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AN INTRODUCTION TO DIFFERENTIATED LEARNING TOOLS

Participants in flexible learning programs have limitations on the nature of the time they can spend on learning. Typically they are employed fully or partially, pursuing higher studies or have other social and familial responsibilities. Availability of time is a great constraint to these students.

To aid the participants, we have developed four unique learning tools as below:

· Bullet Notes : Helps in introducing the important concepts in each unit

of curriculum, equip the student during preparation of examinations and

· Case Studies : Illustrate the concepts through real life experiences

· Workbook : Helps absorption of learning through questions based on real life nuggets

· PEP Notes : Sharing notes of practices and experiences in the Industry will help the student to rightly perceive and get inspired to learn concepts at the cutting edge _{application level.}placementinterviews

Why are these needed?	· Adults learn differently from B. School or college going
	· Adults learn differently from B. School or college going
	students who spend long hours at campus.
	· Enhancing analytical skills through application related learning
	kits trigger experiential learning
	· Availability of time is a challenge.
	· Career success increasingly depends on continuous learning
	and success

What_· makes it relevant?

How_· is it useful?

Where· does this lead to?

· Easier to move ahead in the learning process.

· Will facilitate the student to complete the program earlier than _otherwise.Helpsstay motivated and connected.

When_· is it useful?

Case Studies:

Business Environment &

Law

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CONTENTS

1.	Google‘s Challenges in China‘s Internet Services Market	6
2.	Anti-dumping Regulations: Impacting Foreign Trade in India	7
3.	Domino‘s Pizza: Combating Demographic Challenges in Japan	8
4.	BMW: Targeting the Creative Class in North America	10
5.	Coca-Cola: Customizing its Marketing and Promotional Strategies in Various Countries	11
6.	Organizational Culture at Cisco	13
7.	Economic Development: India vs. China	14
8.	Nationalization of the Bolivian Oil & Gas Sector	16
9.	Inflation in India: Its Causes and Impact	17
10.	Brazil: Transforming into a World Economic Power?	19
11.	Mercosur: Hampering Free Trade between Developing Economies?	20
12.	Life Insurance Corporation of India: The Undisputed Leader	22
13.	Challenges Faced by the Indian Microfinance Industry	23
14.	The Franchising System at McDonald‘s	24
15.	India‘s Challenges with WTO‘s Information Technology Agreement	25
16.	Brilliance Auto‘s Technology Transfer Agreements with Global Automakers	27
17.	Financial Institutions: Coping with the Challenges of Global ATM Frauds	29
18.	Pfizer‘s Patent Litigations in China	31

19. Regulatory Environment for the Sustainable Development of the

	Wind Energy Industry in the US and Canada	33
20.	Tax Problems for Cairn Energy in India	34
21.	Value Added Tax in India	36
22.	The Rise and Fall of Huang Guangyu	37
23.	Unfair Trade Practices at Christie‘s and Sotheby‘s	39
24.	Government of India Files Suit for Damages against Union Carbide	40
	iii

25.	The NTPC-RIL Contract Agreement Dispute	41
26.	Collective Bargaining Deal between General Motors and United Auto Workers	43
27.	Data Privacy Issues in the Indian BPO Industry	44
28.	Facebook‘s Initial Public Offering to Fund Future Growth	46
29.	Microsoft Raises Debt to Make Dividend Payments	47
30.	IDBI Merges with IDBI Bank	49
31.	Adidas Merges with Reebok	51
32.	Housing Finance Industry in India at the Crossroads	52
33.	Debt Crisis in Greece	53
34.	The Indo - Mauritius Double Taxation Avoidance Agreement	55

35. Software Sales Attracts Sales Tax: The Battle between

TCS and the Supreme Court of India

Introduction to the Case Study

Participants in ICFAI University Programs are eager to apply theory into practice. They realize that application orientation can enhance their learning and subsequent usage of management precepts and practices. Picking out the principle behind real world events is critical to this learning.

To fulfil this objective the institution has introduced the Case Study methodology as a learning tool. A one page case is developed for learning a concept/topic from an illustration of a real world occurrence. The case illustrates a situation pertinent to an individual/a company/an industry or an economy in relation to a concept or issue covered in the curriculum. The illustration is specific to the point being discussed.

The case depicts the knowledge which can be applied as illustrated in the practice of the real world. These experiences can be distilled to look at a core principle at play by the participant. While there could be multiple principles at play, the illustration of each case helps in its better understanding of the concept at a very fundamental level.

The learning outcomes expected are:

1. Real world is illustrated and connected back to one concept/topic for better theoretical understanding.

2. Application based approach, which significantly enhances absorption and retention.

3. Exposure to specific business situations and developments improves perspective.

It may be used for Assessment.

Many Google loyalists across the world were infuriated at the company agreeing to censor its content.

	1		Google’s Challenges in China’s Internet Services Market
	1

In September 2000, Google Inc. (Google), the world‘s leading Internet search engine company, began operating its search engine in China. By 2002, Google had gained a lot of popularity in China owing to its simplicity of use and ability to carry out searches effectively.

By 2003, Google was ranked No.1 in China‘s search engine market with a share of 34.8 percent. But in 2005, it started losing its market share to China‘s search engine company, Baidu.com. Google was unable to

maintain its lead as it did not have a local presence and its services became slow and unreliable. Google had been providing services to users in China through its global search engine www.google.com, which had its servers in the US. This meant that the content had to pass through Chinese firewalls, which often stalled the browser and slowed it down. The slowdown was also associated with the filtering and censorship carried out by the Chinese government and Internet service providers (ISPs). ISPs used their own filtering methods, resulting in inconsistent results.

In spite of these constraints, Google wanted to have a major presence in China due to China‘s lucrative Internet market. It was reported that in 2005, China had the second largest number of Internet users after the US. Google felt that only a local presence could help it to provide better and more reliable services to customers. To operate in China, Google needed an Internet Content Provider license, which required it to filter its content. Hence, Google decided to place its servers in China and agreed to self-censor the content

and let the users know about it. On January 25, 2006, Google announced that its Chinese website www.google.cn would be censored by the company itself on the basis of the government‘s instructions.

· Some analysts opined that Google‘s complying with the Chinese Government norms would give it several gains in one of the most lucrative Internet markets in the world and Google may once again emerge as the most preferred search engine in the country.

· Some experts also felt that the company would get better access to the market as it would be able to place its servers in China and with the Chinese government not blocking the search, the site would speed up.

· Google‘s move to censor its search results was criticized by several people including human rights activists, student organizations, and supporters of press freedom all across the world. They opined that Google had started operating from China mainly to take advantage of the burgeoning Internet market in China. Google was alleged to be working according to the whims of the Chinese government

_·and increasing press censorship in the country.

The case of Google illustrates the role of the Chinese government and the regulations in the Internet market which had an adverse effect on Google‘s operations in China. Organizations foraying into

new markets can succeed by studying the legal and regulatory environment in the country.

Discussion Questions

1. Comment on the legal and regulatory environment in China and its implications for China‘s media industry. How have the restrictions imposed by the Chinese government on Internet access affected the online media industry in China?

(Hints: Chinese firewalls, online industry)

2. By censoring its search content in China, was Google taking the right step? Why (not)? What steps should the company take to regain its lost market share in China?

(Hints: Market share, Accuracy)

Course Reference: Concept- Legal Environment, Regulatory Environment/Unit 1-Business Environment: An Introduction/Subject-Business Environment

Sources:

i. ―Google to Censor Itself in China,‖ www.edition.cnn.com, January 26, 2006.

ii. Ben Hirschler, ―Google: China Decision Painful but Right,‖ Reuters, January 26, 2006.

Other Keywords: Government Regulations, Internet services market

₂ Anti-dumping Regulations: Impacting Foreign Trade in India

Globalization has reduced tariffs and other barriers to international trade. The successive rounds of trade liberalization at Uruguay, under the General Agreement on Tariffs and Trade (GATT), resulted in a reduction in both tariff and non-tariff barriers. This led to many countries, which were producing goods at low manufacturing costs, exporting their goods to other countries and selling them at prices lower than those prevailing in the importing countries. This practice seriously affected the domestic industries of the importing countries. These countries therefore began using anti-dumping measures as an effective weapon to counter the dumping of foreign goods. Anti-dumping measures were unilateral remedies which could be applied by a member country of the World Trade Organization (WTO) after investigation and determination of dumping in accordance with the provisions of the Anti-dumping Agreement. If an imported product was

―dumped‖ and the dumped import was causing material injury to the domestic industry producing a similar product, then the host country could protect its domestic industry or producers by imposing anti-dumping duties.

India had	been an	By April	2012,	India had filed anti-dumping
active user of anti-		India had	filed	cases on a range of Chinese
dumping	measures	149	anti-	products, from toys, textiles
and was among the		dumping	cases	and mobile phones to tyres
top 10 countries that		against China		and chemicals. China, on the
imposed	anti-			other hand, took anti-
dumping	measures			dumping measures against
against China.				Indian antibiotics.

The series of anti-dumping investigations initiated by India against China came against the backdrop of a

rising trade deficit, which stood at US$ 27 billion in 2011. Bilateral trade reached US$ 74 billion during the same period, making China India‘s biggest trade partner.

In a bid to remove trade differences, India and China intensified their efforts and in April 2012, a trade remedy joint working group met in Beijing to formalize a mechanism to remove trade disputes before they led to the filing of formal anti-dumping investigations. The group aimed to primarily look at anti-dumping investigations and examine whether such cases could be settled before formal complaints were filed. Analysts opined that coming out with a mechanism to remove trade disputes, before anti-dumping investigations were formally filed, was a good measure as the growing number of anti-dumping measures could otherwise paralyze international trade between countries, ultimately affecting the manufacturers and exporters.

In an instance of anti-dumping, a case was filed in December 2012 by Japan and the European Union which accused China of hindering firms such as Sumitomo Metal and Nippon Steel from selling the tubes used in coal fired power plants. The WTO instructed China to bring its customs duties in line with the WTO regulations.

The case of anti-dumping introduces the concept of anti-dumping and its importance.

Discussion Questions

1. Explain how anti-dumping measures help countries to protect their domestic marketers. Discuss how anti-dumping measures have affected India.

(Hints: Unilateral remedies, Anti-dumping agreement)

2. Analysts feared that the increase in the number of anti-dumping measures would influence trade relations among countries and ultimately affect the exporters. In the light of this statement, discuss the need for reducing the number of anti-dumping measures.

(Hints: trade relations between countries, anti-dumping laws )

Course Reference: Concept- Trade Environment/Unit 1-Business Environment: An Introduction/Subject-Business Environment

Sources:

i. ―India-China Meet to Discuss Trade Disputes,‖ www.thehindu.com, April 15, 2012.

ii. Tile Firms up in Arms against Dumping,‖ www.business-standard.com, September 9, 2004.

Other Keywords: Anti-dumping, trade deficit

Domino’s Pizza: Combating Demographic Challenges

in Japan

The American restaurant chain and international franchise pizza Delivery Company, Domino‘s Pizza, was a

success in the US. It expanded to other countries and by 2004; it had 7,500 outlets around the globe and was the eighth largest fast food brand in the world. But the company‘s operations in various countries outside the US were a failure. Many analysts opined that the company‘s lack of success was mainly due to its failure to

comply with the requirements of local customers.

Its failures in various markets proved to be a valuable lesson for the company. It started carefully analyzing

the local environment and adapting its practices to suit the needs of customers. Further, it also trained its franchisees to meet the company‘s standards. This was evident in the case of its franchisees in Japan who

won the hearts of Japanese consumers by meeting their demands.

The dramatic changes in the demographics of the Japanese market in the 1980s gave rise to plenty of business opportunities. The emergence of the working woman who found little time for cooking spurred the

demand for ready to eat food. Further, the teen population in Japan had developed an interest in western habits and styles. These demographical changes in Japan encouraged Domino‘s Pizza to open its first pizza

store in Japan in 1985. It proved to be a success.

However, the company tried many strategies to win the patronage of the Japanese consumers. The first among those was to change the size of the pizza to make the pizzas more affordable to teenagers. Domino‘s

Pizza made the pizzas smaller – into 10 and 14 inch pies from the 12 and 16 inch versions, adding toppings that the Japanese preferred. It introduced toppings such as squid, shimeji mushrooms, pineapple, and corn, to cater to the tastes of the Japanese consumers. Also, the employees of the stores were given intensive training on behavioral aspects. The training programs taught the staff about the Japanese standards of politeness by

providing samples of polite phrases. The staff was also supposed to use polite phrases when they answered phone calls from customers. Experts felt that that it was Domino‘s Pizza‘s strong determination to reach the

Japanese consumers that led to its success in the country.

In the US, McDonald‘s Corporation (McDonald‘s), the world‘s largest chain of hamburger fast food restaurants, was grappling with demographic challenges too. In March 2013, it was reported that millennials

(customers aged 18 to 32 as classified by McDonald‘s) were not showing a preference for McDonald‘s

hamburgers and were gravitating instead toward fresher, sustainable, and organic foods. To counter this challenge, McDonald‘s pushed a healthier menu by launching McWrap, which was customizable and had fewer calories than hamburgers. McDonald‘s felt that the customizability of McWrap would be a key factor

in attracting younger consumers.

The case of Domina‘s Pizza highlights the importance of changing demographics in targeting and attracting customers in Japan.

Discussion Questions

1. Discuss the demographic challenges faced by Domino‘s Pizza in Japan.

(Hints: Local customers, Food habits)

2. Discuss how the demographic changes helped Domino‘s Pizza attract Japanese consumers and capturing a portion of the pie in the Japanese market.

(Hints: eating habits of working woman, Teenagers)

Course Reference: Concept- Demographic Classification/Unit 2-Demographic and Social Environment/Subject-Business Environment

Sources:

i. ―Reviving Wendy‘s: Ernest Higa on Entrepreneurship in Japan,‖ www.japansociety.org, October 3, 2012.

ii. Erdener Kaynak and Paul A. Herbig, ―Handbook of Cross-Cultural Marketing,‖ The Haworth Press Inc.,

1998.

Other Keywords: Japanese market, localization, customization

	4		BMW: Targeting the Creative Class in North America
	4

In 2005, BMW North America LLC (BMW LLC), the North American arm of leading German luxury car manufacturer, BMW AG, conducted in-house research, which revealed that a large percentage (75 Percent)

of luxury car buyers in the US did not even consider BMW vehicles at the time of purchase. The management attributed this situation to BMW‘s overemphasis on ―performance driving‖ over the preceding

33 years. This one-dimensional focus on performance had led to the customer perceiving BMW as a brand that ‗lacked humanity‘. The management also felt that the BMW brand was strongly associated with the yuppie (short for ―Young Urban Professional,‖ describing a demographic of people primarily comprising the

children or grandchildren of the baby boomer generation — people born between 1945 and 1964) phenomenon of the 1980s.

The insights gained from the in-house research prompted BMW LLC to opt for a new advertising agency, GSD&M, in November 2005. Subsequently, in May 2006, the company launched a new advertising campaign to reposition the BMW brand. With the new campaign, the company promoted itself as a

―company of ideas‖. The marketing communication was a huge departure from the company‘s communications in the past. The series of new ads that followed no longer stressed BMW‘s performance,

but strove to project its design prowess and a corporate culture that fostered innovation. In doing so, the company said that it wanted to take its brand beyond yuppies and attract a wider section of the affluent class.

At the same time, it wanted to make the existing BMW loyalists proud of the company‘s success story.

According to the company, the dynamic campaign was aimed at the creative class (comprising scientists, engineers, architects, educators, writers, artists, and entertainers) – consumers who shared many of BMW‘s

principles – an independent spirit, a drive to challenge conventional wisdom, and an appreciation for a brand‘s ability to offer both substance and style.

Though the ads received rave reviews from various quarters, some analysts felt that BMW was losing its soul by moving away from the theme of ―driving‖ and ―performance.‖ According to marketing expert Al Ries (Ries), BMW owned the word ―driving‖ and this had been etched in the minds of consumers over a period of three decades with the tagline ―The Ultimate Driving Machine.‖ Critics contended that when a

strong niche brand like BMW tried to diversify and expand its core customer base, it might cause confusion in the minds of customers. They felt that in trying to be everything to everyone, BMW might dilute what its brand stood for. But others felt that there was nothing wrong with BMW trying to expand its customer base. With a change in perception, more people would eventually start considering BMW. They felt that as long as BMW did not really change its core philosophy, that it built the ultimate driving machine, it would not lose its existing customer base.

The case of BMW highlights its attempt to reposition the brand to appeal to the ‗creative class‘ rather than relying on its traditional customer base consisting of ‗yuppies‘.

Discussion Questions

1. Discuss the rationale behind the ―company of ideas‖ advertising campaign of BMW LLC. (Hints: Corporate culture, Innovation)

2. Critics felt that by targeting the creative class, BMW LLC might dilute its brand. Do you think

BMW‘s new strategy in North America will work? Why (not)? What else needs to be done?

(Hints: Branding and brand dilution)

Course Reference: Concept- Demographic Classification – Social Class/Unit 2-Demographic and Social Environment:

An Introduction/Subject-Business Environment

Sources:

i. ―BMW Losing its Soul,‖ www.professorbainbridge.com, May 8, 2006.

ii. Richard Williamson, ―BMW Targets ‗Creative Class‘,‖ www.adweek.com, May 5, 2006.

Other Keywords: Creative class, Innovation, Corporate culture

Coca-Cola: Customizing its Marketing and Promotional Strategies in Various Countries

American multinational beverage manufacturer ‗The Coca-Cola‘ company operated in more than 200 countries worldwide as of February 2015. The company‘s success in the global markets was attributable to

the customized marketing and promotional strategies it used, which enabled it to overcome cultural and language differences in each of the countries in which it operated.

The Coca-Cola company depended heavily on marketing research to develop products and to plan promotional campaigns that catered to the needs of consumers in the target market. Though Coca-Cola was a global brand, it did not rely on a standardized strategy, preferring instead to approach its various markets around the world in different ways. It identified the regional and cultural differences in various countries and tailored its marketing strategies accordingly. While developing the promotional strategies for new markets, the company took utmost care not to hurt the sentiments and emotions of local consumers. The differentiated strategy of the company was reflected in the fact that its products contained different flavors, packaging,

prices, and advertising for different countries. Thus, the Coca-Cola company successfully applied its principle of ―think locally and act locally‖ in its operations.

