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Industrial Finance | Meaning, Functions, Need, Types & Sources

Industrial Finance


What is Industrial Finance ?


Finance has been aptly described as the life blood of industry. It is a pre-requisite for the mobilization of real resources to organise production and marketing. The provision of adequate finance is of basic importance for the smooth working of the industries and for their expansion.

Meaning of Industrial Finance


The industrial finance pertains to the financial system that provides financial resources for the conduct of industrial activities. The need is for different types of finance and an efficient financial system that adequately finances production and enhances industrial capacity.

The industrial finance refers to the provision of finance for the conduct of activities connected with the production of industrial goods. Production activities involve such diverse activities as construction of building, manufacture of machines, supply/procurement of raw materials, engagement of labourers etc. These activities are undertaken to produce investment-goods and consumption-goods. All these activities imply the use of real/physical resources for production.

In certain cases a part of the physical resources is supplied by producers themselves. An artisan, for instance, may supply his own labour or that of his family. This involves no hiring (or no financing) of labour. But even he will have to purchase other resources for which he will need finance. He may, however, provide finance for himself. In case this does not suffice, he will have to depend upon outside agencies for finance. Again, ins other cases too, organizers of production may to some extent provide finances themselves. But such cases are too few and are limited to small individual enterprises or partnership organisations.

Functions of Industrial Finance


Industrial finance is a very complicated problem. Its management is of vital importance because the development of any country depends largely on the industrial development of that country's economy. The term industrial finance is used to denote the organisation of various types of finance needed by industries for carrying on their activities connected with the production of goods and services. The activities in relation to production include construction of buildings, purchase of machines, their repairs, buying raw materials, payment of wages etc. In the case of large-scale industries, the provision of the entire capital required for an industry by an individual or a few individuals is out of question. Therefore, the provision of finance for industries is done through institutions such as banks, money market and capital market. There are various important functions of industrial finance these functions are as follows :

1) To provide Financial help or support : 
For the improvement of each business there is need of finance. To fulfill the general and salient/ basic needs of the industry or business the financial support or help is must. Industrial finance provides financial support to business. 

2) Help for Standing the new Industries :
To build up a strong economy of any country, there must be a need of standing new industry or business that economic area with present industry or business. Industrial finance plays vital important role in helping for standing the new industries.

3) Renovation and Modernization of the present business or industry : 
21st century is considered as science and technology and also the information technology. Due to the evolution in the science and technology the continuous changes in the business technology and concept takes place. So, if there is impact or effect of these changes takes place on the total product then there is need of renovation and modernization in the business. To fulfill this technology and modernization need the industrial finance plays an important role.

4) To fulfill the procedures before and after production :
When any industry is established it has to go through the various procedures during start of the exact production. There should be the fulfillment of the procedures likes, building, machinery, raw materials, market, distribution and marketing before production and after production. For the purpose of fulfill these needs industrial finance plays vital role.

5) To promote Research and Development :
According to the world change there must be modernization in the industrial technology, management system, economic and budget control system For this the research and development is so important. To promote this there is need of finance. Through the medium of industrial finance the research and development is promoted in brief it is said that the various needs of the industrial procedures are fulfill by the industrial finance very well.

6) Provide Direct Assistance : 
It provides direct assistance to industries in the form of Term Loans and this is one of the important functions of industrial finance.

7) Encourages to Corporate :
It encourages the New as well as the existing corporate to raise capital through different types of securities.

8) Project Financing :
It finances the projects of self-employed, handicapped and blind people. It provides refinancing facilities to State Financial Corporations.

Need & Types of Industrial Finance


Finance is usually referred to as the life-blood of industry. It is a pre-requisite for mobilizing real resources to organise production and marketing. Depending upon the type of activity to be financed, industries require short-term, medium-term and long-term finance. Depending upon the nature of the activity to be financed, business requires short-term, medium - term and long-term finance.

1) Short-term Finance :
Short-term finance usually refers to the funds required for a period of less than one year. Short-term finance is usually required to meet variable, seasonal or temporary working capital requirements. Borrowing from banks is very important source of short-term finance. Other important sources of short-term finance are trade credit, installment credit and customer advances.

2) Medium-term Finance :
The period of one year to five years may be regarded as a medium-term. Medium-term finance is usually required for permanent working capital, small expansions, replacements, modifications, etc. Medium-term finance may be raised by :
  • Issue of shares
  • Issue of debentures
  • Borrowing from banks and other financial institutions
  • Ploughing back of profits
Although medium-term financial requirement may be met by issue of shares, this source is of long-term nature.

