Financial Management - Chapter 1.doc

Subject: Financial Management 

Chapter: One

Chapter No. 1 – Introduction to Financial Management Contents Finance function as dierent from Accounts function Objectives of Financial Management – short-term and long-term Financial sstem and mar!ets in "ndia – #overnment of " ndia$ Ministr of Finance at the helm$ statutes$ statutor authorities$ %nancial intermediaries$ other %nancial institutions$ agents &ho operate in the mar!ets etc' (rief introduction to )Financial "nstruments*

At the end of the chapter the student will be able to Map the dierences bet&een Finance and Accounts functions in an organisation and e+plain the integration of these functions ,in! the short-term and long-term objectives of Financial Management to  pro%tabilit and &ealth ma+imiation respectivel  respectivel  .ra& the Financial sstem in "ndia and .ierentiate one %nancial instrument from another 

Introduction Financial Management is an integral part of Business Management. Finance is one of the key functions in an organisation. The other key functions in an organisation are: Production Human Resources Marketing Each Each of the aboe aboe func functio tion n has got sub!d sub!di iisi isions ons " for e#amp e#ample le Produ Producti ction on has has mainte maintenan nance$ ce$ %dministration has purchases etc. Financ inance e deals deals &ith &ith 'nanc 'nancial ial resou resourc rces. es. Financ inancial ial manag manageme ement nt as a coroll corollary ary &ould &ould deal deal &ith &ith management of 'nancial resources and related areas.

Some of the ke !nance functions are" Financial planning and estimation of 'nance re(uired for the organisation Mobilisation of 'nancial resources re(uired as aboe Ensuring that the funds are aailable in ade(uate (uantity at appropriate time and at an a)ordable cost Management of cash in the organisation through cash *o& statement Management of inestment outside the business enterprise in other organisations

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Subject: Financial Management 

Chapter: One

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In &ith orderforeign to printe#change this document from Scribd, Management of risk in dealing for imports and you'll e#ports need to download it. Note" #he abo$e list is n otfirst e%hausti$e. Cancel &ith some Download And Print 1et us e#amine brie*y the aboe functions e#amples. Financial planning and estimation of 'nance re(uired for the organisation %ny actiity in a business enterprise re(uires planning for proper e#ecution in time. Finance is re(uired for any actiity at least in the beginning and hence 'nancial planning is the prime function of  2Finance3. This inoles detailed study of any actiity from understanding the total funds re(uirement for that actiity$ &hen the funds &ill be re(uired and ho& much funds &ill be re(uired at di)erent stages. For a ne& enterprise the entire resources hae to come from outside 4e#ternally56 for an e#isting enterprise$ a part of the resources at least &ill be aailable from the pro'ts made in the past and retained in business after declaring diidend. E#ample 7o. 0: 8e re(uire Rs. 9 lacs for an actiity. 1et us see ho& it a)ects an e#isting enterprise. 1et us assume the pro'ts aailable to be Rs. ; lacs. Then &e re(uire further resources of Rs. 0chedule A after claiming depreciation as per proisions of /ompanies= %ct " >chedule A /onforming to proisions relating to %dance Ta# payment in four instalments " 'rst instalment by 0I;$ second instalment by 0I?$ third instalment by 0I09 and the last instalment by 0IJ. /onforming to proisions relating to statutory audit of accounts under the /ompanies= %ct Preparation of reenue and capital budgets Management Anformation >ystem 4MA>5 relating to %ccounts and Finance

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Subject: Financial Management 

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order to print document from Scribd, 7ote: Further details on the In aboe are notthis gien here as they are you'll outside the scope of te#tbook on 2Financial Management3. %s the can see$it.most of them are self!e#planatory. first students need to download Short(term and long(term ob)ecti$es of Download FinancialAnd Management Cancel Print Short(term ob)ecti$e  The short!term ob+ectie of Financial Management is to procure 'nancial resources at an a)ordable cost thereby increasing the return to the shareholders in the form of Earnings Per >hare 4EP>5. EP> comprises t&o elements namely iidend per share 4P>5 and Retained Earnings per share 4REP> or Reseres per share5. This ob+ectie is often times referred to as 2pro't ma#imisation3. This is kno&n as the short!term ob+ectie as it is done on a continuous$ year!to!year basis. -ne or more of the follo&ing measures can achiee this: Monitoring of costs on a continuous basis through budgets >uitable cost reduction techni(ues &hereer the costs are high Minimisation of cost of borro&ed capital from outside through 'nancial discipline Proper mi# of e(uity and debt 4kno&n as 'nancial leerage " for further details please refer to /hapter no.  " -perating and 'nancial leerages /ontrol oer li(uidity aailable in the organisation so as to minimise the cost of carrying too much cash0 etc.