The company used the ‗Always Coca-Cola‘ campaign theme worldwide to convey the universality of the

brand. At the same time, it analyzed the differences in culture and preferences of various countries and adapted its ad campaigns for each specific market. For instance, its ‗Eat Football, Sleep Football, Drink Coca-Cola‘ campaign in Great Britain proved to be very popular with consumers. The campaign was based on the British consumers‘ strong inclination for football, reinforcing the link between the Coca-Cola company and football while continuing the brand‘s support for the game and the fans.

In addition to launching different campaigns, The Coca-Cola Company created an extensive and well-established global distribution network to reach consumers in different parts of the world. The company operated a worldwide franchise system supplying syrups and Coke concentrate to bottling plants spread all over the world. The company supported its international bottler network with sophisticated marketing programs.

In June 2014, The Coca -Cola Company, taking its customized marketing strategies forward, rolled out a new campaign called ‗Share a Coke‘ in the US, inviting consumers to get their names printed on Coke bottles.

With this campaign, the company aimed to give a modern and youthful twist to the 128-year-old brand. The campaign, first introduced in 2011 in Australia, was rolled out in 50 more countries by mid-2014.

Just as Coca-Cola had done, global food and beverage giant, PepsiCo Inc. (PepsiCo), too launched global marketing campaigns in addition to adapting its campaigns for each specific market. For instance, in January

2014, PepsiCo launched the ‗Bring Happiness Home‘ campaign for the Chinese market. The campaign revolved around promoting the idea of delivering happiness while targeting the China market.

The case of Coca-Cola explains the strategies adopted by the company for operating in various countries worldwide. It focuses on how Coke adapted itself to the cultural variations in different countries and explains how the company reaches customers across the globe through a strong dealer network.

Discussion Questions

1. Discuss how Coca-Cola customized its marketing and promotional strategies in different countries. Do you think these strategies enabled the company to overcome cultural and language differences and succeed in the global market? Justify your answer.

(Hints: Global distribution network, Franchise)

2. Critically analyze how Coca-Cola adapted its product and other elements of marketing in such a way as to meet the demands of local people.

(Hints: strategies to suit local demands)

Course Reference: Concept- Cultural Adaptation/Unit 3-Cultural Environment/Subject-Business Environment

Sources:

i. ―Designing Global Market Offerings: Marketing Spotlight-Coca-Cola,‖ http://wps.prenhall.com.

ii. ―Within an Arm‘s Reach of Desire,‖ http://businesscasestudies.co.uk, 1995.

Other Keywords: Customized marketing, promotional strategies

	6		Organizational Culture at Cisco
	6

Cisco Systems Inc. (Cisco), the leader in Internet Protocol (IP)-based networking technologies and networking gear, was founded on a culture based on the principles of customer focus, open communication, empowerment, trust, integrity, and giving back to the community.

The company‘s success was attributed to its relationship with its customers, according to Cisco. Cisco professed a ‗worship of customers‘, which was a part of the company‘s culture right from its inception.

John T Chambers (Chambers), President and CEO, Cisco, played a significant role in the evolution of the

Cisco culture. When Chambers joined Cisco in 1991, the organization had a culture of chaos, but soon the organization became a more managed one and the chaos turned into ‗directed chaos,‘ a change partly

attributed to Chambers.

Chambers maintained a high degree of visibility in the company. He regularly communicated with the executive staff, vice presidents, directors, managers, and other employees through the Intranet, video-on-demand, etc. There were sessions like birthday breakfasts and new-hire sessions with Chambers. Chambers epitomized the value of transparent communication, a key to the Cisco culture.

According to some analysts, Cisco faced the risk of diluting its culture due to the influence of new recruits who brought in behaviors from their past job experiences. Cisco conducted team-building events to facilitate high levels of interaction among different departments and within departments that existed across countries.

The people practices of Cisco set industry benchmarks and ensured that the employee turnover of the company ition was marginal. Cisco stated that the company‘s financials had also improved through the years and this was attributable to its culture. Industry observers pointed out that Cisco‘s organizational culture led to the company listing in Fortune magazine‘s ‗100 best places to work‘ for eight consecutive years, starting

1998.

The case of Cisco helps us understand its organizational culture which was based on the principles of customer focus, transparent communication, employee empowerment, integrity, and frugality.

Discussion Questions

1. Critically analyze Cisco‘s organizational culture.

(Hints: Work culture in organization, customer focus )

2. Discuss the role played by Chambers in the evolution of Cisco‘s culture.

(Hints: low employee attrition, New recruits in the system)

Course Reference: Concept - Understanding Culture/Unit 3-Cultural Environment/Subject-Business Environment

Sources:

i. Krivda, Cheryl, D., ―Cisco‘s Solvik Channels the Internet Culture,‖ Ariba magazine, 2001.

ii. Schrenk, Kathy, ―Work Force for Sale: Firms Pursue Mergers to Fill Staff Shortages,‖ www. e21corp.com, September 10, 2000.

Other Keywords: Organizational Culture, Work Culture

	7		Economic Development: India vs. China
	7

The rapid progress that China made proved beyond doubt the role of politics in the economic development of the country. The rapid strides that China had made had taken it ahead of India in many areas.

In 2004, China had 12

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Many analysts felt that China was far ahead of India in terms of infrastructure. Infrastructural development in China was attributable to the political will of the Chinese government. On the other hand, in India, sectors under government control had not seen much progress over the years; it was the private companies that had changed.

India was known to have a weak government and a strong corporate sector while China had a strong government and a weak corporate sector. The Chinese had a one-party government, which made it easier for political decisions to be implemented. In contrast, India often had to contend with coalition governments, which made it very difficult for a consensus to be reached on any issue. The Chinese had also been proactive

in developing trade relations with other countries. In October 2004, China and the ASEAN agreed to scrap tariffs by 2010 and by January 2010, a mutual free trade area between ASEAN and the People‘s Republic of

China was established. Under this agreement, the tariff cuts between China and the ASEAN members — Brunei, Indonesia, Malaysia, Singapore, Thailand, and the Philippines — were 20 percent in 2005, 12 percent in 2007, 5 percent in 2009, and 0 percent in 2010.

In November 2014, Chinese Premier, Li Keqiang, pledged US$ 20 billion in loans to Southeast Asia for regional infrastructure development. This was in addition to the US$ 3 billion contributed to the China-ASEAN Investment Cooperation Fund, which funded infrastructure and energy investments in ASEAN member countries. Over and above this, China offered to give preferential treatment to ASEAN investors under an expanded China-ASEAN free trade agreement. While China was progressing in infrastructure development and energy, in November 2014, India was also making efforts to start a new era of economic development, industrialization, and trade by deepening its engagement with ASEAN. According to Prime Minister of India, Narendra Modi, both India and the ASEAN were keen to enhance their cooperation in advancing balance, peace, and stability in the region.

While India was making efforts to relax its political environment and develop its economy, many analysts felt that to compete with China, the Indian government needed to simplify the fiscal administration and cut taxes and excise duties. Some also felt that corporate taxes needed to be lowered, as this would encourage entrepreneurship and investment. Lowering taxes on the rich and the middle class would boost entrepreneurship and consumer demand respectively, analysts felt. India was also expected to face stiff competition from China in the information technology sector as an increasing number of people in China would be learning to speak English in the coming years.

The case discusses the rapid progress made by China and how the political environment facilitated its economic development. It compares the economic development in China and India and explains why China is far ahead of India as far as economic progress is concerned.

Discussion Questions

1. China was ahead of India in creating an environment conducive to business. What factors were responsible for China‘s rapid progress?

(Hints: Major international airports, GDP)

2. Why was India lagging behind China despite more than a decade of economic and structural reforms? How could India compete with China?

(Hints: Fiscal administration, economic development)

Course Reference: Concept- International Politics/Unit 4-Political Environment/Subject-Business Environment

Sources:

i. Arvind Subramaniam, ―India‘s Weak State will not overhaul China,‖ www.ft.comAugust, 16, 2010.

ii. Sarah Y. Tong and Catherine Chong Siew Keng, ―China-ASEAN Free Trade Area in 2010: A Regional Perspective,‖ www.eai.nus.edu.sg, April 12, 2010.

Other Keywords: Economic development, entrepreneurship

	8		Nationalization of the Bolivian Oil & Gas Sector
	8

On May 1, 2006, Evo Morales Ayma (Morales), President of Bolivia, announced the nationalization of the country‘s oil and gas sector. In a symbolic gesture of ownership, Morales sent the military to take over the

oil and gas installations. As per the nationalization decree, all foreign companies were required to give up their ownership of companies in the oil and gas sector. The foreign companies were given six months‘ time

to renegotiate their contracts with the government. All the future sales of the foreign companies were to be channeled through the state-owned oil company, YPFB (Yacimientos Petroliferos Fiscales Bolivianos). The Morales government believed that nationalization would help enhance revenues, promote greater social welfare, create more jobs for Bolivians, and increase Bolivian nationalistic pride.

Morales‘s decision to send military troops to take control of the oil and gas fields attracted heavy criticism

from foreign investors and industry analysts. It was estimated that 56 oil and gas fields had been occupied by the military troops with a copy of the presidential decree and banners stating ‗Nacionalizado: Propiedad de los Bolivianos‘ (Nationalized: Property of the Bolivians) being immediately displayed outside the fields. The

government justified the use of the military troops on the ground, stating that their presence would deter foreign companies from destroying important documents necessary for the proposed audit and renegotiation of the contracts.

The European Union (EU) also criticized the nationalization of the oil and gas sector and said that it might affect the volatile world energy markets. The move was also expected to lead to a direct confrontation with the largest investor in the oil and gas sector in Bolivia, Petrobras, which had already announced a freeze on all its proposed future investments in Bolivia and criticized the nationalization. The Spanish government also expressed concern over the nationalization in Bolivia as Respol-YPF was the biggest player in the oil and gas sector after Petrobras.

Nationalization was expected to affect production severely, if foreign companies chose to leave Bolivia. Foreign companies brought in the latest techniques and, in exploration and production that would help in easy location and quality production of oil and gas. Bolivia was not self-reliant in those areas. It was only after privatization of the sector in 1996 that oil and gas exploration and production grew sharply in Bolivia. Therefore, without private participation, active exploration and production could be severely affected in the country. Upon their withdrawal, Bolivia would be unable to supply gas to Brazil and Argentina as per the original contracts. This would result in loss of revenues and termination of contracts. Further, it was also expected to create a shortage of gas domestically for Bolivia. Hugo Chavez (Chavez), President of Venezuela, promised to offer technical help for refining and production through the Venezuelan state-owned oil company, Petroleos de Venezuela SA (PDVSA) in the event of the foreign companies exiting the country. This move was also criticized by analysts as they said that PDVSA did not possess the required competence to help YPFB and it would therefore be unwise for Bolivia to rely on it.

The case of Bolivia discusses the impact of nationalization of the oil and gas sector on the Bolivian economy, foreign investment flows, and regional trade alliances.

Discussion Questions

1. Is the nationalization of the oil and gas sector expected to be beneficial or harmful to Bolivia? Discuss.

(Hints: Foreign companies, Quality production )

2. Discuss Bolivia‘s nationalization of the oil and gas sector in the context of the debate on privatization vs nationalization for the development of a country.

(Hints: oil exploration, privatization)

Course Reference: Concept — Impact of International Political Environment on Domestic Business/Unit 4-Political Environment/Subject-Business Environment

Sources:

i. ―Takeover in Bolivia Jolts Energy Companies,‖ www.iht.com, May 2, 2006.

ii. Carlos Alberto Quiroga, ―Bolivia: Gas Nationalization Just the Start,‖ http://today.reuters.com, May 1, 2006

Other Keywords: Nationalization, Privatization

	9		Inflation in India: Its Causes and Impact
	9

India, an economy which had consistently posted a Gross Domestic Product (GDP) growth rate of over 8 percent since 2005, was battling high inflation in mid-2011. Headline inflation (measured in India through the Wholesale Price Index (WPI)), which included both food and non-food primary articles besides

manufactured items, was above 8 percent during the whole calendar year of 2010. In July 2011, it stood at 9.22 percent, more than twice the threshold level of 4-6 percent prescribed by the Reserve Bank of India‘s

(RBI), the central bank of India.

A severe drought in 2009 was considered to be the chief reason for the inflation, along with post-crisis monetary and fiscal policies characterized by various stimulus measures which resulted in the availability of easy credit. With the drought, food supplies fell. The growth rate of agriculture and allied sectors declined by 0.15 percent (negative growth) in 2008-2009, and recorded a growth of 0.44 percent the following year. A severe drought in 2009 was considered to be the chief reason for the inflation and small farming patterns were also responsible for price hikes. Sustained demand due to policy measures during and post crisis, coupled with supply constraints in food produce resulted in food inflation. On the other hand, lenient monetary and fiscal policies ensured abundant liquidity in the economy. The age old laws governing land and labor markets were severely criticized for the sorry state of the manufacturing sector, but the government of India was unable to act due to political constraints. On the contrary, it resorted to populist

policies of employment generation for the rural poor. These policies, as observed, resulted in income growth without the corresponding output growth in goods or services. The country‘s dependence on imports to meet

energy needs also added to the inflationary pressures.

With inflation hovering at over 9 percent in July 2011, the RBI followed a tight monetary policy regime. Between March 2010 and January 2012, it hiked interest rates 13 times consecutively to limit liquidity in the economy and curb demand and thereby control the growing inflation. Consequently, the repo rate stood at 8 percent in July 2011, up from 4.75 percent before March 2010. Though the demand in interest rate in sensitive sectors such as automobiles and consumer electronics went down, the demand for food and non-food primary articles still remained high. Economists, while expecting another rate increase from the RBI by

the end of October 2011, maintained that monetary tightening alone might not be enough to control inflation and that government should complement the RBI‘s rate hikes with tight fiscal policies.

Some economists stressed the need to be innovative in remixing agriculture output and restructuring Indian farming to strike the right balance on what to grow domestically and what to import. The right balance between production and imports would help in optimum utilization of land and water. It was also suggested that India could allow contract farming to encourage investment by Indian corporations in agriculture. Investments in farming had remained stagnant for decades. Another area of improvement suggested was to introduce farm credit to help the small farmers. According to developmental economists, the availability of easy and cheap credit for marginal farmers would catalyze agriculture output in the country by facilitating better farming techniques.

In January 2014, an expert committee headed by Urjit R Patel (Patel), Deputy Governor of the RBI suggested that RBI should adopt the new CPI as ―the measure of the nominal anchor for policy communication.‖ The Urjit Patel report proposed a CPI target of 6 percent by January 2016. Raghuram

Rajan, governor, RBI stated that they were exploring the recommendations of the Urjit Patel report on adopting CPI inflation as the benchmark to combat rise in prices.

In October 2014, the Union Finance Minister of India, Arun Jaitley (Jaitley), said that inflation was under control in India. He said that lower prices of vegetables had helped bring down inflation to 3.52 percent in September 2014. In addition to this, fuel inflation had also reached a low of 1.33 percent due to the falling global crude oil prices. Jaitley said that a new monetary policy framework and fiscal consolidation would also help bring down inflation.

In December 2014, the RBI projected that the consumer price index inflation (CPI) would hover around 6 percent in 2015 if global crude oil prices remained at the current levels and the monsoon in 2015 turned out to be normal.

On 20 February, 2015, RBI and the Center signed a Monetary Policy Framework Agreement according to which RBI would first aim to bring inflation below 6 percent by January 2016 (the inflation referred here

being CPI or retail inflation). From the financial year ending March 2017, the government and the central bank made plans to set up a consumer inflation target of 4 percent, with a band of plus or minus 2 percentage points. Industry analysts feel that targeting an inflation rate of 2 percent to 6 percent would be challenging as India had suffered from double-digit inflation in 2013.

The new Monetary Policy Framework Agreement enabled RBI to decide on the monetary policy measures to achieve the inflation target. In addition to this, it also required the RBI to give a report to the Central Government in case the target was missed for a certain period. The RBI also had to make public a document every six months giving the inflation forecast for the period between 6-8 months and explaining the sources of inflation.

The case of inflation discusses both structural and sporadic causes of inflation and also helps in debating policy options available for the government to combat the same.

Discussion Questions

1. Discuss The Causes Of Inflation in India.

(Hints: Severe drought, measures to reduce Fiscal deficit)

2. Do you think the interest rate hike by the RBI is an effective solution to limit the damage caused by inflation? Support your answer. What else needs to be done?

(Hints: Role of RBI in inflation control, impact of rate cut on economy)

Course Reference: Concept- Inflation /Unit 5- Economic Environment/Subject-Business Environment Sources:

i. ―India‘s Delicate Dance: Containing Inflation while Ensuring Growth,‖ http://knowledge.wharton.upenn.edu,

February 10, 2011.

ii. Jason Overdorf, ―Food Crisis Threatens India,‖ www.globalpost.com, January 7, 2011.

Other Keywords: Wholesale Price Index, supply constraints, monetary policy, fiscal policy

	10		Brazil: Transforming into a World Economic Power?
	10

Brazil was known for its soccer prowess rather than its economic strength. However, slowly and steadily,

Brazil was making its mark on the world economic scenario. With well-developed agricultural, mining, manufacturing, and service sectors, Brazil‘s economy had overtaken many other South American economies

and was expanding its presence in the world markets.

In 2002, Brazil signed a trade and cooperation agreement with Russia, India, and China, calling it ―BRIC.‖

A research report released by leading consultancy firm Goldman Sachs (Sachs) predicted a bright future for Brazil‘s economy and for other countries like Russia and India, and said they would be among the fastest

growing economies in the next 50 years.

According to the study released by a global economics team at Sachs, BRIC‘s economies held the greatest potential for economic growth in the 21st century. The study predicted that the size of the BRIC economies could exceed that of the G-6 countries, consisting of the US, Japan, Italy, France, Germany, and the UK, by 2039. The study assumed that the rise in Gross Domestic Product (GDP) of the BRIC countries in US dollar terms would come from a mix of a rise in real GDP and currency appreciation.

