Business environment

By: Dr. Vibhuti Tripathi, SMS

Business Environment

Environmental Forces

• Business Environment• Task Environment• Competitive Forces in the Task

Environment• Technological Forces • Political and Legal Forces

The General Environment and Environmental Forces Affecting

OrganizationsThe General Environment

Cultural Forces

Political - Legal Forces

Technological Forces

Competitive Forces

Organization

Eco

syst

emP

olitical System

Demographics Economic System

The General Environment

Sometimes called the macro-environment.

Are external factors, such as inflation and demographics, that usually affect indirectly all or most organizations.

Factors in the General Environment

Type of economic system and economic conditions

Type of political system

Condition of the ecosystem

Demographics

Cultural Background

Roles of Government in Business

The government acts as a watchdog over business

Provides direction in areas such as:Antitrust,Monetary policy, Defense, Human rightsEnvironmental matters

The Economic System

Privately Controlled MarketsBased On Supply And Demand

Free Market CompetitionPrivate ContractsProfit IncentivesTechnological Advancement

Competitive Forces in the Task Environment

Suppliersbargaining

power

Threatof new

competitors

Buyersbargaining

power

Threat ofsubstitute

goods/services

Rivalry amongexisting firms in industry

New EntrantsBarriers to Entry:Economies of scale

Decrease in per unit costs as volume of goods/services produced increases

Product differentiationuniqueness in quality, price, design, brand image, or customer service that gives a product an edge over the competition

New Entrants cont.

Capital requirements Money needed to finance equipment supplies, advertising, R&D, and the like necessary to start

Government regulationMay bar or severely restrict potential new entrants to an industry

Substitute Goods and Services

Goods/Servicesthat can easily replace the firm’s goods/services

Customers

Potential Effects of Customers:

They may drive down prices

Push for more or higher-quality products

IntegrationDeveloping related business units

Forward Integration- customer

Backward Integration- supplier

Horizontal Integration- competitors

Customers cont.

Exhibit Bargaining Power :They purchase a large volume relative to the supplier’s total sales

They have readily available alternatives for the same services/products

Suppliers Bargaining Power of Suppliers:

Often controls how much they can :Raise prices above their costsReduce the quality of goods and services

Bargaining Power is increased by patents and copyrights

Impact of TechnologyKnowledge, tools, techniques, and actions

Used to transform material , information, and other inputs into finished goods and services

Plays pivotal role in creating and changing an organization’s task environment

Economic Systems Capitalism

Socialistic

Mixed

Capitalistic Economy Free Enterprise Freedom to save and investFree and healthy competition

Run by price mechanism : Goods are bought and sold in the market at a price which is freely determined by the market.

Distribution of goods is according to market conditions prevalent in markets.

Entrepreneurs / Organizations have control over production & distribution of goods by mobilising the resources to maximise profits

Government has a role of regulator only.

Socialistic Economy Private players do not contribute much.

Government takes the responsibility of the economic development wholly to ..

Strategize the exploitation of resources

Equitable distribution of goods

Primary motive is social good.

Entrepreneurship exists in the form of ..

Representatives nominated by government to plan and strategize.

Mobilise the resources

Allocating and re-allocating resources

Resources are channelized towards industries of National importance.

Production and distribution of the goods is according to the needs of the people.

Private entrepreneurs have a negligible role

Mixed Economy Government undertakes the production of capital goods like – iron, steel, cement, fertilizers etc.

Production of consumer goods is left to the private enterprises.

Runs on both price mechanism as well as equitable distribution.

Mixed economy tries to solve the problem of distribution of goods and services in a better way than capitalist economy.

Role of government is wider ..

Formulate different strategies to establish gvt. owned enterprises.

Tries to increase production of essential goods and encourages private entrepreneurship.

Deciding Whether to Go Global

Reasons to consider going global:Foreign attacks on domestic marketsForeign markets with higher profit opportunitiesStagnant or shrinking domestic marketsNeed larger customer base to achieve

economies of scaleReduce dependency on single marketFollow customers who are expanding

Deciding Which Markets to Enter

Before going abroad, the company should try to define its international marketing objectives and policies.

What Volume of Foreign Sales is Desired?

How Many Countries to Market In?

What Types of Countries to Enter?

