Unit-1 Fundamantal of F M

8/3/2019 Unit-1 Fundamantal of F M

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IntroductionTo

Financial Management&

Financial system of India


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Financial Management

Financial Management represents the bridge between the firms

real assets and financial assets

(Capital budgeting)

Real assets

FinancialManagement

(Financing)

LoansEquityshares


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O bjectives of Financial Management

Primary - Profit maximization

- Maximize the wealth of the owners (share holders)

O thers - Ensure financial stability

The Financial manager


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Functions of a Finance manager

Mobilizationof funds

From where ?

At what cost ?

In what time ?

Deployment of funds

Fixed assets

Current assets

Investments

Repayment of debts

Control endUse of funds

Ascertaining facts& figures throughreports

Monitor day to dayfinancial activities

Risk-returnTrade-off

Investment (Risk-return)

Financing(debt-equity)


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The interface

Marketing

Credit toCustomers

F G holding inanticipation of highsales

Production

Equipment (buy/ lease)

R M(Zero inventory)

TopManagement

Short / long termgoals

O verall effectiveness

H R

Staffing

Promotions

R & D

Cost

Monitor thedevelopments


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Financial FunctionFinancial Function

AnticipationO f funds needed

Acquire the fundsneeded

MaximizeFirms value

Proper planningEffective monitoring

UtilizationO f the funds

Increaseprofitability

Reducing the costs

Efficient allocation

Most profitablemanner.Long term

Short Term

Local

External

At least cost

For financing theassets / projects


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The challenges of F M

Treasuryoperations

Short term fundsManagement

Speculative gains byanticipating interest rate movements

Foreignexchange

Currency fluctuation

Hedging / ForwardContract .

Maintainingshare price

Dividend policy

Bonus policy

Financialstructuring

Debt- equity

Arbitrage

Pricing of new issue


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D ifferent forms of organization

Point of difference

Soleproprietaryconcern

Partnership Co-Operativesociety

Company

Registration Not necessary Registered firmscan sue

Necessary Compulsory

Name No guidelines No guidelines End with society Ltd / Pvt ltd

Capital Not specified Not specified Not specified Pvt Ltd - Rs 1 LPublic Ltd- Rs 5 L

Members Single individual 2 to 20 10- no limit Pvt - 2 to 5Public 7 to no limit

Legal status Not a separatelegal entity

Not a separatelegal entity

Not a separatelegal entity

Separate legalentity

Liability Unlimited for owner

Unlimited for partners

Limited to capital Limited to thecapital

Dissolution No procedure Simple & related

procedure

Simple & related

procedure

Difficult/ lengthy

procedure


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Financial System of India


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F inancial system

5 /02/201225 /02/2012 1010


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I ndian Financial systemI ndian Financial systemStage-1

Underdeveloped economy- Low per capita income

Self financing as the development is at low level.

Non existence of financial intermediaries.

Stage-2

Increase in per capita income

Bilateral borrowings & higher financial intermediation

Birth of financial intermediaries

Financial intermediaries become large

Big banks, investments, Mutual funds, NBFC, stock markets

Financial system becomes more market oriented.


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W ell integrated set of subsystems which facilitates the flow of funds from

area of surplus to the areas of deficit in efficient & effective way.

I ndian Financial systemI ndian Financial system

FinancialInstitutions

Financialmarkets

Regulators

RBISEBIIRDAPDRA

Financialinstruments

Financialservices

Formal Informal

Money lendersLocal bankersTradersLand lordsPawn brokers

DepositoriesCredit ratingFactoringMerchant bankingLease & hire purchaseUnderwriting

Equity sharesPreference sharesDebtsTime depositsMF unitsInsurance policies

BanksNBFC sInsurance &pensionsMutual funds

Capital marketsMoney marketsForex Markets


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BankingInstitutions

Non BankingFin. Companies

SCB Sch Co opBanks

P.S.Banks

Pvt S. BanksForeign BanksRRB

Mutualfunds

Insurance &Pension

Financial Institutions

NBFC DFI

National State othersIFCI, IDBI,SIDBI,NABARD, HDFCExim bank, NHB

SFCSIDC

ECGCDICGC

Public MF sPrivate MF s

Public sectorPvt sector


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Capital market Money market

Equity Market Debt Market

Forex market

Financial Markets

Banks & other s

Primary Secondary DerivativesPrivate debt market PSU Bond market Government securities market