The Growth Model of Sachs’ Study

The BRIC report predicted that Brazil would be one of the top six economies of the world. However, Brazil had a history of struggling with inflation. The country‘s first major inflationary surge began in the late 1950s

and continued until 1964. The second surge began in the 1970s, partly as a result of the external shocks caused by the rise in energy prices. Inflation worsened dramatically in the 1980s. The inflation rates disrupted economic activity and discouraged foreign investment. By the late 1980s, the annual rates of

inflation increased exorbitantly. For the citizens of Brazil, life was a great struggle. Between the end of World War II and Brazil‘s Real Plan in 1994, the cost of living increased greatly. However, the efficiency

with which the economic crisis was handled and the way the country was moving ahead on the growth path made it appear as if the predictions by Sachs about Brazil could well come true.

The case highlights the growth of Brazil‘s economy over the years. It analyzes the potential of Brazil as a global economic powerhouse based on the study conducted by Goldman Sachs.

Discussion Questions

1. Do you believe in the Goldman Sachs report that Brazil is going to be one of the top six economies in the world by 2039? Justify your answer.

(Hints: Inflation, GDP)

2. Comment on Brazil‘s history of inflation.

(Hints: Economic activity, Foreign investment)

Course Reference: Concept- Developing Economies/Unit 5-Economic Environment/Subject-Business Environment Source:

i. Talluru Sreenivas, ―Service Sector in Indian Economy,‖ Discovery Publishing House, 2006.

ii. Dominic Wilson and Roopa Purushothaman,―Dreaming with BRICs: The Path to 2050,‖ wwwgoldmansachs.com, December 2003.

Other Keywords: BRIC, Brazil, Economic Power

Mercosur: Hampering Free Trade between Developing

11	Economies?

On March 26, 1991, Argentina, Brazil, Paraguay, and Uruguay formed a four-nation trade bloc, the Southern Common Market (Mercosur), to act as a Free Trade Area (FTA) with the ultimate objective of achieving a

common market through the gradual reduction of tariff and non-tariff barriers. As stated in the Treaty of Asuncion, Mercosur‘s goal was to broaden national markets as a necessary prerequisite to ―accelerate the process of economic development in conjunction with social justice‖ in each of the signatory nations.

By the end of 1994, Mercosur had successfully established an FTA encompassing over 80 percent of the tradable goods of its four member nations. In December 1994, the members agreed to a Common External

Tariff (CET) and a common Customs Union (CU) code that covered most goods, with transitional arrangements for capital goods, computers, telecom equipment, and other such ‗sensitive goods‘ to expire in

2006. The Ouro Preto Protocol signed by all the four member states on December 17, 1994, consolidated the former Mercosur agreements and gave the bloc an international legal status as a CU.

Although Mercosur achieved remarkable progress in the first four years, there were several aspects of the FTA that were left unfinished. After 1995, Brazil and Argentina in particular, showed increasing reluctance to work toward dismantling the remaining tariff and other non-tariff barriers and harmonizing macroeconomic policies. Integration was no longer considered among the major partners as a priority in their economic agenda. As a result, the process of regional integration took a back seat.

At this point, instead of progressing from a complete FTA to a complete CU, Mercosur drifted into a situation where it was an imperfect CU. This imperfection proved extremely costly for the member states. Mercosur members were now bound by the CU rules that prohibited them from having independent trade policies vis-à-vis non-Mercosur states. At the same time, they were un able to reap the benefits of Mercosur as a complete CU.

Some analysts pointed out that the hybrid structure of Mercosur between a full-fledged CU and an FTA, hampered member countries‘ ability to reap the benefits associated with a complete CU, while forcing them

to pay its costs. With an imperfect CU that enforced an incomplete CET, member countries lost control over their external trade policy.

According to analysts, a CU could provide a shield to member countries against domestic pressures for increased protection from the government. The member countries could also realize savings due to the elimination of the bureaucracies and procedures associated with customs administration dealing with rules of origin. It could also facilitate external trade negotiations as all the member states shared the same tariff structure and an enlarged regional market would be more attractive to potential trade partners. All these potential benefits, except for the last, had not been realized to a sufficient extent, as the four member countries could not take Mercosur toward a complete CU.

As the member states could not agree on the methods for deepening the integration process, Mercosur initiated the widening process of the bloc. Mercosur shifted its strategy from internal trade liberalization to the external attainment of market access through the negotiation of FTAs with neighboring countries and other regional blocs. An Interregional Framework Cooperation Agreement with the EU was signed in December 1995 and became fully operational in July 1999. Mercosur also began negotiations with the Andean Community in 1999 for creating a South American Free Trade Area.

Meanwhile, the member countries were facing severe economic and financial crises. The financial crisis, first in Brazil and then in Argentina, definitely hurt the growth and development of Mercosur. Gross Domestic Product and foreign investment fell considerably and there were instances of negative growth. The economies entered into a recession. As a consequence, the members realized how useful a regional trading bloc could be with respect to negotiations with the outside world, as well as in attracting foreign investment. Therefore, the parties made efforts to strengthen the integration process. However, the divergent attitudes of member states toward Mercosur led to slow progress in the process of the CU being completed and in the tariff and non-tariff barriers being removed.

Some analysts felt that with all its imperfections, Mercosur was still a viable regional bloc. They felt that the major partners of Mercosur, especially Brazil, had to take the initiative if Mercosur was to progress and not stagnate. Analysts felt that there was a fundamental contradiction between the national politics of the South American governments and their rhetoric of strengthening regional integration.

In July 2012, with Venezuela joining Mercosur, analysts felt that it seemed that Mercosur was becoming more of a political bloc than an economic bloc that was supposed to strengthen regional integration by facilitating free trade.

In December 2013, Mercosur and the European Union (EU) negotiated a trade agreement in a bid to reduce total trade barriers with the EU by 87 percent, with the goal of reaching 90 percent reduction in future. The agreement would also benefit the EU by strengthening its trade position in the region, given that China and other countries in Asia were increasing their presence in the Latin American market.

The case of Mercosur illustrates the strategies adopted by the developing economies to reduce their trade dependence on developed economies. It also highlights how Mercosur could strengthen economic integration among member states.

Discussion Questions

1. Mercosur started as a Free Trade Area and became a Customs Union. Discuss the advantages and disadvantages of a partial Customs Union such as Mercosur.

(Hints: Transitional arrangements between countries)

2. Mercosur and the European Union were planning to enter into a trade agreement. How would Mercosur and the EU benefit from this agreement?

(Hints: Regional integration, Macroeconomic policies of the countries)

Course Reference: Concept- Developing Economies/Unit 5-Economic Environment/Subject-Business Environment Sources:

i. José María Zufiaur, ―Towards an EU-Mercosur Association Agreement,‖ www.eesc.europa.eu, June 16,

2011.

ii. Alma Espino and Paola Azar, ―Mercosur: Are we there yet? From Cooperation to Integration,‖ www.igtn.org,

January 2005.

Other Keywords: Free Trade Area, customs union, regional integration

12	Leader

The Life Insurance Corporation of India (LIC), a public sector enterprise and the largest insurance company in India as of 2002, sold insurance products and related services. The company had a variety of insurance plans to cater to various categories of people and their diverse needs. It offered life insurance and group insurance.

The company dominated the life insurance sector till the end of the twentieth century. Post 2000, with the setting up of the Insurance Regulatory & Development Authority (IRDA) and the entry of private players, there was a significant increase in competition. Hence, LIC was forced to change its organizational outlook and its business processes. To sustain its growth in an intensely competitive environment, the company, on the recommendations of international consultants, Booze, Allen and Hamilton, initiated organizational changes and came up with more customer-focused initiatives. In January 2000, it adopted a three-pronged business strategy for business, which involved reduction in premiums, higher returns, and introduction of new products.

LIC also developed a clear-cut focus on its marketing initiatives and marketing strategies were devised to raise customer satisfaction. Another area on which LIC concentrated was speeding up the process of settlement of claims, which had been identified as an important aspect of customer service. LIC set up an information center for its clients, which enabled them to make enquiries about its products and policy

details. Customer Relationship Management (CRM) committees were constituted in all the zones to discuss and address customers‘ grievances.

LIC‘s initiatives helped it retain its market leadership position. For the year ended March 2011, it recorded a market share of 68.7 percent in premium income. To sustain its position, LIC planned to enter into more alliances with banks and with leading educational institutes for training its agents. The corporation also

decided to offer value-added services to high -end customers, besides special services. Going forward, the focus of future marketing initiatives would be on enhancing the company‘s ‗caring image.‘ Analysts expect

the company to remain far ahead of its competitors in the number of products offered and in the returns on the products for many years to come.

The case of Life Insurance Corporation of India illustrates the operations of LIC and the several strategies adopted by the company to combat competition and retain its leadership position.

Discussion Questions

1. Critically analyze the different strategies adopted by LIC to tackle competition from domestic and foreign players.

(Hints: CRM committees, Market share in life insurance)

2. Discuss LIC‘s future strategies to sustain its market leadership position.

(Hints: brand image, servicing the clients, Alliances, Caring image)

Course Reference: Concept- Various Kinds of Insurances - Life Insurance/Unit 6-Financial Environment/Subject-Business Environment

Sources:

i. ―LIC Regains Market Share, Private Players Slip,‖ http://timesofindia.indiatimes.com, August 26, 2011.

ii. T.R. Jain and O.P. Khanna, ―Indian Financial System,‖ VK Global Publications Ltd., 2010-2011.

Other Keywords: Life Insurance Corporation, Insurance Regulatory and Development Authority (IRDA)

	13		Challenges Faced by the Indian Microfinance Industry
	13

In October 2010, the government of the southern Indian state of Andhra Pradesh passed a new ordinance to severely restrict the operations of Microfinance Institutions (MFIs) operating in the state. The government‘s

action came in response to allegations that the aggressive recovery practices followed by the MFIs had resulted in many of their borrowers committing suicide. Since Andhra Pradesh had a major share in the business operations of MFIs, the ordinance increased the non-recovery of loans given by the MFIs. Many big MFIs stopped operations in the state, while some of the smaller ones closed down completely. The crisis also made it difficult for MFIs to secure loans from banks and other financial institutions.

While one policy decision by the government led to the crisis, another helped the Microfinance industry recover from it. In December 2011, the Reserve Bank of India (RBI), the central bank of India, issued a new set of guidelines for the Microfinance industry which made it possible for MFIs to again get loans. Some MFIs started securing loans from banks and expanding their operations slowly. The MFIs also followed a lot of innovative strategies to overcome the crisis. They started expanding in some other Indian states like West Bengal where there were no restrictions on their operations. Many MFIs, both big and small, diversified into other areas of finance like extending loans to farmers for buying tractors, gold loans, housing loans, and loans to small traders. The MFIs also started raising more money through novel means like securitization deals and Qualified Institutional Placements, a capital raising tool (QIP) to further expand their operations. These initiatives led SKS Microfinance Limited, one of the leading MFIs in Andhra Pradesh (SKS) and the only publicly listed company which revealed its financial performance, to post profits for the third quarter of FY 2012-2013.

MFIs in India were awaiting the passage of a new bill in the Indian parliament which would make the RBI the sole regulator of MFIs and override any other state level legislation. They were hoping that the passage of the bill would help them expand faster. But some industry experts warned that the going might not be too smooth for the MFIs and that there might be a consolidation of the Microfinance industry in the country.

In another instance, ICICI Bank, the largest private sector bank in India, in spite of being a new entrant, had been highly successful in the microfinance sector, primarily because of its innovative microfinance business models. These included the Bank-led and Partnership models. The Bank-led model was derived from the SHG-Bank linkage program of National Bank for Agriculture and Rural Development. Through this program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies. The Partnership model of ICICI Bank aimed at reaching those areas where the bank did not have any branches. It aimed at synergizing the comparative advantages and financial strength of the bank with the social intermediation, mobilization power, and infrastructure of the MFIs and NGOs.

The case discusses the challenges faced by the Microfinance industry after the government of the southern Indian state of Andhra Pradesh passed an ordinance severely restricting the activities of Microfinance Institutions (MFIs) operating in the state.

Discussion Questions

1. Discuss the ways in which the Microfinance industry could deal with unfavorable government policies that could stifle their business activities.

(Hints: MFIs & Government policy, changes in policies)

2. Critically analyze the strategies that Microfinance Institutions operating in India followed to overcome the crisis.

(Hints: MFIs in India)

Course Reference: Concept- Regional Rural Banks/Unit 6-Financial Environment/Subject-Business Environment Sources:

i. Itisshree Samal, ―Spandana‘s Payment Overdue Crosses Rs 1,400 Mark,‖ www.business-standard.com, August 22, 2012.

ii. ―Hundreds of Suicides in India Linked to Microfinance Organizations,‖ http://articles.businessinsider.com,

February 24, 2012.

Other Keywords: Microfinance industry, Micro Finance Institutions

	14		The Franchising System at McDonald’s
	14

McDonald‘s Corporation (McDonald‘s), one of the largest food service organizations in the world, chose

franchising as the best method of doing business in international markets and was regarded as a premier franchising company around the world. McDonald‘s strongly believed that its success depended upon the

success of its franchisees. Therefore, it was very particular in choosing its franchisees and followed a distinct procedure in doing so.

Franchise	The franchisees were selected on the basis of certain parameters like:
selection	·	Highly qualified individuals in terms of education.
	·	Individual‘s overall business experience, past business, and personal history, ability
		to lead people, high interpersonal relationships, and full dedication to the success of
		the business.

Site		The franchisee had to pay an initial fee to McDonald‘s at the time of opening a
location		new restaurant. The choice of site location lay with the franchiser and it also took
		up the responsibility of acquiring the property and constructing the building. But
		the responsibility of furnishing the building lay with the franchisee.

Support		McDonald‘s allowed its franchisees the freedom to manage their business and did
from the		not interfere in their day-to-day operations. The franchisees received support
parent		from the parent company in areas like operations, training, advertising,
company		marketing, real estate, construction, and purchasing equipment.

Training		In 1961, McDonald‘s established the Hamburger University, a world-wide
		management training center in Oak Brook, Illinois, USA, to train its employees
		and franchisees. Every franchisee had to attend training programs conducted by
		McDonald‘s. The franchisees were trained in basic restaurant operations like
		cooking, serving, cleaning, etc. Once the trainees had gained knowledge in these,
		the training was conducted at regional training centers. Here, the emphasis was
		on various areas such as business management, leadership skills, team building,
		and handling customer enquiries. In the final part of the training program, the
		franchisees were given coaching in controlling the stock and ordering, recruiting
		of people, and maintaining of accounts.

The franchisees benefited from McDonald‘s various activities such as national marketing, which was carried out to analyze consumer attitudes and perceptions in different countries. The research findings helped the franchisees to predict the market for a particular product, thereby reducing their risk in the business. McDonald‘s gave utmost importance to quality and laid down certain standards to be followed by its

franchisees all over the world. To satisfy its customers, the company offered quality service, focused on cleanliness, and provided value for money. McDonald‘s also believed in customizing the menu to suit the tastes of the local customers and in making constant improvisations in its menu to meet customers‘ changing

needs.

The case of McDonald‘s illustrates how the company chose franchising as a mode of entry for operating in international markets.

Discussion Questions

1. McDonald‘s strongly believed that its success depended on the success of its franchisees. Discuss the kind of support given by McDonald‘s to its franchisees to run their businesses successfully.

(Hints: Non-interference in franchisee operations)

2. McDonald‘s was very particular in the selection of franchisees and expected high quality performance from them. Discuss the procedure followed by McDonald‘s to select franchisees.

(Hints: selection process, training)

Course Reference: Concept- International Franchising/Unit 7-Trade Environment/Subject-Business Environment Sources:

i. ―Support System,‖ www.aboutmcdonalds.com, 2010.

ii. ―Franchising and Entrepreneurship,‖ http://businesscasestudies.co.uk, 1999.

Other Keywords: International Franchising, Training

India’s Challenges with WTO’s Information Technology

15	Agreement

In 1997, the Information Technology (ITA) agreement was signed at the World Trade Organization (WTO) where India committed itself to a zero-tariff regime for Information Technology (IT) and electronic hardware, with total elimination of all customs duties by 2005. In February 2005, P. Chidambaram, the then Union Finance Minister of India, announced that the customs duty on specified capital goods and all inputs required for the manufacture of 217 ITA bound items had been removed completely.

The ITA, a pluri-lateral agreement within the WTO, aimed to expand world trade in IT products, develop information-based industries, and facilitate dynamic expansion of the world economy. ITA also aimed to expand and achieve complete freedom of trade in IT products and to encourage continued technological development of the IT industry worldwide.

India joined the ITA on March 25, 1997. The basic principle of ITA was to eliminate tariffs on IT products completely in a phased manner with an equal rate of reduction in each stage. After 2004, the member countries were required to abide by the three principal aims of the ITA, which were:

There were no exceptions to the product coverage; however, sensitive products could be given an extended implementation period.

In all, India had 217 tariff lines. Out of these, 95 lines were reduced to zero level by 2000, 4 lines in 2003, 2 lines in 2004, and 116 lines in 2005.

India joined the ITA right when it started in 1997. When it did so, it had an extremely weak manufacturing industry but it was quite willing to take the measures necessary to improve this, including reducing tariffs. Despite these measures, it was reported that India did not benefit as much from the ITA as it should have. Several factors were attributable for this. Low foreign direct investment, no unified tax structure and large imports of materials, are the factors that placed India far behind China in accruing benefits from ITA. In contrast, China joined the ITA in 2003, at which time it was the third largest exporter and fourth largest importer in the world. In addition to this, China pushed hard for innovation and R&D education. It was also highly integrated into both the global production and global innovation commons. All these factors led to China benefiting hugely from the ITA framework.

In 2014, the WTO aimed to increase the scope of ITA in its Phase II. While China and the US had agreed to sign the ITA pact, India was not keen to sign the agreement though the ITA Phase II was worth US$ 1 trillion with 200 new added products. India stated that only a country with a robust domestic manufacturing base could benefit from the agreement and that it was not ready yet to sign it.

In December 2014, the WTO announced that the talks to extend the ITA had collapsed — which came as a relief to India. Experts reported that if the agreement had been passed, India would have been under pressure to sign it. Some experts, however, opined that the relief would be temporary for India, as the US and other participating countries were hopeful of sealing the deal the following year. They also felt that if the ITA Phase

II was clinched, India could benefit from the fact that all its IT exports would enjoy zero tariff. But the immediate impact would be minimal, as India hardly exported any IT hardware.

