This article is written by Sneha Mahawar, from Ramaiah Institute of Legal Studies. The article discusses the concept of corruption in international investment along with the remedies to overcome such barriers and enjoy the advantages of international investment.
The term investment means spending money, time, or energy on something, especially for some benefit or purpose. The term investment has been derived from the Italian terminology ‘investire’ which is an ‘act of putting’. In the legal sense, the term Investment Law is a branch of law consisting of a set of rules which regulate investment, either foreign or national. Investment is a commercial activity that is mainly done to gain profit. Investment plays a major role in starting any business as without an initial investment, no business can flourish. Investment is a capital put in by a stakeholder for a business to achieve its purpose. It is a placement of capital in expectation of deriving income or profit from its use or application.
Kinds of investment
Investment can be made both- domestically/locally and internationally. In the domestic world, investment is made in the form of stocks, bonds, mutual funds, exchange-traded funds, certificates of deposit, retirement plans, options, annuities, cryptocurrency, commodities, etc. In the international world, investment is made in the form of foreign direct investment, foreign portfolio investment, commercial loans and official flows. Each type of investment has different levels of risks and different levels of rewards. Before investing, a person shall have enough experience or take an expert’s advice so that the individual investing shall not bear the risks and consequences of investing in the wrong arena.
What is corruption
The term corruption has been derived from the Latin terminology ‘corrumpere’ which means ‘to bribe and destroy’. Corruption is an act of impairing integrity, virtue or moral principle. It is an illegal or dishonest act done by an authorized person or group of authorities who have been provided with certain powers. These authorities deceive others by performing immoral acts leading to corruption. In today’s world, corruption has expanded its horizon to almost all spheres like a business, politics, investment, legal department, media, medical field, etc. The act of corruption is generally performed by the people of power by bribing, extortion, leaking confidential information, etc. Corruption generally leads towards the personal gain of cash or power.
Modes of corruption
Corruption is a crime or an illegal act which takes place to gain power or advantage over a certain situation for personal benefit. Corruption can take place through various modes such as fraud, bribery, extortion, nepotism, cronyism, etc. Corrupt practices take place through the actions of people in power such as private businesses, public institutions, government, judiciary, politicians, etc. Corruption is an extremely serious allegation which if proved correct then can damage the reputation heavily of the person accused.
To invest internationally means to grant rights to foreign investors and to foster a country’s development. It may be described as a set of rules that govern international investment. It has been shaped by the interplay of various political, economic, commercial and historical factors of a country. It resolves the dispute between foreign investors and sovereign states. It also governs the Foreign Direct Investment (FDI).
For a country like India where capital is not readily available, Foreign Direct Investment plays a vital role as it is considered as an important source of funds for the companies. Foreign Direct Investment helps an individual or an entity to invest in an Indian company. As per the Organisation for Economic Cooperation and Development (OECD), an investment that is of or above 10% from a foreign nation is regarded as FDI. In India, policies of FDI are regulated under the Foreign Exchange Management Act, 2000 (FEMA) which is governed by the Reserve Bank of India (RBI).
Boost in the country’s economy
When a foreign investment is made, it boosts the economy of the country and also stimulates the local industries of the country.
A higher standard of living
Investing internationally raises the standard of living of the people of that country by providing greater purchasing power and quality products.
Investing internationally creates employment for the labour class by creating more job opportunities and helping them improve their skills.
When an investment is made in a country, the parent enterprise brings along better resources, technology and builds quality infrastructure which helps in the country’s development.
When a company or an individual invests internationally then its products are made available not only in the parent nation, but even in other nations which leads to the globalization of products.
Companies or individuals, who invest in the international sphere, receive tax incentives from the government for boosting the economy of the country and helping in the nation’s development.
Lower cost of production
When better machinery and infrastructure are used then the cost of production is lowered and better quality goods can be supplied to the public at lower rates.
When an international company invests in a country, the other local companies feel threatened and face huge competition because they do not have enough resources to beat the international company and product pricing of the international company which is lower than the domestic company’s product pricing leads to failure of their companies.
The term ‘expropriation’ means to deprive a person of using his private property. Investors are always concerned about political change as a change in political factors can lead to expropriation.
Impact on exchange rates
Investing internationally can have a great impact on the exchange rates of countries in relation and can make things worse for investors or the target economy. It makes a change in the currency value of a country and much more.
Demoralizing of unskilled labour
Unskilled labour is demoralized and sometimes left unemployed because they fail to understand the technical part and modern machinery used by internationally invested companies.