3) Long-term Finance :
Periods exceeding 5 years are usually regarded as long-terms. Long-term finance is required for procuring fixed assets, for the establishment of a new business, for substantial expansion of existing business, modernization, etc. The important sources of long-term finance are :
  • Issue of shares
  • Issue of debentures
  • Loans from financial institutions
  • Ploughing back of profits
The progress of all types of industries entirely depends on the availability of capital and may be held up, if adequate supply of capital is not ensured. In fact tile industrial development in India was held up because of the short supply of capital for a pretty long time. Normally, the supply of capital or finance comes from the commercial and other types of banks, the individuals and the money lenders and the capital markets.

Sources of Industrial Finance


There are Internal and External Sources of Industrial Finance these are explained below :


Internal Sources of Industrial Finance


1) Internal Self-finance :
One source, quantitatively of big importance, is the saving of the unit itself t may be the household, the business of the government. Normally, the household not only invests out of its own saving but it also has surplus which it lends to other units via financial institutions like banks, capital market etc. The saving of the business, comprised of depreciation and the retained earnings, is normally short of its investment. Hence, it also borrows from financial institutions.
Government too finances a part of their investment from internally generated funds. These arise from the excess of tax and other income over consumption spending plus transfers. For the shortfall, if and when it occurs, it also borrows from the financial system. Altogether, roughly half of all investment is self-financed. An advantage of investment through internally generated funds is that it combines the acts of saving and investment. As such certain costs are internalized and reduced. These costs pertain to collection of information in respect of borrowers, transactions with them, monitoring the use of funds, and enforcement of the conditions of borrowing. These costs would have to be met if these funds were to be lent to someone else, Self-financing also reduces the risks of lending as it does not involve preparation of documents in respect of contract, collateral or security etc. The shortcoming of this source is that it may fall short of investment opportunities or its use may be inefficient i.e. funds may not be wholly or partly invested in the most productive lines.

2) Equity, Debentures and Bonds : 
A large part of finance for fixed investments (buildings, machines, etc.) comes from different types of equity or shares such as ordinary, cumulative and non cumulative preference shares. These shares bear risks of different degrees and are tailored to suit the temperament of different investors. The latest trend is to issue shares in small denominations of ten rupees so as to enable the largest number of people to participate in providing long-term finance. The creditworthiness of promoters of industries and profitability of industries, determine the extent to which savers invest their money in shares. In this way, industries are not burdened with interest, and therefore do not get involved in complications on this account during recession or depression.
Often industrial companies also get long-term finance through the issue of debentures. The buyers of these debentures are the creditors of companies. They get a fixed rate of interest on the money invested in debentures. For this reason debentures are safer investments. Till recently, these debentures were not very popular. At present many industries are tapping this source. Public sector undertakings too have started depending upon the capital market. Since recently they have raised funds through the sale of bonds bearing fixed interest.

3) Public Deposits :
Another source is public deposits. Under this system, people keep their money as deposit with these companies or managing authorities for a period of six months, a year, two years, three years or so. Depositors receive a fixed interest. They can ask for the refund of money at any time. This money is used by companies to meet their needs of working capital. However, this source of finance is unreliable because depositors can seek refund at any time. And if the refund happens to coincide with the time when a company needs funds most, then it complicates matters. With the growth of banking habits and increase in dealings with other financial institutions, the importance of public deposits, as a source of finance, should decline.

4) Loan from Banks :
Commercial banks can and do provide funds for working capital. Loans are given against the guarantee of government securities and stocks with companies. Loans are advanced in the form of overdraft and cash. Commercial banks are generally reluctant to put their money in the purchase of shares. The reason is that the deposits that they receive from the public are generally for a short term and, therefore, banks can ill-afford to take any risk in investing public money in shares. They can, however, do something by way of buying debentures of companies. They can earn fixed interest on such an investment and at the time of need they can sell these debentures in the market and recover their money. Still, little has been achieved in this field because of the fear that banks may find it difficult to cash debentures precisely at a time when they need.