Choose Possible Countries and Rank Based on Market Size, Market Growth, Cost of Doing Business, Competitive Advantage, and Risk Level

Strategic OrientationsOrientation

Domestic MarketingExtension

MultidomesticMarketing

Global Marketing

EPRG Schema

Ethnocentric

Polycentric

Regio/Geocentric

Strategic Orientations… Domestic Market Extension Orientation Extension of domestic products into foreign markets International markets are secondary Prime focus—market excess domestic products abroad Firm’s orientation is domesticMulti-Domestic Market Orientation Realizes the difference b/w domestic & foreign markets Different countries need different products Separate marketing strategies for each country Subsidiaries operate independent of one another Products are adapted, advertising is localized Might not standardize products

Strategic OrientationsRegional/Global Orientation

Truly global – single marketEmphasis on standardization—product/processStrive for efficiencies of scale by standardizing market

mix across national borders, whenever it is cost or culture effective

Pursue a global strategy for major brands or multi-domestic strategy for other brands

Market Entry Strategies


Exporting:Indirect: working through independent

international marketing intermediaries.Direct: company handles its own exports.


Joint Venturing:Joining with foreign companies to produce or

market products or services.Approaches:

LicensingContract manufacturingManagement contractingJoint ownership

Joint Ownership

KFC entered Japan through a joint ownership venture with Japanese conglomerate Mitsubishi.

Market Entry StrategiesDirect Investment:

The development of foreign-based assembly or manufacturing facilities.

This approach has both advantages and disadvantages.

An Overview Of Liberalization, Privatization

Indian economy had experienced major policy changes in early 1990s.

The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive.

The series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at making the economy more efficient.

It marks the advent of the real integration of the Indian economy into the global economy.

The term “Liberalization” stands for “the act of making less strict”.

Liberalization in Economy stands for “The process of making policies less constraining of economic activity." And also “Reduction of tariffs and/or removal of non-tariff barriers.”

Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities.

In developing countries, economic liberalization refers more to liberalization or further "opening up" of their respective economies to foreign capital and investments.

Five of the fastest growing developing economies today; Brazil, Russia, India, China and South Africa, have achieved rapid economic growth in the past several years or decades after they have "liberalized" their economies to foreign capital.

Most first world countries, in order to remain globally competitive, have pursued the path of economic liberalization:

partial or full privatization of government institutions and assets, greater labor-market flexibility, lower tax rates for businesses, less restriction on both domestic and foreign capital, open markets, etc.

Backdrop of Indian EconomyThe low annual growth rate of the economy of India before 1980, which

stagnated around 3.5% from 1950s to 1980s, while per capital income averaged 1.3%.

Only four or five licenses would be given for steel, power and communications. License owners built up huge powerful empires.

A huge public sector emerged. State-owned enterprises made large losses.

Infrastructure investment was poor because of the public sector monopoly.

License Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country" and corruption flourished under this system.

Benefits of LiberalizationIncrease in Foreign investmentIncrease in Foreign Exchange Reserve Increase in ConsumptionControl over priceReduction on External Commercial

Borrowings

Definitions Of The Term “Privatization” and “Economic Privatization”

The term “Privatization” refers to “The transfer of ownership of property or businesses from a government to a privately owned entity.”

The transition from a publicly traded and owned company to a company

which is privately owned and no longer trades publicly on a stock exchange.

The process of converting or "selling off" government-owned assets, properties, or production activities to private ownership.

After several decades of increasing government control over productive activities, privatization came into vogue in the 1980s, along with business deregulation and an overall movement toward greater use of markets.”

Privatization is frequently associated with industrial or service-oriented enterprises, such as mining, manufacturing or power generation, but it can also apply to any asset, such as land, roads, or even rights to water.

In recent years, government services such as health, sanitation, and education have been particularly targeted for privatization.

Privatization helps establish a "free market", as well as fostering capitalist competition, which will give the public greater choice at a competitive price.

Reason for Indian Privatization

1. Crippling Budget deficit

2. Spectacular growth by economies of Korea, Taiwan, Malaysia in private sector

3. Changes in China

4. Emergence of professional management

5. IMF & World Bank extended arm to capitalism

6.Gulf crisis

7.Lack of demand in economy

8.Integration of world trade

9. Developed local capital market and Financing Institution

Recent Reasons

•To STENGTHEN Competition

•To improve public finance

•To fund Infrastructure Growth

•Accountability of share holders

•To reduce unnecessary interference

The main reason for increased efficiency gain as a result of privatization can be attributed to

(i)Less political interference in decision making

(i)Staff remuneration is more closely linked to productivity and profitability

(ii)Firm are exposed to open market discipline as opposed to government support

(iii)Firm’s cost reducing effort are higher under competitive private ownership

Key obstacle to privatization(i)Lack of strong and high level political commitment to the

privatization program

(ii) Unclear and weak institutional frame work-decentralized or centralized. (ministry and provincial level)

iii) Lack of proper preparation of enterprise for privatization or divestment eg. Accounting and auditing , treatment of losses, social and environmental safety net

(iv) Insufficient transparency and flexibility in term of the method of privatization, balancing, ownership, and control (corporate governance)

(v) Vested interest of manager, employees and customer

(vi) Lack of appropriate legal frame work (eg. Property right, foreign ownershipbankruptcy law )

(vii) Underdeveloped capital markets

WAYS OF PRIVATIZATIONDISINVESTMENT (a process in which the public

undertaking reduces its portion in equity by disposing its shareholding)

CONTRACTING

FRANCHISING / LEASING

PREMITING PRIVATE SECTOR ENTER INTO PSU RESERVED AREA

LIQUIDATION (Termination of a business operation by using its assets to pay up its liabilities)

ECONOMIC ACTIVITIES

Methods of measuring economic activity :

Consumer spending: consumer demand or consumption is also known as personal consumption expenditure

Exchange Rate: also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other.

