Role of Reserve Bank of India (RBI)

As a central bank, the Reserve Bank has significant powers and duties to perform. For smooth and speedy progress of the Indian Financial System, it has to perform some important tasks. Among others it includes maintaining monetary and financial stability, to develop and maintain stable payment system, to promote and develop financial infrastructure and to regulate or control the financial institutions.

Issuer of currency 

Except for issuing one rupee notes and coins, RBI is the sole authority for the issue of currency in India. The Indian government issues one rupee notes and coins. Major currency is in the form of RBI notes, such as notes in the denominations of two, five, ten, twenty, fifty, one hundred, five hundred, and one thousand. Earlier, notes of higher denominations were also issued. But

Reserve Bank of India (RBI)

The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten

Initial Public Offering

What is an IPO?

In financial terms, IPO or initial public offering is the first issuance of a company's shares to the general public. It is called as primary market. These shares are allowed to be transacted in the stock market where they can be bought and sold. It is called secondary market. In other words, An IPO is defined as an exercise when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. One thing to note is the shares allocated to the public do not constitute 100% of the company's shares. Only a certain percentage is allocated to the public. Usually the company owner or the board of directors will still hold the majority of the shares.

What is the need of IPO?

Organization offer IPO is to raise capital for their organization. The main reason is because companies plan to use the money gathered from IPO to further expand their business or to increase their business operations. Legal compliance and financial regulations that needs to be followed during IPO process.

Procedure for issue of IPO

Step :1(Assigning Underwriter)

Company needs to set up underwriters. Underwriters are nothing but investment banks. The purpose of underwriters is to assess the business. Underwriters are used to analyze operational and financial background of the company in order to determine the value of the company's shares to be sold to the public. The company will sign an agreement with the lead underwriter to sell shares on the market and the underwriters can proceed to sell these shares to any interested investors. For large corporations dealing with billions of dollars of shares, several large investment banks may act as underwriters. These banks are paid commissions for shares that they sell. The underwriters will also help the company deal with the legal and financial regulations imposed by the country.

Step :2 (Performing Legal procedures)

While launching IPO, they reserve some percentage shares for various categories such as Retail investors, Institutional Investors and Employees. As soon as the IPO is successfully launched, companies will need to submit their annual business earnings reports to the financial securities board since the company's shares will be listed in the stock market. It changes based on the country. In India, it is SEBI.

Step : 3(Grading)

IPO-grading is nothing but Grade which assigned by a Credit Rating Agency registered with Financial securities. Shortly, it is called as CRISIL . The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. These grading is generally assigned on a five-point benchmark

grade 1 : Poor fundamentals

grade 2 : Below-average fundamentals

grade 3 : Average fundamentals

grade 4 : Above-average fundamentals

grade 5 : Strong fundamentals

Types Of Mutual Funds

Types Of Mutual Funds

By Structure

• Open Ended

These are schemes that do not have a fixed maturity. The mutual fund ensures liquidity by announcing sale and repurchase price for the unit of an open-ended fund.

• Closed Ended

These are schemes that have a fixed maturity. The money of the investor is locked in for the period. Occasionally, closed-end schemes provide a re-purchase option to the investors, either for a specified period or after a specified period. Liquidity in these schemes is provided through listing in a stock market; however this option is not yet available in India.

• Interval Schemes

These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.

By Investment Objective

• Growth Schemes

Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short term decline in value for possible future appreciation.

These schemes are not for investors seeking regular income or needing their money back in the short term.

• Income Schemes

Income Schemes Aim to provide regular and steady income to investors. These schemes generally invest in

fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

• Balanced Schemes

Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents.  In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls.

• Money Market / Liquid Schemes

Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short term instruments such as treasury bills, certificates of deposit, commercial paper and inter bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.

Other Schemes

• Tax Saving Schemes (Equity Linked Saving Scheme - ELSS)

These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds.Eligible for deduction under section 80C .Lock in period three years

• Index fund

Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.

Mutual Funds

A mutual fund is a professionally managed type of collective investment scheme that pools money from any investors and invests it in stocks, bonds, short-term money market instruments and other securities. Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling stocks, bonds etc. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

WHO MANAGES INVESTOR’S MONEY?