Types of International Investment
Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is a kind of international investment in which the investor buys or constructs a factory in a foreign country or adds improvements to existing facilities in the form of plants, machinery, property, equipment, etc. Multinational Corporations (MNCs) commonly undertake FDI. Foreign Direct Investment is calculated to include all kinds of capital contributions such as stock purchases, reinvestment of earnings by a holding company into a subsidiary company, transfer of assets, etc. Investors’ earnings on FDI take the form of profits such as dividends, management fees, royalty payments and retained earnings. The FDI transactions are done via greenfield projects, joint ventures and mergers & acquisitions. Examples of FDI investments are Coca-Cola, Starbucks, Tata Steel, etc.
Foreign Portfolio Investment (FPI)
Foreign Portfolio Investment (FPI) is a kind of international investment that does not have a controlling stake in an enterprise. It includes investments via stocks, bonds, etc. Stocks include dividend payments, possible voting rights, open-ended holding periods and ownership of the company’s part. Bonds include interest payments, ownership of bond rights, no voting rights and specific holding periods. FPI is ascertained from diverse sources such as pensions, mutual funds, etc. Investors acquire returns on FPI in the form of dividends and interest payments. Investments in FPI which are for less than one year are termed as short-term portfolio flows. It also affects national economic growth rates, exchange rate stability, general macroeconomic stability, interest rates, taxes on capital gains, regulation of stock, market bonds and levels of foreign exchange reserves.
Commercial loans are primarily in the form of bank loans which are issued to foreign businesses or foreign governments. These are the loans issued by banks to make an international investment which if done with expertise will result in profit-making and development of the nation.
Official flows are the funds that the developed nations provide to the developing nations in the form of development assistance. These funds are provided to the developing or third world countries for their growth and future development.
Corruption in International Investment
Recently, lots of allegations of corruption have been confronted with international investment tribunals and the number of allegations is increasing with time. This involves the investors alleging the corrupt conduct of the public officials as a basis of their claim. The defence produced by the host states gives rise to the responsibility of the host states towards their public officials. The implementation of a few mechanisms can control corruption in international investment such as investor-state arbitration. By implementing such laws and mechanisms corruption can be controlled as its legal infrastructure will already be in place.
Suggested Policies to be implemented for controlling corruption and creating awareness in the public
The term impunity means exemption from punishment. To control corruption, effective law enforcement is essential so that no corrupt person can escape the strong legal framework.
Follow the money
The government collects taxes from its citizens and has a vast sum of public funds to spend which has a serious corruption risk. The general public can keep monitoring the government expenditure and expose any kind of corruption spotted via RTI.
The government spends a lot of money on funding the schools. Schools shall keep a count of the supplies provided by the government so in case of the wrong count, the government authorities can be accounted for corruption.
Close international loopholes
Most of the corrupt government officials hide their money or illegal assets in international banks. If the international financial loopholes are closed then these authorities will not be able to hide their corrupted funds and corruption will reduce.
Promote transparency and access to information
To control corruption, many countries have implemented a tradition of government openness, freedom of press & media, transparency and access to information. This reduces corruption due to the transparency of information.
Reform public administration and finance management
Reforms should be implemented which focus on improvising financial management and auditing agencies such as disclosing budget details and other related information.
The technology prone companies can create a platform, where the general public can report corruption cases via the web or mobile applications. In today’s world, social media is a great platform to talk about an individual’s grievances.
Comics and cartoons
Comics and cartoons have a great power of raising awareness about corruption. This kind of combination helps spark debate and gives voice to the public. This can even be an interesting way of educating the general public about corrupt practices taking place in the country and worldwide.
Theatre and drama
Through theatre and drama, people’s voices can come into the light. The anti-corruption drive can be initiated via music, drama, poetry, dance, skit, etc. It also creates awareness towards people who are unaware of the state of corruption in the country.
Protests are a powerful tool to fight corruption and create awareness about corruption. It is a way for citizens to show their opposition towards the corrupt practices taking place.
It is a collection of signatures from the general public supporting a valid cause of their interest. The signed petition is then presented to the decision-makers and has the power to create changes they want. Petitions can be signed against corruption and wanting to implement certain policies to control corruption.
Hence, Corruption in international investment is increasing day by day and certain steps shall be taken to control it. If corruption is not controlled by implementing certain mechanisms then it can destroy the international investment along with the legal infrastructure, which is developed to control the crime rates and take required actions towards the accused. These investments are highly rewarding but also carry a large amount of risk and thus doing proper analysis and taking steps with due diligence before investing is necessary. There are various policies through which corruption can be controlled and people corrupting our system can be brought forward and punished accordingly.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: