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Q.1 Describe all the tasks of Treasury Management in large Company. Treasury management (or treasury operations) includes management of an enterprise's holdings. It includes activities like trading in bonds, currencies, financial derivatives and also encompasses the associated financial risk management. All banks have departments devoted to treasury management, as do larger corporations. For non-banking entities, Treasury Management and Cash Management are sometimes used interchangeably. The treasury operations come under the control of CFO of the concern or the Vice-President / Director of Finance. Bank Treasuries may have the following departments a. A Fixed Income or Money Market desk that is devoted to buying and selling interest bearing securities b. A Foreign Exchange or FX desk that buys and sells currencies c. A Capital Markets or Equities desk that deals in shares listed on the stock market. In addition the Treasury function may also have a Proprietary Trading desk that conducts trading activities for the bank's own account and capital, an Asset liability management or ALM desk that manages the risk of interest rate mismatch and liquidity; and a Transfer Pricing or Pooling function that prices liquidity for business lines (the liability and asset sales teams) within the bank. Banks may or may not disclose the prices they charge for Treasury Management products. Q.2 What is Qualified Institutional Placement? Do you think it is injustice on retail investors of the Company? Qualified institutional placement (QIP) is a capital raising tool, primarily used in India, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB). Apart from preferential allotment, this is the only other speedy method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. QIP scores over other methods because the issuing firm does not have to undergo elaborate procedural requirements to raise this capital. The Securities and Exchange Board of India (SEBI) introduced the QIP process through a circular issued on May 8, 2006, to prevent listed companies in India from developing an excessive dependence on foreign capital. Prior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and
This provision allows the allottees an exit mechanism on the stock exchange without having to wait for a minimum period of one year. The minimum number of QIP allottees shall not be less than two when the aggregate issue size is less than or equal to Rs 250 crore. venture capital funds and foreign venture capital funds registered with the SEBI) in any issue of equity shares/ fully convertible debentures/ partly convertible debentures or any securities other than warrants. such as American depository receipts (ADRs). which are convertible into or exchangeable with equity shares at a later date (Securities). Q. or (ii) the preceding two weeks. which would have been the lock–in period had they subscribed to such shares pursuant to a preferential allotment. There are certain obligations which are to be undertaken by the merchant banker. . the Securities may be issued by the issuer at a price that shall be no lower than the higher of the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange (i) during the preceding six months. in order to encourage domestic securities placements (instead of foreign currency convertible bonds (FCCBs) and global or American depository receipts (GDRs or ADRs)). mutual funds. and not less than five. The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets. The aggregate of proposed placement under the QIP Scheme and all previous placements made in the same financial year by the company shall not exceed five times the net worth of the issuer as per the audited balance sheet of the previous financial year. so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets. In India Therefore. Pursuant to the QIP Scheme. in outside markets. This was seen as an undesirable export of the domestic equity market. The QIP Scheme is open to investments made by “Qualified Institutional Buyers” (which includes public financial institutions. The issuing company may issue the Securities only on the basis of a placement document and a merchant banker needs to be appointed for such purpose.3 What is risk involved in investment in debt funds where more than 90% investment is in Government bonds? Which short term option (90days) you will choose for your Company for investment of liquid surplus and why. where the issue size is greater than Rs 250 crore. 2000 (the DIP Guidelines). foreign institutional investors. 2006 inserted Chapter XIIIA into the SEBI (Disclosure & Investor Protection) Guidelines. no single allottee shall be allotted more than 50 per cent of the aggregate issue size. However.authorities that Indian companies were accessing international funding via issuing securities. except on a recognized stock exchange. to provide guidelines for Qualified Institutional Placements (the QIP Scheme). the Securities Exchange Board of India (SEBI) has with effect from May 8. The Securities allotted pursuant to the QIP Scheme shall not be sold by the allottees for a period of one year from the date of allotment.