In light of the mixed reactions, the Department of Electronics and IT in India said the ITA would be in India‘s interest only if it increased exports and local manufacturing. It also said that in the long run, India

would sign the ITA Phase II as it would give local firms access to a huge market. Even though the sales of PCs, color televisions, mobile phones, and other consumer products had increased rapidly, the Indian manufacturing industry was still not ready to meet the huge demand. The future seemed quite difficult for India as MNCs were opting to import products from Thailand instead of manufacturing them in India. If this continued, India was expected to lose a large number of manufacturing companies. Hence, retaining manufacturing companies was an important issue for India. Attracting foreign investments to improve production and exports of IT products was another concern for the government, but the infrastructural facilities in most cities were not sufficient to meet the needs in case of a surge of foreign investments. Apart from these domestic problems, Chinese competency in manufacturing Information Technology related

products was also fast expanding. Therefore, it was imperative that the IT industry and the government should make efforts to raise the Indian IT and electronic industries to a level where they could compete in the global market.

The caselet explains the impending threats which India faces on account of the WTO - IT agreement and the steps the country needs to take to overcome the threats.

Discussion Questions

1. What are the impending threats which India faces on account of the proposed WTO ITA Phase II?

(Hints: international trade, WTO role)

2. What steps does India need to take to overcome the difficulties arising from the WTO‘s ITA

Phase II?

(Hints: Information technology, WTO)

Course Reference: Concept- World Trade Organization/Unit 7- Trade Environment/Subject-Business Environment Sources:

i. ―WTO Talks on ITA-II collapse, India Heaves Sigh of Relief,‖ www.business-standard.com, December 14, 2014.

ii. ―Trade and Innovation: India‘s and China‘s Diverse Experiences with the Information Technology Agreement,‖ www.eastwestcenter.org, September 22, 2014.

Other Keywords: Zero-tariff regime, Information Technology Agreement (ITA), Non-Tariff Trade Regime.

Brilliance Auto’s Technology Transfer Agreements with

16	Global Automakers

Chinese automaker Brilliance China Automotive Holdings Ltd. (Brilliance Auto) was one of the major independent automakers in the country, which, like Chery Automobile (Chery) and Geely Automobile (Geely), sold its vehicles in China under its own brand names. Many of the top Chinese auto manufacturers mostly manufactured vehicles as part of joint ventures (JVs) with foreign auto companies and sold them under foreign brand names.

Brilliance Auto was incorporated in June 1992 by a wealthy Chinese entrepreneur, Yang Rong (Rong) as an exempted company (a company incorporated in Bermuda by non-Bermudians for the purpose of conducting business) with limited liability under the laws of Bermuda. The company was established to hold a 51 percent stake in Shenyang Brilliance Automotive Company Ltd. (Shenyang Auto), a Sino-foreign equity joint venture. The remaining 49 percent stake in Shenyang Auto was held by Shenyang Jinbei Automotive Company Ltd. (Jinbei Auto).

The automaker was known for developing new products by entering into technology transfer agreements with foreign automakers.

The company also made use of its collaborations with global auto brands to develop several vehicles. In March 2003, Brilliance Auto through one of its subsidiaries, Xing Yuan Dong, entered into a JV agreement with BMW to produce, sell, and provide after sales service for BMW sedans in China. Apart from this, the JV would also manufacture engines, auto parts, and components. In May 2003, the company obtained a business license from the Chinese government to establish the JV — BMW Brilliance Automotive Limited (BMW Brilliance). The initial stake of Brilliance Auto in the JV was 40.5 percent. This later increased to 49.5 percent.

Brilliance Auto decided to enter the European market through Germany. However, the company‘s efforts faced a setback in June 2007, when the BS6 sedan failed a crash test conducted by the German automobile club ADAC, using the Euro New Car Assessment Program (NCAP) (European car safety performance assessment program) guidelines. The car was awarded just one star out of a possible five, giving rise to speculation among auto analysts that the Chinese manufacturer would not be able to manufacture a car that met European safety standards. However, Brilliance Auto redesigned the car in a few months. This time, in a crash test conducted by IDIADA Automotive Technologies SA, a Spanish company, using guidelines which differed from the Euro NCAP test, the BS6 managed to receive three out of five stars — an average performance. This made Brilliance Auto the first Chinese automaker, and as of 2009 the only one, which had managed to make an entry into the coveted western European auto market with its own brand of vehicles. By August 2009, the company claimed to have sold about 4,000 of its sedans in Europe.

According to some analysts, the company‘s quick response to the quality debacle demonstrated that its product development skills were of international standards, and showed that Chinese manufacturers who had worked in JVs with western partners in China had the capability to come with quality products within a short period of time. The company too admitted it had been able to speed up its product development process

because of the knowledge transfer from JVs. According to Chi Ye (Ye), Head of Global Sales for Brilliance Auto, Brilliance Auto‘s cooperation with BMW helped in improving its quality.

In June 2014, BMW extended its JV with Brilliance Auto till 2028. The German firm was expanding its China operations since it planned to cut its dependency on the sluggish European market, which accounted for 44 percent of group sales in 2013. In addition to this, industry experts stated that the current policy in China required foreign automakers setting up a jointly-run technical center in China to transfer

some of the technologies to their local partners. While this would strengthen BMW‘s position in China, Brilliance Auto was expected to launch quality products in global auto markets through its technology transfer association with BMW.

The case of Brilliance China Automotive Holdings Ltd. discusses its JVs and its technology transfer agreements with major global automakers.

Discussion Questions

1. Critically analyze how technology transfer agreements with global automakers helped Brilliance Auto develop new and innovative products.

(Hints: technology transfer, global competition)

2. Discuss how global automakers such as BMW helped Brilliance Auto in improving the quality of its products. What else does Brilliance Auto need to do to establish itself as a global automaker? (Hints: China operations, Joint ventures in China)

Course Reference: Concept- Technology Transfer/Unit 8- Technological Environment/Subject-Business Environment Sources:

i. ―Brilliance Marches to U.S., Europe,‖ www1.cei.gov.in, September 17, 2007.

ii. Gail Edmondson, ―China‘s Brilliance: Back from Disaster?‖ www.businessweek.com, September 14, 2007.

Other Keywords: China auto market, knowledge transfer

Financial Institutions: Coping with the Challenges of Global

17	ATM Frauds

The Automatic Teller Machine (ATM) was first commercially introduced in the 1960s. By 2005, there were over 1.5 million ATMs installed worldwide. The introduction of the ATM proved to be an important technological development that enabled financial institutions to provide services to their customers in a 24X7 environment. These machines enhanced the convenience of customers by enabling them to access their

cash wherever required from the nearest ATM. However, as the banker and the customer did not come face-to-face, there was the risk of fraud, which could affect the customers and also the bank‘s reputation.

Unscrupulous individuals devised a number of methods to commit ATM frauds and these became more sophisticated in nature over the years.

ATM fraud evolved from the conventional ‗trick of shoulder surfing‘ to steal the PIN of customers at the ATM, to more sophisticated methods such as:

·	The Lebanese Loop	·	Diversions
·	Use of electronic gadgets	·	Website spoofing, or phishing
·	Card jamming	·	ATM burglary
·	Card swapping

Tricks used by fraudsters for

stealing customers‘ personal

·details included:

· Skimmer devices

· Fake PIN pad overlay

PIN interception

Financial institutions implemented many strategies to upgrade the security at their ATMs and to reduce the scope for fraud. These included choosing a safe location for installing the ATM, installation of surveillance video cameras, remote monitoring, anti-card skimming solutions, and increasing consumer awareness by informing them about the various methods of safeguarding their personal information while transacting at the ATM or on the Internet. Financial institutions worldwide began shifting from magnetic strip cards to chip cards to prevent fraudsters from stealing the personal data of customers.

Financial institutions were confronted with cybercrimes and online banking frauds, in addition to ATM frauds. Cybercrimes refer to crimes that involved a computer and a network. Many fraudsters were reportedly creating viruses and disseminating them online to infect a computer via an email attachment. Other forms of cybercrime include cyber stalking wherein the fraudsters used the Internet to stalk an individual or an organization. Identity theft was another form of cybercrime wherein a fraudster stole personal information such as name, social security number, credit card, debit card details of another person through spyware, and used that information for obtaining financial benefits. Fraudsters were also targeting customer bank accounts and their points of payment, which not only resulted in heavy monetary loss, but also adversely affect the brand value of the banks. The concept of remote banking and use of the Internet for online transfer of funds had not only facilitated the ease of transactions for customers, but it also enabled fraudsters to create fake accounts and fraudulently transfer funds. At present, identity theft and phishing were identified as the major problems facing financial organizations.

The financial industry was faced with the dual problem of fighting against frauds as well as for retaining consumer confidence. As goodwill and trust plays a vital role for financial institutions in attracting customers, these organizations tend to under-present the number of frauds related to them. This strategy actually misrepresented the criticality of the crime. Lack of consumer awareness was another problem that the financial organizations faced, as a small mistake by the consumer could make him/her vulnerable to fraud. It had been observed that people affected by ATM frauds were shying away from transacting online. This decline in consumer confidence could negatively impact technological developments in the financial sector.

Anti-money laundering regulations were being implemented worldwide to prevent ATM frauds. UL 291

Level 1 quality standards were being followed by ATM manufacturers to make them tamper-proof. To safeguard consumer‘s interests, Japan had implemented regulations that directed financial organizations to

refund fraud victims. Enhanced security at ATMs and increasing consumer awareness were expected to decrease ATM frauds and boost consumer confidence in using ATMs and transacting online.

The case of Global ATM fraud highlights how frauds were carried out using technology and how several anti-money laundering regulations were being implemented to prevent these ATM frauds.

Discussion Questions

1. Discuss the various kinds of Global ATM frauds and the strategies implemented by financial institutions to reduce the scope of frauds.

(Hints: Chip cards, Safe location)

2. Discuss how the financial institutions could fight against frauds as well as retain consumer confidence in the wake of growing ATM frauds.

(Hints: Consumer awareness, Anti-money laundering regulations)

Course Reference: Concept- Computer Fraud and Failures/Unit 8-Technological Environment/Subject-Business Environment

Sources:

i. Chris Richard, ―Guard Your Card: ATM Fraud Grows More Sophisticated,‖ www.csmonitor.com, July 21,

2003.

ii. ―Credit Card Frauds on Rise in India,‖ www.tribuneindia.com, April 14, 2001.

Other Keywords: ATM Fraud, Banking and Financial Services, Customer Information Protection

	18		Pfizer’s Patent Litigations in China
	18

In November 2006, the Bangbu Intermediate People‘s Court in the Anhui Province of the People‘s Republic

of China (China) sentenced a Chinese man, Xi Yongli (Yongli), to eight years in prison for producing and selling counterfeits of Viagra, a drug for erectile dysfunction (ED), developed by the world‘s largest pharmaceutical company, Pfizer Inc. (Pfizer). In December 2006, a Beijing court upheld Pfizer‘s Chinese

patent for Viagra and ordered two Chinese companies to stop making generic versions of the drug and to pay compensation of 600,000 yuan (US$ 76,726) for infringing on the registered trademark of Pfizer.

Analysts saw these incidents as some of the successes achieved by Pfizer in its efforts to thwart the

challenge posed by manufacturers of generic and fake drugs in a country that was known to offer weak intellectual property rights (IPR) protection. Many also saw these rulings as an indication of China‘s

increasing commitment to provide adequate IPR protection in order to conform to the Trade Related Intellectual-Property Rights (TRIPS) agreements.

In late 2001, Pfizer was granted a patent for Viagra in China. But Pfizer soon became engaged in numerous

patent litigations. An alliance of Chinese pharmaceutical companies petitioned the State Intellectual Property Office‘s (SIPO) Patent Re-examination Board (PRB) to invalidate the patent. They contended that Viagra should not be provided a patent as it failed to fulfill the ―novelty‖ requirement under China‘s patent law.

On July 4, 2004, PRB invalidated Pfizer‘s patent for Viagra citing that it had failed to accurately explain the uses of Viagra‘s key ingredient, Sildenafil citrate (Sildenafil). Pfizer argued that at the time of filing of the

patent application, there was no requirement for that data, and to invalidate the patent on that basis was a flawed, ―retroactive‖ judgment. The invalidation of the patent led to a huge international outcry. Free trade supporters viewed this as an attack on the IPRs of foreign companies and an indicator of China‘s reluctance

to provide adequate protection to IPRs. Critics lambasted China for failing to properly enforce IPR laws and called for political pressure to make China conform to TRIPS.

However, some analysts felt that there were significant positives relating to the litigation. It showed that Chinese companies had begun to appreciate the importance of IPRs. The decision of these companies to take legal recourse rather than infringe upon the IPRs was appreciated. It indicated that China was keen to project its transition to becoming fully compliant with the WTO agreements. Such patent litigations also took place in other places like the US and Europe and the verdict could go either way. They felt that the incident signified the growing maturity of the legal framework for intellectual property (IP) in China. They also pointed out that China was showing this transition to a stronger IPR regime over a relatively short period of time and that as Chinese companies came out with their own innovations, they were beginning to appreciate the importance of IPRs. Though Pfizer tried to link its future investments in China to the outcome of the patent litigation, analysts felt that the Chinese pharmaceutical market was too attractive for the company to pull out of. It was the ninth largest pharmaceutical market in the world and growing at double digit rates.

Pfizer appealed against PRB‘s ruling before the Beijing No 1 Intermediate People‘s Court. On June 2, 2006,

the Beijing intermediate court overturned the ruling of the PRB. This decision was hailed by analysts as evidence of China‘s growing commitment to improving its IP legal framework. The subsequent crackdown

on counterfeiters and patent infringers was seen as a positive sign. However, significant challenges remained

for Pfizer and other foreign pharmaceutical companies. The alliance of Chinese pharmaceutical companies was going to appeal against the ruling before the Beijing High People‘s Court. Chinese pharmaceutical

manufacturers were improving their understanding of the IP laws and such challenges to patented drugs would certainly continue into the future. Moreover, the IPR enforcement system was still weak in China.

Analysts felt that China was well on its way to transitioning to full compliance with the WTO agreement. Foreign IP owners were no longer at a disadvantage in China. But there was a need for these international

companies to be more serious while filing their patent applications as the Chinese competitors were increasingly gaining expertise at exploiting any lacunae. Proper knowledge of the IP legal framework as well as knowledge about the competitors would be of crucial importance for international pharmaceutical companies to be able to take advantage of the booming Chinese pharmaceutical market.

Other instances of patent litigations include the October 2014 patent battle between diversified technology

company, Royal Philips NV, and Irvine, California-based manufacturer of non-invasive patient monitoring technologies, Masimo Corp. (Masimo). Philips was accused of infringing on Masimo‘s pulse oximeter

technology. Philips lost the battle and paid a penalty of US$ 466 million to Masimo. In another instance, in November 2014, American multinational corporation, Apple Inc. (Apple), lost US$ 24 million in a patent

lawsuit to pager and telco firm, Mobile Telecommunications Technologies (MTel). MTel claimed that Apple‘s iPhone, iPad, and iPod Touch, as well as its Airport Wi-Fi routers, infringed the six patents MTel

used in its two-way pager network, SkyTel.

The case discusses Pfizer Inc.‘s numerous intellectual property rights (IPR) litigations in China related to its blockbuster drug for erectile dysfunction, Viagra.

Discussion Questions

1. Describe the challenges faced by Pfizer in protecting its IPRs in China. Do you think China has done enough to provide adequate protection to IPRs? What else needs to be done?

(Hints: IPRs, protection of IPRs)

2. Considering the increased sophistication of Chinese competitors, what should the multinational research-based pharmaceutical companies do to ensure adequate protection of their IPRs in China?

(Hints: Loopholes in legal systems, IP legal framework)

Course Reference: Concept- Intellectual Property Rights/Unit 9-Legal and Regulatory Environment/Subject-Business Environment

Sources:

i. ―Pfizer Wins Viagra Ruling in China,‖ www.indiatimes.com, December 28, 2006.

ii. Jeffrey A Andrews, ―Pfizer‘s Viagra Patent and the Promise of Patent Protection in China,‖ www.lockeliddell.com, 2006.

Other Keywords: Trade Related Intellectual-Property Rights (TRIPS), trademark

	19		Regulatory Environment for the Sustainable Development of

			the Wind Energy Industry in the US and Canada

The US and Canada were largely dependent on the import of fossil fuels such as oil and natural gas to meet their power requirements. The fossil fuel reserves were limited in nature and were getting continuously depleted with the rise in consumption. The increasing demand for energy coupled with the near-stagnant supply of fossil fuels had resulted in a rise in fuel prices. Consumption of fossil fuels for power generation also resulted in the emission of greenhouse gases (GHG) that were detrimental to the ecosystem.

In the US and Canada, the transportation sector accounted for the major chunk of oil consumption, in contrast with the rest of the world where most of the oil was used for electricity generation. Increasing industrialization and growing consumption had created more of a demand for energy and power, while the natural gas supply remained inadequate to meet this demand. Natural gas sources in North America were very limited in nature. The natural gas shortage was expected to get more severe in the near future in North America. This had made the mainstream power suppliers realize the need to have a balanced mix of energy sources in their portfolio to meet the growing demand.

The governments in the US and Canada were promoting wind energy generation by framing favorable regulations. They stated that wind energy helped in gaining self-sufficiency in power generation and also decreased GHG emissions.

The regulatory environment played a vital role in nurturing the wind energy sector. The US government initiated an advanced energy initiative for funding the development of cleaner, cheaper, and more reliable alternative energy sources. Renewable portfolio standards in the US mandated an increase in the supply of power from various renewable sources of energy. Policies such as the production tax credit in the US and wind power production incentives in Canada increased the attractiveness of the wind energy sector as an investment option. Incentive systems such as feed-in tariffs for suppliers of green power and net metering for power consumers encouraged decentralized investments in wind power generation.

In the US and Canada, consumer awareness was high regarding environment conservation and the need for self-sufficiency on the energy front. These factors also induced utility suppliers to increase the proportion of power sourced from wind energy generators. Technological innovations had continuously made generation of wind power economical and were expected to bring down the offshore turbine installation cost. Some experts opined that there was a possibility of wind energy becoming cheaper than power based on fossil fuels in the long-term, even without the benefit of production tax credit.

The case highlights the importance of a regulatory environment for the sustainable development of the wind energy industry in the US and Canada.

Discussion Questions

1. Discuss the importance of wind energy as an eco-friendly and reusable source of power generation.

(Hints: GHG emissions, Power generation)

2. Discuss the importance of having a favorable regulatory environment for the development of wind energy industry in the US and Canada.

