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MACROECONOMICS AND BUSINESS
ENVIRONMENT
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ASSIGNEMENT 1: RISK FACTORS

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ANKITA SONEJA -10BSP0309

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Q. What are the risk factors for doing business in India. In this background analyze
risk factor index and its various components ?

MEANING OF BUSINESS RISK :

The risk that a company will not have adequate cash flow to meet its operating expenses . A
company's risk is composed of  financial risk, which is linked to debt, and risk, which is often
linked to economic climate. If a company is entirely financed by equity, it would pose almost
no financial risk, but, it would be susceptible to business risk or changes in the overall
economic climate

BUSINESS RISK IN INDIA :

If you compare advantages and disadvantages of investing in India, it is very difficult to
judge. It is a big risk – but it is worth taking. Many of the company’s have gone ahead with
huge commitment to India, even though possibility of failing in India is equal to the success

VARIOUS RISK FACTORS ARE AS FOLLOWS :

i. Governmental, Legal and Compliance Risks

 Failure to Adequately Protect the Intellectual Property Rights Upon Which We Depend
Could Harm Our Business
 Defending Against Intellectual Property Claims Brought by Others Could Harm Our
Business
 We Are Subject to Risks in Our International Operations
 Because of Labor Laws and Practices, Any Workforce Reductions That We May Seek to
Implement in Order to Reduce Costs Company-Wide May Be Delayed or Suspended

ii. Operational Risks

 The Number of Systems We Can Produce Is Limited by Our Dependence on a Limited

Number of Suppliers of Key Components
 The Pace of Introduction of Our New Products Is Accelerating and Is Accompanied by
Potential Design and Production Delays and by Significant Costs
 We Are Dependent on the Continued Operation of a Limited Number of Manufacturing
Facilities
  We May Be Unable to Make Desirable Acquisitions or to Integrate Successfully Any
Businesses We Acquire
 Our Business and Future Success Depend on Our Ability to Attract and Retain a
Sufficient Number of Adequately Educated and Skilled Employees

iii. Financial Risks

 A High Percentage of Net Sales Is Derived from a Few Customers

 Fluctuations in Foreign Exchange Rates Could Harm Our Results of Operations

iv. Soverign Risks :

Sovereign Risk in India is therefore zero for both "foreign direct investment" and "foreign
portfolio investment." It is however advisable to avoid investing in the extreme north-eastern
parts of India because of terrorist threats. Kashmir in the northern tip is also a troubled area,
but investment opportunities in Kashmir are anyway restricted by law.

V .  Political Risk

India suffered political instability for a few years due to the failure of any party to win an
absolute majority in Parliament. Thus, political instability in India, in practical terms, posed no
risk to foreign direct investors because no policy framed by a past government has been
reversed by any successive government so far. You can find a comparison in Italy which has had
some 45 governments in 50 years, yet overall economic policy remains unchanged. Even if
political instability is to return in the future, chances of a reversal in economic policy are next to
nil.

Vi Commercial Risk :

Commercial risk exists in business in any country. Not each and every product or service can be
readily sold, hence it is necessary to study the demand/supply situation for a particular product
or service before making any major investment. There is a large number of market research
firms in India (including our own) which will study demand/supply situation for any
product/service and advise the potential investor accordingly in exchange of a professional fee
Vii Risk of Foreign Sanctions :

India did not seem to be in the good books of the United States government due to its nuclear
weapons and missiles development policy. However, US President Bill Clinton's state visit to
India in 2000 was a massive hit which even saw the President dancing with a crowd of colorfully
dressed women in the northwestern state of Rajasthan. Subsequent to the visit, visits between
the two countries at different levels took place, and the US government has all but come to
terms with the reality of a nuclear-armed India.

SOME OTHER RISKS ARE AS FOLLOWS :

 Terrorist attacks or other acts of violence would adversely affect the Indian economy, the
health of which the company’s business depends upon.” Or “If communal disturbances or
riots erupt in India, the Company’s business activities may be adversely affected,
resulting in a decline in the Company’s income.” Useless -- everybody knows that. 

 “Being majority stakeholders, the promoters have the ability to exercise significant
influence over matters requiring shareholder approval.” First, this is commonplace in
India. Worse, the company turns this into a virtue, through the management perception:
“The company operates in an open and professional manner. The board of directors, on a
joint consultative basis, takes important corporate decisions.”

 “We are promoted by first generation of entrepreneurs and the investors will be subjected
to all consequential risks.” The issuer’s response “We are in this industry for the last 20
years and are supported by a team of professionals and experts.” In the first place, I am
not convinced by this risk factor. If one inherits a business, however poorly it is run, there
is no risk but if a person has set up a business himself and has run it successfully for
several years, it is a risk! 

 “The company has not paid any dividends” This in fact should be a strength in an IPO as
the promoters have not withdrawn money from the company.

 “Intense competition in the market could affect our cost advantages, which could reduce
our share of business from clients, and adversely impact our revenues and profitability.”
How redundant one can get?

 “Timely and easy availability of raw material is essential for the operations of the
company. The prices of the raw materials may also change. This may adversely affect our
profitability.” Management perception: “Raw materials are available in plenty and we,
 therefore, do not reasonably foresee any hindrances in the timely and easy availability of
the same.” Why then state this as a risk?

 “Our registered office is not an owned premise.” The regulator obviously believes not
owning the premise where the registered office of the company is located is a risk.
Surely, this is a hangover of the vanishing companies’ scam of the nineties, when
inspections found companies not available at their registered office addresses. It’s hardly
a check, as a fraudulent promoter who wants to disappear with issue funds can sell off his
office before doing so.