*ong(term ob)ecti$e  The long!term ob+ectie of 'nancial management is to increase the &ealth of the shareholders. The term 2&ealth3 refers to arious business assets of the enterprise that are free of debt. This means that this &ealth belongs to the e(uity shareholders. At is often re*ected in the 2book alue3 of the share as re*ected in the balance sheet.  The formula for book alue is: E(uity share capital K Reseres and >urplus 7umber of e(uity shares issued  This can be e#plained through an e#ample. E#ample no. J E(uity share capital C Rs. 0 lacs 4paid up capital5 Reseres and surplus C Rs. 9 lacs 7umber of shares C 0 lacs &ith the Face alue being Rs.0I!  Then the book alue of the share &ould be C Rs. 0 lacs K Rs. 9 lacs C Rs. JI!. 0 lacs shares  This means that at the starting point the book alue &as Rs.0I! and this has gone up to Rs. JI! due to the prudent policy of the management of retaining pro'ts &ithin the organisation. Thus the short! term ob+ectie also is a contributory factor to realising the long!term ob+ectie of &ealth ma#imisation. >ome of the measures through &hich &e achiee the long!term ob+ectie are: >trategic 'nancial management decisions relating to e#pansion$ take oer of another business$ 'nancial re!restructuring through 'nancial re!engineering 4e#ample " s&ap a costly loan for a cheaper loan proided the credibility of the 'rm is (uite high5$ +oint enture etc. Thus &hile

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 Carrying too much liquidity involves cost. This cost is referred to as “opportunity cost”. It simply means that by  carrying too much liquidity, the business enterprise has foregone an opportunity of getting a return on such amount  that it will have got by employing the funds in business. On the contrary, carrying too little cash is also risy as the enterprise may not be able to ful!l its obligations to creditors etc. in time. Pun+ab Technical ,niersity$ -nline irtual /ampus

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Subject: Financial Management 

Chapter: One

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print this document from Scribd, you'll ma#imisation pro'tability re*ectsIn order the to operating eLciency &ealth managerial+entrepreneurial eLciency. first need to download it.

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 To sum up$ both short!term ob+ectie and long!term ob+ectie need to be put in place for sustained gro&th of a business enterprise. To an e#tent at least$ the long!term ob+ectie is dependent upon the short!term ob+ectie of pro't ma#imisation. Cancel Download And Print

Financial sstem in India An order to understand 'nancial management better$ &e need to understand the 2Financial >ystem3 that e#ists in Andia. %ny country needs a system to regulate$ superise$ monitor and control the players$ intermediaries$ the inestors etc. &ho take part in the 'nancial markets in the system. Further an eLcient system alone can ensure that the national ob+ectie on 2Economy3 of the country is met by aligning the deelopments in the system &ith the national priorities. %n e#ample of the national priority deciding the deelopment in the 'nancial markets is " 2infrastructure deelopment and need for longer duration 'nancial resources3 and deelopment of 2deep discounted bonds3 to meet this re(uirement. 4For further details please refer to /hapter no. < " Financial sources5

Constituents of the Indian Financial Sstem  The Goernment of Andia$ Ministry of Finance$ heads the Andian 'nancial system. The ministry in turn is bifurcated into arious departments like the epartment of Economic %)airs$ the epartment of  /ompany %)airs etc.  The Andian 'nancial system consists of:  The 'nancial markets  The statutes goerning the arious segments of the 'nancial markets  The statutory authorities responsible for regulating$ superising$ monitoring and controlling the markets and its components  The 'nancial intermediaries >pecial organisations %gents operating in di)erent segments of the 'nancial markets and Financial instrumentsIsecurities issued in the markets to raise resources

 The 'nancial markets  The 'nancial markets consist of: Money markets " ma#imum duration of 09 months /apital markets " Minimum duration 09 months and ma#imum duration could be een 9!9 years Foreign e#change markets Ansurance market Banking and Mutual funds  The money markets and capital markets in turn do hae 2Primary market3 and 2>econdary market3. Primary market means issue of 'nancial instruments by companies and others that &ant to raise 'nancial resources from the market. >econdary market refers to that market &herein the 'nancial instruments issued in the Primary market change hands from one inestor to another for 'nancial consideration.

