures that our invoices are executed and
not only the profitable ones.
Example of bilateral netting:
 Here as shown in the below figure for the first swap, Bank A has to pay 10
million Euros to bank B while for second swap bank B has to pay 5 million
euros to bank A. If without netting the swaps would have taken place then
the total amount would be (10+5 = 15m) and no of transactions will be
equal to two. So, if the banks would have used bilateral netting there would
be only one transaction i.e. from Bank A to Bank B (10-5 =5m). Thus, the
amount involved in the transaction is half with immediate cost saving.
Multilateral netting
 Multilateral netting is a process that consolidates and reduces the number of
inter-company funds transfer payments thus minimizing the cost of
intercompany transactions.

M.com Semester IV 25 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
 Multilateral netting is set up between the internal group entities of internal
companies so that they can settle their invoices and helps them to avoid
multiple transactions. Netting can also be used for third party transactions.
Thus, rather than settling each individual invoice that can lead to huge
volumes of transactions, parties can consolidate invoices and agree upon
one net payment stream. Almost all the methodologies of netting are either
payables- or receivables-driven. The payables are netted against the other
participant’s payables for payable driven system and same applies for the
receivable driven system. The end must be a zero-game sum meaning that
intercompany receivables = intercompany payables.
The netting process can be used to handle the following intercompany
transactions
1. Trade payments
2. Interest payments
3. Dividends
4. Loan payments
5. Investments

https://fintelligents.com/bilateral-and-multilateral-netting/
https://www.studocu.com/in/document/sharda-university/financial-management/
international-receivables-and-inventory-management/52741274

3. Understanding International Accounts Receivable

Accounts receivable refers to the outstanding invoices a company has or the

money the company is owed from its clients. In an international setting, this
can turn quite complex due to factors such as multiple currencies, diverse tax
systems, and different time zones. Nevertheless, effective management of
international accounts receivable can bring substantial benefits including
improved financial efficiency, reduced business risks, and an improved cash
flow.
A systematised process of billing, invoicing and collecting payments is crucial
in managing international accounts receivable. This framework promotes a
positive cash flow and helps avoid potential financial hiccups. In fact,
companies aim to collect over 99.9% of billings, expecting a high percentage of
invoices to be paid on time.
International accounts receivable demands a balance between nurturing
customer relationships and adhering to a stringent monitoring system. The
challenge for managers lies in managing potential risks without compromising

