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P RAJU IYER
B.Com., FICWA,ACS,MIMA, MBA (UK)
• Modern Economy is based on sound financial system. • Finance is the lifeline for any business enterprise. • All business operations depend upon the availability of adequate amount of funds as and when required. • Management of finance is as important as that of marketing, production or industrial relations.
of Financial Management is “the maximization of the Value of the Firm.” Financial management deals with efficient use of capital funds Financial system and financial management are over-lapping to each other. Today’s world economy is dependent upon financial service industry.
The international economic activities are supported by the financial services industry in two ways –
* by providing means of transfer payment for goods and services purchased internationally by acting as an intermediary between the nations with excess funds and those in need of funds
International Financial Management deals with cross border Financial Assets and Liabilities and Cash Flows – The Foreign Exchange Market. Foreign Exchange is simply a payment or deposit in some National Currency (or artificial currency) that is exchanged for payment in another currency. Unlike money and capital markets, the foreign exchange market deals NOT in ‘credit’ but in ‘means of payment’.
Modern approach to the financial management provides conceptual and analytical framework for managerial decision-making. Financial management is now considered to be an integral part of general management rather than a staff function concerned only with administering sources of funds. The main focus of financial management is on the efficient allocation of funds and the central process involved in rational matching of advantages of potential uses against the cost of alternative potential sources so as to achieve the broad financial goals, which an enterprise sets for itself.
The three basic decision areas in financial management are * Investment decision • Financing decision • Dividend decision
.Investment decision refers to the selection of assets both
long term and short term, in which funds should be invested. It is, therefore, concerned with both the capital budgeting decision and working capital management. .Financing decision is concerned with the sources through which funds are to be raised and the proportion in which funds should be raised from different sources namely, Debt and Equity. .Dividend decision is concerned with allocation of profits
Financial system covers both credit and cash transactions. Cash payment or issue of negotiable instruments like cheque, bills of exchanges, deals with all financial transactions. Thus a financial system is a set of institutional arrangements through which Capital Formation is taking place - financial surpluses are mobilized from the units generating surplus income and transferring to the others in need of them.
The organizational structure of financial system includes the following: Financial Markets Financial Institutions and Intermediaries Financial Products
Financial Market is where buyers and sellers meet to exchange things for money. The things exchanged in the financial markets are called “Claims or Financial assets”. Functions of Financial Market:
savings, capital formation or investments Set prices by making things convenient for both buyers and sellers of various financial assets. Financial Market is divided into Money market and Capital market
Money market refers to open market operations in highly marketable short-term debt instruments and the capital market deals in long-term debt issues and stocks
Capital market deals in financial assets excluding coin and currency - is essentially a market for securities, which have either long-term or infinite maturities. Consists of two segments: Primary market Secondary market.
New issue of shares and debt securities are made in the primary market and the existing securities are traded in the secondary market. Thus, whenever a company has to raise funds, it approaches the primary market with one of the three options: Public Issue Rights Issue Private Placement
Developments in the financial and capital markets have taken place broadly in the areas like
· · · · · · · · · · · · · Market Regulations Primary Market Reforms Secondary Market Reforms Capital Market Intermediaries Mutual Funds Institutional Development Foreign Institutional Investors Euro Issues Credit Rating Money Market Development Paper-less Trading Depository and Custodian Services Innovations in Financial Instruments
FINANCIAL INSTITUTIONS AND INTERMEDIARIES
range of institutions performs financial intermediation. Financial services have today taken the shape of industry and can be defined as group of organisations, which facilitate the intermediate financial transitions of individual investors and companies through their resources allocation activities.
The various financial intermediaries operating in the financial markets in India are the following:
1. Commercial Banks 2. Non-Banking private finance companies [Hire purchase, leasing, investment Companies., and finance corporations etc.,] 3. Specialized financial institutions include – UTI, LIC, GIC, IDBI, ICICI, IFCI, SFC, and NABARD etc. 4. Mutual Funds 5. Provident Funds 6. Merchant Bankers 7. Brokers 8. Underwriters 9. Custodians 10. Jobbers 11. Foreign institutional investors 12. Credit rating agency.
Essentially debt and stock are the basic forms of instruments traded in the financial markets. DEBT INSTRUMENTS – they entail a fixed rate and repayment of principal amount at regular intervals. Debt capital is raised by many ways: 1. Term loans from financial institutions 2. Working capital advance from commercial banks 3. Issue of debentures.
It is of two types namely equity and preference.
Equity stock represents owners’ funds and the equity shareholders collectively own the company. They enjoy the rewards of ownership and also bear the risk of fluctuations in the return of their investment. Preference stock is a kind of hybrid stock embodying in it the features of both equity and debt. The preference stockholders enjoy the benefit of fixed rate of dividend and preference over equity shareholders as regards repayment of capital.
One of the world’s largest industries today is the financial services industries which has transformed markets and national economies bringing in its wake progress and prosperity to countries and regions. Both national and international economy has become dependent on financial services industry. It also indicates that there is enormous potential for growth and the players in the financial industry can transform the Indian economy. Indian Financial Sector which can be said to be a reasonably well-developed financial market is no longer an exclusive domain of public sector banks and financial institutions. The private sector entrants in financial services have already ensured a visible presence. The growth of money market has also contributed to the development of 19 financial services.
ROLE OF FINANCIAL INDUSTRY
companies are emerging has high-achiever bright stars, offering the state of the art financial services, supported by strong research and investment advisory capabilities Financial services are rendered by the financial intermediaries which primarily include merchant bankers. The importance of these intermediaries is known world over in promoting economic growth and development by increasing the financial of resources society saves are improving the way society allocates the savings. Financial intermediaries improve the allocation of resources, diversity risks and take advantage of scale.
The financial services comprise of four basic facets
1. Financial Instruments - Such as primary market instruments, money market and secondary market operations. 2. Financial Players - Bankers, financial institutions, brokers, merchant bankers, non banking finance company, etc. 3. Financial Activities - Merchant banking, capital market activities, depositories, trading, portfolio management, credit rating etc. 4. Institutions and Regulatory Bodies - Securities and Exchange Board of India, Reserve Bank of India, stock exchanges, OTCEI, NSE, Credit Rating Agencies, Venture Capital Funds etc.
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