Gross domestic product: The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country's overall official economic output.

It is the market value of all final goods and services officially made within the borders of a country in a year.

It is often positively correlated with the standard of living.

Stock Market:

Interest Rate: a fee paid on borrowed assets. or, money earned by deposited funds. Paid on percentage of amount deposited or charged on percentage of amount borrowed.

National Debt: A broader definition of government debt considers all government liabilities, including future pension payments and payments for goods and services the government has contracted but not yet paid.

can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders.

Rate of Inflation: a rise in the general level of prices of goods and services in an economy over a period of time.

When the price level rises, each unit of currency buys fewer goods and services.

an erosion in the purchasing power of money.

uncertainty about future inflation may discourage investment and saving

may lead to reductions in investment of productive capital and increase savings in non-producing assets. Selling Stocks and buying gold.

Unemployment:

Balance of Trade: difference between the monetary value of exports and imports of output in an economy over a certain period.

trade surplus , trade deficit

Few More Terms

Money Supply – Total volume of money that is circulated in the economy. M 1 –

Currency in Circulation

Demand Deposits of public with banks

M 2 – Total of M 1 + Post Office savings + Time Deposits of small denominations

(M1 & M2 = Narrow Money)

M 3 – Total of M 2 + Large time deposits + Institutional funds.

M 4 - All deposits with post office saving(excluding National Savings Certificates).

(M3 & M4 = Broad Money )

These gradations are in decreasing order of liquidity. M1 is most liquid and easiest for transactions

M4 is least liquid of all. M3 is the most commonly used measure of money supply

M1= Currency with public + Current deposits with banking system + demand liabilites portion of saving deposits with the banking system .Governorof RBI + ministers + MP can have account with RBI

More money = more liquidity = easy to get loans = inflation

central bank money (physical currency, government money)

commercial bank money (money created through loans) - sometimes referred to as private money, or chequebook money.

Expansion of Money :

i. Money is pumped into market through issuing of Currency by RBI.

ii. Borrowings of Government.

iii. Government meets its budgetary deficits by borrowing from RBI

Contraction of Money : Unlimited expansion of money and credit would

lead to ?

INFLATION

Role of RBI Monetary Policy: It is a statement stated bi-

annually through RBI.

Fixed by considering the prevailing prices and growthpatterns of economy and also rate of population

growthand employment.

The Reserve Bank estimates the demand for banknotes on the basis of the growth rate of the economy, the replacement demand, Inflation and public expenditure demand by using statistical models/techniques.

All the currency issued is the monetary liability of RBI.

Backed by assets of equal value held.

Assets consist of gold, foreign securities, and the government’s securities.

Devaluation of RupeeThere is a shortage of dollars.

Foreign Exchange reserves are almost static around $ 300 billion since last nearly 3 years . This means that we are not able to increase the reserves and is a poor reflection on our inability to increase our net earnings in dollar terms.

Our exports have gone up and in 2011-12 touched the highest figure of $300 bn but so have the imports also risen to an ever highest figure of nearly $450+ bn levels. Foreign Exchange reserves are not going up.

High rate of inflation it erodes the value of rupee

High fiscal deficit in the central budget, presently around 5.9% and expected to go up. requires to resort to increased borrowings

Increasing burden of subsidies on account of fertilisers, cooking gas, petrol and diesel prices, NAREGA etc it is a mammoth task to reduce the overspending to reduce the fiscal deficit to manageable levels.

The recent downgrading of India by Standard & Poor international rating agency has resulted in flight of dollars by FII's who quit from the share markets thus leading to a furthur shortage of dollars.

Monitory Policy Expansionary policy, increases the total supply of money in the economy rapidly

OR Contractionary policy, decreases the total money supply or increases it only slowly.

It Regulates the supply of money and the cost of availability of credit in the economy.

Aims at – maintaining price stability and Economic growth through;

Changing money supply and interest rates.

Credit Control Measures :

Bank Rates: Rate at which the central bank provides credit to commercial banks.

Increase in bank rates leads to ?