 “Our revenues and profitability are dependent on a number of factors, and may vary
significantly from quarter to quarter, which could cause our share price to decline.” What
is the company trying to say that is not known?

 “Political, economic and social developments in India could adversely affect our
business.” Or “Changes in the Government policies could adversely affect our business.”
Or “Any changes in tax provisions may decrease our profits” These add no value to the
investment decision.

Components Of Business Risk :

 Product Risk :
The biggest risk a company faces is offering products or services for sale to consumers.
Offering products that consumers do not want or need quickly creates a negative impact on a
business, both financially and professionally.

 Market Risk
Each business operates in an economic marketplace, which has boundaries and limitations that
companies cannot exceed or ignore. Failing to understand the marketplace limits, such as
supply, demand, or price will create unprofitable situations for a company and lead to
department failures or company bankruptcy. Market risk can also include competitors, which
will limit the amount of market share companies can gain when entering new markets or
industries
  Finance Risk :

Financing is used by all companies to start new operations or expand current operations. When
companies use too much leverage, bank loans or credit lines to finance their operations, cash
flow will be severely limited because banks require monthly repayments.

The Way these Risk factors have behaved since past 10 years
A growth rate of above 8% was achieved by the Indian economy during the year 2003-04 and in
the advanced estimates for 2004-05, Indian economy has been predicted to grow at a level of 6.9
%.  Growth in the Indian economy has steadily increased since 1979, averaging 5.7% per year in
the 23-year growth record.  Many factors are behind this robust performance of the Indian
economy in 2004-05.  High growth rates in Industry & service sector and a benign world
economic environment provided a backdrop conducive to the Indian economy.  Another positive
feature was that the growth was accompanied by continued maintenance of relative stability of
prices.  There is a paramount need to move Indian agriculture beyond its centuries old
dependency on monsoon.  This can be achieved by bringing more area under irrigation and by
better water management.
In spite of measures taken to attract Foreign Direct Investment (FDI), the inflow was below
expectations in the last five years.  A significant achievement of the economy in the external
sector has been the steady and sustained improvement in the balance of payment position. 
Another notable development was the decline in the inflation rate during the five years.  
Value-Added Tax (VAT), one of the most radical reforms to be proposed for the Indian
economy, has been approved by 21 Indian States.  Over 120 countries worldwide have
introduced VAT over the past three decades and India is amongst the last few to introduce it.
The Government has set up several committees with a view to pursue economic reforms that
enable higher economic growth and generate more employment, while making the Indian
economy more globally competitive. The Government has also taken several steps to revitalize
the public sector and increase public investment. Two important institutional innovations have
been the creation of the National Committee on Infrastructure, chaired by the Prime Minister,
and the Investment Commission, chaired by Shri Ratan Tata. 
The economy is expected to grow at close to 7 per cent. To step up the rate of growth further,
requires more investment in infrastructure and in agriculture and an improvement in
government finances.
High-energy costs continue to exert pressure on the price front.  While work on the national
highways project has been speeded up, port and rail modernization has acquired a much higher
profile recently.  Public and private investment in both areas has been stepped up sharply.  A
financial Special Purpose Vehicle has been created to channelize funds for investment in the
infrastructure sector.
Economic reforms began in earnest only in July 1991.  The reforms of the last 10 years have
gone a long way toward freeing up the domestic economy from state control.  Progress has also
been made in many areas that were previously off limits to reforms.  Insurance has been opened
to private investors, both domestic and foreign.  Diesel oil and gas prices have undergone some
increases.  At least symbolic reductions have also been made in fertilizer and food subsidies. 
The value-added tax has undergone substantial rationalization.  These reforms have paid
handsomely.  The economy has grown at more than 6 percent coupled with full macroeconomic
stability. 
Economic reforms of the last decade have virtually bypassed agriculture.  Besides fertilizers
among others, farmers need adequate supply of water and electricity.  Financial sector reforms,
particularly the reform of banking, remain a distant goal.
While foreign banks are now allowed freely to open branches in India, they have not yet moved
in aggressively.  Banking sector privatization will take time but large efficiency gains could be
achieved if labor laws are reformed to restore the hire and fire policy.
The most important area of reforms is perhaps India’s power sector.  Virtually no sector of the
economy — industry, agriculture, or services — can achieve successful transformation without
adequate supply of power.  Infrastructure is another important area of reforms.  Roads,
railways, and ports all need expansion as well as improvement in the quality of service. 
Fertilizer and food subsidies pose yet another challenge.  As much as 0.7 percent of GDP goes
into fertilizer subsidies.  Finally, the reform of bureaucracy is essential.  The problem of a
bloated bureaucracy and the need for downsizing it is well recognized.  Moreover, the success
of the reforms in delivering growth and poverty reduction must make the road to future
reforms less bumpy.
In India for almost four decades the country was pursuing a path of development in which
public sector was expected to be the engine of growth.  However, the public sector had
overgrown itself and their shortcomings started manifesting in the shape of low capacity
utilization and low efficiency due to over manning and poor work ethics, over capitalization
due to substantial time and cost overruns, inability to innovate, take quick and timely decisions,
large interference in decision making process etc.
The Government started to deregulate the areas of its operation and subsequently, the
disinvestment in Public Sector Enterprises (PSEs) was announced.  The process of deregulation
was aimed at enlarging competition and allowing new firms to enter the markets.  The market
was thus opened up to domestic entrepreneurs / industrialists and norms for entry of foreign
capital were liberalized.