Financial Management in a Global Context

7/24/2019 Financial Management in a Global Context

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Chapter 1 FinancialManagement in the Global

Context

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Indian EconomicLiberalization1980s and 1990s

Shift in policy towards more open economy

Liberalisation of imports and concerted eort to

boost exports21stCentury

uantitati!e restrictions on imports are bein"

phased out

#mport duties are lowered

$%# and $## are on the rise

&ar'et determined exchan"e rate

Current account con!ertibility 2


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Indian EconomicLiberalization

21stCentury (penin" up of outward forei"n direct

in!estment (utward $## limit)200*000 +S%

#%,s issued by forei"n companies

-%,s and .%,s issued by #ndiancompanies

/xports and #mports are on the raise


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Why should India go or openEconomy!

o 'eep the "rowth rate steady)forei"n capital isneeded to au"ment domestic sa!in"s

echnolo"y up "radation needs import of forei"n

technolo"y* both hardware and softwareSince subsidy and uantitati!e easin" is becomin"

increasin"ly di3cult to cater* capital formation isdone throu"h commercial borrowin"s and $%#s and$##s

#ndian companies ability to oer lon" term4nancin" to buyers of en"ineerin" euipment andturn'ey pro5ects

67s and $orei"n subsidiaries of #ndian # Companies


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"he Finance Function


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#esponsibilities o FinanceManagers

o loo' for en!ironmental chan"esand analyse its implications

/xchan"e rates* interest rates* creditconditions at home and abroad* chan"esin industrial* tax and forei"n tradepolicies* stoc' mar'et trends* 4scal and

monetary de!elopments* emer"ence ofnew 4nancial instruments and productsetc:

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o understand and analyseinterrelationships between rele!anten!ironmental !ariables and corporateresponses) own and competiti!e Stoc' mar'et crashes) domestic and o)

shore

ostile a'eo!ers etc:

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o be able to adapt the 4nance function to

si"ni4cant chan"es in the 4rm@s ownstrate"ic posture Chan"e in product mar'et mix (penin" up of a prohibited sector or industry

%i!ersi4cation

Si"ni4cant chan"e in operatin" results

Competitors reorientation in strate"y

#nno!ation in fundin" strate"ies

Chan"es in di!idend policies

Sale of assets to reduce debt etc:

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o ta'e in stride past failures andmista'es to minimi=e their ad!erse

impact Aron" ta'eo!er decision

$orei"n loan in an appreciatin" currency

Loans with low interest rate in a "rowin"mar'et with "rowin" inBation rate

. 4xed price supply contract in a !olatilemar'et

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o desi"n and implement eecti!esolutions to ta'e ad!anta"e of the

opportunities oered by the mar'etsand ad!ances in 4nancial theory (ptions* swaps and forwards for ris'

mana"ement

Securitisation of assets to increaseliuidity

#nno!ati!e fundin" techniues

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#ecent Changes in GlobalFinancial Mar$ets

19;0s /mer"ence of euro money mar'ets and

internationalisation of the ban'in"

business which "a!e rise to inno!ati!efundin" techniues

19?0s

/xchan"e ,ates of !arious countries wereBoated which led to hi"her exchan"e rate!olatility

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1980s

/xchan"e rate !olatility and interest rate !olatility led

to demand for inno!ati!e ris' mana"ement products

li'e options* swaps etc: #nte"ration of national as well as oshore mar'ets

which led to the emer"ence of "lobal uni4ed 4nancial

mar'et

-lobali=ation of ban's of ad!anced economies ational bond and stoc' mar'ets were open to non)

resident in!estment ban's

+ni!ersal Dan'in")uni4cation of functional areas of a

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#easons or the rise o %ni&ersal 'an$ing

Cross)border 4nancial transactions,emo!al of taxes on interest paid to non)

residents%omestic 4nancial mar'ets were open to

forei"n borrowers and !ice !ersa leadin" tothe in!estors and borrowers portfolio and

liabilities to be denominated in dierent

currencies

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#easons or the rise o %ni&ersal'an$ing

%ere"ulation of the 4nancial systems of ma5orindustrial nations)Liftin" of exchan"e controls in +:S*+:E* $rance* -ermany* Swit=erland* 6apan* >olland

%ere"ulation was achie!ed by

/liminatin" specialised institutions caterin"

exclusi!ely to a particular se"ment /ncoura"in" competition by abolishin" 4xed

bro'era"e fees* brea'in" up ban' cartels etc:

(penin" up of domestic mar'ets for forei"n

institutions 1


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#easons or the rise o %ni&ersal

'an$ing on)resident 4rms were allowed to be listed on

national stoc' exchan"es of de!eloped countries and

their numbers increased si"ni4cantly

Spreads on loans and underwritin" commissions

were becomin" thin because of competition withinthe 4nancial ser!ices industry

Dorrowers issued securities directly to the in!estors

eliminatin" ban's as intermediaries

he o!erall trend was towards securitisation and 1


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1990she formation of /conomic and

&onetary +nionF/&+G and the birth of/uro) a ri!al to +:S $inancial &ar'ets

$ree 4nancial &ar'ets) +:S* most of/urope* 6apan* Sin"apore* >on" Eon"

>u"e in!estments by 4nancial institutionof de!eloped countries into thede!elopin" mar'ets of east /urope and.sia

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E(ects o Globalization

Con!er"ence of business cyclesleadin" to less resilience in "lobal

economyLocal 4nancial crisis could spread

throu"hout the "lobal systemControl by policy ma'ers becomes

di3cult

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"he EmergingChallenges

he ability of the company to synchroni=e its "oals andstrate"ies with respect to the chan"in" businessen!ironment

$actors aectin" business en!ironment

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Financial Management in a Global Context