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Nature of Business
Business may be understood as the organised efforts of enterprises to supply consumers with goods and services for a profit
The purpose of business goes beyond earning profits – It is an important institution in society
• for supply of goods and services• creation of job opportunities• contributing to economic growth of a country• offer of better quality of life
Scope of Business
Business includes all activities connected with• Production, trade, banking, finance, advertising• Efforts to comply with Regulatory, Legal restrictions• Discharging obligations to consumers, employees, owners and other stakeholders
What is Business Environment ?
External Business Environment includes factors like • Economic• Political and regulatory• Technological• Social – cultural• Global
Economic environment refers to factors like• Savings and money supply• National Income and per capita income• Price level• Infrastructure• Stage in the economic development
Political Environment refers to the influence of• Legislature• Executive ( Government - Regulatory )• JudiciaryA stable and dynamic political environment is neededfor business growth
Technological Environment
• Technology is understood as the systematic application of scientific knowledge to practical tasks
• It is through business that technology reaches people• Enterprises should be ever alert to adopt changed technology in their business.
Social and cultural environment
• People’s attitude to work and wealth• Role of family and education• Ethical issues and social responsiveness of
business
Global environment
• Liberalisation of Indian economy forced Indian companies to fine tune their business responses to survive in the market.
• Getting familiar with changing currencies is a must
• Suitably changing the products to different customer needs to survive intenseompetition
Some other external factors
• Buyers• Suppliers• Rival Firms• New entrants• Substitute products
• Business environment offers many opportunities for potential market exploitation and also poses threats to a firm
Business VisionA vision is an explanation of why the firm exists and where it is trying to go.Vision statement of an organization seeks to answer the following questions.
• Where do we go from here ?• What changes lie ahead in the business ?
Vision of Infosys “ To be a globally respected corporation that provides best of breed business solutions, leveraging technology, vendors and society at large.”
Vision of ICICI Bank
“To be the preferred brand for total financial and banking solutions for both corporates and individuals”
Vision of Tata Motors“To be best in the manner in which we operate, best in the products we deliver, and best in our value system and ethics.”
Business Mission
A mission statement outlines the fundamental purpose of the organisation.
If the vision statement answers the question “ where do we go from here ? ” ,
the mission statement answers “ what is our business ? ”
A mission statement includes four elements
• Customer needs ( what is being satisfied ? )
• Customer groups ( who is being satisfied ? )
• Company’s activities ( how it creates and delivers value to customers )
• Company concern for survival and for public image
Mission of Infosys
“ To achieve our objectives in an environment of fairness, honesty and courtesy towards our clients, employees, vendors and society at a large ”
Mission of Ford Motor “ To improve continually our products and services to meet our customers’ needs, allowing us to prosper as aBusiness and to provide a reasonable return for our shareholders ”
Business objectivesMission statements seek to make a vision more specific and objectives are attempts to make mission statements more concrete.
Objectives represent the operational side of an organisation
A business unit seeks to achieve more than one objective and objectives vary with the passage of time
Business objectives
Objectives common to many corporate businesses are• Profit• Growth• Power• Employee satisfaction & Development• Quality products and services• Market Leadership• Joy of creation• Service to society• Good corporate citizenship
Internal Environment• Operations• Finance• Marketing• Personnel• General Management
Environmental analysis
• Development of broad strategies and long term policies of the firm.
• Development of action plans to deal with technological advancements.
• To forecast the impact of socio-economic changes at the national and international levels on the firm’s stability.
• Analysis of competitor’s strategies and formulation of effective counter measures.• To keep oneself dynamic.
Environmental Scanning
Strategyformulation
StrategyImplementation
Evaluation&
Control
Process of Environmental analysis
Scanning• Involves general surveillance of all environmental factors to identify early signals of possible environmental change.
• Potentially relevant data for scanning may be unlimited, scattered, imprecise.
• The challenge for analysis in scanning is therefore, to make sense out of imprecise and unconnected data.
Monitoring• Purpose of monitoring is to assemble sufficient data to discern whether certain trends are emerging.• As monitoring progresses, data turn frequently from imprecise to preciseForecasting• Forecasting is concerned with developing projections of the direction, scope of environmental change. Ex: How long will it take the new technology to reach the market place ? Are current life style trends likely to continue ?
Assessment In assessment, the reference moves from understanding the environment to identifying what the understanding means for the organization.
It tries to answer questions such as• what are the key issues presented by the environment and what are the implications of such issues for the organization ?
Financial Markets in India• Financial markets are the centres that provide facilities for buying and selling of financial assets.
• Financial assets are paper ( or electronic ) claims on some issuer such as the government or a corporate body.