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Module –II Advance Financial Management
service quality. Ultimately, it is about maintaining professionalism while
promoting sales and serving all customers promptly and courteously.
A Brief Explanation of International Accounts Receivable
International Accounts Receivable is often a part of business dealings in a
global landscape. It involves overseas customers who owe the business money
in exchange for products or services acquired. The mechanism of managing
international accounts receivable is not starkly different from the domestic
process. It continues to involve the tracking and managing of money effectively
through procedures such as billing, invoicing, payment processing, and
collections.
However, it draws some unique challenges such as dealing with multiple
currencies and complying with the tax systems of different countries.
Furthermore, the presence of different time zones impacts the efficiency of
communication with clients and can sometimes lead to delayed payments.
Financial control measures are vital in this segment to maintain the pulse of
international accounts and remain compliant with relevant regulations. It
involves a precise understanding of international business transactions and the
skills to navigate its complexities.
The Importance of Managing International Accounts Receivable for a Global
Business
More than just a financial function, effectively managing international accounts
receivable has far-reaching influence on a global business’ operations.
Streamlining this aspect fosters financial efficiency by ensuring that
international clients make timely payments. It is a direct contributor to a
healthy cash flow that enables the business to continue its investment and
growth activities.
Appropriate policies for credit and collections can effectively mitigate business
risks. With a proactive approach, potential issues can be identified early and
corrective measures can be implemented promptly. Therefore, it enhances the
overall financial security of the company while also developing a robust
relationship with clients.
Additionally, an efficient international accounts receivable process reduces
overall administrative costs in the revenue cycle. It eliminates overheads such
as excessive deductions and concessions losses. Importantly, superior
customer service is an extended benefit of effectively managing accounts
receivable, thereby acting as a catalyst for increasing customer loyalty and
retention.
Highlighting the Difference between Domestic and International Accounts
Receivable
The core function of managing domestic and international accounts receivable
remains the same – ensuring the business collects the money owed by its
customers. However, domestic accounts receivable management deals with set
M.com Semester IV 27 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
processes, often limited to one currency, and standard tax considerations. The
complexity level increases substantially when managing international accounts.
Apart from multiple currencies, international businesses must deal with the
complexities of diverse tax systems. Each country has its specific tax
regulations and compliance guidelines. While establishing effective
communication might be challenging due to different time zones,
understanding and meeting the legal requirements of different countries
further complicates this process.
Added to this is the constant fluctuation in foreign exchange rates, introducing
an element of uncertainty in anticipating profits. It becomes vital to engage
increased financial controls in international accounts receivable methods. It
requires businesses to be adaptable, resilient, and willing to evolve their
processes to maintain efficiency. Even amidst these amplified complexities, the
importance of nurturing customer relationships should always be at the
forefront.
Challenges and Risks Associated with International Accounts Receivable
When operating on a global scale, managing international accounts receivable
comes with its fair share of challenges and risks. These potential pitfalls can
seriously disrupt cash flow and impair operations if not addressed in a
proactive and effective manner. Understanding these risks is the first step in
curating a strategy to mitigate their impact and respond effectively when they
occur. Let’s delve into these challenges and how they affect international
accounts receivable.
Among these, there are four crucial factors that necessitate diligent attention:
the fluctuation of exchange rates, legal complexities across borders, delayed
payments and non-payment, and cultural considerations in the payment
process. Each poses its unique challenges and calls for specific measures to
fend off any potential harm to the company's revenues.
Familiarity with these factors will allow your business to anticipate potential
challenges and put in place strategies to manage them effectively.
The Risks of Fluctuating Exchange Rates (Foreign Exchange Risk)
Operating globally often means dealing in multiple currencies, which exposes
your international accounts receivable to risks stemming from fluctuating
exchange rates, also known as Foreign Exchange Risk. This uncertainty can
bring about significant financial impact, directly affecting the value of
receivable accounts and potentially leading to financial losses.
The degree of fluctuation in currency exchange rates can create financial
uncertainties that can unexpectedly affect your bottom-line. The potential
losses incurred can be significant and may even hamper your business's
growth. Hence, it is paramount to monitor these rates religiously and have
strategies in place to cushion the effects of these fluctuations.

