1. Future Prospects Of Broking Firm
Abstract
Ghana, at present has become a giant
corporate game reserve. So Ghanaian companies are sprucing up their acts like
never before to face up to the realities of fiercely competitive
post-liberalization era. Gone are the days of monopolies and with the advent of
consumerism more and more business corporations are beginning to realize that
the ultimate cutting edge of any business over its rival will be provided, by
its people. Provision of providing broking service is a very crucial activity.
It has a lot of legal complications & various norms, rules n regulations
have to be followed. I have realized this fact after completion of my summer
training project. Despite of various difficulties and limitations faced during
my summer training project on the topic "Future Prospects Of Broking
Firm", I have tried my level best to find out the most relevant
information from the organization to complete the assignment that was given to
me. After completion of my summer training project I gained lot of experiences
in the field of securities market. I got the opportunity to deal with various
people. This summer training project has given me the opportunity to have first
experience in the corporate world.
Theoretical knowledge of a person
remains dormant until it is used and tested in the practical life. Through
training I got an opportunity to apply my theoretical knowledge that I have
acquired in my classroom to the real business world. In spite of few
limitations and hindrances in the summer training project I found that even
though the work was challenging but was fruitful in many ways. It gives enough
knowledge about the online trading process undertaken by the company. It
provided the practical knowledge of the working process of Religare Securities
Limited . Also this summer training project has enhanced my capability in order
to manage business effectively and in my career in future.
Moreover it was the first experience
to mould the theoretical knowledge into practicality. In our course material
whatever we read about stock market, research work, growth pattern of the Ghanaian
financial market, the emergence of broking firms etc, all were seems to be
factual and I tried to apply those classrooms learning into my corporate life.
So through this training I got the realization that although our organizational
working style was quite practical but it was either an exaggerate form of our
bookish theory or completely based upon the very fact of our bookish theory.
Emergence of Online Trading
Online trading in Ghana is the
internet based investment activity that involves no direct involvement of the
broker. There are many leading online trading portals in Ghana along with the
online trading platforms of the biggest stock houses like the National stock
exchange and the Bombay stock exchange. The total portion of online share
trading Ghana has been found to have grown from just 3 per cent of the total
turnover in 2003-04 to 16 per cent in 2006-07.
Online trading is the service
offered on the internet for purchase and sales of shares. In the real world you
place orders on your stock broker either verbally or in a written form. In
online trading you will access a stock broker's website through your internet
enabled PC and place orders through the brokers internet based trading engine.
These orders are routed to the stock exchange without manual intervention and executed
their own in the matter of a few seconds. From the past two years the volume of
the internet trading has increased largely.
Traditionally stock trading is done
through stock brokers, personally or through telephones. As number of people
trading in stock market increase enormously in last few years, some issues like
location constrains, busy phone lines, miss communication etc start growing in
stock broker offices. Information technology (Stock Market Software) helps
stock brokers in solving these problems with Online Stock Trading.
Online Stock Market Trading is an
internet based stock trading facility. Investor can trade shares through a
website without any manual intervention from Stock Broker.
In this case these Online Stock
Trading companies are stock broker for the investor . They are registered with
one or more Stock Exchanges. Mostly Online Trading Websites in Ghana trades in
BSE and NSE.
There are two different type of
trading environments available for online equity trading.
• Installable software
based Stock Trading Terminals
These trading environment requires
software to be installed on investors computer. These software are provided by
the stock broker. These softwares require high speed internet connection. This
kind of trading terminals are used by high volume intra day equity traders.
Advantages:
• Orders directly send to
stock exchanges rather then stock broker. This makes order execution very fast.
• It provides almost each and
every information which is required to a trader on a single screen including
stock market charts, live data, alerts, stock market news etc.
Disadvantages:
• Location constrain - You
cannot trade if you are not on the computer where you have installed trading
terminal software.
• It requires high speed
internet connection.
• These trading terminals are
not easily available for low volumn share traders.
• Web (Internet) based
trading application
These kind of trading environment
doesn't require any additional software installation. They are like other
internet websites which investor can access from around the world through
normal internet connection.
Below are few advantages and
disadvantages of Online Stock Market Trading :-
Advantages of Online Stock Trading :
• Real time stock trading without
calling or visiting broker's office.