Increase in lending rate Money supply could be checked. Acts as a pace setter to all other rates of interests.

Increase in Bank rates could lead to reduction in BorrowingsLevel of inventory holding Investment Prices

CRR (Cash Reserve Ratio): Every Bank has to keep certain amount of cash reserve with the RBI

SLR (Statutory Liquidity Ratio) : Every bank should keep certain percentage of its total DEMAND and TIME deposits with RBI in the form of Liquid assets.

Open Market Operations: buying or selling of bonds by RBI in the open market.

• The assets purchased or sold are – –Government Securities / Bonds–Company Shares–Foreign Exchange

–Repo rate: Interest rate at which the Reserve Bank of India lends money to other banks.

– It is a repurchase agreement between RBI & commercial bank. (Essentially short term securities).

– Purchased or sold at discounted rates.

When the repo rate increases borrowing from RBI becomes more expensive.

If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate;

Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo rate : rate at which banks park their short-term excess liquidity with the RBI.

The RBI uses this tool when it feels there is too much money floating in the banking system.

An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest.

As a result, banks would prefer to keep their money with the RBI.

Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI.

Whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks.

Fiscal PolicyIs a deliberate attempt of the government to influence the economy by changing levels of government expenditure and / or taxation.

Government must provide equitable Division of revenue raised nationally among : Centre, state and local

• It should be of national interest. • Consider economic disparity among the states. • Budgets must contain:

–Estimates of revenue and expenditure; differentiating between capital and current expenditure.

–Proposal for financing and anticipated deficit for the said period.

–Funding areas could be :• Agriculture, Education, Health, Social Security,

Institutional,

Fiscal Factors

Expenditure

Output and Employment

Deficit

Revenue

Fiscal deficit can be higher if …

… public investment is large.

Tools of Fiscal Policy

(1)Government Expenditure: Chosen area

(2)Taxes, both direct & indirect: Revenue generation

(3)Deficit financing: Government spends more money than it receives as revenue, the difference being made up by borrowing.

issue bonds or to print money

(4)Subsidies: they can alter relative prices and budget constraints and thereby affect decisions concerning production, consumption and allocation of resources.

Subsidies, lead to changes in demand/ supply decisions. ..

By means of creating a wedge between consumer prices and producer costs,

Subsidies are often aimed at :

• inducing higher consumption/ production

• offsetting market imperfections

• achievement of social policy objectives including redistribution of income, population control, etc

(5)Transfer payments: Transfer payments are payments made by the government sector to the household sector with no expectations of productive activity in return.

The three common transfer payments are:

• Social Security benefits to the elderly and disable, •unemployment compensation to the unemployed,

•welfare to the poor.

Money Market

Money Market is a wholesale market of short term debt instrument and is synonym of liquidity..

Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place.

As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.

It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can be converted into cash.

Features of Money Market?

It is a market purely for short-terms funds orfinancial assets called near money.

It deals with financial assets having a maturityperiod less than one year only.

In Money Market transaction take place informally, only through oral communication, relevant document and written communication transaction can be done.

Transaction are conducted without the help of brokers.

It is not a single homogeneous market, it comprises of several submarket like call money market & treasury bill market.

Objective of Money Market?

To provide a parking place to employ short termsurplus funds.

To provide room for overcoming short term deficits.

To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market.

To provide a reasonable access to users of short termfunds to meet their requirement quickly, adequately at reasonable cost.

The Players

Reserve Bank of India

Acceptance Houses: guarantees the payment of bills used to finance trade deals and goods in shipment. Its profit is the difference between the discounted amount it guarantees to pay and the full amount of the bill that it undertakes to collect from the original creditor.

Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend.

•Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders

• Companies, Corporate bodies, Trusts and institutions can purchase the treasury bills, Commercial Papers and Certificate of Deposits.

Composition of Money Market?

Money Market consists of a number of submarketswhich collectively constitute the money market. They are ..

Call Money Market

Treasury bill market

Call Money Market

The day-to-day surplus funds (mostly of banks) are traded.

The loans are of short-term duration varying from 1 to 14 days.

The money that is lent for one day in this market is known as "Call Money", and

If it exceeds one day (but less than 15 days) it is referred to as "Notice Money".

Banks borrow in this market for the following purpose:

• To fill the gaps or temporary mismatches in funds

• To meet the CRR & SLR mandatory requirements as stipulated by the Central bank

• To meet sudden demand for funds arising out of large outflows.

Instrument of Money Market?

A variety of instrument are available in a developedmoney market.

• Treasury bills

• Certificate of Deposits

• Commercial Papers, promissory notes in the bill market.

• Repurchase agreement

• Money Market mutual fund

Treasury Bills

Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days.

All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

Who can invest in T-Bill

Banks, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs invest in T-Bills.