More recently. The following is a list of services generally offered by banks and utilised by larger businesses and corporations: • Account Reconcilement Services: Balancing a checkbook can be a difficult process for a very large business. • Advanced Web Services: Most banks have an Internet-based system which is more advanced than the one available to consumers. since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the company's true balance is. Companies use this to pay others. To address this. • • Automated Clearing House: services are usually offered by the cash management division of a bank. instead of asking its employees to deposit the cash.g. but also which have not. The Automated Clearing House is an electronic system used to transfer funds between banks. Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). Finally. because under this system banks assume that the company initiating the debit is correct until proven otherwise. They include information on cash positions as well as 'float' (e. banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis. especially employees (this is how direct deposit works). Balance Reporting Services: Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead bank. Armored Car Services (Cash Collection Services): Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company. as well as those at other banks. allowing employees to send wires and access other cash management features normally not found on the consumer web site. so that at the end of the month the bank statement will show not only which checks have cleared. This system is criticized by some consumer advocacy groups. This enables managers to create and authorize special internal logon credentials.. banks have used this system to prevent checks from being fraudulently cashed if they are not on the list. checks in the process of collection). they offer transaction-specific details on all forms • . These sophisticated compilations of banking activity may include balances in foreign currencies. a process known aspositive pay.
and the bank pays those items. many of these companies have an agreement set with their primary bank. This is referred to as a "lockbox" service. The bank pays only "true" exceptions. excess funds from a company's bank accounts are automatically moved into a money market mutual fund overnight. that is. This is the primary use of money market mutual funds. . including deposits. with exactly the same specifications as listed in the register (amount. and then moved back the next morning. • Lockbox . sometimes with detailed requirements for processing. etc. This might be a company like a dentist's office or small manufacturing company. • Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. serial number.). those that can be reconciled with the company's files. wire transfers in and out. checks.of payment activity. the bank sends that file to the company.Retail: services: Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them. and dollar amounts and sends the file to the bank. Under this system. This system dramatically reduces check fraud. The bank then researches the checks that do not match. To prevent funds in these accounts from being idle and not earning sufficient interest. open their mail. • Reverse Positive Pay: Reverse positive pay is similar to positive pay. maintaining the list of checks issued. the Federal Reserve prepares a file of the checks' account numbers. In reverse positive pay. not the bank. and deposit any checks found. ACH (automated clearinghouse debits and credits). they open bank accounts at various local banks in the area. etc. but the process is reversed. • Cash Concentration Services: Large or national chain retailers often are in areas where their primary bank does not have branches. serial numbers. where the company compares the information to its internal records. whereby their primary bank uses theAutomated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account. When checks are presented for payment and clear through the Federal Reserve System. and determines if any items are fraudulent. Therefore.Wholesale: services: are for companies with small numbers of payments. investments. corrects any misreads or encoding errors. This allows them to earn interest overnight. The bank therefore will only pay checks listed in that register. The company lets the bank know which checks match its internal information. • Lockbox . payee. • Sweep accounts: are typically offered by the cash management division of a bank. with the company.
that provides the amount of disbursements that will be charged to the customer's account. or by a transfer of cash at a cash office. but all the money deposited into the individual store accounts are automatically moved or swept into the company's main bank account. banks are almost all converting their systems so that companies can tell which store made a particular deposit. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities. Therefore. This allows the company to look at individual statements for each store. The message also includes settlement instructions. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. • Controlled Disbursement: This is another product offered by banks under Cash Management Services. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account.S. where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time. U. The bank provides a daily report. zero balance accounting is being used less frequently. even if these deposits are all deposited into a single account. Traditionally. • Wire Transfer: A wire transfer is an electronic transfer of funds. This is different from delayed disbursements. banks developed a system where each store is given their own bank account. typically early in the day. . To help correct this problem.• Zero Balance Accounting: can be thought of as somewhat of a hack. The actual wire transfer itself is virtually instantaneous. typically money market investments. requiring no longer for transmission than a telephone call. it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. Wire transfers can be done by a simple bank account transfer.
Greater focus is being placed on monitoring flows and analysis of data under various Auto Route facilities. 3. employment abroad.2 Explain various objectives of liquidity management by Banks. By assuring a bank's ability to meet its liabilities as they become due.000 without documentary requirements.000 for private travel in any calendar year. Use of International Credit Card upto sanctioned credit limit for meeting expenses/making purchases while abroad and for purchase of books and other items through Internet. What steps Banks can take to meet the impending shortage of liquidity? Measuring and managing the liquidity needs are vital for effective operation of commercial banks. Some of them are: Simplification of exchange release of foreign exchange upto USD 10. room for improvement will be continuously explored. Q.1 Give any three measures taken by RBI in the recent past (1 year) to liberalise exchange control? The three measures taken by RBI in the recent past (1 year) to liberalise exchange control are: 1. Though there has been a move away from micro regulation of transactions and authorised dealers (ADs) were given the freedom and responsibility on appropriate documentation for current account transactions. with operational ease as is in the case of rupee transactions. medical treatment overseas. . Release of foreign exchange upto USD 100.000 on the basis of self-certification towards study abroad. emigration and towards maintenance of close relatives. 2. Procedural simplification of any permitted current account transaction upto USD 5. Noted for guidance for future. The Committee has focused on moving towards a policy content supported with procedures that would enable individuals to undertake foreign exchange transactions. It may also be noted that a variety of measures have been taken both to liberalise facilities as well as carry out relaxation in procedures for foreign exchange transactions involving individuals.Masters in Business Administration-MBA MF0007 – Treasury Management – 2 Credits Assignment Set-2 (30 Marks) Q.