• Important financial assets are • Govt. securities • Deposits with banks • Equity shares, debentures • Mutual fund units, Insurance policies
Financial Markets in India
• Participants on the demand and supply sides of these markets are financial institutions, brokers, borrowers, lenders and savers
• The participants trade in financial products on these markets either directly or through brokers on organised exchanges or off –exchanges.
Classification of Financial Markets
Unorganised markets• Money lenders lend money to the public• Indigenous bankers also collect deposits from public• Regulations concerning their financial dealings are inadequate.
Organised Markets • Consist of standardised rules governing their financial dealings• High degree of institutions and instruments.• Subject to control by regulators like RBI, SEBI, IRDA.
Organised Markets
Organised markets can be classified into two categories• Capital Market • Money Market
Capital Market• It is a market for financial assets which have a long term maturity period ( more than one year )• It’s function is to transfer resources from savers to producers.• It may be further divided into three types
• A) Industrial Securities market• B) Govt. Securities market• C) Long term loan market
Capital Market
A) Industrial Securities marketIt is a part of the capital market where companies raise their long term capital by issuing either shares or debentures.
The shares can be equity shares or pref. Shares
It consists of Primary market ( New Issue market ) and Secondary market
Capital Market
Primary marketPrimary market is a market for issue of new financial claims.
It deals with those securities which are issued to the public for the first time.
Borrowers exchange new financial securities for long term funds.
It facilitates capital formation.
Capital Market
Companies raise equity capital by • Public issue of shares• Rights issue of shares• Private placement of shares
Secondary MarketIt is a market for secondary sale of securities which were already issued in primary market.The equity shares are traded in the stock exchanges ( NSE or BSE ) to provide a continous market for buying and selling of shares.
Capital Market
B) Govt. Securities MarketIt is market where Govt. securities are traded.
Govt. securities include securities issued by Central Govt, State Govt and others like NABARD, REC.
Long term securities are traded in this capital market whereas short term are traded in money market.
Major participants in this market are the commercial banksbecause they need to buy these to satisfy their SLR requirements.
Capital Market
C) Long Term Loan marketThis market includes
• Term loan market• Mortgage market• Financial guarantee market
Banks play a vital role in this market by supplying long term loans to corporate customers.
A mortgage loan is a loan against the security of immovable property.
Financial guarantee will be provided mainly by commercial banks and relate to deferred payments for imports and exports and other loans.
Importance of capital market
• Capital market serves as an important source for the productive use
of the economy’s savings.
• Absence of capital market acts as a deterrent factor to capital formation and economic growth.
• It provides an avenue for investors, both retail and HNIs, to invest in financial assets which are more productive than physical assets.
• It facilitates increase in production in the economy and enhances economic welfare of the society.
• The operations of different institutions in the capital market induce economic growth.
Money Market
Money market is a market for dealing with financial assets which have a maturity period of upto 1 year ie. Short term funds market.
It can be classified as • Call money market• Commercial bills market• Treasury bills market• Short term loan market
Money Market
Call money market
It is a market for extremely short period loans, ranging from 1 day to 14 days.
It is a highly liquid market and commercial banks are the major players in this market.
The interest rate varies from day to day and sensitive to changes in demand and supply of cash liquidity.
Money Market
Commercial bills market
It is a market for Bills of Exchange arising out of genuine trade transactions.
In the case of credit sale, the seller draws a Bill of Exchange on the buyer and once the buyer accepts this bill, the seller can discount it with a Bank and receive cash.
Discount and Finance House of India was set up in 1988 to promote secondary market in bills.
Money Market
Treasury bills market
A treasury bill is a promissory note issued by the Govt. and its repayment is also guaranteed by the Govt.
It is an important instrument for short term borrowing of the Govt.
T-Bills are issued to Banks and other financial institutions with a view to raising funds for Govt. to meet its short term financial needs.
T-Bills have a maturity period of 91 days or 182 or 364 days only.
Money Market
Short term loan marketIt is a market where short term loans are given to corporates for meeting their working capital requirements.
Commercial banks provide short term loans in the form of cash credit and overdraft .
Cash credit is given against the security of commodities and a proper limit is sanctioned by the Bank, which is normally a % of value of commodities pledged.
Overdraft is purely a temporary facility extended by Banks against the security of financial instruments like bonds, LIC policies.
Money Market
Short term loan marketCommercial paper ( CP ) is an unsecured promissory note issued with a fixed
maturity by a company approved by RBI.
Negotiable by endorsement and delivery.
Issued in bearer form and at such discount on the face value.
Minimum maturity period of 7 days and maximum is 6 months.