• At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.

Amount

• Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par.

Certificate of DepositA CD is a time deposit with a bank.

Like most time deposit, funds can not be withdrawn before maturity without paying a penalty.

CD’s have specific maturity date, interest rate. The main advantage of CD is their safety.

Anyone can earn more than a saving account interest.

CDs can be issued by all scheduled commercial banks

Minimum period 15 days ; Maximum period 1 year

Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac

CDs are transferable by endorsement

CDs may be issued at discount on face value

Commercial PaperCommercial Paper (CP) is issued in the form of a promissory note.

Issued by a corporation typically financing day to dayoperation.

Only company with high credit rating issues CP’s. (CRISIL, ICRA)

Denomination: min. of 5 lakhs and multiple thereof.

Maturity: min. of 7 days and a maximum of upto one year from the date of issue

Eligibility for issue of CP

a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore;

b) (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore

c) and the borrowal account of the company is classified as a Standard Asset by the financing bank/s.

All eligible participants should obtain the credit rating for issuance of Commercial Paper

Credit Rating Information Services of India Ltd. (CRISIL)

Investment Information and Credit Rating Agency of India Ltd. (ICRA)

Credit Analysis and Research Ltd. (CARE) Duff & Phelps Credit Rating India Pvt. Ltd.

(DCR India) The minimum credit rating shall be P-2 of

CRISIL or such equivalent rating by other agencies

Rating Requirement

ReposIt is a transaction in which two parties agree to sell and

repurchase the same security.

Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price

The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

Importance of Money Market

Development of trade and industry

Development of capital market

Smooth functioning of Commercial banks

Effective central bank control

Formulation of suitable monetary policy

Source of finance to government

Need for Development of Capital Market

Increase in Industrial Units due to ..Technological DevelopmentIncrease in Demand Competition

Situation ..Capital at the disposal of one individual or a few

individuals is not sufficient.

Paucity of funds arises .

Industrial Securities MarketRefers to the market for shares and debentures of

old and new companies

New Issues Market- also known as the primary marketrefers to raising of new capital in the form of shares and debentures

Stock Market- also known as the secondary market. Deals with securities already issued by companies

Types of Shares• Equity shares: These shares are also known

as ordinary shares.

• They are the shares which do not enjoy any preference regarding payment of dividend and repayment of capital.

• They are given dividend at a fluctuating rate.

• The dividend on equity shares depends on the profits made by a company.

• Preference shares: These shares are those shares which are given preference as regards to payment of dividend and repayment of capital.

• Preference shareholders have some preference over the equity shareholders, as in the case of winding up of the company, they are paid their capital first.

• Deferred shares: which are held by the founders or pioneer or beginners of the company.

• They are also called as Founder shares or Management shares.

The right to share profits of the company is deferred, i.e. postponed till all the other shareholders receive their normal dividends.

IPOs : Initial Public offer , floated by new companies or for first time to raise funds.

FPOs: Follow on Public Offer, already listed company issues more equity shares.

DebenturesIs a document that either creates a debt or

acknowledges it.

Used for a medium- to long-term debt instrument used by large companies to borrow money.

Debenture holders have no voting rights.

Mutual Funds• Promote savings and mobilise funds which are invested in the stock

market and bond market

• Pool funds of savers and invest in the stock market/bond market

• Their instruments at saver’s end are called units

• Offer many types of schemes: growth fund, income fund, balanced fund

• Regulated by SEBI

• Provide a service in terms of analytical knowledge of the investment opportunities.

• Fund Management expertise

Stock Exchange • Place where trading of shares is done in terms of

sale and purchase.

• At present, there are twenty one recognized stock exchanges in India.

• Bombay Stock Exchange is the largest, with over 6,000 stocks listed.

• The BSE accounts for over two thirds of the total trading volume in the country.

Working of Stock exchanges• Placing an order with a broker –

– Only members are allowed to trade.– Outsiders trade through members.– Opening of an account with the broker– Order placed with the broker

• Execution of the order- – Broker or his clerk approaches the SE– Quotations are asked or quoting his own price– Negotiation on word of mouth and noted for, quantity,

description, name of party – Transaction appears in SE’s daily official list – including

no. of shares and price.

• Reporting the deal to the client –– Contract note is prepared – security bought or sold,

price, broker’s commission, date of settlement.

• Settlement of transaction – 1.Ready delivery (Spot Delivery) – cash

settlement made immediately on transfer of securities or within 1-7 days through clearing houses.

2.Forward Delivery – settlement within a fixed duration, normally 15 days.

3.Carry forward transactions- postponing the transaction to next settlement period by paying carry forward charge.

Clearing Houses: agencies given the responsibility of settling the amounts payable between counter parties.