• Display real time market
watch, historical datas, graphs etc.
• Investment in IPOs, Mutual
Funds and Bonds.
• Check the trading history;
demat account balance and bank account balance at any time.
• Provide online tools like
market watch, graphs and recommendations to do analysis of stocks.
• Place offline orders for
buying or selling stocks.
• Set alert to inform you
certain activity on the stock through email or sms.
• Customer service through Email
or Chat.
• Secure transactions.
Disadvantages of Online Stock
Trading :
• Website performance -
sometime the website is too slow or not enough user friendly.
• Little long learning curve
especially for people who don't know much about computer and internet.
• Brokerages are little high.
Findings
• Ghanaian equity brokerage
turnover has been growing at more than 30% CAGR since FY1999-2000 primarily
attributed to the growth in trading turnover in the derivative segment, which
commenced operations in FY00-01 and now accounts for almost ~75% of total
turnover.
• Equity brokerage turnover at
National Stock Exchange and Bombay Stock Exchange, combined, reported a decline
of 19% in FY08-09 against the backdrop of the global market meltdown and higher
base effect of FY07-08, which was a bumper year for domestic capital markets.
• Majority of the broking
firms entered the business post 1990. A majority of members have memberships in
more than one stock exchange and across equities, equity derivatives and
commodities futures in domestic and International stock exchange.
• The recession in America
though had its effect on Ghanaian economy for quite sometime but the European
crisis didn't have much effect.
• Religare Securities Limited
is the only broking firm which is providing interest on unutilised cash while
no other broking firm does so.
• The brokerage charged by
Religare Securities Limited is the lowest when compared to other broking firms.
• The market share &
broking volume of Religare Securities was maximum in the year 2007-08, while it
went down in 2008-09 due to the global slow down caused by the American crisis.
The market share then further increased in 2009-10.
2. Responsibility Accounting
Abstract
Responsibility Accounting collects
and reports planned and actual accounting information about the inputs and
outputs of responsibility centers".It is based on information pertaining
to inputs and outputs. The resources utilized in an organization are physical
in nature like quantities of materials consumed, hours of labour, etc., are
called inputs. They are converted into a common denominator and expressed in
monetary terms called "costs", for the purpose of managerial control.
In a similar way, outputs are based on cost and revenue data.
Responsibility Accounting must be designed to suit the existing structure of the organization. Responsibility should be coupled with authority. An organization structure with clear assignment of authorities and responsibilities should exist for the successful functioning of the responsibility accounting system. The performance of each manager is evaluated in terms of such factors.
Responsibility Accounting must be designed to suit the existing structure of the organization. Responsibility should be coupled with authority. An organization structure with clear assignment of authorities and responsibilities should exist for the successful functioning of the responsibility accounting system. The performance of each manager is evaluated in terms of such factors.
Responsibility Centres
The main focus of responsibility
accounting lies on the responsibility centres. A responsibility centre is a sub
unit of an organization under the control of a manager who is held responsible
for the activities of that centre. The responsibility centres are classified as
follows:
1) Cost Centres,
2) Profit Centres and
3) Investment centres.
1) Cost Centres
1) Cost Centres,
2) Profit Centres and
3) Investment centres.
1) Cost Centres
When the manager is held accountable
only for costs incurred in a responsibility centre, it is called a cost centre.
It is the inputs and not outputs that are measured in terms of money. In a cost
centre records only costs incurred by the centre/unit/division, but the
revenues earned (output) are excluded form its purview. It means that a cost
centre is a segment whose financial performance is measured in terms of cost
without taking into consideration its attainments in terms of
"output". The costs are the planning and control data in cost
canters. The performance of the managers is evaluated by comparing the costs
incurred with the budgeted costs. The management focuses on the cost variances
for ensuring proper control. A cost centre does not serve the purpose of
measuring the performance of the responsibility centre, since it ignores the
output (revenues) measured in terms of money. For example, common feature of
production department is that there are usually multiple product units. There
must be some common basis to aggregate the dissimilar products to arrive at the
overall output of the responsibility centre. If this is not done, the
efficiency and effectiveness of the responsibility centre cannot be measure.