5) The Managing Agency System :
This system of industrial finance, peculiar to India, and which prevailed in the recent times, is of little importance nowadays. Under this system an individual or a group of individuals finance the initial stage of the establishment of industries, and manage many activities of the company thus established. Very often, one managing agent controls more than one concern and uses funds of one concern to meet the needs of others under him.
In the past, when there was great shortage of industrial finance and almost complete lack of financial institutions, and capital market in the real sense had not even come into existence, managing agents did render a valuable service in the promotion of industries within the country. Of course, it is true that their funds were mostly used for the establishment of consumer goods industries.
In due course, however, the system developed certain drawbacks and came to be plagued by serious shortcomings. The management of so many units- good and bad and producing a variety of products-led to certain evils. The payments. which managing agents extracted for themselves-interest on their money, commission for their services etc., were too much and were out of proportion with the paying capacity of the companies and/or the work performed by these agents. It is for these reasons that the government in 1970 put a ban on this system. 

6) Indigenous Bankers :
In spite of the establishment of new financial institutions, indigenous bankers also advance financial help to a few large-scale industries, particularly during the time of stress, both for fixed capital and working capital. But mainly they have provided finance to small-scale industries. In the absence of adequate institutional finance, these industries have been forced to depend upon indigenous bankers These banks charge a very heavy rate of interest, thus making finance a costly affair. However, the importance of these banks, even as a source of finance for small industries, is on the decline.

7) Development Finance Institutions : 
Established with the help of the government to fill in the gaps in industrial finance and to promote the objectives of planning, these institutions cater to the needs of large and small industries. The new institutions supplying industrial finance are the Industrial Development Bank of India, Industrial Finance Corporation of India, Unit Trust of India, General Insurance Corporation of India, Industrial Reconstruction Bank of India, 18 state financial Corporations and 26 state Industrial Development Corporations. These institutions provide huge amounts of finances for setting up of new industries, for meeting their several needs and in several forms. These also ensure and monitor the use of finances in pre-planned directions. As such these fit well with the modern scenario of industrial development.

8) Ploughing Back of Profit :
The most suitable method of financing for an existing and well-established company is the policy of retaining a portion of net profit. A new company has to raise capital from external sources-shares, debentures, loans, bank loans and loan from other financial institutions. Financially, sound undertaking can meet its financial need out of its own savings generated in its regular work.
The process of using the past net profit for financing the business operations of a company is often referred to as ploughing back of profits or self-financing. It is reinvestment of company's own surplus earnings. The entire net profit is not distributed among the shareholders. A reasonable part of it is transferred to reserves and surplus. The accumulated reserves can be utilized for accelerating the business of the company. Ploughing back of profits is also known as self financing or internal financing.

External Sources of Industrial Finance


Following are the foreign sources of industrial finance :
A) Foreign Direct Investment
B) Institutional Investment
C) Non-Resident Investments
As a supplement to domestic finance, external capital too has been made use of in meeting the needs of industrial finance. They are used mostly for long-term needs. This has taken on several forms. There is the foreign aid from foreign governments and foreign institutions extended to Indian Government. A part of this assistance has also gone to the private sector. A part of foreign funds has come through foreign companies which have Indian subsidiaries in our country or through multinational corporations which have branches in India. There are also non-resident Indians who have invested in collaboration with Indians. These sources are discussed below:

A) Foreign Direct Investment :

The long-term capital investment is defined as Foreign Direct Investment (FDI). FDI does not create debt. The word "Direct show that it can give direct control to the investor across nation's borders. Depending on the type of investment the investor could get direct control on the investing company. Outside control is the fear of host country. On the other hand FDI by nature is short-term and mostly speculative in nature. FPI may be removed suddenly. FPI may be risky to national economies. Hence, it may be seen that FDI could bring loss of control to the host country whereas FPI is risky and speculative. FDI has more control and FPI has less control. Both FPI and FDI have different perceptions of risks.

Need of Foreign Direct Investment (FDI) :

The important criteria of growth of an economy are gross domestic product, its rate of growth and its international trade and its rate of growth. To achieve better results the nations desire to acquire more resources. As noted earlier capital is a vital resources which can help quickly growth of industries. production of goods and services. With the resources within the developing nations the process may be long. In the globalization the countries are making special schemes and provisions to attract FDI. Example; countries like Malaysia, Korea and Taiwan built up their exportable surplus and built up strong economies. India followed a policy of closed economy and discouraged FDI till 1990, lack of capital and smaller production units as compared to global size reduced the progress of Indian economy for four decades during the plan period. Now developing nations including India are encouraging FDI The global economy is moving towards mobility of global resources for reducing costs of products.

Benefits of Foreign Direct Investment :

Countries are now inviting FDI for production of goods and services. The advantages are many and are detailed hereunder:

1) Gives Ready Capital :
The capital can be deployed immediately to increase production of basic, consumer good and services. Thus, help in growth of industrialization and economy. It is particularly true of developing countries. The size of the industry and quality can match the global requirements.

