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CURRENT AFFAIRS - BASIC ECONOMY What are Alternative Investment Funds? | 23-Oct-2016 14:01

What are Alternative Investment Funds?

There are a large variety of investment institutions making investment in several types of assets. New varieties like angel funds emerges with time. existing regulations may not cover them. Hence these institutions that are different from the traditional investment institutions are categorized as Alternative Investment Funds. The necessity for classifying these institutions is from the view point of regulation. Every financial entity should be well regulated for the overall safety of the financial system as well as growth of the economy.

The name Alternative is vital as it shows the entities specified as AIFs are not like the traditional institutions - mutual funds, pension funds, insurance companies etc. Anything alternate to traditional form of investments can be categorized as alternative investments.

What are Alternative Investment Funds?

Alternative Investment Funds are a class of investment entities that are not covered under the usual SEBI regulatory framework for investment institutions. AIFs refers to any privately pooled investment fund - a trust or a company or a body corporate or an LLP (Limited Liability Partnership) which are not presently covered by any Regulation of RBI, SEBI, IRDA and PFRDA.  They may be foreign or Indian.

A notable general feature of AIFs is that they are tailor made investment arrangements like Private Equities that aims to utilize investment opportunities. AIFs are thus private investment entities.

Thus, AIFs includes Private Equities, Venture Capital Fund, Hedge funds, Commodity funds, Debt Funds, infrastructure funds, etc. Most of these investment entities are owned by big corporate houses or wealthy individuals. Private Equities like Blackstone and KKR (Kohlberg Kravis Roberts) are examples for AIFs. Several multinational banks have also AIFs. Venture Capital Funds and Angel Investors are also categorized as AIFs.

Regulation of AIFs

SEBI in May 2012 had notified the guidelines for AIFs as funds established or incorporated in India for pooling in of capital from Indian and foreign investors for investing as per a pre-decided policy.

In 2014, SEBI decided that the promoters of listed companies can offload 10 per cent of equity to AIFs such as such as SME Funds, Infrastructure Funds, PE funds and Venture Capital Funds registered with the market regulator to attain minimum 25 per cent public holding.

Under SEBI guidelines, AIFs are classified into three categories. The SEBI rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others.

The Category-I AIFs are the ones who can produce positive spillovers in the economy and for that they get incentives from the government, SEBI or other regulators. They include Social Venture Funds, Infrastructure Funds, Venture Capital Funds including Angel Investors, SME Funds etc.

The Category-II For these funds, no specific incentives and concessions are given by the government or any regulator. The institutions under this category are: Private Equity Funds, Debt Funds, Fund of Funds and such other funds that are not classified as category I or III. These funds shall be close ended and shall not engage in leverage.

The Category-III AIFs are institutions like Hedge Funds that trade with a view to make short term returns. They employ diverse or complex trading strategies and do leverage including investment in listed or unlisted derivatives.

Government in budget 2015 has allowed foreign investment in AIFs. Now, foreign investments would be allowed in AIFs that are established as registered trust, structured as incorporated company or limited liability partnership. The decision would enable foreign investment in AIFs established as trust or incorporated firms or LLPs or body corporate and registered with SEBI under the SEBI (AIFs) Regulations 2012.

The same would be enabled in the FDI policy and FEMA regulations including foreign investment by way of units of AIFs set up as trust in terms of SEBI regulations.

Creative destruction and disruptive innovations | 14-Oct-2016 18:18

Creative destruction and disruptive innovations

The world is witnessing a new wave of innovation. Present principle is that every business entity should innovate or apply scientific invention in to the business field in a perpetual manner to survive.

Artificial intelligence, robotics, internet of things…all have changed our economic activities and way of life. Most innovations in the digital field are disruptive or the one which displaces an existing product or method. There were different observations and concepts about innovations and its relationship with economic activities. The earliest one is the concept of creative destruction coined by economist Joseph Schumpeter and the recent one is the concept of disruptive innovation.

Schumpeter – Creative destruction

The first systematic attempt to connect inventions and economic development was made by economist, Joseph Schumpeter.  In his entrepreneurial theory of development, Schumpeter has narrated the origin, evolution as well as the disintegration of the capitalist system centered on the involvement of the entrepreneur. The life cycle of an economy is explained through changes in the level of innovation activities.

According to Schumpeter, competition under capitalism is not fundamentally about decisions on price or quality of goods. Rather it is related with the race to discover new technologies and ways of doing business that expand the range of available products, change daily life and destroy existing industries.

For Schumpeter, creative destruction implies the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Schumpeter had depicted entrepreneur as the change agent. Development is initiated by the innovating entrepreneur who is the hero of capitalist drama of development. Entrepreneur is a man of vision, imagination and drive and it is leadership and not ownership that matters.

