Professional Documents
Culture Documents
SFM
SFM
SFM
Management
Unit-I
Corporate Policy: Strategic Financial Planning-
Changing Complexion of Regulatory Framework
- Shareholder Value Creation (SCV): Market
Value Added (MVA) – Market-to-Book Value
(M/BV) – Economic Value Added (EVA) –
Managerial Implications of Shareholder Value
Creation- Corporate Risk Management –
Understanding the firms Strategic Exposure.
CORPORATE POLICY
Policy
A policy is a set of ideas or plans or principles or guidelines
that is used as a basis for making decisions, especially
in business.
A policy is the statement or general understanding which
provides guidelines in decision-making to members of an
organization in respect to any course of action.
CORPORATE POLICY
Corporate Policy
A documented set of broad guidelines, formulated
after an analysis of all internal and external factors
that can affect a firm's objectives, operations, and
plans. Formulated by the firm's board of directors.
A formal declaration of the guiding principles and
procedures by which a company will operate typically
established by its board of directors or a senior
management policy committee.
Strategic Financial Management
The subject strategic financial management basically
involves in applying the knowledge and techniques of financial
management to the planning, operating and monitoring of the
finance function in particular as well as the organization in
general. So, strategic financial management basically involves
planning the utilisation of company’s resources in such a
manner that it brings maximum value to the shareholders in
the long run.
Financial Planning (I. M. Pandey, Page No: 561 - 567)
Financial planning involves preparation of projected or
proforma profit and loss account, balance sheet and funds flow
statement. Financial planning and profit planning help a firm’s
financial manager to regulate flows of funds which is his primary
concern. It focuses on aggregate capital expenditure
programmes and debt-equity mix rather than the individual
projects and sources of finance.
Definition
Strategy
The term strategy has been coined from the Greek
word Strategia, which means art of a troop leader. As we all
know, a troop leader does not give any information and
makes the final decision based on a long-term vision,
similarly strategic decisions are also not disclosed and remain
only with the senior-level management.
Strategy is a long-term plan, which is believed to take the
company to greater heights by exploring and exploiting all
possible opportunities available and using all emerging
possibilities.
The process of planning something or carrying out a plan
in a skilful way.
Strategic Planning
Strategic planning implies identifying all
the long-term plans and framing a plan that best
suits the need to explore and exploit all
opportunities and maximize the usage keeping in
mind the long-term objective of the company.
Strategic Financial Planning
Chartered Institute of Management
Accountants of UK (CIMA) defines strategic
financial management as “the identification of the
possible strategies capable of maximizing an
organization’s net present value, the allocation of
scarce capital resources between competing
opportunities and the implementation and
monitoring of the chosen strategy so as to achieve
stated objectives”.
Scope of Strategic Financial
Planning
Financial Planning
& Analysis
Effective Utilization
Financial
of the Cash
Surplus Decision Making
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Regulatory Framework of right issue
Section 62 of Companies Act, 2013 contains provisions on
“further issue of capital”, and enacts the principle of preemptive
rights of shareholders of a company to subscribe to new shares of
the company.
Provisions of Section 62 of Companies Act, 2013 are
mandatory for all Private companies, Public Companies, Listed as
well as unlisted companies in relation to further Issue of Capital.
A rights issue by any listed issuer, where the aggregate value of
specified securities offered is fifty lakh rupees or more has to
comply with Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009, as
amended
19 (“ICDR Regulations”)
As per ICDR Regulations, the following companies are not
allowed to raise funds through a Rights Issue:
Issuer, Promoters/ Promoter Group or Directors or persons in control
of the Company debarred from accessing the capital market;
If there are any existing partly paid-up equity shares;
If firm arrangements of finance towards 75% of the stated means of
finance, excluding the amount to be raised rough the proposed rights
Issue is not made;
If the issuer of convertible debt instruments is in the list of wilful
defaulters published by the Reserve Bank of India or it is in default of
payment of interest or repayment of principal amount in respect of debt
instruments issued by it to the public, if any, for a period of more than
six months.