This is the role of the Asset Management Company (the Third tier). Trustees appoint the Asset management Company (AMC), to manage investor’s money. The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them. The AMC’s Board of Directors must have at least 50% of Directors who are independent directors.

THE ROLE OF THE AMC?

The role of the AMC is to manage investor’s money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity. The AMC cannot deal with a single broker beyond a certain limit of transactions. The AMC cannot act as a Trustee for some other Mutual Fund. The responsibility of preparing the OD lies with the AMC. Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC. Finally, it is the AMC which is responsible for the acts of its employees and service providers.

ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a Mutual Fund are: Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

Types of Derivatives

There are various types of derivatives traded on exchanges across the world. They range from the very simple to the most complex products. The following are the three basic forms of derivatives, which are the building blocks for many complex derivatives instruments (the latter are beyond the scope of this book):

• Forwards
• Futures
• Options

Knowledge of these instruments is necessary in order to understand the basics of derivatives.

We shall now discuss each of them in detail.

Forwards

A forward contract or simply a forward is a contract between two parties to buy or sell an asset at a certain future date for a certain price that is pre-decided on the date of the contract. The future date is referred to as expiry date and the pre-decided price is referred to as Forward Price. It may be noted that Forwards are private contracts and their terms are determined by the parties involved.

A forward is thus an agreement between two parties in which one party, the buyer, enters into an agreement with the other party, the seller that he would buy from the seller an underlying asset on the expiry date at the forward price. Therefore, it is a commitment by both the parties to engage in a transaction at a later date with the price set in advance. This is different from a spot market contract, which involves immediate payment and immediate transfer of asset. The party that agrees to buy the asset on a future date is referred to as a long investor and is said to have a long position. Similarly the party that agrees to sell the asset in a future date is referred to as a short investor and is said to have a short position. The price agreed upon is called the delivery price or the Forward Price.

Forward contracts are traded only in Over the Counter (OTC) market and not in stock exchanges. OTC market is a private market where individuals/institutions can trade through negotiations on a one to one basis.

Futures

Like a forward contract, a futures contract is an agreement between two parties in which the buyer agrees to buy an underlying asset from the seller, at a future date at a price that is agreed upon today. However, unlike a forward contract, a futures contract is not a private transaction but gets traded on a recognized stock exchange. In addition, a futures contract is standardized by the exchange. All the terms, other than the price, are set by the stock exchange (rather than by individual parties as in the case of a forward contract). Also, both buyer and seller of the futures contracts are protected against the counter party risk by an entity called the Clearing Corporation. The Clearing Corporation provides this guarantee to ensure that the buyer or the seller of a futures contract does not suffer as a result of the counter party defaulting on its obligation. In case one of the parties defaults, the Clearing Corporation steps in to fulfill the obligation of this party, so that the other party does not suffer due to non-fulfillment of the contract. To be able to guarantee the fulfillment of the obligations under the contract, the Clearing Corporation holds an amount as a security from both the parties. This amount is called the Margin money and can be in the form of cash or other financial assets. Also, since the futures contracts are traded on the stock exchanges, the parties have the flexibility of closing out the contract prior to the maturity by squaring off the transactions in the market.

The basic flow of a transaction between three parties, namely Buyer, Seller and Clearing Corporation is depicted in the diagram below:

Options

Like forwards and futures, options are derivative instruments that provide the opportunity to buy or sell an underlying asset on a future date.

An option is a derivative contract between a buyer and a seller, where one party (say First Party) gives to the other (say Second Party) the right, but not the obligation, to buy from (or sell to) the First Party the underlying asset on or before a specific day at an agreed-upon price. In return for granting the option, the party granting the option collects a payment from the other party. This payment collected is called the “premium” or price of the option. The right to buy or sell is held by the “option buyer” (also called the option holder); the party granting the right is the “option seller” or “option writer”. Unlike forwards and futures contracts, options require a cash payment (called the premium) upfront from the option buyer to the option seller. This payment is called option premium or option price. Options can be traded either on the stock exchange or in over the counter (OTC) markets. Options traded on the exchanges are backed by the Clearing Corporation thereby minimizing the risk arising due to default by the counter parties involved. Options traded in the OTC market however are not backed by the Clearing Corporation.

