Basics of Financial Management

Topic 2: Week 1
Financial Environment of Business
 1.1 What Is Corporate Finance?

Corporate Finance addresses the following three

questions:
1. Financing Decisions From where to raise fund at
lowest cost possible, capital structure
2. Investing Decisions- Where to Invest (Capital
Budgeting)
3. Dividend Policy Profit Appropriation (How much
profit to be retained and how much to distribute in form
of dividends)

Copyright 2016 McGraw-Hill Education. All rights reserved.

No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Balance Sheet Model of the Firm
Total Value of Assets: Total Firm Value to Investors:
Current
Liabilities
Current
Assets Long-Term
Debt

Fixed Assets
1 Tangible
Shareholders
2 Intangible Equity
The Capital Budgeting Decision
Current
Liabilities
Current
Assets Long-Term
Debt

Fixed Assets
What long-term
1 Tangible investments Shareholders
should the firm
2 Intangible Equity
choose?

Copyright 2016 McGraw-Hill Education. All rights reserved.

No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Capital Structure Decision
Current
Liabilities
Current
Assets Long-Term
How should the Debt
firm raise funds
for the selected
Fixed Assets
investments?
1 Tangible Shareholders
2 Intangible Equity

Copyright 2016 McGraw-Hill Education. All rights reserved.

No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Short-Term Asset Management
Current
Liabilities
Current
Net
Assets Working Long-Term
Capital Debt

How should
Fixed Assets
short-term assets
1 Tangible be managed and
financed? Shareholders
2 Intangible Equity

Copyright 2016 McGraw-Hill Education. All rights reserved.

No reproduction or distribution without the prior written consent of McGraw-Hill Education..
The Importance of Cash Flow

Firm Firm issues securities (A) Financial

markets
Invests
Retained
in assets cash flows (F)
(B)
Short-term debt
Current assets Cash flow Dividends and Long-term debt
Fixed assets from firm (C) debt payments (E)
Equity shares

Taxes (D)

Ultimately, the firm The cash flows from

must be a cash the firm must exceed
Government
the cash flows from
generating activity.
the financial markets.
Copyright 2016 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Financial System
External Internal
(Organised (Un-organised
Financial Financial
System) System)

Regulators Financial Financial Financial Money Lenders

(SEBI, RBI, Institutions Financial Instruments Services
Markets Local Bankers
IRDA) (intermediaries) Traders
Landlords
Pawn Brokers
Term: Type
Non Banking Mutual Funds
Insurance & Short Depositories
Banking Institutions
Housing Medium Custodial
Institutions
Finance Long Credit Rating
Public Sector Private Factoring
Companies
Sector Merchant Banking
NBFC Development
Finance Hire purchase
Scheduled Scheduled Primary Secondary Guaranteeing
Institutions
Commercial Cooperative Securities Securities Portfolio Mgt
banks banks Underwriting
Public sector Banks
Equity Time deposits
Private sector Banks
Preference MF Units
Foreign Banks in India Debt & various Insurance Policies
Regional Rural banks combinations
IDBI Industrial Development Bank of India
IFCI Industrial Finance Corporation of India
SIDBI Small Industries Development Bank of India
IDFC Infrastructure Development Finance Company Ltd
All India Financial State Level Other IIBI Industrial Investment Bank of India
Institutions (IFCI, Institutions Institutions NABARD National Bank for Agri & Rural Development
IDBI, SIDBI, IDFC, (SFC, SIDC) (ECQC, EXIM Bank Export Import Bank of India
NABARD, EXIM DICGS) SFC State Financial Corporation
bank, NHB
A SIDC State Industrial Development Corporation
ECGC Export Credit Guarantee Corporation of India
DICGS Deposit Insurance & Credit Guarantee Corporation
 A

Capital Market Money Market

(Treasury Bills
Call Money
Market
Commercial Bills
Equity Market Debt Market Commercial
Papers
Certificate of
Deposits
Term Money
Private Corporate
Debt
Primary Market Secondary Market Derivatives Market PSU Bond market
(NSE - Exchange Traded Govt Securities mkt
BSE
OTCEI
Regional SE) Primary Secondary
Futures & Options Segment Segment
Public Private
Issue Placement Primary Secondary
Segment Segment

Index Stock

Domestic International
Market Market
CDSL IPO issue
Issue Detail:
Issue Open: Jun 19, 2017 - Jun 21, 2017
Issue Type: Book Built Issue IPO
Issue Size: 35,167,208 Equity Shares of Rs 10
aggregating up to Rs 523.99 Cr
Offer for Sale of 35,167,208 Equity Shares of Rs 10
aggregating up to Rs [.] Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs 145 - Rs 149 Per Equity Share
Market Lot: 100 Shares
Minimum Order Quantity: 100 Shares
Listing At: NSE
Dmart IPO details
Objects of the Issue:
The net proceeds of the IPO are proposed to be used as set forth below:
1.
Repayment or prepayment of a portion of loans and redemption
or earlier redemption of NCDs availed by the Company;
2. Construction and purchase of fit outs for new stores;
3. General corporate purposes.

