Chapter 1 Financial

Management in the Global

Context

Indian Economic
Liberalization
1980s

and 1990s

Shift in policy towards more open economy

Liberalisation of imports and concerted effort to

boost exports
21st

Century

Quantitative restrictions on imports are being

phased out
Import duties are lowered
FDI and FII are on the rise
Market determined exchange rate
Current account convertibility

Indian Economic
Liberalization
21st

Century

Opening up of outward foreign direct

investment
Outward FII limit-200,000 USD
IDRs issued by foreign companies
GDRs and ADRs issued by Indian
companies
Exports and Imports are on the raise
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Why should India go for open

Economy?
To

keep the growth rate steady-foreign capital is

needed to augment domestic savings
Technology up gradation needs import of foreign
technology, both hardware and software
Since subsidy and quantitative easing is becoming
increasingly difficult to cater, capital formation is
done through commercial borrowings and FDIs and
FIIs
Indian companies ability to offer long term
financing to buyers of engineering equipment and
turnkey projects
JVs and Foreign subsidiaries of Indian IT Companies
4

The Finance Function

Responsibilities of Finance
Managers
To

look for environmental changes

and analyse its implications
Exchange rates, interest rates, credit

conditions at home and abroad, changes

in industrial, tax and foreign trade
policies, stock market trends, fiscal and
monetary developments, emergence of
new financial instruments and products
etc.
6

Responsibilities of Finance
Managers
To

understand and analyse

interrelationships between relevant
environmental variables and corporate
responses- own and competitive
Stock market crashes- domestic and off

shore
Privatization
Liberalization of economy
Default by Governments
Hostile Takeovers etc.
7

Responsibilities of Finance
Managers
To

be able to adapt the finance function to

significant changes in the firm's own
strategic posture
Change in product market mix
Opening up of a prohibited sector or industry
Diversification
Significant change in operating results
Competitors reorientation in strategy
Innovation in funding strategies
Changes in dividend policies
Sale of assets to reduce debt etc.
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Responsibilities of Finance
Managers
To

take in stride past failures and

mistakes to minimize their adverse
impact
Wrong takeover decision
Foreign loan in an appreciating currency
Loans with low interest rate in a growing

market with growing inflation rate

A fixed price supply contract in a volatile
market
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Responsibilities of Finance
Managers
To

design and implement effective

solutions to take advantage of the
opportunities offered by the markets
and advances in financial theory
Options, swaps and forwards for risk

management
Securitisation of assets to increase
liquidity
Innovative funding techniques
10

Recent Changes in Global

Financial Markets
1960s
Emergence of euro money markets and

internationalisation of the banking

business which gave rise to innovative
funding techniques
1970s
Exchange Rates of various countries were

floated which led to higher exchange rate

volatility
11

Recent Changes in Global

Financial Markets
1980s
Exchange rate volatility and interest rate volatility led

to demand for innovative risk management products

like options, swaps etc.
Integration of national as well as offshore markets

which led to the emergence of global unified financial

market
Globalization of banks of advanced economies
National bond and stock markets were open to non-

resident investment banks

Universal Banking-unification of functional areas of a

financial institution

12

Recent Changes in Global

Financial Markets
Reasons for the rise of Universal Banking
Cross-border

financial transactions
Removal of taxes on interest paid to nonresidents
Domestic financial markets were open to
foreign borrowers and vice versa leading to
the investors and borrowers portfolio and
liabilities to be denominated in different
currencies
13

Recent Changes in Global

Financial Markets
Reasons for the rise of Universal
Banking
Deregulation of the financial systems of major
industrial nations-Lifting of exchange controls in U.S,
U.K, France, Germany, Switzerland, Japan, Holland
Deregulation was achieved by
Eliminating specialised institutions catering
exclusively to a particular segment
Encouraging competition by abolishing fixed
brokerage fees, breaking up bank cartels etc.
Opening up of domestic markets for foreign
institutions

14

Recent Changes in Global

Financial Markets
Reasons for the rise of Universal
Banking

Non-resident firms were allowed to be listed on

national stock exchanges of developed countries and
their numbers increased significantly
Spreads on loans and underwriting commissions
were becoming thin because of competition within
the financial services industry
Borrowers issued securities directly to the investors
eliminating banks as intermediaries
The overall trend was towards securitisation and
15

Recent Changes in Global

Financial Markets
1990s
The formation of Economic and

Monetary Union(EMU) and the birth of

Euro- a rival to U.S Financial Markets
Free financial Markets- U.S, most of
Europe, Japan, Singapore, Hong Kong
Huge investments by financial institution
of developed countries into the
developing markets of east Europe and
Asia
16

Effects of Globalization
Convergence

of business cycles
leading to less resilience in global
economy
Local financial crisis could spread
throughout the global system
Control by policy makers becomes
difficult

17

The Emerging
Challenges

The ability of the company to synchronize its goals and

strategies with respect to the changing business
environment
Factors affecting business environment

Political uncertainties
Changes in economic policies of government
Exposure to international markets
Volatility in exchange rates and interest rates
Removal of trade barriers according to WTO agreements
Capital Account Convertibility of the rupee
Increasing ceilings on FDIs, FIIs
Freeing up Indian Banking Sector
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