Meaning of Financial Management

Financial Management means planning,

organizing, directing and controlling the
financial activities such as procurement
and utilization of funds of the enterprise.
It means applying general management
principles to financial resources of the
enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement,
allocation and control of financial resources of a concern. The objectives
can be1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon
the earning capacity, market price of the share, expectations of the
shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe
ventures so that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between debt and
equity capital

BENEFITS OF FINANCIAL MANAGEMENT

The stronger your financial management the greater
the opportunity you have to maximise your profits in
the short term and to grow your capital value in the
long term.
The stronger your financial management the easier it
is for you to raise finance, and probably at a lower
cost. Obviously banks prefer to work with business
owners who can control their finances well.
Good financial management leads to a transparency
of figures and supports a real understanding of the
numbers in your business. It makes it much easier to
find savings, to show others how profitable your
business is and simply allows you to sleep much
easier at night.

ROLE OF FINANCIAL
MANAGER
The financial activity plays an important role
in the success of business concern. It is
acomplex and delicate activity. Finance
manager is the person who plays a key role in
such activities which bring sufficient profits
and good will to the concern and takes care
of all the important finance related functions
of a business concern. He with his far
sightedness utilizes the resources wise
manner and brings stability to the concern.

What Is a Government Security?

Agovernment securityis a bond or
other type of debt obligation that is
issued by a government with a promise of
repayment upon the security's maturity
date. Government securities are usually
considered low-risk investments because
they are backed by the taxing power of a
government. In fact, investment in U.S.
treasury securities is probably the safest
investment that can be made.

Why Are They Issued?

Government securities are usually issued for two different reasons. The
primary reason that most government securities are issued is to raise funds
for government expenditures. The federal government issues treasury
securities to cover shortfalls (deficits) in its annual budget. Additionally,
cities will often issue bonds for construction of schools, libraries, stadiums,
and other public infrastructure programs.
A central bank of a country, such as the U.S. Federal Reserve, will sell debt
securities for another reason: to control the supply of money in an
economy. If the Federal Reserve wants to slow the growth rate of money in
the economy, it will sell government securities. This means that it is
sucking up dollars from the economy and replacing them with government
securities, which results in a slowing of the rate of growth in the money
supply. Slowing the rate of money's growth in an economy will help keep
inflation under control.

Types of Government Securities

Dated Government securities

Dated Government securities are long term securities and carry a fixed or floating coupon
(interest rate) which is paid on the face value, payable at fixed time periods (usually halfyearly).
They are issued at face value.
Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of
the security.
The tenor of the security is also fixed.
Interest /Coupon payment is made on a half yearly basis on its face value.The security is
redeemed at par (face value) on its maturity date.
Zero Coupon bonds :
Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These
were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95
and 1995-96 respectively. The key features of these securities are:
They are issued at a discount to the face value.
The tenor of the security is fixed.
The securities do not carry any coupon or interest rate. The difference between the issue price
(discounted price) and face value is the return on this security.
The security is redeemed at par (face value) on its maturity date.

Partly Paid Stock :

Partly Paid Stock is stock where payment of principal amount is made in
installments over a given time frame. It meets the needs of investors with
regular flow of funds and the need of Government when it does not need
funds immediately. The first issue of such stock of eight year maturity was
made on November 15, 1994 for Rs. 2000 crore. Such stocks have been
issued a few more times thereafter. The key features of these securities
are:
They are issued at face value, but this amount is paid in installments over
a specified period.
Coupon or interest rate is fixed at the time of issuance, and remains
constant till redemption of the security.
The tenor of the security is also fixed.
Interest /Coupon payment is made on a half yearly basis on its face value.
The security is redeemed at par (face value) on its maturity date.
Floating Rate Bonds :
Floating Rate Bonds are securities which do not have a fixed coupon rate.
The coupon is re-set at pre-announced intervals (say, every six months or
one year) by adding a spread over a base rate. In the case of most floating
rate bonds issued by the Government of India so far,the base rate is the
weighted average cut-off yield of the last three 364- day Treasury Bill
auctions preceding the coupon re-set date and the spread is decided
through the auction. Floating Rate Bonds were first issued in September
1995 in India.