Minimum amount to be invested by an investor is Rs. 1 crore and in multiples of Rs. 25 lakhs.
Repo Instruments
• Repo stands for Repurchase. Reverse Repo is the opposite of Repo
• sells securities
• receives cash
• The borrower ( SBI ) sells securities to lender ( RBI ) with an agreement to repurchase them at the end of the fixed maturity period at a specified price
• The difference between purchase price and the original sale price is the cost for the borrower
• This cost of borrowing is called Repo Rate.
SBI RBI
Distinction between Capital & Money market
• Long term funds Vs Short term funds• Fixed capital Vs Working capital• Deals in instruments like shares, debentures Vs Bills of exchange, TBs, Commercial paper• Instrument denomination is of small amount ( as low as Rs.10 ) Vs Instrument denomination is of large amount• Transactions done at a formal place ( stock exchange) Vs No formal place and done over the phone
Primary market / New Issue market
Merchant Bankers or Lead Managers
Merchant banker means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.
Simply defined, a ‘MB’ is a Sponsor of capital issues.
Categories of ‘MB’• Category I, that is – • (i) to carry on any activity of the issue management, which will inter-alia
consist of preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers and final allotment and refund of the subscription; and
• (ii) to act as adviser, consultant, manager, underwriter, portfolio manager.
• (b) Category II, that is, to act as adviser, consultant, co-manager, underwriter, portfolio manager;
• (c) Category III, that is to act as underwriter, adviser, consultant to an issue;
• (d) Category IV, that is to act only as adviser or consultant to an issue.
Capital adequacy norms
• A ‘MB’ will be registered by SEBI in different categories on the basis of capital adequacy norms in terms of its net worth.
• Category Minimum Amount • Category I Rs. 5, 00, 00, 000• Category II Rs. 50, 00, 000 • Category III Rs. 20, 00, 000 • Category IV Nil
• Explanation: For the purposes of this regulation "net worth" means in the case of an applicant which is a partnership firm or a body corporate, the value of the capital contributed to the business of such firm or the paid up capital of such body corporate plus free reserves as the case may be at the time of making application.
Registration Fee• A ‘MB’ has to pay a fee at the time of original registration • Category I Rs. 10 Lakhs• Category II Rs. 5 Lakhs • Category III Rs. 1 Lakh • Category IV Rs. 5000
• The certificate of registration granted under regulation 8 shall be valid for a period of three years from the date of its issue to the
applicant.
• The certificate of renewal granted under regulation 9, shall be valid for a period of three years from the date of its issue to the
applicant.
• Determines the types of securities to be issued ( capital structure )
• Drafting of prospectus ( offer documents )
• Listing of securities• Appointment of Registrars to deal with share application & transfers
• Selection of brokers and bankers to the Issue
• Popular Lead Managers are ICICI Securities, Enam Securities, JM Financial, UBS Securities India pvt. Ltd, Kotak Mahindra capital, SBI Capital Markets.
Merchant BankersCompulsory RegistrationMerchant Banker must be a body corporate having adequate office space and man power.
Merchant Bankers require compulsory registration with SEBI to carry out their activities.
The directors of a ‘ MB ’ should not be involved in any litigation relating to securities market.
They must have professional qualification in business management, finance or law.
SEBI grants a certificate of registration to a merchant banker on consideration of all relevant matters.
Merchant Bankers
Code of conductMake all efforts to protect the interests of investors
Maintain high standards of integrity in the conduct of business
Ensure that adequate disclosures are made to the investors to enable them make an informed decision.
Clearly demarcate the responsibilities of various intermediaries appointed by it so as to avoid any conflict in their job description.
Ensure that SEBI is promptly informed about any legal action initiated against it.
Underwriters
• Another important intermediary in the new issue market is the underwriters to the Issue of capital, who agrees to take up securities which are not fully subscribed.
• Underwriters make a commitment to get the issue subscribed either by others or by themselves
• Underwriters are appointed by the issuing companies in consultation with the Lead Manager or Merchant Banker to the issue.
• To act as an Underwriter, a certificate of Registration must be obtained from SEBI, after payment of prescribed fee to SEBI.
Indicators of Economic developmentNational Income & its variants
National Income
Total value of annual flow of final goods and services
Total national output or value of a nation’s output during a specific period , normally one year.
Three different ways of looking at the value of a nation’s output
• Gross National Product ( GNP )• Gross National Income ( GNI )• Gross National Expenditure ( GNE )
National Income
GNP is the total value of final goods and services produced.
GNP is a monetary measure since there is no other way of adding up different sorts of goods and services produced except with their money price.
GNI values national output as a sum total of payments made to the factors of production for their services or the earnings recd. by various factors
