PIB News Analysis - 02 January 2013

FDI vs Portfolio Investment
Foreign direct investment is a direct investment into production or business in a country by an individual/company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. But Portfolio investment is a passive investment in the securities of another country such as stocks and bonds.

Different Types of FDI
Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. eg: Walmart in India

Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. eg: Toyota Car Plant in India

Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country

A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. 

Failure to pay a bond effectively means bankruptcy. Bondholders who have not received their interest can throw an offending company into bankruptcy, or seize its assets if that is stipulated in the contract.
  • A movable(transaerable) property.
  • Issued by the company in the form of a certificate of indebtedness.
  • It generally specifies the date of redemption, repayment of principal and interest on specified dates.
  • Option of Converable debentures(CD) and Non Converable debentures(NCD)
  • An NCD can be both secured as well as unsecured.

An NCD can be both secured as well as unsecured. For secured debentures, which are backed by assets, in case the issuer is not able to fulfil its obligation, the assets are liquidated to repay the investors holding the debentures.

Secured NCDs offer lower interest rates compared with unsecured ones. Any Indian company can raise money through NCDs if it has a tangible net worth of at least Rs 4 crore and has been sanctioned loans by banks or financial institutions which is classified as 'standard asset' and not as bad debt.
eg: Muthoot Finance Secured NCDs

Finance Commission of India
The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state. The Finance Commission Act of 1951 states the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission. As per the Constitution, the commission is appointed every five years and consists of a chairman and four other members.

Articles which specify ways and means of sharing resources between Union and States: 269, 270, 275, 282 and 293

Recently fourteenth finance commission is constituted under the chairmanship of Y.V. Reddy,former RBI Governor.

The President  constitutes a Finance Commission on every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.
Parliament may by law determine the requisite qualifications for appointment as members of the Commission and the procedure of selection.

The Commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same amongst the States themselves. 

It is also under the ambit of the Finance Commission to define the financial relations between the Union and the States. They also deal with devolution of non-plan revenue resources.It also determines factors governing Grants-in Aid to the states and the magnitude of the same.

It is alleged that Planning Commission of India which is neither a constitutional nor a statutory body has usurped the role of Finance Commission. PC has restricted FC's role to mere recommend grants to states on revenue account only under article 275 of Indian constitution.