It is separate arm; for BSE – Bank of India

Clearing the transactions on commission.

Flaws in Stock ExchangesLack of integration – leading to variation in

prices.

Settlement system varies.

No nation wide platform.

National Stock Exchange (NSE)Established in 1994 in Mumbai. There was a need for a nation wide tradingEqual access to investors across the

country.Meet international securities market

standard.

Working of NSEFully automated screen based trading system. Trader can put various conditions in terms of

type, price and quantityOrders received are stacked in price and time

priority. Computer searches for compatibilityIn case of no-match the order is kept pending

• When the deal is stuck a confirmation slip is printed to give details of price and quantity.

• Identity of the trader is not revealed.

• Done through registered brokers.

• NSE to Start Mobile Trading from Early October (Read the hand out distributed)

SPECULATION :Definition : it involves the buying, holding,

selling, short-term selling of stocks, bonds, commodities, currencies, collectibles or any valuable financial instrument to ..

Profit from fluctuations in its price as opposed to buying it for use or for income via method like dividends or interest.

Kinds of speculation• Bull Market (Tejiwala): purchasing the shares

at current prices to sell at a higher price in the near future and make a profit.

Only if expectations come true. Also called a long buyer.

• Bear Market (Mandiwala) : Selling security in the hope that he will be able to buy them back at lesser price. Also called “short selling”.

Stag : Applying for a large number of a shares in a new issue with the intention of selling them at a premium.

Insider trading

The trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company.

Why do we need a regulatory body ?

India is an ` informationally ' weak market.

Investors are less aware.

Boosting capital market demands; restoring the confidence of investors who have been beaten down by repeated scams.

FEW SCAMS, Which shook the Investors’ confidence.

• During 1992 : ‘Big Bull’, Harshad Mehta’s Securities Scam. Many Banks were involved.

• 1993 : Preferential Allotment Scam, issuing of equity allotments to their respective controlling groups at steep discounts. To the tune of Rs. 5000 crores lost.

• 1993 – 94 : Disappearance of companies; Stock market shot up 120%; 3,911 companies raised over Rs. 25,000 crores and vanished / did not set up their projects.

1995-97 : Plantation Companies’ Scam, NBFCs promised high returns; collected Rs. 50,000 crores

1999 – 2000 UTI Scam Rs. 32 crores.

IT Scam; firms changed their names to include infotech; IT sector was booming.

Satyam Fiasco : Inflated (non-existent) cash and bank balances. Insider Trading; corporate-mis-governance.

Mission of SEBISecurities & Exchange Board of India (SEBI) formed

under the SEBI Act, 1992 with the prime objective of Protecting the interests of investors in securities,Promoting the development of, and Regulating, the securities market and for matters connected

therewith or incidental thereto.’

Focus being the greater investor protection, SEBI has become a vigilant watchdog

FUNCTIONS OF SEBI 1. A review of the market operations, organizational structure and

administrative control of the exchange

2. Registration And Regulation Of The Working Of Intermediaries

Portfolio ManagersPortfolio Managers

Sub- BrokersSub- BrokersUnderwritersUnderwriters

Stock brokersStock brokersMerchant BankersMerchant Bankers

Secondary MarketSecondary MarketPrimary MarketPrimary Market

3. Registration And Regulation Of Mutual Funds, Venture Capital Funds & Collective Investment Schemes

Promoting and protecting the interest of mutual funds and their unit-holders, increasing public awareness of mutual funds, and serving the investors' interest by defining and maintaining high ethical and professional standards in the mutual funds industry'.

Every mutual fund must be registered with SEBI and registration is granted only where SEBI is satisfied with the background of the fund.

SEBI has the authority to inspect the books of accounts, records and documents of a mutual fund and its trustees.

SEBI (Mutual Funds) Regulations, 1996 lays down the provisions for the appointment of the trustees and their obligations

Every new scheme launched by a mutual fund needs to be filed with SEBI and SEBI reviews the document in regard to the disclosures contained in such documents.

Regulations have been laid down regarding listing of funds, refund procedures, transfer procedures, disclosures, guaranteeing returns etc

SEBI has also laid down advertisement code to be followed by a mutual fund in making any publicity regarding a scheme and its performance

SEBI has prescribed norms / restrictions for investment management with a view to minimize / reduce undue investment risks.

SEBI also has the authority to initiate penal actions against an erring MF.

In case of a change in the controlling interest of an asset management company, investors should be given at least 30 days time to exercise their exit option.

4. Prohibiting Fraudulent And Unfair Trade Practices In The Securities Market

– SEBI is vested with powers to take action against these practices relating to securities market manipulation and misleading statements to induce sale/purchase of securities.