Domesticinternational

Stockexchanges

Financialcommodities

Treasury BillsCall moneyCommercial paperCertificate of Deposit


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Bond market Equity market

Foreign bonds Euro bonds

Euro notes market

International Financial Markets

Renewable Euro notes

Euro commercial paper

Euro medium notes

Foreign equity

ADR

Freely tradedin America

Euro equity

GDR

Tapping financialresources inthe whole world


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Characteristics / F unctions of F inCharacteristics / F unctions of F in MktsMkts

CharacteristicsCharacteristics

Larger volumeLarger volumeSpeed of resource movement from one market to other Speed of resource movement from one market to other Saver decides the place to investSaver decides the place to investScope for instant arbitrage among various instruments in the marketScope for instant arbitrage among various instruments in the marketHigh volatility ( F ailure of one segment affects others )High volatility ( F ailure of one segment affects others )

F unctionsF unctions

Efficient payment mechanismEfficient payment mechanismProviding information's to the companyProviding information's to the companyGives sufficient indications to investors to track their portfolio.Gives sufficient indications to investors to track their portfolio.


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Money markets Capital markets

Short term marketsLarge volume of transactionsCP/CD/TB/Call money are the instruments

FunctionsEquilibrium force(redistributes cash balance as per needs & liquidity )

Basis for management of liquidity &money in the economy

Meeting short term requirement

Long term markets (equity /Debt)Large volume of transactionEquity shares / debt /debentures

Functions

Provides liquidity by selling financialassets in the markets

Mobilizes long term savings forlong term investments

Improves efficiency of capitalallocation through competitivepricing mechanism


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L ink between primary secondary markets.

1. A buoyant secondary market will help the growth of primary market

2. Secondary market provides basis for determining the price of primary market

3. The depth of secondary market depends on primary market

4. Larger the primary market- larger the secondary market

5. Bunching of primary markets affects secondary market


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Financial system & economyFinancial system & economy

Surplus spending Units D eficit spending Units

Consumption less than production

Surplus savings held in the form of financial assets

Lending to productive investments

Consumption & planned investmentsexceeds income

-ve savings to be met by borrowings

No such options .

The surplus savings from households are transferred to deficit spending.

This factor links Financial System to economy


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F inancial system & economy

Fin SystemFinancial markets

Financial institutions

Capital formation

Economic growth

Borrowers

Government

corporates

Lenders

Households

Rest of theworld

Deficit SpendingEconomic Units

Y< (C+I)

Surplus SpendingEconomic Units

Y > (C+I)

Primary securitiesPrimary/secondarysecurities

Y=Income, C = consumption, I- planned investments


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Role of F . S. in economy

Most important institution & vehicle for economic transformation.Most important institution & vehicle for economic transformation.

The achievements of national objectives depends on the financial systemThe achievements of national objectives depends on the financial system

The country which wants to grow economically needs a vibrant F S.The country which wants to grow economically needs a vibrant F S.

The existence of efficient financial system facilitates economic activitiesThe existence of efficient financial system facilitates economic activities

The growth of financial structure will lead to economic growth.The growth of financial structure will lead to economic growth.

Diverts the savings towards more productive use & increase the output of the economy.Diverts the savings towards more productive use & increase the output of the economy.

Markets & Institutions are prime movers for economic growth.Markets & Institutions are prime movers for economic growth.

Deeper the system, greater the stability & resilience.Deeper the system, greater the stability & resilience.

Accelerates the rate of savings through various financial instruments. Accelerates the rate of savings through various financial instruments.

Monetary policies are effective if financial markets are well developed.Monetary policies are effective if financial markets are well developed.


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A ssignment

A discussion on Regulatory environment in India

( FEMA, Companies act, Industrial policy, MRTP act, SEBI & RBI)


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Unit-1 concluded

Documents

Unit-1 Fundamantal of F M