are with respect to various time horizons. These mismatches. but these committees rarely meet to take decisions. this research article attempts to find out the status of Liquidity Management in State Bank of India with the help of "Cash Flow Approach" methodology for controlling liquidity risk. the incentive for banks for performing the function of financial intermediation is the difference between interest receipt and interest cost which is called the interest spread. that banks will have a mismatched balance sheet. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. the Indian banking system has not enforced the guidelines in total. and with assets greater than liabilities in the medium and long term. not only the liquidity positions of banks on an ongoing basis. as lenders normally prefer a shorter time frame (liquidity preference). It can also be defined as the comprehensive ability of a bank to meet liabilities exactly when they fall due or when depositors want their money back. Liquidity has been defined as the ability of an institution to replace liability run off and fund asset growth promptly and at a reasonable price. The importance of liquidity transcends individual institutions. Decision criteria . as liquidity shortfall in one institution can have repercussions on the entire system. the overwhelming concern of a bank is to maintain adequate liquidity. which represent liquidity risk. Q. Taking this as a base. But their liabilities are typically short term in nature. The banks have formed AssetLiability Committees (ALCO) as per the guidelines. as borrowers normally prefer a longer time frame. They lend for longer time periods. Hence. therefore. Decisions relating to working capital and short term financing are referred to as working capital management. Banks are in the business of maturity transformation. Maintenance of superfluous liquidity will. Bank managements should measure. Objectives and Methodology of the Study Though Basel Capital Accord and subsequent RBI guidelines have given a structure for Liquidity Management and Asset Liability Management (ALM) in banks. This is a heart of the banking operations and distinguishes a bank from other entities. impact profitability adversely.liquidity management can reduce the probability of an adverse situation developing. This results in long-term interest rates typically exceeding short-term rates. but also examine how liquidity requirements are likely to evolve under different conditions.3 What is operating cycle? How does it affect working capital management? What are other major factors that influence working capital management? Operating cycle is the average time between purchasing or acquiring inventory and receiving cash proceeds from its sale. Hence. however. with liabilities greater than assets in short term. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. It is implicit.
Identify the appropriate credit policy. Economic production quantity Debtors management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials . Inventory management. One measure of cash flow is provided by the cash conversion cycle .which are "reversible". the most useful measure of profitability is Return on capital (ROC). Identify the cash balance which allows for the business to meet day to day expenses. See Economic value added (EVA). and cash. management generally aims at a low net count. Cash management.the net number of days from the outlay of cash for raw material to receiving payment from the customer. Management of working capital Guided by the above criteria. credit terms which will attract customers.generally. These policies aim at managing the current assets (generally cash and cash equivalents. which results from capital investment decisions as above. inventories and debtors) and the short term financing. the Finished Goods should be kept on as low level as possible to avoid over production . Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities.and hence increases cash flow. relating to the next one year period .e. Short term financing. These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related. given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier. the return on capital. Return on equity (ROE) shows this result for the firm's shareholders. As a management tool. it may be necessary to utilize a bank loan (or overdraft). Just In Time (JIT). i. but reduces cash holding costs. . The result is shown as a percentage. working capital management entails short term decisions . and if. accounts receivable and payable. Firm value is enhanced when. as above) rather they will be based on cash flows and / or profitability. Identify the appropriate source of financing. determined by dividing relevant income for the 12 months by capital employed. the lead times in production should be lowered to reduce Work in Progress (WIP) and similarly. which results from working capital management.see Supply chain management.and minimizes reordering costs . In this context. exceeds the cost of capital. ROC measures are therefore useful as a management tool. this metric makes explicit the inter-relatedness of decisions relating to inventories.By definition. Economic order quantity (EOQ). Besides this. see Discounts and allowances. however. in that they link short-term policy with long-term decision making. management will use a combination of policies and techniques for the management of working capital. such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa). or to "convert debtors to cash" through "factoring". such that cash flows and returns are acceptable.
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