There are two types of options—call options and put options

Derivative Market

The term “derivatives” is used to refer to financial instruments which derive their value from some underlying assets. The underlying assets could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these various assets, such as the Nifty 50 Index. Derivatives derive their names from their respective underlying asset. Thus if a derivative’s underlying asset is equity, it is called equity derivative and so on.

Derivatives can be traded either on a regulated exchange, such as the NSE or off the exchanges, i.e., directly between the different parties, which is called “over-the-counter” (OTC) trading. (In India only exchange traded equity derivatives are permitted under the law.) The basic purpose of derivatives is to transfer the price risk (inherent in fluctuations of the asset prices) from one party to another; they facilitate the allocation of risk to those who are willing to take it.

Two important terms

Before discussing derivatives, it would be useful to be familiar with two terminologies relating to the underlying markets. These are as follows:

Spot Market

In the context of securities, the spot market or cash market is a securities market in which securities are sold for cash and delivered immediately. The delivery happens after the settlement period. Let us describe this in the context of India. The NSE’s cash market segment is known as the Capital Market (CM) Segment. In this market, shares of SBI, Reliance, Infosys, ICICI Bank, and other public listed companies are traded. The settlement period in this market is on a T+2 basis i.e., the buyer of the shares receives the shares two working days after trade date and the seller of the shares receives the money two working days after the trade date.

Index

Stock prices fluctuate continuously during any given period. Prices of some stocks might move up while that of others may move down. In such a situation, what can we say about the stock market as a whole? Has the market moved up or has it moved down during a given period? Similarly, have stocks of a particular sector moved up or down? To identify the general trend in the market (or any given sector of the market such as banking), it is important to have a reference barometer which can be monitored. Market participants use various indices for this purpose. An index is a basket of identified stocks, and its value is computed by taking the weighted average of the prices of the constituent stocks of the index. A market index for example consists of a group of top stocks traded in the market and its value changes as the prices of its constituent stocks change. In India, Nifty Index is the most popular stock index and it is based on the top 50 stocks traded in the market. Just as derivatives on stocks are called stock derivatives, derivatives on indices such as Nifty are called index derivatives.

Responsibility accounting and Responsibility Centre

Responsibility accounting

Responsibility accounting involves a company’s internal accounting and budgeting. The objective is to assist in the planning and control of a company’s responsibility centers—such as decentralized departments and divisions.

Responsibility accounting usually involves the preparation of annual and monthly budgets for each responsibility center. Then the company’s actual transactions are classified by responsibility center and a monthly report is prepared. The reports will present the actual amounts for each budget line item and the variance between the budget and actual amounts.

Responsibility accounting allows the company and each manager of a responsibility center to receive monthly feedback on the manager’s performance.

Responsibility Centre

A responsibility center is a part or subunit of a company for which a manager has authority and responsibility. The company’s detailed organization chart is a logical source for determining responsibility centers. The most common responsibility centers are the departments within a company.

When the manager of a responsibility center can control only costs, the responsibility center is referred to as a cost center. If a manager can control both costs and revenues, the responsibility center is known as a profit center. If a manager has authority and responsibility for costs, revenues, and investments the responsibility center is referred to as an investment center.

1: Cost Center

A cost center is often a department within a company. The manager and employees of a cost center are responsible for its costs but are not responsible for revenues or investment decisions.

A manufacturer’s cost centers include each of its production departments as well as the manufacturing service departments such as the maintenance department or quality control department. Other examples of cost centers include the human resource department, the IT department, the accounting department, and so on.

Cost centers are not limited to departments. There might be several cost centers within a department. For example, each assembly line could be a cost center. Even a special machine could be a cost center.

Cost centers are usually associated with the topic of decentralization, responsibility accounting, and planning and control.