For Schumpeter, capitalism disintegrates when entrepreneur becomes irrelevant as entrepreneurial activity becomes reutilized and institutionalized.

Recent history and trends shows the quick invention and innovation cycle across the world leading to rapid disappearance of old technologies and the establishment of new ones. For a company to survive, it has to be a perpetual innovator. Technological progress in electronics and IT is indicative of a new trend described as ‘disruptive innovation’.

The idea about disruptive innovation was first coined by Harvard Professor Clayton Christensen in his book ‘The Innovator’s Dilemma (1997)’. Christensen adapted Schumpeter’s idea into the present day world and classified innovations and new technologies as either sustaining ordisruptive. Sustaining innovation improves existing products and technologies whereas disruptive innovations challenges established firms, products and business models. 

How computers have displaced typewriters and how mobile phones have displaced mobile music devices are classic examples for disruptive innovation. Similarly, how artificial intelligence and robotics are going to replace human labour and services in future – all these shows the trend of disruptive innovation. 

What are the features of New industrial policy of 1991? | 09-Oct-2016 19:58

The New Industrial Policy of 1991 comes at the center of economic reforms that launched during the early 1990s. All the later reform measures were derived out of the new industrial policy. The Policy has brought comprehensive changes in economic regulation in the country. As the name suggests, these reform measures were made in different areas related to the industrial sector.

As part of the policy, the role of public sector has been redefined. A dedicated reform policy for the public sector including the disinvestment programme were launched under the NIP 1991. Private sector has given welcome in major industries that were previously reserved for the public sector.

Similarly, foreign investment has given welcome under the policy. But the most important reform measure of the new industrial policy was that it ended the practice of industrial licensing in India. Industrial licensing represented red tapism.

Because of the large scale changes, the Industrial Policy of 1991 or the new industrial policy represents a major change from the early policy of 1956.

The new policy contained policy directions for reforms and thus for LPG (Liberalisation, Privatisation and Globalisation). It enlarged the scope of private sector participation to almost all industrial sectors except three (modified). Simultaneously, the policy has given welcome to foreign investment and foreign technology. Since 1991, the country’s policy on foreign investment is gradually evolving through the introduction of liberalization measures in a phasewise manner.

Perhaps, the most welcome change under the new industrial policy was the abolition of the practice of industrial licensing. The1991 policy has limited industrial licensing to less than fifteen sectors. It means that to start an industry, one has to go for license and waiting only in the case of these few selected industries. This has ended the era of license raj or red tapism in the country. The 1991 industrial policy contained the root of the liberalization, privatization and globalization drive made in the country in the later period. The policy has brought changes in the following aspects of industrial regulation:

1. Industrial delicensing

2. Deregulation of the industrial sector

3. Public sector policy (dereservation and reform of PSEs)

4. Abolition of MRTP Act

5. Foreign investment policy and foreign technology policy.

1. Industrial delicensing policy or the end of red tapism: the most important part of the new industrial policy of 1991 was the end of the industrial licensing or the license raj or red tapism. Under the industrial licensing policies, private sector firms have to secure licenses to start an industry. This has created long delays in the start up of industries. The industrial policy of 1991 has almost abandoned the industrial licensing system. It has reduced industrial licensing to fifteen sectors. Now only 13 sector need license for starting an industrial operation.

2. Deregulation of the industrial sector- Previously, the public sector has given reservation especially in the capital goods and key industries. Under industrial deregulation, most of the industrial sectors was opened to the private sector as well. Previously, most of the industrial sectors were reserved to the public sector. Under the new industrial policy, only three sectors- atomic energy, mining and railways will continue as reserved for public sector. All other sectors have been opened for private sector participation.

3. Reforms related to the Public sector enterprises: reforms in the public sector were aimed at enhancing efficiency and competitiveness of the sector. The government identified strategic and priority areas for the public sector to concentrate. Similarly, loss making PSUs were sold to the private sector. The government has adopted disinvestment policy for the restructuring of the public sector in the country. at the same time autonomy has been given to PSU boards for efficient functioning.

4. Foreign investment policy: another major feature of the economic reform measure was it has given welcome to foreign investment and foreign technology. This measure has enhanced the industrial competition and improved business environment in the country. Foreign investment including FDI and FPI were allowed. Similarly, loan capital has also introduced in the country to attract foreign capital.

5. Abolition of MRTP Act: The New Industrial Policy of 1991 has abolished the Monopoly and Restricted Trade Practice Act. In 2010, the Competition Commission has emerged as the watchdog in monitoring competitive practices in the economy.

The industrial policy of 1991 is the big reform introduced in Indian economy since independence. The policy caused big changes including emergence of a strong and competitive private sector and a sizable number of foreign companies in India.