2) Help in Larger Enterprise and Global Size : 
Inflow of large capital brings large companies of global size. Example: There are many textile companies in Sri Lanka and China exclusively built for global markets. These are funded and run on the technologies provided by companies from USA.

3) Nucleus of Growth :
New large companies generate more business and more down stream industries. It also develops that help ancillary industries and service providers. There will be growth of domestic investment. All the positive give rise to economic development in the host country.

4) Generates Healthy Competition :
FDI generally flow to efficient and successful industries in the host country. The competition between the countries to get FDI brings in efficiency. The chain of actions for the improvement improves productivity of the industries in the host country. The FDI can be complementary if the goods produced by the FDI are new and not produced by the host country earlier. MNCs introduce new product by FDI route to capture new markets. FDIs may come for the existing product. These are called substitute FDI.

5) Pushes Domestic Investment :
FDI bring new morale and ways of improvements in the industry. FDI what stronger impact on domestic investment than Foreign loans or foreign portfolio investment. It builds confidence level in the economy and pushes domestic investment to higher levels. Example; growth of Indian share markets in last one decade.

6) Boosts Economy :
The economy of the host country gets a boost of development. More FDI brings in more world class companies, products and consequently Foreign exchange. FDI spurs output of both domestic and export goods and services. These in turn increase GDP and per capital incomes. The FDI gives multiplying effect on economy. The consistent good growth of economy attracts more FDI and the cycle continues. 

7) Green Field Investments :
New FDI in new companies or new products is called green field investments. FDI here does not replace the existing FDI. The new companies or new products will have larger spread effect on economy as compared to investment in brown field that is expansion of existing industry. If the products from Green field FDI are better quality and cheaper in cost then domestic existing industry suffers.

8) FDI for Mergers and Acquisition :
Here a company of host country is purchased by FDI. No new company is made and no change in products. Large MNC purchase companies in developing countries by their money power. If the efficiency does not increase or if exports do not increase then there is no benefit to host country. The host country looses a good local company by FDI mergers and acquisition. With large scale mergers and acquisitions, the economic power goes and will have its effect on political domain. The policy makers of developing countries fear and guard against FDI mergers and acquisitions.

9) Growth of Market :
FDI increase long reach in global markets, facilities open for knowing global customer base and their preferences. The network enlarges to many countries and markets grow. FDI flow of capital gives enhanced networking; hence the knowledge influence and size of markets grow to the advantage of the company.

10) Productivity Gains :
FDI brings productivity to the companies in the host country in many points :

a) Increase in Size of the Company : 
The companies will be global size. There will be improvement in quality and productivity. The bench marking will be to good companies in the world.

b) Proper Utilization of Resources:
Competition brings in best use of resources globally. The transportation costs will be saved, as new companies will be located near the raw materials or near the customers.

c) Attention on Market:
Closer understanding of the business. Business processes leading to focused attention to markets.

d) Research and Development:
The research and development activities will develop and knowledge sharing helps in bringing new products and value addition to existing products. 

11) Gains in Technology :
FDI in most of the cases is accompanied by improved or current technology. The technology brings know-how, new equipment's and facilities. The employees will be trained in use of new equipment and method. Example; A semi conductor plant that is built with FDI will have lot of new technologies that are given to host country.

12) Generate Enhanced Employment :
More new companies more products means enhancement of business. All this leads to more employment in host country.
Examples :
  • Many MNCs have come to Bangalore in IT industry like Intel, IBM, Toyota. The FDI in these sectors particularly in IT and BPO has increased employment in Bangalore.
  • MNCs that have gone to Chennai: Hyundai Motors, Nokia and the like have increased employment in Chennai.
The employment is not only in the MNC units but also in other product and service companies that help the main unit. For every one direct employment usually there will be five supporting employments like transport, shops, repairers supplier of components. With better employment the economy improves.

13) Improves Culture and Systems :
FDI generally flows from developed world to developing countries. FDI bring in better management skills, global marketing strategies, skills and systems.
Examples :
  • Toyota brought their top quality skills to Toyota Indian Company. 
  • Bosch introduces German technologies and systems in their Indian company.
The MNC introduce new skill by good training programmes and guidance. FDI also bring change of attitudes and a production culture for better world class level. 