M.com Semester IV 28 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
Successful navigation of this risk involves careful monitoring of exchange rates,
making informed predictions, and where necessary, using financial instruments
like Hedging and Forward Contracts as means to mitigate potential losses.
Legal Complexities and Inconsistencies Across Different Countries
Another challenge of international accounts receivable stems from the legal
complexities inherent in cross-border trade. Each country boasts its own legal
systems and regulations, leading to potential inconsistencies and complexities.
Navigating these differences can be daunting and failure to do so may result in
contractual disputes, issues regarding intellectual property rights, varying
taxation regulations, and more.
Clearly understanding these legal peculiarities and how they apply to your
trade relationships is therefore crucial. Seek advice from international
commercial law experts to navigate these challenges effectively and protect
your company's interests.
Establishing clear contracts and agreements is one of the simplest ways to
mitigate legal risks. These contracts should be as comprehensive as possible,
covering everything from the basic terms of trade to actions in case of legal
disputes.
Delays in Payments and Increased Possibility of Non-payment
One of the most frequent risks encountered in the realm of international
accounts receivable is the delay in payments and the prospect of non-payment.
These can be caused by financial difficulties on the customers’ end, disputes
over invoices, administrative issues, and more. It's important to develop
preventive measures to alleviate these risks before they come to pass.
Proactively establishing clear payment terms and policies can exponentially
reduce the likelihood of delayed payments. Regular credit checks on your
customers coupled with attractive incentives for early payments can prevent
delayed payments.
Non-payment, commonly caused by severe financial difficulties or fraudulent
activities, poses an even greater risk. In such cases, considering options like
credit insurance or diversifying your client base to spread risk, can prove
useful.
Cultural Considerations in the Invoicing and Payment Process
 International business invariably involves interaction with diverse
cultures, each having its unique understanding and expectations of
marketing, negotiations, and payment protocols. Ignorance of these
cultural nuances can unintentionally cause offence, impede
communications, or create misunderstandings leading to delayed
payments or financial losses.
 When dealing with international clients, businesses need to adapt their
payment processes to suit regional practices and expectations. This could
mean adjusting your invoices to include specific details required by a
M.com Semester IV 29 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
client’s country or simplifying transactions to accommodate countries
with less established financial infrastructures.
 Understanding international business customs and the prominent cultural
idiosyncrasies, allowing for local holidays and working hours, practicing
cultural sensitivity in communications, and employing multi-lingual staff
can ease relations with overseas clients, ensuring smoother transactions.
 In conclusion, handling risks and challenges associated with International
Accounts Receivable requires comprehensive understanding, effective
strategizing, and proactive handling. Embracing such a proactive
approach will ensure your business is equipped with the right tools and
capabilities to mitigate these risks, allowing you to concentrate on your
core operations for sustainable growth.
Strategies for Effectively Handling International Accounts Receivables

 In order for businesses to succeed in the global marketplace, they must

adopt effective strategies for managing international accounts
receivables. These best practices can help guide businesses in navigating
the often complex world of international finance.
 Key strategies include adopting a structured credit management policy
for international customers, utilizing technology for efficient management
of accounts receivables, employing effective communication strategies,
and carefully balancing risk and opportunity.
 With these strategies in place, businesses can mitigate risks associated
with international transactions, improve cash flow, and take advantage of
global opportunities.
Adopting a Structured Credit Management Policy for International
Customers
 One of the first steps in managing international accounts receivables
effectively is establishing a structured credit management policy. Such a
policy should include procedures for setting and maintaining credit limits,
conducting ongoing controls, and considering credit insurance options.
With this strategy, businesses can significantly reduce the risk of non-
payment and other financial complications.
 A well-structured credit management policy ensures that businesses can
maintain a healthy cash flow, even when dealing with customers across
different countries. Furthermore, it instills a sense of financial discipline in
the organization, fostering a proactive approach to managing accounts
receivables.
 While this strategy requires a commitment, the financial security it offers
in return makes it an undeniably advantageous practice for dealing with
international transactions.
Utilizing Technology for Efficient Management of International Accounts
Receivables
 As companies expand globally, the number of transactions and the
complexity of managing them also increases. To efficiently manage this

M.com Semester IV 30 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
increased workload, businesses should leverage technology and
automate accounts receivables wherever possible. Technology aids in
streamlining processes, minimizing the risk of human error, and providing
real-time updates on receivables management.
 One such tool for efficiency is receivables management software. This
serves as a centralized platform for all the information associated with
the quote-to-cash process. Automation through such software helps in
improving performance by reducing days sales outstanding (DSO) and
delinquencies.
 Besides, this technology also offers valuable customer and process
intelligence. Businesses can gain a deeper understanding of their
customers, their payment habits, and their specific needs, thereby
enhancing customer satisfaction and profitability.
Effective Communication Strategies and Negotiation Tactics
 When dealing with international customers, effective communication
strategies go a long way. From resolving account disputes to negotiating
terms of payment, effective communication is the key to successful
international transactions. The cultural differences that can often lead to
misunderstandings and friction in business transactions can be minimized
through skilled communication.
 Educating team members on receptivity to different cultures, improving
language proficiency, and practicing patience and empathy in
communication can enhance relationships and result in prompter
payments.
 Another vital tactic is negotiation skills. Striking a balance between
assertively pursuing payments and maintaining good customer relations
requires tact and diplomacy, essential skills that all businesses operating
globally should master.
Balancing Risk and Opportunity: When to Consider Insurance and
Factoring
 One of the realities of international business is the inherent risk involved.
However, with risk comes opportunity. When considering steps to mitigate
risk such as insurance or factoring, businesses need to weigh potential
benefits against cost.
 Factors like cost of premiums, creditworthiness of the customer, cash flow
situation, and the financial stability of the business should all be
considered before deciding on insurance or factoring for international
accounts receivable.
 While it's impossible to eliminate all risk, the goal for businesses should
be finding a balance where they are secure but still financially healthy.
Conclusion: Best Practices in Managing International Accounts Receivable
 Managing International Accounts Receivables is no small task, but with
the right strategies in place, it becomes manageable and can even open