2. Revenue Center
A manager of a revenue center is held accountable for the revenue attributed to the sub-unit. Revenue centers are responsibility centers where managers are accountable only for financial outputs in the form of generating sales revenue. A revenue center's manger may also be held accountable for selling expenses such as sales persons' salaries, commissions, and order receiving costs.

3. Profit Center
Profits are the excess of revenue over the total expenses. Therefore, the manager of a profit center is held accountable for the revenues, costs, and profits of the center. A profit center is aresponsibility center in which inputs are measured in terms of expenses and outputs are measured in terms of revenues.

4. Investment Center
The manger of investment center is held accountable for the division's profit and the invested capital used by the center to generate its profits. Investment centers consider not only costs and revenues but also the assets used in the division. Performance of an investment center are measured in terms of assets turnover and return on the capital employed.

Transfer Pricing

The amount charged when one division sells goods or services to another division is called transfer price. 

The basic purpose of transfer pricing is to induce optimal decision making in a decentralized organization (i.e., in most cases, to maximize the profit of the organization as a whole).

Purposes of Transfer Pricing

There are two main reasons for instituting a transfer pricing scheme:

• Generate separate profit figures for each division and thereby evaluate the performance of each division separately.

• Help coordinate production, sales and pricing decisions of the different divisions (via an appropriate choice of transfer prices). Transfer prices make managers aware of the value that goods and services have for other segments of the firm.

• Transfer pricing allows the company to generate profit (or cost) figures for each division separately.

• The transfer price will affect not only the reported profit of each center, but will also affect the allocation of an organization’s resources.

Main objectives of a transfer pricing system

1. To achieve goal congruence: The transfer prices should be such that actions which will have the effect of increasing a division’s reported profit will also have the effect of increasing the company’s reported profit. This maximises the likelihood that the division managers will act in the company’s best interests.

2. To ensure that divisional autonomy is maintained: In principle the top management of a company could simply issue precise instructions to divisions as to what goods to transfer to each other, in what quantities, and at what prices. This would seem to solve the problem of transfer pricing at a stroke, and to achieve optimization (for the company as a whole) by diktat. However, most organizations are unwilling to go down this road, because of the enormous benefits of allowing divisional autonomy. It would be very difficult to make division managers accountable for their profits if they were not given a free hand in making important decisions.

3. To ensure that the information provided: (e.g., division Profit & Loss Accounts) is useful for evaluating the economic performance of divisions and the managerial performance of division managers. 

International Monetary Fund (IMF)

IMF is UNO recognized international monetary fund or reserve which helps its members. It established in 1946 after bretton wood meeting. It has 185 members across the all nations but soviet Russia and its member are not linked with IMF.

All work is done by its board of directors which is made by board of governors. Every country’s finance minister is as the governor from his respective country. There are two type directors in board of directors of IMF. One is quota and other is non quota. USA, UK, Germany and India are quota country and one member is taken in board of directors and other from non quota countries. Total no. of directors are 20.

Objective and functions of IMF

Provide loan to the members for removing unfavorable balance of payment.

Determine the value of currency of member countries.

Determine the economic policies’ main contents of member’s countries.

To make plan for increasing per capita income of member countries.

To collect money from member countries in the form of fun or reserves.

Latest objective in IMF is that it will support 3 trillion dollars under his budget for decreasing the pressure of 2000 recession.

Eligibility for membership in IMF

Any country can become the member of IMF but for getting eligibility the following procedure is adopted by IMF.

First of all membership is accepted by board of directors after accepting membership , board of directors send this proposal to board of governors with supported all documents and subscription and quota amount as per the terms of membership .

Database Management System (DBMS)

What is a Database?

• A database is any collection of related data.

• A database is a persistent, logically coherent collection of inherently meaningful data, relevant to some aspects of the real world.

What is a Database Management System?

A database management system (DBMS) is a collection of programs that enables users to create and maintain a database. According to the ANSI/SPARC DBMS Report (1977), a DBMS should be envisioned as a multi-layered system:

Function of DBMS:

The main functions of operating systems are as follows:

Process Management: As a process manager, the OS handles the creation and deletion of processes, suspension and resumption of processes and scheduling and synchronisation of processes.