>egments of money markets:

/all money market e#clusiely for banks to be borro&ers " inter!bank operations for a ery short period. -ne day to fourteen days.

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Subject: Financial Management 

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In order to print thisborro&ing document from you'll money market that is also a Fourteen day is inScribd, the notice /all Money Market. -nly scheduled commercial banks are firstpart needoftothe download it. permitted to be borro&ers in this market. 8hile some banks &ill be borro&ers$ some others &ill be lenders. There is no speci'c market place. eals are done oer the phone.

>egments of money markets

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/ommercial paper issued by companies and Public >ector ,ndertakings as part of &orking capital re(uirement. This is a promissory note issued by companies re(uiring short!term funds 4say from 0 days to 0D days or si# months5. Ma#imum period is t&ele months. The si#!month commercial paper can be e#tended for a further period of si# months$ making a total of 09 months. /ommercial bills discounted by banks and 7on!banking Financial Anstitutions. These are short!term bills usually not e#ceeding ?!09 days coering commercial transactions in the priate sector.

 Treasury bills issued by Goernment of Andia through the RBA for meeting budgetary de'cits. These are for '#ed maturity periods of ?0 days and J;< days.

 The Resere Bank of Andia controls the money markets in Andia. At is kno&n as money market regulator.

Primary market Primary market in the money market is &herein the Anstitutions re(uiring funds issue securities like treasury bills and get 'nance and there is no speci'c market place e#cepting in the case of treasury bills. RBA conducts auction of treasury bills after due notice in national dailies and hence this can be construed as the 2market place3.

>econdary market  The secondary market is proided by iscount and Finance House of Andia 1imited 4FHA5 a subsidiary of RBA. At proides a t&o!&ay (uotation$ one for purchasing money market instruments and another for selling money market instruments. For e#ample$ a holder of Treasury bill of Goernment of Andia can sell it to FHA and anyone &ants to purchase treasury bills$ he can approach FHA &ho can sell it to him. There is no secondary market for call money or notice money market.

>egments of capital markets :

G-A bonds

arious state goernment bonds Bonds issued by Public >ector undertakings like BHE1 etc. Bonds issued by priate sector companies$ banks and 'nancial institutions ebentures issued by priate sector companies E(uity share capital issued by priate sector companies Preference share capital issued by priate sector companies An the case of public issues by priate sector companies$ banks$ 'nancial institutions and mutual funds$ >ecurities E#change Board of Andia 4>EBA5 is the controlling authority. At is referred to as the capital market regulator. Ho&eer >EBA does not control Goernment bonds or securities issued by Public >ector ,ndertakings. G-A bonds and state goernment bonds are handled and controlled by RBA. Public sector undertaking like Bharat Heay Electricals 1imited 4BHE15 come directly under G-A " M-F.

Primary market Pun+ab Technical ,niersity$ -nline irtual /ampus

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Subject: Financial Management 

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In order printThis thisagain$ document Scribd,  There is no speci'c market place forto this. likefrom in the caseyou'll of money market$ facilitates issue of securities by those &ho re(uire in theit.medium to long!term. The public issue process is first needfunds to download superised and controlled by the lead merchant bankerIbankers in the case of all public issues. Primary market ends &ith the listing of securities on stock e#changes by the Registrar to the Assue. etails of  operators in the primary market hae been gien under 2%gents operating in 'nancial markets3. >econdary market

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 The secondary market begins &ith the listing of securities on the stock e#changes by the Registrar to the issue. At has a market place in the form of stock e#changes. Ats operations are through share brokers &ho are registered &ith respectie stock e#changes. The stock e#changes in turn are controlled and regulated by >EBA. etails of operators in the secondary market hae also been gien under 2%gents operating in the 'nancial markets3.

>tatutes goerning the arious segments of the 'nancial markets and the statutory authorities >tatute means an %ct passed either by the Parliament or >tate legislature. Money market " 7o speci'c statute " controlled by RBA /apital market " >ecurities /ontracts Regulations %ct and Rules as &ell as >EBA regulations for the arious operators in the /apital market " controlled by >EBA. Mutual Funds also come under the Regulations of >EBA. Ansurance " Ansurance Regulatory and eelopment %ct 4AR%5 " controlled by the Ansurance Regulatory and eelopment %uthority coming under G-A$ Ministry of Finance Banking " Banking Regulations %ct controlled by RBA 7on!banking Financial /ompanies 47BF/s " e#ample otak Mahindra Finance /ompany 1imited5 " 7on! Banking Financial /ompanies %ct of RBA Functioning of limited companies registered in Andia " The /ompanies= %ct " controlled by the /ompany 1a& Board9 4/1B5 coming under G-A$ Ministry of Finance. The principal oLcer is kno&n as 2The Registrar of /ompanies3 4R-/5. Foreign E#change market " Foreign E#change Management %ct and E#change /ontrol Regulations %ct both coming under the RBA >ome segments of the 'nancial markets like the Andian companies accessing international markets come directly under the G-A$ Ministry of Finance