14) Boosts Export of the Host Country :
The developing countries welcome FDI for it generates the hard currency by exports. The FDI in service sector increases export of services. The MNCs help in exports by acting as guarantors and intermediaries between the host country and the customers through their overseas facilities.

B) Foreign Institutional Investment :

Capital is the soul of every business. For the rapid development of a country, the flow of capital from well developed countries to developing countries or under developing countries is very necessary. Due to the smooth international relations and international monetary co-operation, there is the flow of capital from developed countries to underdeveloped countries. Such capital is necessary for the growth of the business sector in India. Every country had relied on the foreign investment for its development during the early stages of development. When there is scarcity of finance for business, foreign capital plays an important role in the formation of capital required for the business. Such foreign capital fills the shortage of capital required for the development.
This flow of capital, smooth international economic relations and co-operation to a certain extent has become possible because of certain international organisations such as UNO, IBRD, etc. The inflow of foreign capital really creates the basis for long term industrial and economic development and the problem of shortage of capital is solved by the foreign direct investment by different institutions in India. These foreign institutions are as follows :

1) International Monetary Fund (IMF) : 
IMF was established in December 1945. There were 29 member countries in this fund World Bank and IMF were established as result of the Bretton Woods Conference. This fund is governed by the Board of Governors consisting of one representatives and one alternative representative for each member country. A Board of Executive Directors looks after the day to day affairs of the fund. This board consists of 16 members. They are representatives of 16 elected countries and 6 nominated countries. Its secretariat is in Washington.

Objectives of International Monetary Fund (IMF) :
  • International monetary co-operation.
  • Expansion of world trade.
  • Exchange rate stability.
  • To solve balance of payment difficulties. 
  • To maintain international liquidity.
  • Orderly international relations.

2) World Bank or International Bank for Reconstruction and Development (IBRD) :
It was founded in July 1944. It began its operation in June 1946. To assist the economic development of its member countries and to raise the standard of living of the people of the world, is the aim of this bank. Its purpose is to provide capital for productive purpose and to promote private foreign investment by means of guarantees or participation in loans. The loans are granted by World Bank in four stages. These stages are as follows :
  • Discussion about the repayment capacity of the borrower. A mission is sent by the bank to study the country's agricultural, mineral and industrial resources position.
  • Investigation about the specific projects starts.
  • Negotiation of the terms of the loan begins.
  • The administration of the loan where end use is verified.

3) International Development Agency (IDA) :
It is an affiliate of the World Bank. It was started in 1960. Its aim is to make soft loans different from the conventional loans of IBRD. It is to supplement the development efforts. The membership is open for all member countries of the World Bank.

4) International Finance Corporation (IFC) :
This is managed by a Board of Governors to be constituted by Board of Governors of World Bank. However, it is separate and independent organisation. Its funds are kept separate from the funds of World Bank. It functions as an affiliate of the World Bank.
Its major objectives are to further economic development by encouraging growth of productive private enterprise in the member countries. It makes investment in partnership with private investors. It serves as a clearing house to bring together investment opportunities, private capital or both foreign and domestic and experienced management.

5) Asian Clearing Union (ACU) :
It was established on 9th December 1994. It has its Head Quarter at Teheran.

Objectives of Asian Clearing Union (ACU) :

The objectives of ACU can be given as follows :
  • To facilitate payment for current international transactions within the ESCAP region on a multilateral basis. 
  • To reduce the use of extra-regional currencies to settle such transactions by promoting the use of the participants currencies.
  • To effect economy in the use of foreign exchange and a reduction in the cost of making payments for such transactions. 
  • To contribute to the expansion of trade and promotion of monetary co-operations among the countries of the area.

6) Bank for International Settlement (BIS) :
It was founded in 1930. Its aim was to facilitate the reparation of damages caused by the First World War and to streamline the financial co-operation among Central Banks. This was founded by the Central Banks and not by the Governments. It developed into an organisation. It provides additional facilities for international financial operations. It functions as an important medium for international financial settlements. It is governed by international law. It functions as a depository of Central Bank's Funds. In the same way, it functions as a manager of foreign exchange reserves of Central Bank. It accepts deposits in gold and inter-bank settlements. It gives monetary and financial co-operation.

C) Non-Resident Investments :

India is a developing country. The essential of the business is the sources of capital. To develop the business in India, capital investment is necessary. Such capital can be raised through the flow of foreign capital. Such an investment is very essential. Every country had to rely on the foreign investment for its development during the early stages of development. Foreign capital is essential for the development of economic potentialities in under-developed or developing countries. India is one of these developing countries. So, the foreign investment have great importance in India. The investment by non-residents of Indian origin have assumed great importance in recent years.