(Hints: Cheaper alternative energy sources)

Course Reference: Concept- Regulatory Environment: Role of the Government/Unit 9-Legal and Regulatory Environment/Subject-Business Environment

Sources:

i. ―Wind Power Production Incentive (WPPI),‖ www. canren.gc.ca, September 15, 2005.

ii. ―Offshore Wind Energy Potential for the United States,‖ www.eere.energy.gov, May 19, 2005.

Other Keywords: Regulatory Environment, Wind Energy Industry

	20		Tax Problems for Cairn Energy in India
	20

In 1996-97, crude oil production in India was around 32.90 million tonnes (mt), while consumption of petro products was around 79.16 mt. India‘s gross import of crude oil and petro products in the 1996-97 fiscal

touched 54.17 mt, at a cost of Rs. 341.72 billion. To reduce the increasing gap between demand and production, the Government of India (GoI) proposed a new exploration and licensing policy (NELP) in the 1997-98 budget. The proposal was accepted in 1998.

Under the NELP, a total of 48 exploration blocks — on-land, offshore, and deep-water blocks were identified. The NELP aimed to increase the exploration of oil in India and permit private, public, and joint venture partnerships in explorations. The government signed 90 contracts with investment levels of about US$ 4.4 billion. Also, additional fiscal concessions were proposed for companies undertaking exploration in deep waters and frontier areas for a period of seven years. The blocks under NELP were not subjected to cess by the state governments as against the old policy of cess having to be paid to the government of the state in which the block had been identified.

Cairn Energy PLC (Cairn), an independent, public oil and gas exploration and production company based in Edinburgh, Scotland, explored and produced oil and natural gas offshore and onshore in Bangladesh and India. In 2004, after an extensive exploration and appraisal program across its 5,000 square kilometer onshore exploration block, Cairn announced a major oil find in Rajasthan. The British company planned to start production in 2007 and estimated that it would produce 80,000 to 100,000 barrels per day from its Mangala and Aishwariya fields in Barmer district in Rajasthan.

Cairn received formal approval from the GoI for a Declaration of Commerciality in respect of its oil discoveries in Rajasthan. This approval provided it with an extensive Development Area, inclusive of all development, appraisal, and exploration rights, across 1,858 square kilometers of the Thar Desert in Rajasthan. The Development Area was to be retained until 2020 and further extension in retention was possible with the consent of the GoI. Cairn also started to work on developing the proposed oil sites and contemplated submitting the Field Development Plan to the GoI in the first half of 2005.

The Oil and Natural Gas Corporation (ONGC), a major Indian public sector company in the petroleum industry, had a right to a 30 percent stake in any development area resulting from a commercial discovery in the block. Cairn owned 100 percent stake in the Rajasthan block as ONGC was reluctant to exercise its right to buy a 30 percent stake in the block, as it would become liable to pay the statutory dues of royalty for itself and Cairn. ONGC argued that what it would get out of taking a 30 percent stake in terms of crude oil would be much less than what it would have to pay as statutory levies. After being persuaded by the GoI, however, it finally agreed to take a 30 percent stake. Thus, Cairn became the operator of the field while ONGC was the licensee.

The Petroleum Ministry asked Cairn to pay a production tax (cess) of Rs.900 per tonne of the crude oil which it planned to produce from Barmer district. But Cairn refused to pay the cess, claiming that the Rajasthan block was a pre-NELP block where ONGC, as the licensee, was responsible for the payment of all statutory dues such as royalty and cess.

Finally, the Petroleum Ministry referred the case to the Law Ministry. The Law Ministry ruled that Cairn would have to pay the proposed cess on the crude oil it planned to produce from Barmer district. The Ministry sought a clear written commitment from the company that it would pay up the cess. Also, the Ministry warned that failure to pay the cess would result in all the fields being transferred to ONGC. The Ministry stated that the production sharing contract (PSC) for the Rajasthan block clearly mentioned that only the royalty would be paid by ONGC and not the payment of production cess. Since Cairn and ONGC

were partners, both were ordered to pay the cess in proportion to their shareholding (ONGC was thus liable to pay a part of the cess and also the royalty). Cairn disagreed with the Law Ministry‘s ruling and said that it was ONGC‘s liability to pay the cess. It said that it could head for an arbitration to resolve the dispute. In

September 2009, Cairn appointed an arbitrator in London to solve the dispute with ONGC over the payment of cess.

In March 2013, Cairn started its first commercial sale of natural gas. The company planned to sell around 5 million standard cubic feet a day of gas from its blocks in Rajasthan.

The case discusses the controversy between Cairn Energy PLC and ONGC over the payment of production tax (cess). It also discusses at length the actions of the petroleum ministry to resolve the problem and the refusal of Cairn Energy to pay the cess and royalty.

Discussion Questions

1. What are the possible reasons for the tax dispute between Cairn and the Government of India? How should Cairn handle this dispute?

(Hints: Cess, Pre-NELP block)

2. What is NELP? Discuss its role in increasing the production of oil and natural gas in India.

(Hints: Oil Exploration, Permits for exploration)

Course Reference: Concept-General Purposes of Taxation/Unit 10-Tax Environment/Subject-Business Environment Sources:

i. ―Cairn Starts Gas Output, Activates New Oil Field in Rajasthan,‖ www.bloomberg.com, March 23, 2013.

ii. Cairn, ONGC to Pay Cess in Proportion to Barmer Stake, http://articles.economictimes.indiatimes.com, January 5, 2005.

Other Keywords: Production tax (cess), Production Sharing Contract (PSC)

	21		Value Added Tax in India
	21

In April 2005, Value Added Tax (VAT) came into effect in India. The first few days of its implementation saw protests from different sections of society. Even after two months of implementation of VAT, traders were worried and confused over whether they had to pay more tax; consumers were afraid that they would have to pay higher prices for commodities; and companies were unsure of whether they stood to gain or lose. Certain states in India which had implemented VAT and those which were to take it up had a common concern - whether there would be an increase in the prices of products after implementation of the new tax system. There were thus a lot of misconceptions and misinterpretations regarding VAT.

Features of VAT

· VAT was a tax structure intended to replace central sales tax and other state taxes.

· VAT was applicable to all goods, except those whose prices were not fully market-determined.

· Under VAT, a method of indirect taxation, a tax was levied on the value added at each stage of a product being produced and sold and not on the gross sales price.

· Under VAT, there were only two basic tax rates – 4% and 12.5% - and a special rate of 1% for a few selected items like gold, silver, and precious stones.

The surge in taxes under the pre-VAT tax regime was expected to be avoided under the VAT system. At each level of the value chain, the tax was levied only on the value addition to the product at that particular level. Traders and consumers were expected to pay reduced total taxes when compared with the previous system. However, some analysts were of the view that there would be an increase in the prices of some commodities and a reduction in the prices of others. This was because some products that were being taxed lower, at say, 5 percent, might now be taxed at 12.5 percent while others, based on their relevance, might be taxed at a rate much lower than earlier, say at 4 percent under VAT.

The state governments were assured by the Union Government that they would be fully compensated for any revenue losses incurred during the fiscal year ending March 2006 due to the implementation of VAT. The states were therefore liberal in experimenting with VAT rates and with the list of commodities under each slab.

Prior to VAT, the tax being levied on a particular product by one state was different from the tax levied on it by the other state. VAT was intended to bring about uniformity in the tax structure throughout the country. However, with some states still not accepting the VAT system, the process of implementing a uniform tax structure throughout India was getting delayed.

Some analysts felt that the benefits of the VAT system to manufacturers, traders, and consumers needed to be communicated properly so that all sections of the society in India would accept it. According to analysts, VAT should curb tax evasion to a considerable extent and this would result in increased revenue generation to the Government. It was reported that state Governments that had implemented the VAT system from April 1, 2005, saw at least a 25 percent increase in revenues from the new tax system as against the erstwhile sales tax system.

The case illustrates the concept of VAT, discusses some issues related to VAT, and its effect on consumers.

Discussion Questions

1. VAT is aimed at removing a number of indirect taxes and establishing uniformity. Discuss how implementing VAT will impact various sectors in India.

(Hints: Surge in taxes, Value addition)

2. Briefly discuss the impact of VAT on consumers and traders.

(Hints: Tax evasion, Surge in tax incomes)

Course Reference: Concept- Types of Taxation – Indirect Taxes/Unit 10-Tax Environment/Subject-Business Environment

Sources:

i. Parthasarathi Shome, ―VAT/GST: Where do we go from here? Experiences of India & the United Kingdom,‖ www.iticnet.org, November, 2011.

ii. ―A Brief on VAT (Value Added Tax),‖ http://ctax.kar.nic.in.

Other Keywords: Indirect Tax, Value Added Tax

	22		The Rise and Fall of Huang Guangyu
	22

On May 18, 2010, Huang Guangyu (Guangyu), home appliances tycoon and founder of China-based Gome Electrical Appliances and Holdings Ltd. (Gome), was sentenced to 14 years in prison on charges of insider trading, illegal operations, and bribing officials. It was a huge reversal of fortunes for Guangyu, who had once been the richest businessman in China.

Guangyu caught the attention of Chinese authorities after the backdoor listing of Gome on the Hong Kong

Stock Exchange. He was questioned several times by Chinese authorities with regard to his business practices. In 2006, a loan through which Gome‘s investments were funded came under scrutiny by

authorities and an investigation was launched. Guangyu and his brother were questioned about receiving loans amounting to RMB 1.3 billion from the Bank of China in the 1990s. In early 2007, a statement from Gome said that Guangyu had been cleared of all the charges. However, the investigations continued with the knowledge of a very few officials from the China Securities Regulatory Commission (CSRC) and the Ministry of Public Security.

In May 2007, Gome raised HK$ 6.55 billion from a share sale and a convertible-bond issue. Through new shares priced at HK$ 13.30 each, HK$ 1.46 billion was raised. An additional HK$ 5.09 billion was raised through zero coupon convertible bonds. At that time, Warburg Pincus, LLC, US-based private equity firm, sold the existing shares of Gome for HK$ 159 million. This was done after the stock price increased following the announcement of the results of the first quarter, which showed Gome had recorded high profits.

In another case, in August 2008, the Central Commission for Discipline Inspection launched investigations into corruption pertaining to foreign investments. During the course of investigations, several officials from the Ministry of Commerce were questioned. Many of them claimed that they had accepted bribes from

Guangyu during Gome‘s listing in Hong Kong.

On November 18, 2008, Gome‘s share price dropped suddenly. A few days later, a website of business magazine, Caijing, reported that Guangyu had been detained by police on November 19, 2008, and was under residential surveillance. It was alleged that he had been involved in insider trading in the shares of a pharmaceutical company, the Shandong Jintai Group. Between January and August 2007, the price of these shares had gone up by 900 percent. Due to the unusual price movement, trading in the stock had been suspended.

The Beijing police immediately confirmed that Guangyu was under investigation. At the same time, there were widespread reports in the Chinese media that Guangyu had been detained for bribes paid to government officials in relation to the listing of Gome on the Hong Kong stock exchange. A few reports claimed that the political environment in Southern China had changed, due to which the regulatory environment which had been in his favor till then, had also changed.

On November 24, 2008, trading in shares of Gome on the Hong Kong stock exchange was suspended as Gome could not provide information on possible factors that had affected the share price. At that time, Guangyu was the Chairman, Executive Director, and controlling shareholder of the company. Consumer confidence in the company dropped after the allegations surfaced.

On November 28, 2008, Gome came out with a statement that Guangyu was under investigation. On that day, CSRC said that a company controlled by Guangyu, Eagle Investment Co. Ltd., had manipulated the share prices of Sanlian Commercial Co (Sanlian) and Beijing Centergate Technologies Co. Ltd. (Beijing Centergate).

By the end of December 2008, police announced that several other businessmen were also involved in the scandal involving Guangyu. Gome suspended Guangyu from executive duties on December 23, 2008.

After fifteen months in police custody, Guangyu was charged with insider trading, bribery, and business crimes in February 2010. In May 2010, he was jailed and was fined RMB 600 million. Guangyu‘s wife Du

Juan was sentenced to three and half years in prison on allegations of insider trading and was fined RMB 200 million.

Instances of bribery and illegal business practices such as this have been documented in other parts of the world as well. One such instance was the involvement of German multinational conglomerate company,

Siemens AG (Siemens). In May 2007, a German court convicted two former managers of Siemens for diverting the company‘s money to bribe employees of Enel SpA (Enel), Italy‘s largest energy company. In

late 2006, another scandal had surfaced in the telecommunications division of Siemens involving slush funds created to bribe foreign officials to secure contracts abroad. In still another case, Siemens was accused by IG Metall, a dominant labor union in Germany, of having tried to bribe a small union called AUB to gain support for its policies. In October 2007, Siemens was indicted for paying more than US$ 29.13 million in

bribes to officials in Nigeria, Russia, and Libya. Yet another instance of unethical practices involved Britain‘s best-selling Sunday tabloid, the News of the World (NOTW), and that eventually led to its

shutdown in July 2011. NOTW was entangled in a series of controversies which included hacking the phone lines of celebrities and the royal family and those of murder and terror victims. It was also accused of paying bribes to police officers for obtaining information.

The case discusses the rise and fall of Huang Guangyu, one of the richest persons in China. In 2008, Guangyu was arrested and prosecuted for insider trading, bribery, and illegal business dealings.

Discussion Questions

1. Critically analyze the factors that led to the fall of Guangyu. (Hints: Illegal operations, Insider trading)

2. Discuss the importance of Ethics in the management of business. (Hints: Bribery, Illegal business practices)

Course Reference: Concept- Bribery/Unit 11-Ethics in Business/Subject-Business Environment

Sources:

i. Chris Hogg, ―What Brought down China‘s Huang Guangyu,‖ http://news.bbc.co.uk, May 18, 2010.

ii. ―China‘s Uneasy Billionaire,‖ The Economist, February 4, 2006.

Other Keywords: Insider trading, illegal business dealings

	23		Unfair Trade Practices at Christie’s and Sotheby’s
	23

In the early 2000, Christie‘s Inc. (Christie‘s), the famous auction house based in London, and its rival Sotheby‘s Holdings, Inc. (Sotheby‘s), also based in London, were rocked by anti-trust investigations by the

US Department of Justice (DoJ) for colluding and indulging in unfair trade practices. The roots of the

scandal dated back to February 1993 when the then Chairmen of both the companies, Sir Anthony Tennant (Tennant) of Christie‘s and Alfred Taubman (Taubman) of Sotheby‘s, attended a series of one -to-one meetings. Taubman supposedly instructed Diana D. Brooks (Brooks), Former President, Sotheby‘s, to fix the deal with Christopher Davidge (Davidge), the then CEO of Christie‘s but to leave his name out of it. Brooks

and Davidge met several times during the six year period. It was during those meetings that the price-fixing deal was alleged to have been hatched.

In 1993, as part of its arrangement with Sotheby‘s, Christie‘s increased its buyer‘s commission. Almost immediately, Sotheby‘s followed suit. In 1995, Christie‘s introduced a fixed non-negotiable fee for sellers

(or seller‘s commission) which was again followed by Sotheby‘s. In June 1996, the UK Office of Fair Trading announced that it was making informal inquiries into the business practices at Christie‘s and Sotheby‘s which violated Britain‘s Fair Trading Act of 1973 and Competition Act of 1980.

In May 1997, the DoJ became suspicious of the business practices at Christie‘s and Sotheby‘s and ordered the auction houses and several art dealers to submit documents relating to correspondence between them. In

December 1999, Davidge resigned from his post with a US$ 7 million severance package. In January 2000, sensing that the firm was headed for anti-trust investigation and other legal hassles, Christie‘s lawyers worked out an arrangement with the DoJ. The arrangement, which required Davidge‘s cooperation with the DoJ, came under the Antitrust Division‘s Corporate Leniency program. Christie‘s cooperated fully with the

investigating agency and provided the anti-trust lawyers with evidence of misconduct. In exchange, the company was exempted from some penalties resulting from the case.

In January 2000, as part of the arrangement with the DoJ, Davidge declared that Christie‘s, together with rival Sotheby‘s, had resorted to price-fixing. Davidge handed over the documents and other evidence that

implicated the auction houses. He sought a conditional amnesty in exchange for the evidence. It was estimated that the auction houses‘ price-fixing deal had earned the firms more than US$ 400 million in illicit

gains through inflated commissions.

Soon after Davidge‘s disclosure, the clients of Christie‘s and Sotheby‘s filed hundreds of civil lawsuits against the auction houses, which were consolidated into a single class-action suit. In September 2000, the auction houses agreed to a US$ 512 million settlement. As per the settlement, both the auction houses agreed to pay US$ 206 million in cash and US$ 50 million in the form of discount certificates to their clients.

The case deals primarily with the ethical issues confronting Christie‘s and Sotheby‘s. It highlights how two auction houses indulged in unfair trade practices.

Discussion Questions

1. Critically analyze Christie‘s and Sotheby‘s unfair trade practices. Discuss the anti-trust investigations carried out by the Department of Justice.

(Hints: trade practices, Price fixing deal)

2. Discuss the importance of ethics in the management of business. (Hints: Unfair trade practices, Evidence of misconduct)

Course Reference: Concept- Importance of Ethics in Business – Micro Perspective /Unit 11-Ethics in Business/Subject-Business Environment

Sources:

i. ―Christie‘s and Sotheby‘s: What an Art,‖ www.economist.com, August 5, 2004.

ii. Anna Rohleder, ―Time Line: The Rise of Christie‘s and Sotheby‘s,‖ www.forbes.com, November 14, 2001.

Other Keywords: Anti-trust Laws, Unfair Trade Practices, US Department of Justice

	24		Government of India Files Suit for Damages against Union

			Carbide

In the early morning hours of December 3, 1984, forty tons of toxic gases from Union Carbide India Limited (UCIL‘s) pesticide plant at Bhopal spread throughout the city, sending residents scurrying through the dark

streets. When victims arrived at hospitals breathless and blind, doctors did not know how to treat them, as

UCIL did not provide emergency information. While the government, citizens, and industry watchers held UCIL‘s parent company, Union Carbide Corporation (UCC) responsible for the tragic incident, UCC had a

different take. UCC said that the gas was not fatal.