M.com Semester IV 31 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
up new opportunities. Adopting a structured credit management policy
builds a solid foundation for negotiating international transactions.
 Utilizing technology allows for efficient management of international
accounts receivables, while employing effective communication
strategies can diffuse potential misunderstandings and enhance
relationships. Moreover, a careful balance of risk and opportunity can
ensure financial health while also pushing for business growth.For
businesses hoping to succeed internationally, these best practices are the
key to achieving a profitable and sustainable global presence.

4. International Inventory Management. (Theoretical concepts)

https://theintactone.com/2019/04/29/fm-u4-topic-7-receivable-and-inventory-
management/

Objective Questions
1. Multiple choice questions
N
No Question Options Answer
.
What is the primary
purpose of Depository
1 Receipts (DRs)? B
B) To raise foreign D) To reduce
A) To raise domestic capital by listing C) To avoid operational
capital shares overseas taxation costs
Which of the following is
NOT a type of Depository
2 Receipt? C
M.com Semester IV 32 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management

A) ADR B) GDR C) ECB D) EDR

What is the key difference
4 between ADRs and GDRs? A
D) ADRs are
A) ADRs are listed only in B) ADRs are C) GDRs cannot issued only by
the US, while GDRs are denominated in be converted to Indian
listed in Europe/US euros shares companies
What is the full form of
5 FCCB? A
C) Financial D) Foreign
Currency Capital
A) Foreign Currency B) Foreign Credit Convertible Convertible
Convertible Bond Conversion Bond Bond Bond
Which entity acts as the
overseas agent for the
issuer in a GDR/ADR
6 issue? B
A) Lead Manager B) Depository C) Custodian D) Underwriter
What is the primary goal
7 of GIFT City? A
D) To replace
C) To reduce Mumbai as
A) To compete with global foreign India’s
financial hubs like Dubai B) To promote investment in financial
and Singapore agriculture in Gujarat India capital
Which of the following is a
benefit for businesses
8 setting up in GIFT City? A
C) Restrictions D) Mandatory
A) 100% income tax B) No GST on foreign local
exemption for 10 years exemptions ownership partnerships
What is the regulatory
authority governing GIFT
9 City? C
A) RBI B) SEBI C) IFSCA D) FEMA
Which of the following is a
challenge in foreign
10 investment analysis? A
C) Stable
political D) Uniform tax
A) Exchange rate risk B) High liquidity environment laws globally
What is a key
complication in
international capital
11 budgeting? B
B) Financing D) Single
challenges in foreign C) No regulatory currency
A) Fixed exchange rates markets differences usage
Which of the following is a
risk management strategy
in international capital
12 budgeting? B
A) Ignoring currency C) Avoiding D) Centralizing
fluctuations B) Hedging diversification all operations