Issue Detail:
Issue Open: Mar 8, 2017 - Mar 10, 2017
Issue Type: Book Built Issue IPO
Issue Size: 62,541,806 Equity Shares of Rs 10 aggregating up to Rs
1,870.00 Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs 295 - Rs 299 Per Equity Share
Market Lot: 50 Shares
Minimum Order Quantity: 50 Shares
Listing At: BSE, NSE
Power Grid FPO details
Objects of the Issue:
The object of the issue are to:
1. Carry out the disinvestment of 185,189,014 Equity Shares of 10 each by the
Selling Shareholder.
2. Meet the capital requirements for the implementation of certain identified
transmission projects
2. ("Identified Projects"); and
3. General corporate purposes.

Issue Detail:
Issue Open: Dec 3, 2013 - Dec 6, 2013
Issue Type: Book Built Issue FPO
Issue Size: 787,053,309 Equity Shares of Rs 10 aggregating up to Rs
6,958.64 Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs 85 - Rs 90 Per Equity Share
Market Lot: 150 Shares
Minimum Order Quantity: 150 Shares
Listing At: BSE, NSE
OFS - Rashtriya Chemicals and Fertilizers Limited
Rashtriya Chemicals and Fertilizers Limited is offering to sell shares
through an OFS process, the details of which are below:

Name: Rashtriya Chemicals and Fertilizers Limited

Floor price: Rs.74.25 per share
Issue Size: 2,75,84,405 Equity Shares

Orders will be accepted from June 29, 3:30 pm till June 30, 3.15 pm.
There is a 5% discount being offered to retail investors.

If your account results in a debit, post allotment of OFS, interest at the

rate of 0.05% will be charged on the debit balance.
You will receive contract notes should you receive allotment of the
OFS.
 Components of the Formal Financial
System
Financial Institutions
Banking and Non-banking
Term finance
Specialised
Sectoral
Investment
State Level
Financial Markets
Money Market
Capital Market
Primary
Secondary
Components of the Formal Financial
System
Financial Instruments
Marketable
Tradeable
Tailor made
Financial Services
Borrowing and funding
Lending and investing
Buying and selling
Payments and Settlements
Managing risk
Financial Markets
Financial Markets
Market where financial assets are traded
Financial assets also known as instruments or
securities
Financial assets are claims against real assets
either directly or indirectly or a claim on future
cash flows
Debt securities-Bonds, debentures, term loans
Equity securities/shares
Hybrid Securities- Preference shares, convertible
bonds
 Functions of Markets
Facilitate transfer of funds from one agent to another
for either investment or consumption purposes
Help in price determination
Provide Liquidity
Improve Efficiency
Money Market
Market for the suppliers and demanders of short
term funds (one day to one year)

Provides stability and equilibrium in dealing with

short term demand and supply mis-matches in the
financial system

Used by the RBI as a point of intervention in

influencing liquidity in the economy
Capital Market
Market for long term suppliers and demanders of
funds (greater than one year)

Primarily includes equity and debt markets

Comprises of the various Stock exchanges or

secondary markets as well as the new issue or primary
market (IPOs)
 Capital Market
Capital markets are financial markets where long-
term securities like shares and debentures are traded.

The capital markets have two important functions

with respect to liquidity and pricing.

Capital markets facilitate purchasing and selling of

securities by thousands of investors continuously.

Capital markets are of two types, i.e. primary and

secondary.
Overview of Indian Capital Market
Primary market is where firms sell new securities to investors in order to
raise funds.
Existing or new firms can make public issue of securities. It includes:
IPO Initial Public Offer
FPO Follow on Public Offer

Prior to 1980 the private firms in India were a small minority compared to
the giant public sector units being set up by the government.
It was during the 1980s that large number of firms came with IPOs to issue
securities.
Dematerialisation of securities totally revolutionised the way the trading
was being conducted in India.
Two main financial instruments for raising capital from primary markets are
Equity IPO/FPO
Debt Bonds/Debentures
Primary or New Issue Market
Deals with the issue of new securities that are
offered to the public for the first time
Used when an enterprise is in need of funds and
approaches the public individuals and institutions
Operationally, split into 3 services:
Origination
Includes detail study of various aspects of issuing company,
appointing a merchant bank, advisory services on class of security,
price, size of issue, etc
Underwriting
Guarantee that new issue will be subscribed to
Distribution
Sale of securities to investors
Overview of Indian Capital Market:
Primary market
Generally, securities are issued to public. But these may also be issued to
persons (less than 50) privately, in which case it is called private
placement.