GoI Files a Lawsuit for Damages and Compensation

In its reaction to the GoI‘s suit for damages and compensation, UCC blamed the government for the disaster

and filed a countersuit against the GoI and the state government of Madhya Pradesh. The central and the state governments were charged with ‗contributory‘ responsibility for the gas leakage. UCC alleged that the

government had failed to take necessary precautions that could have prevented a disaster though they were aware of the toxicity of gases.

On February 14, 1989, the Supreme Court of India passed an order directing UCC to pay up US$ 470

million in ‗full and final settlement‘ of all claims, rights, and liabilities arising out of the disaster‘. The Supreme Court ruled that the US$ 470 million settlement was ‗just, equitable, and reasonable‘. It also

ordered the GoI to purchase a medical insurance policy covering 100,000 patients who may later develop symptoms. The GoI was also instructed to make up for any shortfall of funds if required. Besides, the central government was entrusted with the responsibility of addressing the on-going concerns of the gas victims. The state government took up the responsibility of cleaning up the site.

UCC felt that the Supreme Court‘s decision was fair and logical. Soon after, UCC‘s stock rose in the London market. Ten days after the decision was announced, UCC and UCIL paid the amount to the GoI.

Subsequently, the GoI agreed to drop all the criminal lawsuits against UCC. Experts felt that the compensation was the largest ever in India and was US$ 120 million more than the plaintiff‘s lawyers had

said was fair in the US courts. Critics, however, felt that the settlement amount of US$ 470 million was meager for a disaster which had left thousands of people dead and around 600,000 injured. Dow Chemicals (Dow) (UCC was part of Dow since 2001) continued to maintain that it did not have any liability since UCC had settled the matter by paying a one-time compensation of US$ 470 million. Dow stated that the

responsibility of the plant now rested with the state government and hence it was not responsible for the safety of the citizens and clean-up of the site. In a statement, Dow said that the compensation ―resolved all existing and future claims.‖

The case of UCC highlights the suit for damages and compensation for victims of the Bhopal gas tragedy.

Discussion Questions

1. Critically analyze the GoI‘s role for filing a lawsuit to claim damages and compensation against UCC after the Bhopal gas disaster.

(Hints: company ethical practices, corporate governance, Compensation laws)

2. Do you think the compensation paid by the UCC to the victims was adequate? Support your answer.

(Hints: damages to life, compensation)

Course Reference: Concept- Suit for Damages/Unit 12-Law of Contracts/Subject-Business Environment Sources:

i. Vidya Krishnan, ―Bhopal Gas Tragedy: The Fight Continues,‖ www.livemint.com, December 3, 2013.

ii. ―The Incident, Response, and Settlement,‖ www.unioncarbide.com, 2001-2009.

Other Keywords: Bhopal gas tragedy, Industrial disaster

	25		The NTPC-RIL Contract Agreement Dispute
	25

In December 2005, a proposed agreement between Reliance Industries Limited (RIL) and National Thermal Power Corporation (NTPC) was on the verge of failure. RIL threatened to sue NTPC if the agreement, under which RIL was to supply liquefied natural gas (LNG) to NTPC, was not signed before the end of the year (December 31, 2005). RIL issued an ultimatum to NTPC that it should either sign the contract or face the prospect of RIL paying it the bank guarantee amount of US$ 4 million and winding up the contract.

As of March 31, 2005, NTPC had an installed power generation capacity of 23,749 MW, which met around 19 percent of India‘s total power requirements. As part of its long-term plans, NTPC was going through a

phased capacity expansion by establishing new power plants and acquiring existing ones. In the tenth five-year plan, the Government of India decided to increase NTPC‘s capacity by 9,160 MW by the end of the

11th five-year plan. As part of the capacity expansion in the 10th five-year plan, NTPC planned to establish two gas-based thermal power plants in Gujarat — at Kawas and Jhanore Gandhar — each with an installed capacity of 1300MW.

In early 2004, NTPC called for tenders for a Gas Sale and Purchase Agreement (GSPA) to procure the major raw material (LNG) needed for power generation. The company adopted a transparent international competitive bidding process for all of its purchases through tenders. The draft terms and conditions of the (GSPA) formed part of the Request for Proposal (RFP) documents and was issued by the NTPC to the qualified bidders short-listed through the qualification process (RFQ). NTPC first held extensive talks with the short-listed bidders that included Shell, Yemen LNG, Petronas LNG, and RIL After clarifying all the details about the GSPA, NTPC issued a set of amendments, based on which a price bid was sought from the participating bidders. RIL accepted all the terms and conditions of the GSPA and increased the price of gas in the final offer.

On completion of the bidding process, NTPC selected RIL as it had quoted the lowest price for the sale of gas. RIL‘s quote was US$ 2.97 per million British thermal units (Btu), while the next closest bid was above

US$ 4.0 per million Btu. In July 2004, NTPC awarded the contract to RIL for the supply of gas to its Kawas and Gandhar power stations. As per the understanding between the two parties, a 1400 km long pipeline would be laid from Kakinada in Andhra Pradesh to Ahmedabad in Gujarat for the transportation of gas. Besides, RIL would supply 13 million standard cubic meters of gas per day for the two power plants (RIL committed to providing 132 trillion Btu of gas per year). The agreement spanned 17 years and the total cost of the project was estimated at US$ 8.2 billion.

But after that, a number of issues cropped up between NTPC and RIL that came in the way of their signing the agreement of sale. The main disagreement was over the issue of cost and the method of procurement. RIL felt that it might not be able to supply gas to NTPC by the specified time and could do so only by the middle of 2008. RIL also wanted to increase the bid offer and amend the existing clause in the agreement, which was not in its favor. These developments were not acceptable to NTPC as it wanted continuous supply of gas without interruption. It asked RIL to develop its gas fields in the Krishna Godavari (KG) basin and supply gas as per the schedule fixed. But RIL was adamant in its demand for changes to be made in the agreement.

The power ministry then took this matter to the petroleum ministry. But the petroleum ministry refrained from getting involved in the issue. It stated that RIL could be directed to produce gas from the KG basin as quickly as

possible, but that it was out of its scope to force RIL to sign the GSPA. In early December 2005, NTPC announced that it would take legal action against RIL for not signing the agreement. NTPC argued that RIL‘s

acceptance of the tender document could be considered a legally-enforceable contract. This meant that RIL was legally bound by the contract and should carry out its obligations, as per the contract.

As a counter-attack, RIL served an ultimatum to NTPC to accept the suggested changes and sign the GSPA by the year end. In case NTPC failed to do so, RIL would pay the bank guarantee amount of US$ 4 million and walk out of the contract. NTPC then decided to sue RIL for breach of contract and planned to consult the solicitor general of India and other higher authorities for further action. NTPC felt that since RIL had accepted all the terms and conditions of the revised GSPA with the amendments, the bank guarantee amount should be higher.

In July 2013, the GoI decided to double the price of gas produced in the country. According to NTPC, this decision could do irreparable damage to its pending case with RIL in the Bombay High Court since NTPC would have to pay more money to RIL.

Similar to the NTPC-RIL contract dispute, Microsoft Corporation (Microsoft) and Samsung Electronics Co Ltd. (Samsung) entered into a contract in 2011 under which both the companies agreed to cross-license their intellectual property, with Samsung paying Microsoft per-device royalties for each Android-based phone and tablet Samsung sold. In August 2014, Microsoft filed an Android patent-royalty suit against Samsung stating that the latter had failed to make the royalty payment in time. In its response, Samsung claimed the

Microsoft‘s acquisition of the Nokia handset division breached the business collaboration part of the

agreement between the two companies. In February 2015, Microsoft and Samsung settled their contract dispute over patent royalties, though the terms of the settlement were confidential.

The caselet deals with the transparent, competitive bidding policy of NTPC for purchasing liquefied natural gas (LNG). In this respect, the case also examines the various problems involved in the proposed Gas Sale and Purchase Agreement between Reliance Industries Limited and NTPC.

Discussion Questions

1. Do you think RIL breached the contract agreement, since the contract was awarded to it based on its ability to provide the gas from 2007 and at a specified rate quoted by RIL? Give reasons for your answer.

(Hints: KG Basin, GSPA)

2. The NTPC-RIL case was a typical case of pre-contractual conflict. How do you think this dispute can be solved?

(Hints: GSPA amendments, Gas price)

Course Reference: Concept- A Contract: Agreement/Unit 12-Law of Contracts/Subject-Business Environment

Sources:

i. Monalisa and Utpal Bhaskar, ―NTPC Fears Gas Price Hike may affect Case with RIL,‖ www.livemint.com,

July 3, 2013.

ii. ―NTPC to Sue Reliance,‖ www.business-standard.com, December 8, 2005.

Other Keywords: Price bids, agreement of sale

	26		Collective Bargaining Deal between General Motors and
			Collective Bargaining Deal between General Motors and
			United Auto Workers

General Motors (GM), the world‘s second largest automobile manufacturer, had been the market leader in the US till 1980, with a market share of 46 percent. However, with the entry of foreign car manufacturers like Honda Motor Company (Honda) and Toyota Motor Corporation (Toyota), GM began to face intense competition and it lost market share to these new players. Analysts felt that GM had lost its market

leadership position because of its sluggishness in designing new models when compared to its Japanese competitors who kept coming out with new designs. In addition to this, GM‘s fortunes were severely

affected with under-funded pension liabilities, rising employee and retiree health care costs, and a decreasing market share in the US automobile market.

Mounting healthcare costs was one of the major problems for GM. In 2004, GM spent US$ 5.1 billion toward healthcare costs for its 1.1 million workers, retirees, and their family members. However, powerful worker unions such as the United Auto Workers (UAW) demanded more and more benefits from the motor companies. As there was no dearth of funds, GM paid generous benefits such as free healthcare insurance, dental insurance, and retiree healthcare benefits.

GM had built up a long-term relationship with the UAW. Negotiations with labor unions formed an essential

component for GM in sustaining its business in the long run. Hence, in 2005, the UAW entered into negotiations with GM, wherein GM‘s healthcare liability was to be completely transferred to the UAW with the setting up of a new Voluntary Employees‘ Benefit Association (VEBA) fund.

By September 2007, GM failed to set up the VEBA fund. Consequently, the UAW, on September 24, 2007, called for a national strike since the management of GM had overlooked the deadline set by it. The 73,000 workers went on a strike across 80 facilities at 30 locations. On September 26, 2007, GM and the UAW through the collective bargaining process, entered into a tentative agreement.

On November 12, 2007, an agreement was signed between GM and the UAW, for the provision of healthcare benefits to workers. The prime objective of the contract was to reduce the company‘s healthcare

costs by forming a VEBA fund. Under the agreement, the UAW was entrusted with the responsibility of administering the healthcare benefits to workers. The agreement with the UAW put an end to the problems GM had been facing with regard to the rising healthcare costs for its employees. GM expected the historic agreement with the UAW to reduce its expenditure on US hourly and salaried pension and healthcare from an average of US$ 7 billion per annum from 1993 to 2007 to approximately US$ 1 billion per annum in 2010.

Some analysts felt that though both the parties were trying to project the deal as a win-win situation, GM was clearly the bigger beneficiary. The company had resolved the long-standing healthcare problem and also managed to get significant concessions from the UAW. Analysts felt that if the company had failed to get the concessions it could well have gone into bankruptcy or been forced to sell out to private investors.

The case discusses the collective bargaining agreement between one of the world‘s leading automobile manufacturers, General Motors Corporation and the United Auto Workers in late 2007.

Discussion Questions

1. Discuss the reasons for GM losing its market share in the US automobile market. (Hints: Intense competition, Sluggishness in designing new models)

2. Discuss the collective bargaining process between GM and the UAW. How would GM benefit from the agreement?

(Hints: VEBA fund, Pension)

Course Reference: Concept- Collective Bargaining/Unit 13-Special Contracts/Subject-Business Environment Sources:

i. ―UAW Members Ratify New Contract with GM,‖ www.futureoftheunion.com, October 10, 2007.

ii. James R. Healey and Sharon Silke Carty, ―GM-UAW Reach Tentative Deal; Strike Ends,‖ www.ustoday.com,

September 25, 2007.

Other Keywords: Strike, Negotiation

	27		Data Privacy Issues in the Indian BPO Industry
	27

Data security had emerged as a major issue plaguing the Indian Business Process Outsourcing (BPO) industry, especially the BPOs dealing with content protected by Intellectual Property Rights (IPR) and for those serving banks as they had to maintain the confidentiality of the personal information of their clients.

Maintaining information security was particularly critical for BPOs undertaking voice-based services as the employees had access to confidential information such as customers‘ account passwords and PIN codes.

BPOs that failed to maintain the desired level of information security faced the risk of losing their business and tarnishing the image of the industry as a whole.

In 2004, it was estimated that approximately 83 percent of Indian businesses had reported a security breach. Of these, 42 percent reported three or more breaches. In 2004, Indian BPOs missed business opportunities worth US$ 100 million due to lack of laws governing data security. Therefore, companies concentrated on enhancing their data security systems by diverting an increased share of their budget to these activities. For example, the spending of Indian multinational IT Consulting and System Integration services company, Wipro Solutions, on information security increased by 25 percent on a per desktop basis. Indian companies needed to develop risk assessment processes, network and desktop security, disaster recovery procedures and standard tests, and information security management to cope with the issue. In August 2005, it was estimated that data security frauds could severely impact the Indian BPO industry, resulting in lowering its annual growth rate by 30 percent over the next 15 to 18 months.

Some of the information security and data privacy challenges that Indian BPOs faced were lack of data

protection laws, employees using portable devices such as laptops to store confidential business information, rising data security costs arising out of the BPOs struggle to maintain the confidentiality of their clients‘

information, the costs involved in training employees in maintaining data security by complying with security policies implemented by the company, and the difficulties in systemic plugging of any loopholes through employee activity monitoring procedures.

To ensure that the confidentiality of client information was maintained, the BPOs had to implement certain data security measures. The companies were required to be self-regulatory in maintaining data security. Major BPOs in India such as Mphasis and Wipro Spectra mind had implemented an array of measures for data security. The Government of India amended the Information Technology Act of 2000 in 2008 with the intention of including data security rules in it. In 2013, the National Association of Software and Service Companies (NASSCOM), the main body which represented the IT software and services industry in India, established a self-regulatory organization, the Data Security Council of India, to promote data protection, security, and privacy best practices. The US and the European Union were also monitoring the data outsourced and the operations of the service providers to ensure data security. Foreign companies were also required to ensure that all data security requirements were being fulfilled while entering into an outsourcing contract. In spite of all the measures taken for data security, an organization had to have a preplanned strategy for dealing with data fraud, if it occurred.

Some of the Data Security Measures Taken by Indian BPOs were:

· BPOs should implement the required physical security measures, policies, and data protection technologies to safeguard the confidentiality of their client‘s data.

· Indian BPOs should implement disaster recovery and business continuity management plans which include setting up of multiple facilities which include setting up of multiple facilities, in and outside India.

· The confidentiality of information shared on a wired or wireless network should be maintained.

· Identity management solutions can be used to check who is accessing which data and at which operational level in the organization.

· Indian BPOs should obtain certifications that comply with major US and European regulations.

Similar to the data privacy issues in the Indian BPO industry, in October 2013, Adobe Systems Inc, a multinational computer software company, reported that hackers had stolen nearly 3 million encrypted customer credit card records as well as login data of an undetermined number of Adobe user accounts. In

another instance, in December 2013, the computer systems of Canadian retail giant, Target Corporation, were hacked and the credit card and debit card numbers of 40 million customers were stolen in addition to the personal details of 70 million customers.

The case discusses the information and data security concerns faced by the Indian BPO industry. It also points out how maintaining information security was particularly critical for BPOs and how BPOs that failed to maintain the desired level of information security faced the risk of losing their business and tarnishing the image of the industry as a whole.

Discussion Questions

1. Discuss the data security issues faced by the Indian BPO industry. (Hints: Securities breach, Laws)

2. Critically analyze the data security measures taken by the Indian BPO industry. What else needs to be done?

(Hints: Data protection technologies, Wireless network)

Course Reference: Concept- Data Privacy/Unit 13-Special Contracts/Subject-Business Environment Sources:

i. ―EXL Receives NASSCOM-DSCI Security Leader of the Year Award,‖ http://ir.exlservice.com, December 22,

2014.

ii. Gaurie Mishra & Bipin Chandran, ―BPO: In India Data Security Cost Skyrockets,‖ www.rediff.com,

November 3, 2005.

Other Keywords: Business Process Outsourcing, Information and Data Security, Theft and Online Fraud

₂₈ Facebook’s Initial Public Offering to Fund Future Growth

In February 2012, online social networking service, Facebook Inc. (Facebook), decided to go in for an Initial

Public Offering (IPO) of its shares. Facebook embarked on the IPO to meet regulatory requirements as well as to raise requisite funds for its future expansion. Many analysts welcomed Facebook‘s decision to go

public. They said that the IPO would create one of the most valuable Internet companies in the world.

Facebook decided to go in for the IPO after it began to face heightened competition from other Internet majors like Google which had started a new social network called ‗Google+‘ in June 2011. Facebook also

needed more revenues to effectively compete against competitors like Google and Microsoft which were offering many more Internet based services and had more revenues than Facebook. Though Google+ was initially not as successful as Facebook, its user base was steadily expanding.

Facebook planned to use the funds raised through the IPO to expand its operations, develop new technologies, make acquisitions, and recruit the talented people needed for its future expansion. It was also seeking to expand its presence in business marketing. Another area on which Facebook was focusing, to increase its revenues, was on mobile advertising. With the advent of the latest high-end smart phones, more and more people are using these phones to connect to the Internet. Mobile ads are a growing niche in the online advertising space.

In May 2012, Facebook raised US$ 16 billion through the IPO, valuing the company at US$ 104.2 billion. The IPO became the third largest entity in the history of US and made Facebook‘s stock more expensive than other established rivals like Google and Apple. Gradually Facebook‘s shares started to slump and fell to US$ 34 on the next day‘s trading. Its stock continued to underperform in the months that followed the IPO.

Analysts gave a number of reasons for this dismal performance. Some said that its valuations at more than 100 times its earnings were unrealistic and there was a lot of hype surrounding the IPO. Others said that investors were mainly concerned about the future growth prospects of Facebook. They said that the investors were bothered about issues like the slowing growth in the number of new users and no significant revenues coming from mobile devices. After the experience of the dot-com crash, investors had grown more cautious about investing in a technology company with no clear future growth prospects. They were waiting for a viable future growth plan from Facebook.