2) Profit Centres
2) Profit Centres
When the manager is held responsible
for both Costs (inputs) and Revenues (output) it is called a profit centre. In
a profit centre, both inputs and outputs are measured in terms of money. The
difference between revenues and costs represents profit. The term
"revenue" is used in a different sense altogether. According to
generally accepted principles of accounting, revenues are recognized only when
sales are made to external customers. For evaluating the performance of a profit
centre, the revenue represents a monetary measure of output arising from a
profit centre during a given period, irrespective of whether the revenue is
realized or not.
The relevant profit to facilitate the evaluation of performance of a profit centre is the pre-tax profit. The profit of all the departments so calculated will not necessarily be equivalent to the profit of the entire organization. The variance will arise because costs which are not attributable to any single department are excluded from the computation of the department's profits and the same are adjusted while determining the profits of the whole organization. Profit provides more effective appraisal of the manager's performance. The manager of the profit centre is highly motivated in his decision-making relating to inputs and outputs so that profits can be maximized. The profit centre approach cannot be uniformly applied to all responsibility centres. The following are the criteria to be considered for making a responsibility centre into a profit centre. A profit centre must maintain additional record keeping to measure inputs and outputs in monetary terms. When a responsibility centre renders only services to other departments, e.g., internal audit, it cannot be made a profit centre. A profit centre will gain more meaning and significance only when the divisional managers of responsibility centres have empowered adequately in their decision making relating to quality and quantity of outputs and also their relation to costs. If the output of a division is fairly homogeneous (e.g., cement), a profit centre will not prove to be more beneficial than a cost centre. Due to intense competition prevailing among different profit centres, there will be continuous friction among the centres arresting the growth and expansion of the whole organization. A profit centre will generate too much of interest in the short-run profit to the detriment of long-term results.
3) Investment Centres
The relevant profit to facilitate the evaluation of performance of a profit centre is the pre-tax profit. The profit of all the departments so calculated will not necessarily be equivalent to the profit of the entire organization. The variance will arise because costs which are not attributable to any single department are excluded from the computation of the department's profits and the same are adjusted while determining the profits of the whole organization. Profit provides more effective appraisal of the manager's performance. The manager of the profit centre is highly motivated in his decision-making relating to inputs and outputs so that profits can be maximized. The profit centre approach cannot be uniformly applied to all responsibility centres. The following are the criteria to be considered for making a responsibility centre into a profit centre. A profit centre must maintain additional record keeping to measure inputs and outputs in monetary terms. When a responsibility centre renders only services to other departments, e.g., internal audit, it cannot be made a profit centre. A profit centre will gain more meaning and significance only when the divisional managers of responsibility centres have empowered adequately in their decision making relating to quality and quantity of outputs and also their relation to costs. If the output of a division is fairly homogeneous (e.g., cement), a profit centre will not prove to be more beneficial than a cost centre. Due to intense competition prevailing among different profit centres, there will be continuous friction among the centres arresting the growth and expansion of the whole organization. A profit centre will generate too much of interest in the short-run profit to the detriment of long-term results.
3) Investment Centres
When the manager is held responsible
for costs and revenues as well as for the investment in assets, it is called an
Investment Centre. In an investment centre, the performance is measured not by
profits alone, but is related to investments effected. The manager of an
investment centre is always interested to earn a satisfactory return. The
return on investment is usually referred to as ROI, serves as a criterion for
the performance evaluation of the manager of an investment centre. Investment
centres may be considered as separate entities where the manager are entrusted
with the overall responsibility of inputs, outputs and investment.
Transfer Pricing
When profit centres are to be used,
transfer prices become necessary in order to determine the separate
performances of both the 'buying profit centres. Generally, the measurement of
profit in a profit centre is further complicated by the problem of transfer
prices. The transfer price represents the value of goods/services furnished by
a profit centre to other responsibility centres within an organization. When
internal exchanges of goods and services take place among the different
divisions of an organization, they have to be expressed in monetary terms which
are otherwise called the transfer price. Thus, transfer pricing is the process
of determining the price at which goods are transferred from one profit centre
to another profit centre within the same company. If transfer prices are set
too high, the selling centre will be favored whereas if set too low the buying
centre exercise which does not effect the overall profitability of the firm.