 The 'nancial intermediaries % 'nancial intermediary means an institution like a bank mobilising resources from saing units in the economy and deploying these resources by giing loans to or by inestment in users of these 'nancial resources for creating economic &ealth. Banking companies Financial Anstitutions 4FAs5 Mutual Funds 4MFs5 7on!banking Financial /ompanies 47BF/s5

>pecial organisations

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 Company "aw #oard is primarily responsible for conduct of the a$airs of limited companies registered in India under the Companies% &ct. The di$erence in roles of C"# and '(#I is that the latter is mainly concerned with issue of securities in the capital maret protecting the interests of various inds of investors. '(#I is not controlling The Companies% &ct while C"# is not controlling the 'C)&. They play complementary roles. Pun+ab Technical ,niersity$ -nline irtual /ampus

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order to print thisregulators document from Scribd,under you'll G-A " Ministry of Finance  These come under one of theIn'nancial market or directly first need "toG-A download %ll!Andia Financial Anstitutions " M-F it. /entral Board of irect Ta#es " /BT " G-A " M-F >tock E#changes " >EBA

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7ational Bank for %griculture and Rural eelopment 47%B%R5 " RBA Anstitute of /hartered %ccountants of Andia 4A/%A5 " G-A " M-F Anstitute of /ost and 8orks %ccountants of Andia 4A/8%5 " G-A " M-F Anstitute of /ompany >ecretaries of Andia 4A/>A5 " G-A " M-F Anstitute of /hartered Financial %nalysts of Andia 4A/F%A5 " G-A " M-F Foreign Anestment Promotion Board 4FAPB5 " G-A ! M-F

%gents operating in di)erent segments of the 'nancial markets  The agents operating in the capital market are more. Hence &e e#amine them brie*y here. An respect of other segments of the 'nancial markets from a study of the aboe it &ill be clear to the students as to &ho the operators are in the respectie segments. Primary market: Merchant banker J 4the principal operator5 >hare brokers &ho under&rite tock E#change

>econdary market:

>tock E#changes " controlled and regulated by >EBA >hare brokers " controlled by respectie stock e#changes

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 *erchant baner controls the +rimary maret and is fully responsible for the issue of public securities lie equity  shares, debentures, bonds etc. the capital maret instruments. e is the principal operator and controls and monitors all the other operators in the capital maret. e is fully accountable to '(#I for the smooth conduct of the operations in the capital marets. e has to ensure -/ conformity with 'C)& rules and regulations as well as '(#I rules and regulations. <

 0nderwriting in the capital maret means giving an undertaing to invest money in securities issued to public should the issue fail to collect the required amounts as per '(#I rules and regulations. 0nderwriting as such does not involve any funds and hence is referred to as “fee based activity”. owever once the issue fails to collect the required amount, the underwriter is e1pected to mae good the de!cit amount to the e1tent undertaen by him. Pun+ab Technical ,niersity$ -nline irtual /ampus

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Subject: Financial Management 

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In order to print this document from Scribd, you'll epositories " 7ational leel special organisations coming under the first need to download it. national stock e#changes and assume responsibility for collating details of o&nership of shares issued by a limited company. 

epository participants " Retail leel operators &ho maintain Electronic Cancelof arious Download Print >hare %ccounts o&nersAnd of securities Financial instruments %lready referred to under 'nancial markets aboe. For further details$ please refer to chapter on 'nancial sources

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8ith the help of details gien under Andian Financial >ystem$ dra& the map of Andian Financial system$ starting from Goernment of Andia " Ministry of Finance. %lso isit &ebsite " &&&.nic.in to kno& more about the functioning of Goernment of Andia " Ministry of Finance$ its di)erent departments and their functions etc.

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8hat is the di)erence bet&een a share broker and a depository participantN

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As there a statute controlling the money markets in AndiaN 8ho proides the secondary market in the money markets segmentN