Mark Zuckerberg (Zuckerberg), CEO, Facebook, had to show viable growth plans for the future to regain the confidence of its investors.

The case discusses the initial public offering of Facebook and the performance of the stock after the IPO.

Discussion Questions

1. Discuss the reasons that prompted Facebook to go in for an IPO. (Hints: Regulatory requirements, Capital requisites)

2. Discuss how Facebook can use the funds raised through the IPO to fuel its future expansion plans.

(Hints: Expansion activities of Companies, Acquisitions)

Course Reference: Concept- Raising of Capital from Public/Unit 14-Formation and Organization of Company/Subject-Business Environment

Sources:

i. ―Facebook IPO: Letter from Zuckerberg,‖ www.telegraph.co.uk, February 19, 2012.

ii. Evelyn M. Rusli, ―Facebook Files for an I.P.O,‖ http://dealbook.nytimes.com, February 1, 2012.

Other Keywords: Initial Public Offering, Growth Strategy

	29		Microsoft Raises Debt to Make Dividend Payments
	29

On September 21, 2010, Microsoft Corporation (Microsoft), the world‘s leading software company, increased its quarterly dividend by 23 percent to 16 cents from the 13 cents given by it in the previous quarter. The management of the company decided to raise a debt of US$ 6 billion in order to pay the dividends and for the share buyback. During the financial year ending June 2010, the company had paid a dividend of US$ 0.52 per share to its ordinary shareholders.

In 2003, Microsoft had declared a cash dividend. The company distributed cash dividends of US$ 0.16 per share during the Financial Year (FY) 2003-04 to its shareholders. From 2003 to 2010, the company gave back to its shareholders in the form of a cash dividend and by repurchasing stock. On the buyback front too, the company announced major share buybacks as a part of its overall finance strategy of increasing shareholder value. On September 22, 2008, it announced US$ 40 billion worth of stock repurchases. The market took the buyback positively and the Microsoft share price pushed to US$ 26.50 per share in premarket trading, up 5.33 percent. Overall, the company rewarded the shareholders consistently in the decade ending 2010. Some critics dismissed the buybacks as they viewed it as rewarding the employees and executives at the expense of the shareholders.

Microsoft continued to grow rapidly in all segments of its business. Despite facing severe competition from other market players and the pirated software market, the company‘s revenue grew 10.15 percent from 2003

to 2010. The management of the company expected the growth to continue in the future also and expected the company to achieve other several milestones with new businesses.

At the back of a very successful first quarter performance, Microsoft reinforced the faith of its shareholders

when it announced quarterly dividends of US$ 0.16 per share to be paid on March 10, 2011. This was 3 cents above the previous quarter‘s dividend of 13 cents. What was surprising was that the company, despite

a huge cash balance of US$ 36788 million at the end of FY 2010, decided to raise a debt to pay the cash dividend and for the buyback of the common shares. The management decided to raise the debt at maximum limit without causing an adverse impact on the AAA rating of its debt. The board approved the sale of debt of up to US$ 6 billion. The company could raise a debt at the least financial charges to its profit and loss account.

A Bloomberg story quoting an unnamed source said that the company had raised a debt despite a cash

surplus because it did not want to repatriate the cash which had been invested outside the US as it would have had to pay tax. The Federal Reserve‘s move to soften the interest rates made it very attractive for

companies with the highest rating to raise a debt at very cheap rates. Many US companies had started taking advantage of the low rates and were increasing the percentage of debt in the capital. Corporate debt as a percentage of GDP had doubled since 1952. By resorting to leverage and sponsor the dividends, Microsoft showed its interest for taking a debt. For the shareholders, it meant a higher dividend while for the bondholders it meant a safe investment option. What was also interesting was that Microsoft, known for its software, was also falling back on financial engineering and tax arbitrage while concentrating on greater sustainable profits from its business.

Similar to Microsoft‘s dividend policy, in February 2015, American Multinational Corporation, Apple Inc.

(Apple), raised a debt of US$ 6.5 billion for stock repurchases, dividend payments, and debt repayments.

The case deals with the dividend behavior of Microsoft Corporation and the fact that that it was not averse to taking a debt to pay dividends despite having a huge cash surplus.

Discussion Questions

1. Critically analyze why Microsoft raised a debt of US$ 6 billion to make dividend payments. Which was the better way to ensure returns to a shareholder— through cash dividends or repurchase of shares, or both? Give reasons for your answer.

(Hints: Shareholders‘ value, rewarding the stakeholder)

2. Discuss and debate the pros and cons of the dividend policy in comparison to cash dividend and repurchase.

(Hints: Cash surplus, maximum debt)

Course Reference: Concept- Dividend Payment/Unit 14-Formation and Organization of Company/Subject-Business Environment

Sources:

i. Dina Bass, ―Microsoft Raises Dividend, may Borrow up to $6 Billion more,‖ www.bloomberg.com, September 21, 2010.

ii. Joan E. Solsman, ―Microsoft Raises Quarterly Dividend 23% to 16 Cents,‖ www.online.wsj.com, September

21, 2010.

Other Keywords: Buyback, debt

	30		IDBI Merges with IDBI Bank
	30

On April 2, 2005, the merger of IDBI Bank Ltd. (IDBI Bank), the banking subsidiary of Industrial Development Bank of India (IDBI), with its parent company (IDBI held a 57 percent stake in IDBI Bank)

was announced. However, the merger was to be effective retrospectively from October 1, 2004. The merged entity was to be called IDBI Ltd. The merger resulted in the combined entity becoming India‘s fifth largest

bank by business volume (deposits and advances). On July 29, 2004, when the board of directors of both the companies approved the merger in principle, IDBI Bank‘s market value was US$ 236 million and the value

of the combined entity was US$ 1.2 billion.

As per the business model adopted after the merger, IDBI had two strategic business units (SBU). While one SBU focused on corporate banking (development finance), the other SBU catered to commercial banking.

Prior to the merger, though both IDBI and IDBI Bank were in the financial services industry, they served different customer categories. While IDBI was a term lending institution, IDBI Bank was a commercial bank. The new entity was expected to realize some benefits through economies of scale. At the same time, it was expected to cater to a wide spectrum of clientele, ranging from individuals to large corporate organizations, within India and across the world.

One reason for the merger was that Development Financial Institutions (DFIs) like IDBI were no longer commercially viable in the economic scenario of the 2000s. Most DFIs in India had been established in the 1950s and 1960s, with the objective of providing long term finance to businesses in various industries. This was done because the Indian capital markets at that time were not well developed and alternative sources of long term funding were unavailable. Thus, the DFIs were established to bridge the gap between the demand for funding from the industry and paucity of funds in the market. DFIs could avail of easy, long-term funds from the GoI (through GoI subscriptions to DFI capital or long term debt provided to DFIs) to finance these businesses.

After the financial reforms of the 1990s, funding for the DFIs was cut off by the GoI, resulting in their having to raise long-term funds at a higher cost (debt from private investors). The lending operations of these DFIs also took a hit due to competition from public sector and private banks. In addition, as the Indian capital markets became more developed and sophisticated, companies were able to raise money directly from the market through equity or debt. This trend slowly drove DFIs to finance riskier projects, with lower returns and long gestation periods.

The profitability of the DFIs also declined because of the high cost of funds and vulnerability to asset liability mismatches (they provided long-term funding, with money raised for the short-term). Moreover, according to a risk return study conducted by the company, IDBI was not able to take advantage of the profitable market segments (such as sources of cheaper funds, lending to borrowers with low risk profiles), due to the operational restrictions imposed on DFIs.

IDBI considered a merger with IDBI Bank to be a good solution to the issues of low profitability and inaccessibility when compared to cheaper sources of funds. Financial restructuring — instead of the merger

— was ruled out because of bad loans that were nearly 25 percent of IDBI‘s gross assets, as of the year

2004.

To facilitate the merger, a special purpose vehicle called the Stressed Assets Stabilization Fund (SASF) was created by the GoI, to which IDBI transferred Rs. 90 billion of bad loans; in turn, the SASF issued to IDBI, zero-coupon, non-tradable, 20-year bonds for the same amount. Effectively, this Rs. 90 billion was an off-balance sheet, cash-neutral support provided by the GoI. The SASF was further entrusted with the task of

following up on the bad loans and transferring any collections made to IDBI. This transfer of bad loans from the books of IDBI to SASF resulted in IDBI‘s net non-performing assets (NPA) becoming less than 1 percent

of its total loans.

Positives of Merger

Officials at IDBI were confident that	One of the primary advantages of the	After	the	merger,
the new entity would be able to	merger was that it provided IDBI Ltd	the new entity was
capture a respectable market share in	with access to relatively cheaper sources	expected		to have
the highly competitive financial	of funds (such as retail deposits), which	over	200	branches
sector, by leveraging the synergies	the DFIs were previously not allowed to	and over 300 ATMs
between the two entities.	accept in India.	across India.

Analysts also said that the merger could raise issues regarding synergy of operations due to the varied nature of the businesses of the two entities. The merged entity had to identify a common platform wherein the different business models (Retail & Commercial banking of IDBI Bank and Development banking of IDBI) could operate efficiently.

Another instance of merger of banking companies was the November 2014 acquisition of Bengalaru-headquartered ING Vysya Bank by Kotak Mahindra Bank (Kotak) for Rs. 150 billion. The deal would make Kotak the fourth-largest private bank in the country after ICICI Bank, HDFC Bank, and Axis Bank. The combined banking entity would have a widespread network of 1,214 branches across the country.

The case of the IDBI-IDBI Bank merger discusses the merger between IDBI, one of India's leading Development Financial Institutions (DFI), with IDBI bank, its banking subsidiary, in a move aimed at consolidating businesses across the value chain and realizing economies of scale. The case discusses the rationale behind IDBI opting for a merger as opposed to other options including financial restructuring.

Discussion Questions

1. Discuss the rationale for the IDBI and IDBI Bank merger. (Hints: Business volume, Economies of scale)

2. Discuss the pros and cons of the merger.

(Hints: Commercially viable, GoId is investments)

Course Reference: Concept- Amalgamation of Banking Companies/Unit 15-Company Management and Winding up/Subject-Business Environment

Sources:

i. Roshni Jayakar, ―Goodbye IDBI, Hello IDBI Bank,‖ http://archives.digitaltoday.in, November 21, 2004.

ii. ―IDBI Merger may Throw up Daunting Challenges,‖ http://timesofindia.indiatimes.com, August 3, 2004.

Other Keywords: Mergers and Acquisitions, Restructuring

	31		Adidas Merges with Reebok
	31

On August 3, 2005, Adidas-Salomon AG (Adidas), Germany‘s largest sporting goods maker merged with the US-based Reebok International Limited (Reebok) for US$ 3.8 billion. With this merger, Adidas and Reebok aimed to compete against American sports goods maker Nike International Inc. (Nike),

The companies felt that the major driving force behind the merger was greater sales growth rather than just

cost savings. The annual sales of the merged entity were predicted to be US$ 11.7 billion. The merger was expected to give Adidas‘ products a strong push in the US market because of the link with Reebok, while

Reebok would gain a large presence in Europe and Asia with the help of Adidas.

Analysts had varied opinions about the deal. However, a few analysts warned that repositioning the two brands would be a difficult exercise. Analysts were concerned that Adidas would have to support two separate brand identities while rival Nike was intensely focused on a single identity. Some analysts felt that Adidas could beat Nike to become the industry leader while others opined that it was impossible to dislodge Nike from its No. 1 position. Nike was a preferred brand because of its fashion status, colors, and combinations.

Some analysts raised doubts over the success of the merger of the two companies. They were of the view that the merger would not generate much synergy because the individual brand identities would be maintained even after the merger. Analysts also doubted the effectiveness of the merger as a strategy to beat Nike. They felt that the combined entity would have to work really hard to further expand its market share in the US market and also globally.

The case of the Adidas-Reebok merger highlights the rationale for the merger and studies whether the merger would be successful in the long run.

Discussion Questions

1. Discuss the rationale for the Adidas-Reebok merger. (Hints: Sales growth, Compete against)

2. Discuss the pros and cons of the merger.

(Hints: Repositioning, Preferred band)

Course Reference: Concept- Amalgamation/Merger of Companies/Unit 15-Company Management and Winding up/Subject-Business Environment

Sources:

i. Laura Petrecca and Theresa Howard, ―Adidas-Reebok Merger Lets Rivals Nip at Nike‘s Heels,‖ www.usatoday.com, August 4, 2005

ii. News Snap, ―Adidas to Buy Reebok; 2Q Net Profit Rises 50%‖, www.news.morningstar.com, August 3, 2005.

Other Keywords: Mergers and Acquisitions, Integration

32	Housing Finance Industry in India at the Crossroads

In 2000, the housing industry in India was one of the few sectors that grew at a healthy rate of 28-30 percent in spite of the economic slowdown. A host of reasons was responsible for this growth, including favorable government policies, increased corporate activity, and an increasing customer-base. During this time, the Government of India (GoI) had announced many industry-friendly policies; in addition, during the same period, real estate prices had also gone down across the country.

The housing industry‘s strong growth had a direct impact on many other related industries, such as cement, engineering, paint, and steel. One industry that experienced hectic activity during the period was the housing finance industry. In fact, some industry observers claimed that the ease with which housing finance could be obtained resulted in an increased activity in the housing industry. The GoI announced numerous tax

concessions for investments in the housing sector: relief under the Income Tax Act and Wealth Tax Act; exemption from Capital Gains Tax, Stamp Duty reduction; and ‗Tax holidays.‘ For increasing housing for

the weaker sections i.e. the lower income group, the GoI announced concessions for the raising of funds from the market for housing the projects. Housing Finance Companies (HFCs) were also allowed to transfer 40 percent of their profits to a special reserve that was exempt from tax. The policy also announced that around 20 percent of rental income would be eligible for IT deduction. A host of tax concessions were granted to individuals, making housing loans very attractive. As a result, many banks and financial institutions entered the market with attractive financing rates and consumer-friendly schemes.

In December 2002, the Kelkar Panel, named after its chairman, Vijay Kelkar, recommended that income tax deductions for interest payments on housing loans be abolished. Companies as well as customers were shocked to learn of the recommendations made by a government appointed panel on direct tax reforms. Since many salaried professionals in the country depended on these very exemptions for reducing their tax

liabilities, this news had become an unwelcome development for all of them. According to media reports, the new recommendations, apart from being against the interests of the people, could halt the industry‘s growth

if accepted in the next budget that was due at the end of February 2003. This, in turn, could negatively affect the housing, construction, and engineering industries.

Many analysts felt that the reduction in tax exemptions would negatively influence the housing sector‘s growth since the tax exemptions provided to the salaried class had acted as one of the main drivers for its growth. Removing these exemptions would, according to analysts, lead to a decline in demand, especially in the Rs. 1-2 million loans segment (this segment reportedly contributed around 80 percent of the market). Some industry observers were of the opinion that the removal of exemptions could result in the lowering of real estate prices by companies to attract new customers. However, others felt that the acceptance of the

Kelkar Committee‘s recommendations would not result in a drop in the cost of real estate because prices had, reportedly, already touched an all-time low.

The case of the housing finance industry discusses the possible negative impact of the tax reforms that proposed to remove the housing finance related tax benefits.

Discussion Questions

1. Analyze the reasons for the growth of the Indian housing finance industry. (Hints: Government policies, corporate activities)

2. Industry observers opined that implementation of the Kelkar Committee‘s recommendations would dampen the growth of the industry. Analyze the impact of the committee‘s recommendations on the housing finance industry. What strategies should housing finance companies adopt in the event of these recommendations being accepted/not accepted?

(Hints: Income tax deductions, Real estate prices)

Course Reference: Concept- Direct Taxes – Incomes that are Exempted/Unit 16-Direct Taxes/Subject-Business Environment

Sources:

i. Sanjiv Shankaran, ―Housing Finance: Nesting Becomes a Lucrative Business,‖ www.thehindubusinessline.com, April 28, 2002.

ii. T Banusekar, ―Interest on Housing Loan,‖ www.thehindubusinessline.com, March 3, 2002.

Other Keywords: Housing Finance Industry, Tax reforms, Tax benefits

	33		Debt Crisis in Greece
	33

When Greece disclosed that it had a foreign debt of about 125 percent of its Gross Domestic Product (GDP) in 2008-09, it took prominent economists and global political figures alike by surprise, as the Greek authorities had kept the fact under wraps for a long time. Soon after the disclosure, the debt problem spiraled into a sovereign debt crisis.

Many economists opined that the main cause for the problem was the huge non-productive expenditure

incurred on the 2004 Olympics and the false accounting of the budget report during the period 1999-2008. In addition to this, lack of fiscal discipline coupled with the government‘s unproductive expenditure increased

the debt beyond the ceiling that was fixed by the European Union (EU). The issue of high debt came to light when the new Papandreou government, under the Prime Minister George Papandreou (Papandreou), son of Andreas Papandreou, disclosed it in late 2009.

It was not only a huge budget deficit, more than four times the EU limit, that Greece faced but also bond redemption of about 16 billion euros by May 2010. With a budget deficit of 12.7 percent of its GDP, the highest in the Eurozone, and public debt of over 100 percent by 2009, worries about honoring the debt had a sudden effect on the bond market. In January 2010, the yield on the Greek bond increased to 7.1 percent, which was the highest since Greece had joined the euro arena.

Papandreou told the Greek Parliament that immediate measures were required to prevent the economy from

falling into a debt crisis. In early March 2010, the bond issue sent positive signals to the markets, where Athens sold €5 billion in 10-year bonds and in turn received orders for three times that amount. This proved

that the Greek government was on the right track and would avoid defaulting on its debt repayments. However, some observers were concerned that the high interest rate the country had been forced to pay (as a result of the economic crisis) might not be sustainable, and that to meet its debt obligations, financial help from EU countries, Germany and France, would be necessary. The EU countries, in a meeting held in Brussels in 2010, promised to help and rescue Greece from the debt crisis. However, they stated that Greece must make the first move by undertaking painful budget cuts.

Greece stated that it would cut spending by slashing public sector salaries and raising tax rates by 19 percent and by levying higher duties on luxury items such as expensive cars and boats. However, this led to a strike in Athens and strong protests from the public. In May 2010, to overcome the debt crisis, the International

Monetary Fund and the EU offered Greece a bailout worth €240 billion. The bailout program was set to expire on February 28, 2014.