Memory Management: As a memory manager, the OS handles allocation and reallocation of memory space as required by various programs.

File Management: The OS is responsible for creation and deletion of files and directories. It also take care of other file- related activities such as organising, storing, retrieving, naming and protecting the files.

Device Management: OS provides input/output subsystem between process and device driver. It handles the device cache, buffers and interrupts. OS also detects device failure and notifies the same to the user.

Security Management: The OS protects system resources and information against destruction and unauthorized use.

User Interface: OS provides the interface between the user and the hardware . The user interface is the layer that actually interacts with the computer operator. The interface consists of a set of commands or menus through which a user communicates with a program.

Various Levels of DBMS:

A DBMS is implemented through three general Levels:

External Level: This is the level closet to the users and is concerned with the way in which the data are viewed by individual users. For example, even though the bank database sores a lot much information, an account holder (a user) is interested only in his account details and not with the rest of information stored in the database. 

Conceptual Level:  This level of abstraction describes what data are actually stored in the database. It also describes the relationships existing among data.

Internal Level:  This is the closest to physical storage. This level is also sometimes termed as physical level. It describes how the data are actually stored on the storage medium.

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PPT : Database Management System

Bond immunization

• Bond immunization is an investment strategy used to minimize the interest rate risk of bond investments by adjusting the portfolio duration to match the investor's investment time horizon. It does this by locking in a fixed rate of return during the amount of time an investor plans to keep the investment without cashing it in.
• Immunization locks in a fixed rate of return during the amount of time an investor plans to keep the bond without cashing it in.
• Normally, interest rates affect bond prices inversely. When interest rates go up, bond prices go down. But when a bond portfolio is immunized, the investor receives a specific rate of return over a given time period regardless of what happens to interest rates during that time. In other words, the bond is "immune" to fluctuating interest rates.
• To immunize a bond portfolio, you need to know the duration of the bonds in the portfolio and adjust the portfolio so that the portfolio's duration equals the investment time horizon. For example, suppose you need to have $50,000 in five years for your child's education. You might decide to invest in bonds. You can immunize your bond portfolio by selecting bonds that will equal exactly $50,000 in five years regardless of interest rate changes. You can buy one zero-coupon bond that will mature in five years to equal $50,000, or several coupon bonds each with a five year duration, or several bonds that "average" a five-year duration.
• Duration measures a bond's market risk and price volatility in response to a given change in interest rates. Duration is a weighted average of the bond's cash flows over its life. The weights are the present value of each interest payment as a percentage of the bond's full price. The longer the duration of a bond, the greater its price volatility. Duration is used to determine how a bond will react to changing interest rates. For example, if interest rates rise 1%, a bond with a two-year duration will fall about 2% in value.


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Efficient Market Hypothesis (EMH)

Efficient Market Hypothesis (EMH)

An efficient market is one in which securities prices reflect all available information. This means that every security traded in the market is correctly valued given the available information.

There are a number of different definitions of what constitutes an efficient market depending on the what information is deemed to be available.

Weak form efficient markets

• The weakest form of efficient markets is that securities prices reflect all information contained in historical prices. This is the easiest to prove, by showing that share prices follow a random walk.
• It is this form of efficient markets that technical analysis rejects, and neither the track record of technical analysis as a strategy or the evidence from studies of historical prices, provide reasons to reject it.
• Some investors have successfully used statistical arbitrage techniques. However only a minority of the actual trades make large profits, so the deviations from market efficient are, on average, small and they are expensive to find.

Semi-strong form efficient markets

• The semi-strong form of efficient markets is that securities prices incorporate all publicly available information. Given how difficult it is to find groups of “smart” investors who consistently outperform the market, this seems likely. There do seem to be some investors with very impressive records. The semi-strong efficient markets hypothesis is probably very close to being true, but not always true.
• There is evidence that smart investors do out-perform. This probably reflects access to better information rather than better analysis of information that is available to all.