M.com Semester IV 33 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
What does FEMA stand
13 for? A
C) Financial D) Foreign
Exchange Equity
A) Foreign Exchange B) Foreign Economic Management Management
Management Act Management Act Act Act
Which sector allows 100%
FDI under the automatic
14 route in India? B
A) Defence B) Telecom C) Agriculture D) Real estate
What is the FDI limit for
the insurance sector in
15 India? B
A)
Pharmaceutica
A) 49% B) 74%<C) 100% D) 26% ls
Which of the following is a
prohibited sector for FDI in
16 India? B
A) To increase
transaction
A) Pharmaceuticals B) Gambling C) Aviation costs
What is the primary
purpose of netting in
17 international finance? B
B) To reduce the C) To
A) To increase transaction number of complicate cash A) Bilateral
costs transactions flows netting
Which of the following is a
18 type of netting? A
C) Linear
A) Bilateral netting B) Unilateral netting netting
In bilateral netting, how
many parties are
19 involved? B
A) One B) Two C) Three D) Multiple
What is the primary
advantage of a centralized
cash management
20 system? C
C) Lower overall D) Higher risk
A) Increased transaction cash of
costs B) Reduced liquidity requirements expropriation
What is the role of a
21 reinvoicing centre? B
B) To consolidate C) To increase D) To replace
and manage transaction local
A) To avoid taxation currency exposure volume subsidiaries
Which of the following is a
disadvantage of
centralized cash
22 management? B
A) Reduced expertise in B) Inability to handle C) Higher D) Increased
portfolio management local payments foreign expropriation
exchange risk
M.com Semester IV 34 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
quotes
What is the purpose of
leading and lagging in
23 cash flow management? B
B) To accelerate or
delay payments D) To reduce
based on currency C) To avoid reporting
A) To delay all payments expectations taxation requirements
Which of the following is a
24 lagging indicator? B
C) Number of D) Employee
A) Customer footfall B) Revenue leads generated satisfaction
What is a leading
25 indicator? B
B) Customer C) Historical
A) Net profit complaints sales data D) Fixed assets
What is the primary
challenge in international
accounts receivable
26 management? B
B) Cultural D) Single
differences in C) No legal currency
A) Fixed exchange rates payment practices complexities usage
Which of the following is a
strategy to manage
international accounts
27 receivable? B
B) Adopting a
structured credit C) Avoiding D) Centralizing
A) Ignoring credit checks policy technology all operations
What is foreign exchange
28 risk? B
B) Risk due to C) Risk of D) Risk of
fluctuating exchange political regulatory
A) Risk of non-payment rates instability changes
How can businesses
mitigate foreign exchange
29 risk? B
C) By ignoring D) By
A) By avoiding foreign B) By using hedging currency centralizing
transactions instruments fluctuations operations
What is the primary
purpose of international
30 inventory management? B
B) To balance supply
A) To reduce stock levels and demand across C) To avoid D) To eliminate
to zero borders taxation suppliers
Which of the following is a
key component of GIFT
31 City’s infrastructure? B
C) Heavy
B) International manufacturing D) Residential-
A) Agricultural zones Bullion Exchange units only areas
What is the full form of
32 IFSCA? A

M.com Semester IV 35 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
C) International D) Indian
Foreign Foreign
B) Indian Financial Securities Securities
A) International Financial Services Centres Centres Centres
Services Centres Authority Authority Authority Authority
Which of the following is a
33 feature of FCCBs? C
B) They are issued C) They can be D) They are
A) They cannot be only in the issuer’s converted to risk-free
converted to equity domestic currency equity shares instruments
What is the role of a
custodian in a GDR/ADR
34 issue? B
B) To hold the D) To avoid
issuer’s shares C) To act as the regulatory
A) To market the issue physically lead manager compliance
Which of the following is a
benefit of multilateral
35 netting? B
C) Higher D) No
A) Increased number of B) Reduced operational regulatory
transactions settlement risk costs oversight
What is the primary
36 purpose of a cash pool? B
B) To centralize and C) To
A) To increase idle cash optimize surplus complicate cash D) To avoid
balances funds management taxation
Which of the following is a
challenge in foreign
37 investment in India? B
D) Single-
window
C) No regulatory clearance for
A) Uniform tax laws B) Sectoral FDI caps approvals all sectors
What is the primary
purpose of capital
budgeting techniques in
38 international scenarios? B
B) To evaluate long-
term investments C) To reduce D) To eliminate
A) To avoid foreign considering forex operational regulatory
investment risks costs hurdles
Which of the following is a
key consideration in
international receivable
39 management? C
C)
Understanding
A) Ignoring cultural B) Delaying all local payment D) Avoiding
differences payments practices technology
What is the primary risk of
fluctuating exchange rates
40 in international finance? B
B) Unpredictable C) Fixed interest D) No impact
A) Stable cash flows revenue conversion rates on profitability