5. Prohibition Of Insider Trading

an investor who has in excess of 5 per cent of the stake in a company has to disclose any transaction that has the effect of altering his ownership stake by more than 2 per cent.

It has to do so within four working days following the day when its trade resulted in crossing the 2 per cent threshold.

6. Investor Education And The Training Of Intermediaries– SEBI distributed the booklet titled “A Quick Reference Guide for

Investors” to the investors– SEBI also issues a series of advertisement /public notices in national as

well as regional newspapers to educate and caution the investors about the risks associated with the investments in collective investment

schemes – SEBI has also issues messages in the interest of investors on National

Channel and Regional Stations on Doordarshan.7.Inspection And Inquiries

8.Regulating Substantial Acquisition Of Shares And Take-overs

Gilt Edged Securities of government and semi-government

organisations are marketed. Securities are backed by RBI. Investors are predominantly institutions, which

are compelled by law to invest a certain portion of their funds in Government securities.

Thus called a captive market for Government securities.

All Over AgainCapital MarketCapital Market -- The market for relatively long-

term (greater than one year original maturity) financial instruments.

Primary MarketPrimary Market -- A market where new securities are bought and sold for the first time (a “new issues” market).

Secondary MarketSecondary Market -- A market for existing (used) securities rather than new issues.

Market for long-term capital. Demand comes from the industrial, service sector and government

Supply comes from individuals, corporates, banks, financial institutions, etc.

Can be classified into:Gilt-edged marketIndustrial securities market (new issues and stock

market)

Development Financial Institutions

After industrial revolution in India Existing Financial Institutions were inadequate in number to provide funds to large scale industries.

Government of India Established DFIs

These institutions subscribe to shares and debentures of new and old companies and also give them loans.

Industrial Finance Corporation of India (IFCI)

State Finance Corporations (SFCs)

Industrial Development Finance Corporation (IDFC)

Industrial Credit and Investment Corporation of India (ICICI)

Industrial Development Bank of India (IDBI)

Small Industries Development Bank of India (SIDBI)

Non-Banking Finance Companies

Those who are not approaching DFIs due to not matching the requirements.

NBFCs provide credit to them.

No minimum liquidity ratio is mandatory

Also give loans to self-employed individuals.Subject to extreme insecurities;

Loans are not protected. Higher rates of interest

Financial Intermediaries

Merchant Banks: are issue houses rendering various services to industrial projects and new companies.

Reasons to establish : To encourage small and medium industrialists who require specialist services. Complexity in rules and procedures of government norms.

Merchant banking is brought under the regulatory framework of SEBI

Activities of Merchant BankerIssue Management :

Structuring of instrument Preparation of offer document- (prospectus, need for

money, expenditure, nature of instrument, information about management, future plans etc. )

Obtaining statutory and other clearancesAssistance in selection of brokers, registrars,

printers, ad agency and other intermediaries. Post Issue activities- Collecting application forms,

money, dispatch of share certificate.

• Corporate advisory services:– Valuation– Advise on mergers / Acquisitions– Restructuring of business and finance– Selling of assets

Underwriting: contractual obligation whereby the underwriter agrees to subscribe to a certain number of shares if they are not subscribed by the company.

DSP MeryLynch and J P Morgan Stanley

Venture Capital FinancingDevelopment of any entrepreneurship would

require combination of three vital factors :

Innovative ideasCompetency in project preparation &

implementationProject financing

Many ideas are profitable but risky; solution ----

VENTURE CAPITALISTS

Venture Capital firms take up such risky projects.

ICICI, IDBI, IFCI have venture capital divisions.

Private banks too have such divisions.

Socio-cultural Environment

Cultural Forces

Culture is the shared characteristics, values, and beliefs of a group that distinguishes them from another group

Such as religion, language, and heritage

DemographicsCharacteristics of a population such as age,

race, gender, ethnic origin, and social classdetermine the characteristics of work groups,

organizations, specific markets, or nations population.

Demographics influence marketing, advertising, and human resources decisions.

Such as the number of individuals the ages of 18 to 25

They change all the time.

The social environment encompasses various aspects like:

The religious aspects,

Language, Customs, Traditions and Beliefs;

Tastes and Preferences;

Social Satisfaction; Social Institutions;

Buying and Consumption Habits

All very important factors for business

Socio-cultural Factors

1. Population demographics

Ethnic composition

Aging of population (India is a young

country)

Regional changes in population growth

and decline

2. Social mobility

3. Lifestyle changes;

4. Attitudes to work and leisure

5. Education – spread or erosion of educational standards

6. Health and fitness awareness

7. Multiple income families

One of the important reasons for the failure of a number of companies in foreign markets is

Their failure to understand the cultural environment of these markets and to suitablyformulate their business.

