Indirect capital flow in the form of portfolio equities is an important

Indirect capital flow in the form of portfolio equities is an important source of
financial flow between developed countries but its 'nonexistence in the data of
Table-1 shows that, so far, it has been negligible in the developing countries. Non
existence of well developed capital markets is the most important reason for this, in
addition to other considerations, which direct capital flows also face.
Due to interest of the International Finance Corporation (IFC) and major indebted countries, a potential means for the evolution of capital markets in developing
countries may be the scheme of conversion of international debts into equities.
The IFC encourages the conversion process by developing reliable markets
for this purpose through converting its own debts with different countries into
equities and motivating other banks to follow. Under this scheme, Investment
Trusts would be established. Commercial banks would be encouraged to exchange some of their loans for shares in these investment trusts. The loans bought
as, such will be. swapped for local, currency equity participation in the borrowing
entitles: public or private sector organizations. After merging the equity position
into the trust, they would be traded in foreign markets providing an opportunity for
the lending banks to sell their shares to non bank financial institutions. (4)
. Contractual forms of investments: These quasi-equity arrangements are based
on contractual sharing of risks and returns between the contracting parties; viz.,
production sharing, turnkey, production-in-hand, build operate and transfer, and
risk service contracts, and international leasing, off-sets, buy-backs, subcontracting, franchising, licensing, revenue sharing, joint venture arrangements, etc. (5)
There could be several reasons for the growing significance of these modes in
the commercial, technological and financial relations of developing and developed
countries. Firstly, for the host countries the greatly needed financial and
technological inputs become available without allowing, foreigners undue control of
national resources. Secondly, as these arrangements are less vulnerable to non
commercial risks, developed countries avail the benefits of FDI with lesser risks.
Thus; the considerations of host and home countries are simultaneously fulfilled
at lower "reciprocal fear". Thirdly, unprecedented growth in the flow of bank
lending during the seventies may have led to an increase in the developing
countries' demand for the entrepreneurial and technological services.
The growth of these forms of investments is also likely to confront certain
difficulties. Host countries have to meet the initial financial liabilities of the contracts. Depending on the complementarity of demand for these contracts on the availability of debt financing the general decline in flow of funds can be expected to
adversely affect their future growth. Moreover, host institutions can face oper210