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POLITICAL RISK Developed By:- Sandep Singh Sikerwar
<ul><li>Government action to deny or restrict the right of an investor or owner:- </li></ul><ul><ul><li>1. To use or benef...
<ul><li>CONFISCATION:-  Taking of the private property by government without any offer of compensation, on the ground that...
<ul><li>CURRENCY INCOVERTIBILITY:-  Restrict the right of foreign firms to repatriate(send home) profits to their home cou...
<ul><li>NATIONALIZATION:-  Action of government to transfer private property to the government. Compensation offered with ...
<ul><li>Forecast links the act resulting the loss to the cause of the act or predictors of the cause. </li></ul><ul><li>Fo...
<ul><li>Internal causes:-  </li></ul><ul><ul><li>Fractionalization of the political spectrum & the power of these factions...
<ul><li>TYPE III:-  To project losses or the actions which account for the losses themselves out into the future. </li></u...
<ul><li>Risk Management by the multi-national enterprise is required at 3 stages </li></ul>Before an investment is made in...
<ul><li>DICHOTIMIC DECISIONS:-  To invest or not to invest abroad. </li></ul><ul><li>ASSIGNING A RISK PREMIUM:-  Since ris...
<ul><li>Not to localize the whole production process in the same country; </li></ul><ul><li>To integrate local products </...
<ul><li>Public authorities in several countries for insuring the risk inherent in foreign operations. </li></ul><ul><ul><l...
<ul><li>Determination of the amount of compensation; </li></ul><ul><li>Modalities of payment indemnities; </li></ul><ul><l...
<ul><li>Internal Means:- </li></ul><ul><ul><li>By reducing the exports to such a country. </li></ul></ul><ul><ul><li>Explo...
<ul><li>“ Buying back debt”,  repurchase the debt, when there is a grave uncertainty about its recovery. </li></ul><ul><li...
<ul><li>Analysis aims at evaluation & anticipation of the capacity of the potential host country to meet its financial obl...
<ul><li>Contract Repudiation Coverage:-  Provides insurance coverage for non-compliance with contracts by a foreign govern...
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Political Risk

all about political risk in business

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Political Risk

  1. 1. POLITICAL RISK Developed By:- Sandep Singh Sikerwar
  2. 2. <ul><li>Government action to deny or restrict the right of an investor or owner:- </li></ul><ul><ul><li>1. To use or benefit from his/her assets, or </li></ul></ul><ul><ul><li>2. Which reduce the value of a firm. </li></ul></ul><ul><li>Well known political risk includes:- war, revolutions, government seizure of property & action to restrict the movement of profits or other revenues from with in country. </li></ul><ul><li>Impact:- </li></ul><ul><li>Total destruction of assets(war) </li></ul><ul><li>Operate without the right to return profits to a home country. </li></ul><ul><li>Taking of private property for social good. </li></ul>
  3. 3. <ul><li>CONFISCATION:- Taking of the private property by government without any offer of compensation, on the ground that foreign firm are exploiting the country & relation between the government & foreign country are to much strained. </li></ul><ul><li>CONTRACT REPUDIATION:- Contractor entering into the contract with a foreign government only to find that the contract cannot be fulfilled, terminating contract without showing cause, refuse to pay for delivered goods, cancels the contractor’s license to operate or otherwise causes cancellation of the contract. </li></ul>
  4. 4. <ul><li>CURRENCY INCOVERTIBILITY:- Restrict the right of foreign firms to repatriate(send home) profits to their home country. Because of passage of new laws or administrative slowdown( bureaucracy of a foreign country slows the process to convert the currency & it become financial burden to foreign owned companies . </li></ul><ul><li>DISCRIMINATORY TAXATION:- charging higher tax rates to the foreign companies than for domestic companies. </li></ul><ul><li>EMBARGO:- To prohibit or forbid the movement of certain or all goods to a certain country or countries. </li></ul><ul><li>EXPROPRIATION OF PROPERTY:- Seizure of the private property owned by a foreign company with compensation being offered, aimed at specific company. </li></ul>
  5. 5. <ul><li>NATIONALIZATION:- Action of government to transfer private property to the government. Compensation offered with no guarantees that it will be sufficient to pay for loss of value & future profits of the nationalized firm. </li></ul><ul><li>WAR RISK:- Actual damage caused by way, rebellion, insurrection, invasion or use of military force to invade sovereign territory with the intent of exerting governing control. </li></ul><ul><li>WRONGFUL CALLING OF GUARANTEES:- Companies required to put up a good faith guarantee of their performance before being allowed to begin work on a contract for a foreign government. </li></ul>
  6. 6. <ul><li>Forecast links the act resulting the loss to the cause of the act or predictors of the cause. </li></ul><ul><li>Forecast have 4 basic form:- </li></ul><ul><li>Type I:- Correlation from the current attributes of countries, attributes that are deemed significant correlates of future trouble are scored to create an index that should project 10 an equivalent level of danger to the firm. </li></ul><ul><li>Type II:- Asks experts to project the attributes out into the future. Intelligence(BERI) Political Risk Index is an example of type II. Based on 10 variables divided into 3 categories “ internal causes”, “ external causes” & “ symptoms” of political risk. </li></ul>
  7. 7. <ul><li>Internal causes:- </li></ul><ul><ul><li>Fractionalization of the political spectrum & the power of these factions </li></ul></ul><ul><ul><li>Fractionalization by language, ethnic &/or religious groups & the power of these factors; </li></ul></ul><ul><ul><li>Restrictive (coercive) measures required to retain power. </li></ul></ul><ul><ul><li>Mentality including xenophobia, nationalism, nepotism & willingness to compromise; </li></ul></ul><ul><ul><li>Social conditions, including population density & wealth distribution; </li></ul></ul><ul><ul><li>Organization & strength of forces for a radical left government. </li></ul></ul><ul><li>External Causes:- </li></ul><ul><ul><li>Dependence on &/or importance to a hostile major power, </li></ul></ul><ul><ul><li>Negative influences of regional political force. </li></ul></ul><ul><li>Symptoms of political risk:- </li></ul><ul><ul><li>Societal conflict involving demonstrations, strikes & street violence. </li></ul></ul><ul><ul><li>Instability as perceived by non constitutional changes, assassinations & guerilla wars. </li></ul></ul>
  8. 8. <ul><li>TYPE III:- To project losses or the actions which account for the losses themselves out into the future. </li></ul><ul><li>TYPE IV :- Provide distinct approach where future governments are projected by the analysts & then the behaviors of those governments towards business are similarly projected. </li></ul>
  9. 9. <ul><li>Risk Management by the multi-national enterprise is required at 3 stages </li></ul>Before an investment is made in a foreign country During the life of the investment, once made; While negotiating for indemnity in case there has been an attack on the investment through nationalization, etc.