Even when people of different cultures use the same basic product,

The mode of consumption, conditions of use,Purpose of use or the perceptions of the product attributes may vary.

The product attributes, method of presentation, positioning or method of promoting the productmay have to be varied to suit the characteristics of different markets.

The differences in language sometimes pose a serious problem, even necessitating a change in the brand name.

The values and beliefs associated with colour vary significantly between different cultures.

Social inertia (inactivity) and associated factors come in the way of the promotion of certain products, services or ideas.

We come across such social stigmas in the marketing of family planning ideas, use of biogas for cooking etc.

In such circumstances, the success of marketing depends, to a very large extent, on the success in changing social attitudes or value systems.

While dealing with the social environment, we must also consider the social environment of the business, which encompasses

Social responsibility and the alertness or vigilance of the consumers and of society at large.

The number and proportion of the women in the work force have been rising in most of the countries.

Birth control has been a contributory factor in raising the proportion of women employees.

The rise in the number of double income households increases the demand for a number of products like household appliances,electronic gadgets, packaged food products etc.

Demographic trends may confine to certain countries only, the strength of other trends vary greatly between nations.

There are a number of social behaviours that have different meanings in other cultures.

Americans generally consider it impolite to mound food on a plate, make noises when eating, and belch, while….

Chinese feel it is polite to take a portion of every food served and consider it evidence of satisfaction to belch.

Saudi Arabia, it is an insult to:

question a host about the health of his spouse,

show the soles of one’s shoes,

or touch or deliver objects with the left hand.

In Korea, both hands should be used whenpassing objects to another person,

It is considered impolite to discuss politics, communism, or Japan.

In Indonesia, it is considered rude to point at another person with a finger.

However, one may point with the thumb or gesture with the chin.

In Venezuela,; close friends greet each other with a full embrace and a hearty pat on the back;

In Indonesia, a social kiss is in vogue, and a touching of first the right then the left cheekas one shakes hands.

In Malaysia, close friends grasp with bothhands;

Although many of the social behaviors mentioned vary from the home-country norm, negative judgments should not be made about them.

In addition to knowing specific

Courtesies, Personal space, Language and Communication, and Social Behavioral differences,

There are numerous intercultural socialization behaviors that an international business person should be knowing.

It is not always necessary for an international business traveler to understand the “whys” of a culture, but it is

Important to accept them and to abide by them while on foreign soil.

Becoming aware of the culture in which one is visiting or working will pay dividends.

Impact of Social Environment in InternationalMarketing on Consumer Products

Consumer products are more sensitive to cultural differences than the industrial products.

Hunger is a basic physiological need; everyone needs to eat, but what we want to eat can be strongly influenced by culture.

CPC International failed to win popularity for Knorr dehydrated soups among Americans.

90 percent of the soup consumed by households was canned.

Hofstede’s Cultural Dimensions

1. Power distance2. Uncertainty avoidance3. Individualism/

collectivism4. Masculinity/femininity

Power distance: Less powerful members accept that power is distributed unequally

High power distance countries: people blindly obey superiors; centralized, tall structures (e.g., Mexico, South Korea, India)

Low power distance countries: flatter, decentralized structures, smaller ratio of supervisor to employee (e.g., Austria, Finland, Ireland)

Uncertainty avoidance: people feel threatened by ambiguous situations; create beliefs/institutions to avoid such situations

High uncertainty avoidance countries: high need for security, strong belief in experts and their knowledge; structure organizational activities, more written rules, less managerial risk taking (e.g., Germany, Japan, Spain)

Low uncertainty avoidance countries: people more willing to accept risks of the unknown, less structured organizational activities, fewer written rules, more managerial risk taking, higher employee turnover, more ambitious employees (e.g., Denmark and Great Britain)

Individualism: People look after selves and immediate family only

High individualism countries: High value on autonomy; Individual achievement, Privacy

High collectivism countries: High value on group (Family, clan, organization); Loyalty; Devotion; Conformity

Masculinity: dominant social values are success, money, and material

High masculine countries: stress on earnings, recognition, advancement, challenge, wealth; (e.g., German countries)

High feminine countries: emphasize caring for others and quality of life; cooperation, friendly atmosphere., employment security, group decision making; low job stress (e.g., Norway)

How Culture Affects Managerial Approaches

Centralized vs. Decentralized Decision Making:

Safety vs. Risk:

Individual vs. Group Rewards:

Informal Procedures vs. Formal Procedures:

High Organizational Loyalty vs. Low Organizational Loyalty:

Cooperation vs. Competition:

Ambiguity or unpredictability of certain factors external to an organization governmental regulations competition stability of inputs demand characteristics

e.g. Customer bargaining power

Environmental Uncertainty

Business environment

Business

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