 Bonds

with

Call/Put

Option:

Bonds can also be issued with features of optionality wherein the issuer can
have the option to buy-back (call option) or the investor can have the option
to sell the bond (put option) to the issuer during the currency of the bond.
6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years
maturing on July 18, 2012. The optionality on the bond could be exercised
after completion of five years tenure from the date of issuance on any
coupon date falling thereafter. The Government has the right to buyback the
bond (call option) at par value (equal to the face value) while the investor
has the right to sell the bond (put option) to the Government at par value at
the time of any of the half-yearly coupon dates starting from July 18, 2007.
Capital

indexed

Bonds:

Capital indexed Bonds are bonds where interest rate is a fixed percentage
over the wholesale price index. These provide investors with an effective
hedge against inflation. These bonds were floated on December 29, 1997 on
tap basis. They were of five year maturity with a coupon rate of 6 per cent
over the wholesale price index. The principal redemption is linked to the
Wholesale Price Index.

Dos & Donts for Dealing in Government

Securities
Dos
Segregate dealing and back-up functions. Officials deciding about purchase and sale
transactions should be separate from those responsible for settlement and accounting.
Monitor all transactions to see that delivery takes place on settlement day. The funds account
and investment account should be reconciled on the same day before close of business.
Keep a proper record of the SGL forms received/issued to facilitate counter-checking by their
internal control systems/RBI inspectors/other auditors.
Seek a Scheduled Commercial Bank (SCB), a Primary Dealer (PD) or a Financial Institution (FI)
as counterparty for transactions.
Give preference for direct deals with counter parties.
Use CSGL/ Gilt Accounts for holding the securities and maintain such accounts in the same
bank with whom the cash account is maintained.
Insist on Delivery versus Payment for all transactions.
Take advantage of the non-competitive bidding facility for acquiring Government of India
securities in the primary auctions conducted by the Reserve Bank of India.
Restrict the role of the broker to that of bringing the two parties to the deal together, if a deal
is put through with the help of broker.
Have a list of approved brokers. Utilize only brokers registered with NSE or BSE or OTCEI for
acting as intermediary.

 Place a limit of 5% of total transactions (both purchases and sales) entered into
by a bank during a year as the aggregate upper contract limit for each of the
approved brokers. A disproportionate part of the business should not be
transacted with or through one or a few brokers.
Maintain and transact in Government securities only in dematerialized form in
SGL Account or Gilt Account maintained with the CSGL Account holder.
Open and maintain only one Gilt or dematerialized account.
Open a funds account for securities transactions with the same Scheduled
Commercial bank or the State Cooperative bank with whom the Gilt Account is
maintained.
Ensure availability of clear funds in the designated funds accounts for purchases
and sufficient securities in the Gilt Account for sales before putting through the
transactions.
Observe prudential limits for investment in permitted non-SLR securities (bonds
of nationalized banks, unlisted securities, unlisted shares of all-India Financial
Institutions and privately placed debt securities).
The Board of Directors to peruse all investment transactions at least once a
month

 Donts
Do not undertake any purchase/sale transactions with broking
firms or other intermediaries on principal to principal basis.
Do not use brokers in the settlement process at all, i.e., both
funds settlement and delivery of securities should be done with
the counter-parties directly.
Do not give power of attorney or any other authorisation under
any circumstances to brokers/intermediaries to deal on your
behalf in the money and securities markets.
Do not undertake Government Securities transaction in the
physical form with any broker.
Do not routinely make investments in non-SLR securities (e.g.,
corporate bonds, etc) issued by companies or bodies other
than in the co-operative sector.