Euro issues are used to raise funds in foreign capital markets.

Central government as well as state governments regularly borrow large

amounts from primary capital markets by issue of dated securities (fixed
income securities/ Bonds).

Based on SEBI guidelines, the firms can decide the price of new issues.

Issue price for listed firms and new firms is generally kept on lower side.
Primary Market
General method of public issue of shares includes the
issue price fixed beforehand.

Book building is an alternative method of public issue

where issue price is not fixed.

In book building the securities are offered to investors

at various bid prices.

The issue price is discovered based on bids made by

investors.
Book building price is generally higher than the
price under fixed price method.
 Issue Type Offer Price
Price at which the securities
are offered and would be
Fixed Price Issues
allotted is made known in
advance to the investors
A 20 % price band is
offered by the issuer within
which investors are allowed
Book Building Issues to bid and the final price is
determined by the issuer
only after closure of the
bidding.
Demand Payment Reservations
50 % of the shares offered
100 % advance payment is
Demand for the securities are reserved for
required to be made by the
offered is known only after applications below Rs. 1
investors at the time of
the closure of the issue lakh and the balance for
application.
higher amount applications.
10 % advance payment is
Demand for the securities
required to be made by the 50 % of shares offered are
offered , and at various
QIBs along with the reserved for QIBS, 35 %
prices, is available on a real
application, while other for small investors and the
time basis on the BSE
categories of investors have balance for all other
website during the bidding
to pay 100 % advance investors.
period..
along with the application.
Book Building Vs Fixed Price
As per SEBI guidelines, an issuer company can issue securities to
the public though prospectus in the following manner:

100% of the net offer to the public through book building process
75% of the net offer to the public through book building process
and 25% at the price determined through book building. The
Fixed Price portion is conducted like a normal public issue after
the Book Built portion, during which the issue price is determined.

The concept of Book Building is relatively new in India. However

it is a common practice in most developed countries.
 Primary Markets Issue Mechanism
Public issue through Prospectus
Tender/Book Building
Offer for Sale
Placement
Private Placing
Rights Issue
Overview of Indian Capital Market:
Secondary Market
Secondary market is where already issued securities are traded.

Stock exchanges represent secondary markets.

The BSE Ltd. in India was established in 1875 and is Asias first stock
exchange.

After Indias independence, more than 20 stock exchanges have been

established in various cities in the country.

Government debt market represents more than half the total debt market in
India.

Bulk of the government debt securities are owned by commercial banks and
financial institutions.
Secondary Market
There are also the over-the-counter (OTC) markets and the
derivative markets.

In India derivatives trading was launched in the year 2000.

SEBI approved trading in index future contracts based on Sensex

and Nifty.

In the year 2001, trading in options in Sensex, Nifty and few

individual shares was launched.

Trading was extended to IT index and Bank Nifty in 2003 and 2009
respectively.
 Secondary Market
Stock Market/OTC Market based on asset class
Trading of securities already issued or in
existence
Issuing company not involved
Functions include:
Mobilisation of savings into investment
Market Place/Liquidity
Price Formation
Overview of Indian Capital Market :Trading
and Settlement
Investors normally do the trading, i.e. purchase or sale of securities through
brokers and sub-brokers.

Investors can hold the securities in dematerialised (demat) form.

In India there are two depositories, i.e. NSDL and CDSL.

At present 100% of the trade is executed and settled in demat form.

Under rolling system of settlement everyday is a settlement day for trades

done 2 days earlier.

Extreme fluctuation of securities prices are not considered healthy for the
capital market.

SEBI has introduced a system to halt the capital market trading activity
whenever Sensex or Nifty changes beyond a limit within a trading day.
Market Players/Participants
Financial Institutions
Financial Intermediaries
Government
Can also be viewed as buy-side or sell-side
Buy side are investors mutual funds,
insurance companies, treasury dept of banks
and corporate houses
Sell side Merchant banks, broking houses,
IB depts of banks
Types of Market Structures
Exchange Traded Markets
Equity
Commodities
Over-the-counter (OTC) Markets
Debt
Forex
Auction Market
Government bonds