In January 2015, the leftist Syriza party won the elections and Alexis Tsipras (Tsipras) was elected as the

Prime Minister of Greece. Since the deadline to repay bailout loans was approaching, Tsipras presented a list of proposed economic reforms to Greece‘s European creditors as part of a deal to extend its bailout for four

months. The government officials said the reforms aimed to focus on curbing tax evasion, excessive bureaucracy, smuggling, and corruption, while also addressing the poverty caused by a six-year recession. Critics, however, felt that Tsipras was not keeping the promise he had made in the January 2015 election campaign where he had pledged to end the loan program and the grave measures imposed by the lenders. However, Tsipras said that the four-month extension would give Greek officials more time to negotiate with the creditors while keeping the country in the euro zone. Economists wondered whether the extension would be sufficient for the Greek economy to repay the rescue loans and pull itself out of the debt crisis.

The case discusses the nature and causes of Greece‘s sovereign debt crisis.

Discussion Questions

1. Critically analyze the nature and causes of Greece‘s debt crisis.

(Hints: Gross domestic product, Non-productive expenditure)

2. Discuss the immediate measures taken by Papandreou to prevent the economy from falling into a debt crisis. Do you think, the Syriza government‘s proposal of obtaining a four-month extension can help Greece repay its rescue loans of €240 billion? Justify your answer. What else needs to be done?

(Hints: Financial help, Bond issue)

Course Reference: Concept- Debt Owed/Unit 16- Direct Taxes/Subject-Business Environment Sources:

i. ―Greece Submits Reform Plan to Lenders,‖ www.voanews.com, February 24, 2015.

ii. Rizzo Alessandra and Perry Dan, ―ECB Chief Says Greece‘s Debt Crisis Should not Force it out of Euro Zone,‖ www.businessday.co.za, September 9, 2010.

Other Keywords: Greek Sovereign Debt Crisis, euro zone

	34		The Indo - Mauritius Double Taxation Avoidance
			The Indo - Mauritius Double Taxation Avoidance
			Agreement

Under the Double Taxation Avoidance Agreement (DTAA) signed between India and Mauritius in 1982, capital gains arising from the transactions of shares and securities were taxable in the country where the shareholder resided, and not in the country of the firm whose shares were being sold. Therefore, a company or a person established or residing in Mauritius and involved in transaction of shares and securities in India was not liable for taxation in India. Since there was no Capital Gains tax in Mauritius, Foreign Institutional Investors (FIIs) operating from Mauritius were not taxed. This increased the number of investors who were evading taxes as they were routing their investments into the Indian stock market through Mauritius (treaty shopping). Mauritius accounted for high inflows of Foreign Direct Investment (FDI) into India. Since the liberalization of the Indian economy in 1991, investment through Mauritius stood at over US$ 8.7 billion. But from 2002-2004, there was a significant decline in FDI from Mauritius.

The Securities and Exchange Board of India submitted a detailed report in 2001 to the Joint Parliamentary Committee for investigation. The report stated that some Mauritius-based FIIs were issuing participatory notes to unidentified individuals and firms to undertake major transactions in the Indian stock markets. In this connection, the GoI issued show-cause notices to eight companies, without any success. However, on October 7, 2003, the Supreme Court of India upheld a Finance Ministry circular dated April 13, 2000, allowing FIIs and other investment entities incorporated in Mauritius to claim tax exemption under the Indo-Mauritius Double Taxation Avoidance Convention (DTAC).

Owing to the many difficulties arising from the Indo-Mauritius DTAC, India was expected to revise the DTAA with Mauritius to check tax evading investors. The India-Mauritius Double Taxation Avoidance Treaty came under the scanner of the government due to the provisions that were being misused for tax evasion. According to some analysts, the prime reasons for the increase in the number of investors operating from Mauritius were:

Mauritius amended its laws to ensure that there were no ―fictitious‖ companies in Mauritius owned by anyone actually based in India. Though the GoI denied any hard reports on treaty shopping, many investigative reports indicated that Mauritius was the preferred destination for huge amounts of black money generated in India by big corporate houses, corrupt politicians, and the like.

On December 11, 2004, on the India-Mauritius DTAA and re-routing of black money to India through Mauritius, the then Finance Minister, P. Chidambaram, said that the GoI was contemplating three changes in the agreement.

· Changing the basis of taxation from ‗residence‘ of the firm to the ‗source‘ of funds.

· Including a ‗limitation of benefit‘ so that the benefits of DTAA were confined to true residents of Mauritius.

· Taking a re-look on the rates of withholding tax.

In July 2012, the Mauritius government agreed to renegotiate the provisions of its tax treaty with India. However, it planned not to agree to such measures that would harm its own interests. But a failure in the negotiations between both India and Mauritius led to no updation of the DTAA.

In December 2013, Mauritius agreed to include a ‗limitation of benefits‘ (LoB) clause in its revised tax agreement with India. LoB was an anti-abuse provision typically aimed at preventing ‗treaty shopping‘ or

inappropriate use of tax pacts by third-country investors. In spite of including the LoB clause, Mauritius, as of December 2014, had not agreed to certain proposals for the revision of the bilateral tax treaty. The Union Finance Minister of India, Arun Jaitley (Jaitley), said that uncertainties over Mauritius signing the revised

tax treaty were adversely affecting investment flows between the two countries. According to Jaitley, for the fiscal year 2013-2014, Mauritius was one of India‘s major sources of Foreign Direct Investments, with US$

4.85 billion of FDI coming in from there.

The case discusses why changes in the Indo-Mauritius Double Taxation Avoidance Convention were necessary if mass evasion of taxes by Foreign Institutional Investors was to be prevented.

Discussion Questions

1. Discuss why changes in the Indo-Mauritius Double Taxation Avoidance Convention were necessary if mass evasion of taxes by Foreign Institutional Investors was to be prevented. (Hints: Double taxation, Treaty shopping, FDI)

2. Discuss the changes proposed by the GoI on the DTAT with Mauritius from 2004-2014. Critically analyze why Mauritius was not ready to negotiate with the proposed changes.

(Hints: Source of funds, advantages and dis advantages of double taxation)

Course Reference: Concept- Capital gains/Unit 16- Direct Taxes/Subject-Business Environment Sources:

i. ―India-Mauritius Tax Treaty,‖ http://indiaempire.com, February 2015.

ii. Monica Gupta & Sidhartha, ―India asks Mauritius to Rework Tax Treaty,‖ www.business-standard.com, December 11, 2004.

Other Keywords: Double Taxation Avoidance Treaty (DTAT), Foreign Institutional Investor (FII), Association of South-East Asian Nations (ASEAN), Securities and Exchange Board of India (SEBI)

Software Sales Attracts Sales Tax:

35 The Battle between TCS and the Supreme Court of India

On November 5, 2004, the Supreme Court of India (Supreme Court) delivered a landmark judgment on the question of whether software was intellectual property or a product that would attract sales tax. The court ruled that software was a product which could be taxed. The ruling was in connection with a petition filed in the Supreme Court by the Indian software major, Tata Consultancy Services (TCS), challenging the Andhra

Pradesh High Court order that permitted levy of sales tax on computer software, classifying it as ―goods‖ under the Andhra Pradesh General Sales Tax Act, 1957.

In 1994, the government of Andhra Pradesh (AP) declared that software stored on floppy disks and CD-ROMs was subject to the state sales tax as they were physical goods. The AP Government treated canned software (software packages owned by the companies/individuals who developed them) sold by TCS as

‗goods‘ that fell under the Sales Tax Act and levied sales tax upon them. TCS challenged the state‘s decision. It contended that software was intellectual and intangible property, which could only be stored on or transmitted through floppies and compact disks, and so it would not come under the purview of the term

‗goods‘ and could not be taxed.

Soli Sorabjee, the advocate representing TCS, pointed out that software would not come under the definition of ‗goods‘ in Andhra Pradesh as Section 2(h) of the AP General Sales Tax Act included only tangible

moveable property. He contended that since computer software was not tangible moveable property, it would not fall under the state‘s sales tax Act.

After its appeals in Andhra Pradesh district courts were rejected, TCS filed an appeal in the Andhra Pradesh High Court, which also ruled that all branded software was subject to the state sales tax. TCS finally took the matter to the Supreme Court, which held its first hearing in 2001. The Supreme Court upheld the Andhra Pradesh High Court order and ruled that the Andhra Pradesh Government could tax the canned software of TCS. The ruling boosted the revenues of the state governments, but only marginally, as 90 percent of the Indian software market was dominated by customized software (uncanned software developed by the company itself).

According to analysts, the price of branded personal computers could increase as sales tax was being levied on the embedded software, increasing the overall cost. This increase in cost would decrease the purchase of computers, which, in turn would affect the computer market. Also, the analysts feared that the rise in software prices would increase the use of pirated software and that that would further affect the IT industry.

The case discusses the nature of software as a product. It goes into the rulings of various courts in India with regard to the levy of sales tax.

Discussion Questions

1. Critically analyze the judgment of the Supreme Court on software as a product that attracted sales tax.

(Hints: Canned software, sales tax)

2. Discuss the future implications of the Supreme Court‘s ruling on the Indian IT industry.

(Hints: Tax and Increase in cost, IT industry)

Course Reference: Concept- Sales Taxes and Other Levies/Unit 17-Indirect Taxes/Subject-Business Environment

Sources:

i. Murali D, ―Does it Seem Uncanny that you can tax Canned Software?‖ www.thehindubusinessline.com, November 13, 2004.

ii. ―Sales Tax to Hit Market: TCS, Business, www.rediff.com, November 8, 2004.

Other Keywords: General Sales Taxes Act, Intellectual Property

Index of the Title of the Brief Case and its Original Source of ICMR

1. Google‘s Challenges in China‘s Internet Services Market – This Single Page version of the case has been prepared

by Hadiya Faheem based on the original case Google’s Problems in China by P. Indu, under the direction of Vivek Gupta, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

2. Anti-dumping Regulations: Impacting Foreign Trade in India – This Single Page version of the case has been

prepared by Hadiya Faheem based on the original case Anti-Dumping Regulations and India by Mylavarapu Vinaya Kumar, under the direction of Ramya Narasimhan, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

3. Domino‘s Pizza: Combating Demographic Challenges in Japan – This Single Page version of the case has been

prepared by Hadiya Faheem based on the original case Domino‘s Pizza: Challenges Faced in Japan by K Manjula, under the direction of D. G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

4. BMW: Targeting the Creative Class in North America – This Single Page version of the case has been prepared by

Hadiya Faheem based on the original case BMW Brand in North America by Debapratim Purkayastha, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

5. Coca-Cola: Customizing its Marketing and Promotional Strategies in Various Countries – This Single Page version

of the case has been prepared by Hadiya Faheem based on the original case Differentiation Strategies of Coca-Cola by P. Kamala Aparna, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

6. Organizational Culture at Cisco – This Single Page version of the case has been prepared by Hadiya Faheem based

on the original case Cisco‘s Organizational Culture by R.N. Ajit Shankar, under the direction of Sanjib Dutta, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

7. Economic Development: India Vs. China – This Single Page version of the case has been prepared by Hadiya

Faheem based on the original case India Vs. China by Mylavarapu Vinaya Kumar, under the direction of D. G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

8. Nationalization of the Bolivian Oil & Gas Sector – This Single Page version of the case has been prepared by

Hadiya Faheem based on the original case Bolivia Nationalizes the Oil and Gas Sector by Soorya Tejomoortula and Rajiv Fernando, under the direction of Ramalingam Meenakshisundaram, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

9. Inflation in India: Its Causes and Impact – This Single Page version of the case has been prepared by Hadiya

Faheem based on the original case Reining in Inflation in India: Options for a Developing Economy by Saradhi Kumar Gonela, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

10. Brazil: Transforming into a World Economic Power? - This Single Page version of the case has been prepared by

Hadiya Faheem based on the original case Brazil- A World Economic Power in the Making by Mylavarapu Vinaya Kumar, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

11. Mercosur: Hampering Free Trade between Developing Economies? – This Single Page version of the case has been

prepared by Hadiya Faheem based on the original case Brazil- A World Economic Power in the Making by Mylavarapu Vinaya Kumar, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

12. Life Insurance Corporation of India: The Undisputed Leader – This Single Page version of the case has been

prepared by Hadiya Faheem based on the original case Life Insurance Corporation of India: Future Prospects by K. Subhadra, under the direction of A. Mukund, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

13. Challenges Faced by the Indian Microfinance Industry - This Single Page version of the case has been prepared by

Hadiya Faheem based on the original case Microfinance Industry in India by Adapa Srinivasa Rao, under the direction of Debapratim Purkayastha, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

14. The Franchising System at McDonald‘s – This Single Page version of the case has been prepared by Hadiya

Faheem based on the original case McDonald‘s Franchising Practices by D.G. Prasad, under the direction of Sanjib Dutta, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

15. India‘s Challenges with WTO‘s Information Technology Agreement – This Single Page version of the case has

been prepared by Hadiya Faheem based on the original case Can India Make ‗IT‘? by Mylavarapu Vinaya Kumar, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

16. Brilliance Auto‘s Technology Transfer Agreements with Global Automakers – This Single Page version of the case

has been prepared by Hadiya Faheem based on the original case Brilliance Auto: A Chinese Automaker with Global Ambitions by V. Namratha Prasad, under the direction of S. S. George, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

17. Financial Institutions: Coping with the Challenges of Global ATM Frauds- This Single Page version of the case has

been prepared by Hadiya Faheem based on the original case A Report on Global ATM Fraud by Omer Ahmed Siddiqui and Soorya Tejomoortula, under the direction of Rajiv Fernando, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

18. Pfizer‘s Patent Litigations in China – This Single Page version of the case has been prepared by Hadiya Faheem

based on the original case Pfizer‘s Intellectual Property Rights Battles in China for Viagra by Debapratim Purkayastha, under the direction of Rajiv Fernando, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

19. Regulatory Environment for the Sustainable Development of the Wind Energy Industry in the US and Canada – This Single Page version of the case has been prepared by Hadiya Faheem based on the original case Wind Energy

Industry in the US and Canada: A Note on the Regulatory Environment by Omer Ahmed Siddiqui, under the direction of Ramalingam Meenakshisundaram, IBS Hyderabad. Ó 2015, IBS Center for Management Research. .

20. Tax Problems for Cairn Energy in India - This Single Page version of the case has been prepared by Hadiya

Faheem based on the original case Cairn Energy: A Tryst with the Indian Market by Mylavarapu Vinaya Kumar, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research. .

21. Value Added Tax in India – This Single Page version of the case has been prepared by Hadiya Faheem based on

the original case India: Before and After VAT by Mylavarapu Vinaya Kumar, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

22. The Rise and Fall of Huang Guangyu – This Single Page version of the case has been prepared by Hadiya Faheem based on the original case Huang Guangyu: Gome Founder‘s Fall from Grace by Indu Perepu, IBS Hyderabad. Ó

2015, IBS Center for Management Research. .

23. Unfair Trade Practices at Christie‘s and Sotheby‘s – This Single Page version of the case has been prepared by

Hadiya Faheem based on the original case Ethical Issues at Christie‘s by Sachin Govind, under the direction of Sanjib Dutta, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

24. Government of India Files Suit for Damages against Union Carbide – This Single Page version of the case has been

prepared by Hadiya Faheem based on the original case Bhopal Gas Tragedy: Revisited after Twenty-five Years by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Hyderabad. Ó 2015, IBS Center for Management Research..

25. The NTPC-RIL Contract Agreement Dispute – This Single Page version of the case has been prepared by Hadiya

Faheem based on the original case NTPC–Reliance: Conflict over Gas Supply by Jagadeesh Napa, under the direction of Jitesh Nair, IBS Hyderabad. Ó 2015, IBS Center for Management Research..

26. Collective Bargaining Deal between General Motors and United Auto Workers – This Single Page version of the

case has been prepared by Hadiya Faheem based on the original case Collective Bargaining: The General Motors-United Auto Workers Deal by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

27. Data Privacy Issues in the Indian BPO Industry – This Single Page version of the case has been prepared by Hadiya

Faheem based on the original case A Report on Information Security and Data Privacy in the Indian BPO Industry by Omer Ahmed Siddiqui, under the direction of Rajiv Fernando, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

28. Facebook‘s Initial Public Offering to Fund Future Growth – This Single Page version of the case has been prepared

by Hadiya Faheem based on the original case Facebook‘s IPO and Future Growth Strategies by Adapa Srinivas, under the direction of Debapratim Purkayastha, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

29. Microsoft Raises Debt to Make Dividend Payments – This Single Page version of the case has been prepared by

Hadiya Faheem based on the original case Microsoft Corporation: Dividend Policy by Nitya Nand Tripathi, under the direction of D. Satish, IBS Hyderabad. Ó 2015, IBS Center for Management Research. .

30. IDBI Merges with IDBI Bank – This Single Page version of the case has been prepared by Hadiya Faheem based on the original case –IDBI‘s Merger with IDBI Bank by Chinmayee N., IBS Hyderabad. Ó 2015, IBS Center for Management Research. .

31. Adidas Merges with Reebok – This Single Page version of the case has been prepared by Hadiya Faheem based on

the original case The Adidas - Reebok Merger by Mikkilineni Pushpanjali, under the direction of N. Ruchi Chaturvedi, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

32. Housing Finance Industry in India at the Crossroads – This Single Page version of the case has been prepared by

Hadiya Faheem based on the original case The Indian Housing Finance Industry at the Crossroads by K. Subhadra, under the direction of A. Mukund, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

33. Debt Crisis in Greece - This Single Page version of the case has been prepared by Hadiya Faheem based on the original case Greece‘s Sovereign Debt Crisis by Saradhi Kumar Gonela, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

34. The Indo - Mauritius Double Taxation Avoidance Agreement – This Single Page version of the case has been

prepared by Hadiya Faheem based on the original case Exploitation of Indo - Mauritius DTAA by Mylavarapu Vinaya Kumar, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

35. Software Sales Attracts Sales Tax: The Battle between TCS and the Supreme Court of India – This Single Page

version of the case has been prepared by Hadiya Faheem based on the original case Exploitation of Indo - Mauritius DTAA by Mylavarapu Vinaya Kumar, under the direction of D.G. Prasad, IBS Hyderabad. Ó 2015, IBS Center for Management Research.

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