M.com Semester IV 36 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
Which of the following is a
tool for accelerating cash
41 flows? B
A) Lagging B) Leading C) Netting D) Reinvoicing
What is the primary
purpose of a reinvoicing
42 centre? B
B) To consolidate C) To increase D) To replace
and manage transaction local
A) To avoid all taxation currency exposure volume subsidiaries
Which of the following is a
43 key feature of ADRs? B
B) They are C) They cannot D) They are
A) They are listed only in denominated in USD be converted to issued only by
Europe and traded in the US shares governments
What is the primary
advantage of bilateral
44 netting? B
C) Higher D) No
A) Increased transaction B) Reduced credit operational regulatory
volume risk costs compliance
Which of the following is a
challenge in international
45 inventory management? B
D) No
B) Cross-border C) Single regulatory
A) Fixed demand logistics currency usage differences
What is the primary
purpose of the Foreign
Exchange Management
46 Act (FEMA)? A
A) To regulate foreign B) To prohibit all C) To fix D) To eliminate
investment in India foreign transactions exchange rates RBI’s role
Which of the following is a
key benefit of GDRs for
47 issuers? B
D) No
B) Enhanced global C) Higher regulatory
A) Limited investor base visibility taxation compliance
What is the primary
purpose of a centralized
cash management
48 system? B
C) To
A) To increase idle cash B) To optimize complicate cash D) To avoid
balances liquidity globally flows taxation
Which of the following is a
key risk in international
49 accounts receivable? B
D) Single
B) Non-payment by C) No legal currency
A) Fixed exchange rates foreign customers complexities usage
What is the primary
purpose of leading and
50 lagging indicators? B
M.com Semester IV 37 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
B) To measure past
performance and C) To avoid
A) To confuse predict future financial D) To eliminate
management outcomes reporting all risks

State True or False of the following statements

No Answ
Statement
. er

ADRs are denominated in the currency of the issuing company’s home

1 False
country.

GDRs listed in Luxembourg can also be traded in the OTC market in

2 True
London.

3 FCCBs are a mix of debt and equity instruments. True

4 GIFT City allows 100% foreign ownership of businesses. True

The International Financial Services Centres Authority (IFSCA) governs

5 False
SEZs in India.

Leading indicators predict future performance, while lagging indicators

6 True
assess past results.

Multilateral netting involves consolidating transactions across two

7 False
subsidiaries.

The RBI’s ODI rules allow Indian companies to invest up to $1 billion

8 True
abroad without approval.

9 Bilateral netting eliminates all credit risk between parties. False

The custodian in a GDR/ADR issue is located in the issuer’s home

10 True
country.

11 FEMA regulates repatriation of profits by foreign investors in India. True

FDI in Indian e-commerce marketplaces is prohibited under the

12 False
automatic route.

Euro Bonds are issued in a currency different from the issuer’s domestic
13 True
currency.

GIFT City’s tax exemption allows businesses to choose any 10

14 True
consecutive years out of 15.

15 Hedging is a risk management strategy used to mitigate political risk. False

M.com Semester IV 38 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management

No Answ
Statement
. er

A centralized cash management system increases the need for idle cash
16 False
balances.

The reinvoicing centre transfers currency exposure to the parent

17 True
company.

Cultural differences have no impact on international accounts

18 False
receivable management.

Foreign Currency Exchangeable Bonds (FCEBs) can be exchanged for

19 True
shares of a third-party company.

The Foreign Investment Promotion Board (FIPB) approves all FDI under
20 False
the automatic route.