Strong form efficient markets

• The strongest form of efficient markets is that prices incorporate all information that any investor can acquire. This seems unlikely given that insider traders can undoubtedly make money fairly consistently.
• Not only do insider traders make money, but in most situations where insider trading takes place prior to the public release of price sensitive information the price move significantly on the public release of the information. Therefore the non-public information was not fully reflected in the price.

Money Market: Definition, Feature and Instruments

What is Money Market?

• 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”.
• The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).
• It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & govt papers which can converted into cash without any loss at low transaction cost.
• It includes all individual, institution and intermediaries.

Features of Money Market?

• It is a market purely for short-terms funds or financial assets called near money.
• It deals with financial assets having a maturity period less than one year only.
• In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done. 
• Transaction have to be conducted without the help of brokers.
• It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market.
• The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

Instrument of Money Market

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.

They were:

• Treasury bills
• Commercial papers.
• Certificate of deposit.
• Call Money Market
• Commercial bills market

Treasury Bills (T-Bills)

• Treasury bills (TBs), offer short-term investment opportunities, generally up to one year.
• They are thus useful in managing short-term liquidity.
• Types of treasury bills through auctions
• 91- Day, 182- day, 364- day, and 14- day TBs

Commercial paper (CP)

• CP is a short term unsecured loan issued by a corporation  typically financing day to day operation.
• CP is very safe investment because the financial situation of a company can easily be predicted over a few months.
• Only company with high credit rating issues CP’s.

CERTIFICATES OF DEPOSIT

• Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period
• Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs)
• Select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

CALL MONEY MARKET

• Call money market is that part of the national money market where the day to day surplus funds, mostly of banks are traded in.
• They are highly liquid, their liquidity being exceed only by cash.
• The loans made in this market are of the short term nature.

COMMERCIAL BILLS MARKET

• Funds for working capital required by commerce and industry are mainly provided by banks through cash credits, overdrafts, and purchase/discontinuing of commercial bills.

BILL OF EXCHANGE

• The financial instrument which is traded in the bill market of exchange. It is used for financing a transaction in goods that takes some time to complete.

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PPT: Money Market and It's Instruments

BUSINESS ENVIRONMENT

Understanding the environment within which the business has to operate is very important for running a business unit successfully at any place. Because, the environmental factors influence almost every aspect of business, be it its nature, its location, the prices of products, the distribution system, or the personnel policies. Hence it is important to learn about the various components of the business environment, which consists of the economic aspect, the socio-cultural aspects, the political framework, the legal aspects and the technological aspects etc. In this chapter, we shall learn about the concept of business environment, its nature and significance and the various components of the environment.

In addition, we shall also acquaint ourselves with the concept of social responsibility of business and business ethics.

OBJECTIVES

• explain the meaning of business environment;

• identify the features of business environment;

• describe the importance and types of business environment;

• describe the recent developments in Indian Economy that have greatly influenced      

  the working of business units in India;

• explain the concept of social responsibility of business;

• state the social responsibility of business towards different interest groups; and

• explain the concept of business ethics.

MEANING OF BUSINESS ENVIRONMENT

As stated earlier, the success of every business depends on adapting itself to the environment within which it functions. For example, when there is a change in the government polices,Senior Secondary.

Business around us the business has to make the necessary changes to adapt itself to the new policies. Similarly, a change in the technology may render the existing products obsolete, as we have seen that the introduction of computer has replaced the typewriters; the colour television has made the black and white television out of fashion. Again a change in the fashion or customers’ taste may shift the demand in the market for a particular product, e.g., the demand for jeans reduced the sale of other traditional wear. All these aspects are external factors that are beyond the control of the business. So the business units must have to adapt themselves to these changes in order to survive and succeed in business. Hence, it is very necessary to have a clear understanding of the concept of business environment and the nature of its various components.

The term ‘business environment’ connotes external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a business enterprise.

These include customers, competitors, suppliers, government, and the social, political, legal and technological factors etc.  While some of these factors or forces may have direct influence over the business firm, others may operate indirectly. Thus, business environment may be defined as the total surroundings, which have a direct or indirect bearing on the functioning of business. It may also be defined as the set of external factors, such as economic factors, social factors, political and legal factors, demographic factors, technical factors etc., which are uncontrollable in nature and affects the business decisions of a firm.