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Warrants
Meaning and concept of warrant
Warrants are capital market instruments used for raising funds by companies. Warrants
are a type of equity derivative instrument. The value of an equity derivative depends
partly on the value of the underlying security. It is an option issued by the company
granting the buyer a right to purchase some shares of its equity share capital at a given
exercise price during a stipulated period.
Types Of Warrants:
1)Detachable
Detachable warrants are issued in connection with other securities
(like bonds or preferred stock) and may be traded separately from
them.
2)Naked:Naked warrants are issued without any accompanying securities.
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Regulations of Warrants
Securities Contract Regulation Act, 1956
Companies Act, 2013
SEBI (Issue of Capital And Disclosure Requirements)
Regulations, 2009
FEMA Regulations
Warrants are considered as securities under
section 2(h) of the securities contract regulation act, 1956. As per
Section 2(h) of Securities Contract Regulation Act,
1956 “securities” include.
Shares, scrips, stocks, bonds, debentures, debenture stock or
other marketable securities of a like nature in or of any incorporated
company or another body corporate;
Rights
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or interest in securities;
Convertible debentures
The Convertible Debentures are a type of loan that can be converted into the stock of
the company after a stipulated time period at the option of the holder or the issuer in
special circumstances. These are issued with the intent to raise money to expand or
maintain the business operations at a considerable low-interest rate. Convertible
debentures are different from convertible bonds because debentures are unsecured; in
the event of bankruptcy, the debentures are paid after other fixed-income holders.
Type of convertible debentures
•Compulsory convertible debentures provide for the conversion within 18 months of
the issue
•Optional convertible debentures provide for the conversion within 36 months of the
issue.
•Debenture with “call “ or “put” option in case the conversion exceeds 36 months.
Regulations of convertible debentures
•RBI
•Companies
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Act 1956
SHARE HOLDER VALUE CREATION
In highly volatile and complicated marketplace, creating
shareholder value is the key to success in today's marketplace.
The value of a firm is the market value of its assets which is
reflected n the capital markets through the market values of
equity and debt. Thus, share holder value is:
Share holder value = Market value of the firm – Market value of the
debt.
The market value of the shareholders ‘equity is directly
observable from the capital markets. In theory, the market
value should be equal the warranted economic value of the
firm. 24
Reasons for share holder value creation
Creating value for shareholders is now a widely accepted corporate objective.
The interest in value creation has been stimulated by several developments.
Capital markets are becoming progressively global. Investors can willingly
shift investments to higher yielding, often foreign, opportunities.
Institutional investors, which usually were inactive investors, have begun
exerting influence on corporate managements to create value for shareholders.
Corporate governance is instable, with owners now demanding liability from
corporate managers. Manifestations of the increased assertiveness of
shareholders include the need for executives to justify their compensation
levels, and well-publicized lists of underperforming companies and overpaid
officials.
Business press is highlighting shareholder value creation in performance
rating exercises.
More focus is to link top management compensation to shareholder returns.
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Determinants of Shareholder Value Creation
•Investment
•Dividend policy
•Growth
•Restructuring strategies
•Liquidity
•Risk
•Cost of capital
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Approaches for Measuring
Shareholder Value
Market value added (MVA)
Market-to- Book value (M/BV)
Economic Value Added (EVA)
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MARKET VALUE ADDED (MVA) /ENTERPRISE
VALUE ADDED (EVA)
Market value of the firm’s shares is a measurement of the shareholders wealth. It is the shareholders’
appraisal of the firm’s efficiency in employing their capital.
In terms of market and book values of shareholder investment, shareholder value creation (SVC) may
be defined as the excess of market value over book value. SVC is also referred to as the market value
added.
Market value is also referred as the enterprise value. It is the total of the firm’s market value of debt and
market value of equity. Invested capital (IC) or Capital employed (CE) is the amount of equity capital and
debt capital supplied by the firm’s shareholders and debt-holders to finance asset.
Market value added (MVA) is a performance indicator that shows the amount by which the market value
of a company (market value of debt and market value of equity) exceeds the total amount of capital
contributed by investors (shareholders and debt holders).
In terms of shareholders’ wealth maximization, market value added is a very important indicator, so the
higher MVA, the better.
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