  10. 10. <ul><li>DICHOTIMIC DECISIONS:- To invest or not to invest abroad. </li></ul><ul><li>ASSIGNING A RISK PREMIUM:- Since risk are difficult to quantify, it is necessary to be taken into account. </li></ul><ul><li>AVOID LITIGATION:- Try to incorporate a number of points in contracts regarding conditions concerning access to local capital market, taxation applicable to the company, right to import raw material & semi-finished goods, right of capital transfer, dividends, interest, etc. </li></ul><ul><li>BILATERAL AGREEMENTS:- Protecting investments between the country of the parent company & the host country. </li></ul>
  11. 11. <ul><li>Not to localize the whole production process in the same country; </li></ul><ul><li>To integrate local products </li></ul><ul><li>To have resource to debt </li></ul><ul><li>Plough back the funds generated by the subsidiary rather than bringing new capital from the parent company. </li></ul><ul><li>To increase the number of employees; </li></ul><ul><li>To have other local alternatives sources of suppliers </li></ul><ul><li>To establish the joint venture with a local enterprise. </li></ul>
  12. 12. <ul><li>Public authorities in several countries for insuring the risk inherent in foreign operations. </li></ul><ul><ul><li>England-ECGD (Export Credit Guarantee Department) </li></ul></ul><ul><ul><li>France- COFACE ( Companies Françoise d’ Assurances pour le commerce Exterieure), provide upto 95% against political risks arising out of wars & nationalization & BFCE (Banque Francchisee due Commerce Exterior). </li></ul></ul><ul><ul><li>USA- Export-Import Bank (EXIM Bank) </li></ul></ul><ul><ul><li>Germany- Hermes-Kredit-Versicherungs-Aktiongesellschaft. </li></ul></ul><ul><ul><li>Japan- Ministry of International Trade & Industry (MTTI). </li></ul></ul><ul><ul><li>Italy- Institute Nazionale delle Assicurazioni. </li></ul></ul><ul><li>Private Insurance:- Llyod of London, New Hampshire Company & Company Beige d’ Assurance Credit </li></ul>
  13. 13. <ul><li>Determination of the amount of compensation; </li></ul><ul><li>Modalities of payment indemnities; </li></ul><ul><li>Proceedings before courts or International Centre for Settlement of Investment Dispute(ICID). </li></ul><ul><li>Determination of compensatory indemnity:- </li></ul><ul><ul><li>Company quoted in Stock Exchange:- </li></ul></ul><ul><ul><ul><li>Single criterion based solely on share quotations </li></ul></ul></ul><ul><ul><ul><li>Multiple criteria based on a combination of share quotations & other such future cash flows. </li></ul></ul></ul>
  14. 14. <ul><li>Internal Means:- </li></ul><ul><ul><li>By reducing the exports to such a country. </li></ul></ul><ul><ul><li>Explore possibilities of sales in less risk-prone countries. </li></ul></ul><ul><ul><li>Increase the margin on the products that its exports that its export to risk-country. </li></ul></ul><ul><li>External Means:- </li></ul><ul><ul><li>Transferring the risks to other organizations, say to a bank by way of confirmed & irrevocable documentary credit & sells the credits to specialized organizations. </li></ul></ul>
  15. 15. <ul><li>“ Buying back debt”, repurchase the debt, when there is a grave uncertainty about its recovery. </li></ul><ul><li>“ Debt-Equity Swap” , bank credit is sold to a private investor, interested in investing that country. Involves 3 parties- creditor-bank, debtor-country & a private investor. </li></ul>
  16. 16. <ul><li>Analysis aims at evaluation & anticipation of the capacity of the potential host country to meet its financial obligations. </li></ul><ul><li>When multi-national enterprises, plans to enter international market, J/V. </li></ul><ul><li>Assess country risk, sector risk & project risk. </li></ul><ul><li>POLITICAL RISK INSURANCE:- EPCG extends political risk coverage to a limited extent. </li></ul><ul><li>Common Political Risk Coverage:- </li></ul><ul><ul><ul><li>Comprehensive Export Credit Insurance Coverage- coverage for losses caused by a buyer filing to make the payment due to political & commercial risk. </li></ul></ul></ul><ul><ul><ul><li>Confiscation, expropriation & nationalization coverage:- covers worldwide exposure as it provides good spread of risk. </li></ul></ul></ul>
  17. 17. <ul><li>Contract Repudiation Coverage:- Provides insurance coverage for non-compliance with contracts by a foreign government. </li></ul><ul><li>Inconvertibility of Currency Coverage:- insurance against losses arising from inconvertibility is available from specialty international insurance markets. </li></ul><ul><li>Wrongful calling of Guarantees Coverage:- Policies for wrongful calling usually coverage if the call on the guarantee was caused by the action of a government, such as the cancellation of an import or export license or other action that causes the non-performance. </li></ul>

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