Capital budgeting for foreign investments ignores exchange rate

21 False
fluctuations.

Leading involves delaying payments to benefit from currency

22 False
depreciation.

23 SEBI regulates the issuance of GDRs by Indian companies. True

24 Vodafone’s tax dispute in India was related to retrospective taxation. True

25 The International Bullion Exchange (IIBX) is located in GIFT City. True

26 Bilateral netting is only applicable to swap agreements. False

27 NRIs cannot invest in real estate within GIFT City. False

28 The custodian holds physical possession of shares in a GDR/ADR issue. True

29 Cash pooling reduces liquidity risks for multinational corporations. True

FDI in Indian tobacco manufacturing is allowed under the automatic

30 False
route.

Walmart’s acquisition of Flipkart faced challenges due to FEMA

31 True
regulations.

32 Leading indicators are backward-looking metrics like revenue and profit. False

33 The CHIPS system is used for cross-border cash transfers in the UK. False

34 FCCBs must be converted into equity at maturity. False

M.com Semester IV 39 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management

No Answ
Statement
. er

GIFT City operates under India’s Goods and Services Tax (GST)
35 False
framework.

36 Lagging indicators include metrics like customer satisfaction scores. False

37 The SWIFT network is used for international cash transfers. True

38 Retrospective tax disputes have increased investor confidence in India. False

39 Indian companies can use GDR proceeds to fund foreign acquisitions. True

ADRs were introduced in the 1920s to simplify cross-border

40 True
investments.

41 The "automatic route" for FDI requires prior government approval. False

42 Cultural sensitivity is irrelevant in international receivable management. False

43 The Payback Period method ignores the time value of money. True

44 GIFT City’s infrastructure includes district cooling systems. True

Bilateral netting reduces the number of transactions but increases

45 False
settlement risk.

46 Foreign investors in GIFT City are exempt from capital gains tax. True

47 Tata Motors raised funds locally in India to acquire Jaguar Land Rover. True

The Foreign Direct Investment (FDI) limit for Indian insurance

48 False
companies is 49%.

Leading and lagging indicators are mutually exclusive in performance

49 False
analysis.

50 FCEBs are a subset of External Commercial Borrowings (ECBs). False

M.com Semester IV 40 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management

Important Questions

1. Explain the key features and benefits of GIFT City as an International Financial Services
Centre (IFSC). How does it position India in global financial markets?
Answer:

 GIFT City is India’s first IFSC located in Gujarat. Key features include:
 Tax incentives: 100% tax exemption for 10/15 years, no GST on services.
 Regulatory ease: Governed by IFSCA, SEZ status, 100% foreign ownership.
 Infrastructure: World-class facilities, International Bullion Exchange (IIBX), fintech hubs.
 Global connectivity: Strategic location between Ahmedabad and Gandhinagar.
Benefits include attracting foreign investments, enabling global trade, and competing with hubs like
Dubai/Singapore. It positions India as a global financial player by offering a low-tax, compliant ecosystem
for MNCs and fintech firms.

2. Compare ADRs and GDRs. Discuss their significance for Indian companies raising
foreign capital.
Answer:

ADRs (American Depository Receipts):

 Listed on US exchanges (e.g., NYSE).
 Denominated in USD, governed by SEC.
GDRs (Global Depository Receipts):
 Listed on European exchanges (e.g., Luxembourg).
 Traded globally, often in USD/EUR.
Significance:
 Access to global investors: Diversify funding sources.
 Currency flexibility: Raise funds in foreign currencies.
 Enhanced credibility: Compliance with international regulations boosts investor confidence.