FEATURES OF BUSINESS ENVIRONMENT

On the basis of the above discussion the features of business environment can be summarised as follows.

(a) Business environment is the sum total of all factors external to the business firm and that greatly influence their functioning.

(b) It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions.

(c) The business environment is dynamic in nature, that means, it keeps on changing.

(d) The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment.  .

(e) Business Environment differs from place to place, region to region and country to country. Political conditions in India differ from those in USA. Taste and values  cherished by people in India and China vary considerably.

IMPORTANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively.

As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways:

(a) Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.

(b) Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities.

(c) Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.

(d) Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power.

(e) Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own strategies accordingly.

(f) Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments.

TYPES OF BUSINESS ENVIRONMENT

Confining business environment to uncontrollable external factors, it may be classified as (a) Economic environment; and (b) Non-economic environment. The economic environment includes economic conditions, economic policies and economic system of the country.

Non-economic environment comprises social, political, legal, technological, demographic and natural environment. All these have a bearing on the strategies adopted by the firms and any change in these areas is likely to have a far-reaching impact on their operations.

Let us have a brief idea about each of these areas of business environment.

ECONOMIC ENVIRONMENT

The survival and success of each and every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are:

(a) Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.

(b) Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are:

(i) Industrial policy

(ii) Fiscal policy

(iii) Monetary policy

(iv) Foreign investment policy

(v) Export –Import policy (Exim policy)

(c) Economic System: The world economy is primarily governed by three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed

economy. India has adopted the mixed economy system which implies co-existence

of public sector and private sector.

NON-ECONOMIC ENVIRONMENT

The various elements of non-economic environment are as follow:

(a) Social Environment :

The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more conscious of the quality of the products. Due to change in family composition, more nuclear families with single child concepts have come up. This increases the demand for the different types of household goods. It may be noted that the consumption patterns, the dressing and living styles of people belonging to different social structures and culture vary significantly.

• Capitalist Economy: Emphasis on private ownership.

• Socialist Economy: Resources are owned and managed by the state.

• Mixed Economy: Co-existence of public and private sectors.Senior Secondary

(b) Political Environment

This includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The stability of the government also influences business and related activities to a great extent. It sends a signal of strength, confidence to various interest groups and investors. Further, ideology of the political party also influences the business organisation and its operations.  You may be aware that Coca-Cola, a cold drink widely used even now, had to wind up operations in India in late seventies.  Again the trade union activities also influence the operation of business enterprises. Most of the labour unions in India are affiliated to various political parties. Strikes, lockouts and labour disputes etc. also adversely affect the business operations.  However, with the competitive business environment, trade unions are now showing great maturity and started contributing positively to the success of the business organisation and its operations through workers participation in management.

(c) Legal Environment:

This refers to set of laws, regulations, which influence the business organisations and their operations.  Every business organisation has to obey, and work within the framework of the law.

(d) Technological Environment

Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. The varying technological environments of different countries affect the designing of products. For example, in USA and many other countries electrical appliances are designed for 110 volts. But when these are made for India, they have to be of 220 volts. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time. It may be noted that scientific research for improvement and innovation in products and services is a regular activity in most of the big industrial organisations. Now a days infact, no firm can afford to persist with the outdated technologies.

(e) Demographic Environment

This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services. For example a country where population rate is high and children constitute a large section of population, then there is more demand for baby products. Similarly the demand of the people of cities and towns are different than the people of rural areas. The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production. Moreover, availability of skill labour in certain areas motivates the firms to set up their units in such area. For example, the business units from America, Canada, Australia, Germany, UK, are coming to India due to easy availability ofskilled manpower. Thus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.

(f) Natural Environment

The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. Business is greatly influenced by the nature of natural environment.  For example, sugar factories are set up only at those places where sugarcane can be grown. It is always considered better to establish manufacturing unit near the sources of input. Further, government’s policies to maintain ecological balance, conservation of natural resources etc. put additional responsibility on the business sector.Senior Secondary

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