Financial Management: Scope and Significance

Corporate Finance

• Focuses on budgeting, financial forecasting, cash management, credit administration, investment analysis, and fund procurement.
• Requires businesses to adopt modern tech suited to the dynamic global environment.
• Broadly involves raising funds and enhancing the value of business assets through efficient allocation.
• Aims to integrate fund flows to maximize a firm's returns via sound decision-making.

Nature, Scope, and Significance of Financial Management

• One definition centers around providing funds needed by a business under favorable terms relative to its objectives.
• It includes the instruments, institutions, and practices for raising funds and the legal and accounting relationships between a company and its funding sources.
• Some experts view finance as being concerned with cash, impacting every business transaction.
• Third viewpoint considers FM as procuring & effectively utilizing funds within a business. Management must ensure fund-raising covers plant/machinery expenses & that profits sufficiently offset costs & risks of project setup.
• Financial Management involves investment, financing, and dividend decisions in line with company objectives, considering shareholder interests.

Investment Decisions

• Typically, involve using money for profits or returns through physical assets, business operations, or securities purchases.
• Capital budgeting is a key part of the investment decision process
• Investment decisions determine if adding capital assets will boost future revenue to cover costs.
• Investment decisions are made after assessing growth and profitability projections, helping achieve company's long-term goals like survival, growth, and market leadership.
• Investment decisions cover capital budgeting, cost of capital, risk assessment, liquidity management, expansion/contraction strategies, and asset acquisition (buy/hire/lease).

Financing Decisions

• Centers on how businesses identify funding sources and structures aligned with investment plans.
• Includes equity like ordinary/preference shares, long-term loans like debentures from financial institutions, and short-term loans from banks.
• Optimal financing mix requires balancing equity and debt, minimizing costs and risks.
• Financing decisions integrate capital budgeting, long-term planning, and fund usage evaluation.
• Emphasis is placed on evaluating the cost of funds and capital-intensive projects for effective return measurement.
• Risk and return analysis is performed by assessing financial leverage and risk impact on earnings/capital structure, using operating and financial leverage.
• Corporate focus on efficient capital allocation using modern techniques, including computer-aided financial planning.

Dividend Decisions

• Financial manager decides on profit distribution, retention, or a balance, ideally based on whether the company or shareholders can better use the funds to earn higher returns.
• Practical factors like share price, earnings trends, shareholder tax positions, cash flow, growth funding needs, and Companies Act restrictions influence dividend policy.

Decision Criteria

• Financial decision-making uses principles & methods to achieve objectives like maximizing returns &minimizing costs.
• Core principles: prioritize larger benefits over smaller ones & prioritize earlier benefits.
• Decision criteria for investments involve urgency, payback period, rate of return, and benefit-cost ratios.
• Urgency in which projects with immediate contributions or high priority are favored.
• Discounted & Undiscounted benefit-cost ratio is measured by comparing total benefits to costs with and without considering the timing of benefits.
• Assessments also include Present Value Method and Internal Rate of Return (IRR).

Profit Maximization

• In economic theory, a firm balances marginal revenue and marginal cost.
• Implies either maximizing output with fixed inputs or minimizing inputs for a specific output, thus promoting efficient resource allocation in competitive markets.
• It often assumes perfect competition, which is unrealistic in modern markets.
• Can overlook interests of stakeholders beyond shareholders (e.g., employees, customers, society).
• Focuses on short-term gains, potentially sacrificing long-term sustainability and ignores timing of returns, risk, and share price impacts.

Shareholder Wealth Maximization

• This involves maximizing the Net Present Value (NPV) of decisions for shareholders, which focuses on the long-term financial health.
• NPV is the difference between the present value of benefits and costs.
• It's a superior objective compared to profit maximization as it is aligned with sustainable and comprehensive growth.
• Considers the time value of money by ensuring that earlier returns are valued higher, accounts for risks, and encourages consistent dividends to ensure shareholder satisfaction, ultimately maximizes the company's value.

ICDR IPO Regulations

• Regulation 5 outlines which companies can and cannot issue/deal with an IPO, including rules against debarment of the issuer/promoters by SEBI.
• An IPO can be disqualified if promoter or director is tied to another company that is debarred.
• Issuers and key people shouldn't be willful defaulters or fugitive offenders.
• Outstanding convertible securities can also disqualify an issuer.
• Regulation 6 covers eligibility requirements for IPOs, including:
  • Minimum net tangible assets of Rs. 3 crores per year, with monetary assets capped at 50%.
  • Average operating profit of at least Rs. 15 crores, with each year showing a profit.
  • Minimum net worth of Rs. 1 crore each year on a consolidated basis.
  • If a company changed its name in the last year, at least 50% of the revenue must come from the activity related to the new name.
• An issuer not fully meeting these financial conditions can proceed through book-building if a minimum of 75% of the net offer is allotted to qualified institutional buyers, and the company commits to refund subscription money if the allotment target isn't met.
• Regulation 102 states entities including the company, its promoters, and directors linked to debarred entities cannot partake in follow-on public offerings.
• Regulation 104 lists general conditions for FPOs, including listing on recognized stock exchange.
• Having a depository agreement to dematerialize securities.
• Ensuring all partly paid-up shares are fully paid or forfeited.
• Arranging firm financing for 75% of the business needs, excluding what is raised via public issue funds.
• Usage of proceeds is allocated capped with general corporate purposes or unidentified purposes, not exceeding 25% individually and 35% combined.
• Regulation 113 says that promoters need to hold at least 20% of post-issue capital. If this threshold isn't met, additional investments can be made by alternative investment funds.
• Regulation 112 covers companies without promoters or which get exchange traded after a long duration or are engaging in rights issues.
• Regulation 114 covers securities that are issued for non-cash consideration.

Promoter & Promoter Group

• Promoter is named in the draft offer document, controls company affairs directly or indirectly, whose advice is typically followed by the board.
• Promoter group includes immediate relatives such as spouse, parents, siblings & children or groups of members that hold a 20% stake.

Regulation 7

• Regulation 7 mandates for stock exchange listing, the issuer must apply to a recognized stock exchange and also needs to have a depository agreement to ensure all shares are held in dematerialized form.

Section 186, Indian Companies Act 2013

• Section 186 allows a company to make investments through more than two layers of investment firms and prevents a company from giving a loan or security to anyone, or from acquiring shares that exceed more than 60% of its paid-up capital.
• Legal requirements exist for the approval of board members by passing a special resolution of security and guarantee proposed to be made exceeds the limit.
• No such approval is needed if the aggregate of loans does not exceed the limit.
• Specified IFSC must pass a resolution at the Board of Directors meeting or through circulation.
• Rate of interest should be more than the prevailing yield of one, three, five, or ten years of Government Security closest to the loan period.
• No defaults if a company fails at the end of a loan period.
• Disclosures in financial statements as well as registration under SEBI are required.
• Not applicable in certain companies such as those involving banking, insurance, or housing finances.
• Section 186 has restrictions regarding what is allowed on the layers of investment companies
• Penalties apply for fines ranging for an official, and maximum imprisonment for two years for a company.