3. Discuss the complexities involved in foreign investment analysis for multinational

corporations.
Answer:
Key complexities include:
 Exchange rate risk: Fluctuations impact cash flows and profitability.
 Political/regulatory risks: Sudden policy changes (e.g., Vodafone tax dispute).
 Cultural differences: Payment practices, negotiation styles.
Taxation: Double taxation, transfer pricing, repatriation laws.
Financing challenges: High borrowing costs in foreign markets.
Example: Walmart faced regulatory hurdles under FEMA while acquiring Flipkart.

4. Explain the concept of centralized cash management in MNCs. What are its advantages
and challenges?
 Answer:
Centralized Cash Management: Consolidating cash reserves globally under a central
authority (e.g., Cash Management Center).
Advantages:
 Reduced idle cash balances.
M.com Semester IV 41 Asst. Prof. Girish L. Chhagani
Module –II Advance Financial Management
 Efficient netting (bilateral/multilateral) lowers transaction costs.
 Better liquidity management and risk hedging.
Challenges:
 Regulatory restrictions on cross-border fund transfers.
 Currency mismatch risks.
 Operational delays in local payments.

5. What are FCCBs? How do they differ from ECB and Euro Bonds?
Answer:
 FCCBs (Foreign Currency Convertible Bonds):
 Debt instruments convertible to equity after a period.
 Issued in foreign currency (e.g., USD).
Differences:
 ECB (External Commercial Borrowings): Plain debt with no equity conversion.
 Euro Bonds: Issued in a currency foreign to the issuer (e.g., Indian company issuing USD bonds in
Europe).

6. Analyze the role of netting (bilateral vs. multilateral) in optimizing international cash
flows. Provide examples.
Answer:
Bilateral Netting:
 Settling net payables between two subsidiaries (e.g., German and Italian units netting $1M vs. $2M to a
single $1M payment).
Multilateral Netting:
 Consolidating payables/receivables across multiple subsidiaries (e.g., matrix-based clearing).
Benefits:
 Reduces transaction volume/costs.
 Minimizes forex exposure.
Example: Tata Motors used netting to manage GBP/INR fluctuations during JLR acquisition.

7. Discuss the challenges faced by foreign investors in India’s FDI framework. Use case
studies to support your answer.
Answer:
Challenges:
 Sectoral caps: Defence (74% under automatic route), insurance (74% FDI).
 Retrospective taxation: Vodafone’s $2.2B tax dispute.
 Regulatory delays: Walmart-Flipkart deal required FIPB approval.
 State-level variations: Land acquisition laws differ across states.

8. Explain the application of capital budgeting techniques (NPV, IRR) in cross-border

investment scenarios.
Answer:
 NPV: Discount foreign cash flows to home currency using risk-adjusted rates (e.g., INR to USD for
Walmart-Flipkart).
 IRR: Compare project IRR with hurdle rate + country risk premium.
 Adjustments: Factor in forex risks (e.g., hedging), political risks (scenario analysis).
Example: Infosys used NPV in USD for GDR-funded US acquisitions.

9. What are the key components of international receivable management? How do cultural
factors influence it?
Answer:
Components:
 Credit policy design (e.g., payment terms for foreign clients).

M.com Semester IV 42 Asst. Prof. Girish L. Chhagani

Module –II Advance Financial Management
 Forex risk hedging (e.g., forwards, options).
 Legal compliance (e.g., FEMA for repatriation).
Cultural Factors:
 Payment delays in regions with relaxed timelines (e.g., Middle East).
 Negotiation styles (e.g., hierarchical vs. egalitarian cultures).
Example: Amazon adapted invoicing formats to meet EU tax compliance.

10. Critically evaluate the role of IFSCA in regulating GIFT City. How does it promote ease
of doing business?
Answer:
IFSCA’s Role:
Single regulator for banking, insurance, and capital markets in GIFT City.
 Ease of Business:
 Unified compliance framework.
 Allows offshore banking, global stock trading.
 Facilitates innovations like blockchain-based settlements.
Example: HSBC and Wells Fargo used IFSCA’s framework for blockchain-driven forex netting.

M.com Semester IV 43 Asst. Prof. Girish L. Chhagani