Definition of Non-Resident :

For the purpose of providing facilities and incentives for investment a non-resident of Indian origin means :
  • An Indian citizen also has made his permanent residence or home outside India,or
  • Who has proceeded abroad for employment or gainful occupation, or
  • An Indian who has made his permanent house outside India and acquired foreign citizenship, or
  • The descendant of an Indian who had migrated from undivided India.

Need for Non-Resident Investments (NRIs) Equity Participation : 

The inflow of foreign capital serves various purposes. They are as follows :

1) Increase in Rate of Saving : 
The rate of saving in an under-developed country is too small to generate self sustaining rate of economic development. Under-developed countries find it difficult on their own, to get out of the vicious circle of low income resulting in a low rate of capital formation. This coupled with low productivity of labour leads to low income. So, it is essential to augment the domestic savings by external resources.

2) Technical Know-how :
An under-developed country is deficient not only in capital but also in skills. and in trained, technical manpower. External assistance can by bringing in technical experts and technical know-how bridge the gap between the need for and supply of technical knowledge as well as of trained personnel to carry through the programmes of industrialization.

3) External Assistance :
External assistance has a vital role in supplying to under-developed countries the fruits of years of scientific and industrial research accomplished by the older industrialized countries.

4) Strengthening the Industrial Structure :
External aid makes it possible to run a deficit in the balance of payments, caused due to the import of capital goods and other equipment required for strengthening the industrial structure.

5) Quick Development :
External assistance enables to plan for quicker development without the inherent inflationary pressure of the development outlay. It is anti-flationary in character.

Incentives and Facilities to the Non-Resident Investments :

Liberal facilities are available for NRIs for investment in India. They can invest their money in Indian industries. In the same way the funds can be brought in through normal banking channels as well as amounts lying in their non-resident accounts. In order to increase the flow of foreign exchange in our country through NRIs, the Reserve Bank of India framed various schemes, and provided them certain facilities. They are given various incentives with certain restrictions. They are as follows :

1) Accounts in Indian Banks :
NRIs can open accounts in Indian Banks. The people can open their accounts by selling their foreign currency. To withdraw money from these accounts. They have to take prior permission of the RBI. The deposits in these accounts can be used for local disbursement or purchasing Government securities.

2) Investment in Government Securities :
The NRIs can invest their money in purchasing the Governmental securities and units of UTI.

3) Investment in Industry :
The NRIs are given facilities which are classified into two groups :

i) Investment on Non-Repatriation Basis :
  • NRIs can make investment in Government securities, units of UTI etc.
  • They can invest in foreign currency bonds or deposits certificates. 
  • They can invest in proprietary or partnership firm.
  • They can make investment in shares or debentures of companies through stock exchange.
  • They can make investment in the issues of Indian Companies.
  • They can invest in deposits with companies.

ii) Investment on Repatriation Basis :

The NRIs can make investment in :
  • Government securities and units of UTI.
  • Shares or debentures.
  • New issues of Indian Companies under 40% scheme or 74% scheme or 100% scheme.
iii) Sick industrial units.
iv) Deposits in public limited companies.

For this purpose they have to purchase the shares through stock exchanges scripts to be retained by them for minimum one year. They can also invest in non-convertible debentures through stock exchanges or even in convertible debentures. Through stock exchanges with repatriation benefits upto 1% of the total paid up capital.

Tax Incentives for Non-Resident Investments (NRIs) Investors :

NRIs are given some tax incentives. Following are some of the tax incentives given to NRIs : 

1) Exemption from Tax :
Total exemption from income tax of interest income from NRI and FCNR accounts.

2) Dividend Income :
Dividend income from units of UTI is free from income tax.

3) Flat Rate on Income : 
Flat rate of 20% on income derived from shares, debentures and deposits of public limited companies.

4) Interest Income :
Interest income from National Saving Certificates and other Specified Government Securities.

5) Flat Rate on Long-Term Capital Gain :
Flat rate of 20% on long-term capital gains derived from the transfer of foreign exchange assets.

6) No Gift Tax :
No gift tax on gifts to the relatives of NRIs.

7) Wealth Tax Exemption :
Wealth tax exemption for 7 years on assets brought by the NRIs at the time of his or her return to India for permanent settlement.

8) Free from Wealth Tax :
Balances held in non-resident external accounts in India are free from wealth tax.

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