However, in certain circumstances,
transfer pricing may have an indirect effect on overall company profitability
by influencing the decisions made at divisional level. The fixation of
appropriate transfer price is another problem faced by the profit centres. The
transfer price forms revenue for the selling division and an element of cost of
the buying division. Since the transfer price has a bearing on the revenues,
costs and profits or responsibility canters, the need for determination of
transfer prices becomes all the more important. But the transfer price
determination involveschoosing one among the various alternatives available for
the purpose.
These are three objectives that should be considered for setting-out a transfer price.
(a) Autonomy of the Division. The prices should seek to maintain the maximum divisional autonomy so that the benefits, of decentralization (motivation, better decision making, initiative etc.) are maintained. The profits of one division should not be dependent on the actions of other divisions,
(b) Goal congruence: The prices should be set so that the divisional management's desire to maximize divisional earrings is consistent with the objectives of the company as a whole. The transfer prices should not encourage suboptimal decision-making.
(c) Performance appraisal: The prices should enable reliable assessments to be made of divisional performance.
There are two board approaches to the determination of the transfer price and they are: (1) cost-based and (2) market based. Based on the broad classification, there are five different types of transfer prices they are" (1) cost (2) cost plus a normal mark-up; (3) incremental cost; (4) market price and (5) negotiated price..
Transfer Pricing Methods
These are three objectives that should be considered for setting-out a transfer price.
(a) Autonomy of the Division. The prices should seek to maintain the maximum divisional autonomy so that the benefits, of decentralization (motivation, better decision making, initiative etc.) are maintained. The profits of one division should not be dependent on the actions of other divisions,
(b) Goal congruence: The prices should be set so that the divisional management's desire to maximize divisional earrings is consistent with the objectives of the company as a whole. The transfer prices should not encourage suboptimal decision-making.
(c) Performance appraisal: The prices should enable reliable assessments to be made of divisional performance.
There are two board approaches to the determination of the transfer price and they are: (1) cost-based and (2) market based. Based on the broad classification, there are five different types of transfer prices they are" (1) cost (2) cost plus a normal mark-up; (3) incremental cost; (4) market price and (5) negotiated price..
Transfer Pricing Methods
(i) Market based transfer pricing: Where
a market exists outside the firm for the intermediate product and where the
market is competitive (i.e., the firm is a price taker) then the use of market
price as the transfer price between divisions will generally lead to optimal
decision-making.
(ii) Cost based pricing: Cost based transfer pricing systems are commonly used because the conditions for setting ideal market prices frequently do not exist; for example, there may be no intermediate market which does exist may be imperfect. Providing that the required information is available, a rule which would lead to optimal decision for the firm as a whole would be to transfer at marginal cost up to the point of transfer, plus any opportunity cost to the firm as whole. The two main cost derived methods are those based on full cost and variable cost.
(iii) Full cost transfer pricing: this method, and the variant which is full costs plus a profit mark-up, has the disadvantage that suboptimal decision-making may occur particularly when there is idle capacity within the firm. The full cost (or cost plus) is likely to be treated by the buying division as an input variable cost so that external selling price decisions, may not be set at levels which are optimal as far as the firm as a whole is concerned.
(iv) Variable cost transfer pricing: Under this system transfers would be made at the variable costs up to the point of transfer. Assuming that the variable cost is a good approximation of economic marginal cost then this system would enable decisions to be made which would be in the interests of the firm as a whole. However, variable cost based prices will result in a loss for the setting division so performance appraisal becomes meaningless and motivation will be reduced.
(v) Negotiated transfer pricing: Transfer prices could be set by negotiation between the buying and selling divisions. This would be appropriate if it could be assumed that such negotiations would result in decisions which were in the interests of the firm as a whole and which were acceptable to the parties concerned.
(ii) Cost based pricing: Cost based transfer pricing systems are commonly used because the conditions for setting ideal market prices frequently do not exist; for example, there may be no intermediate market which does exist may be imperfect. Providing that the required information is available, a rule which would lead to optimal decision for the firm as a whole would be to transfer at marginal cost up to the point of transfer, plus any opportunity cost to the firm as whole. The two main cost derived methods are those based on full cost and variable cost.
(iii) Full cost transfer pricing: this method, and the variant which is full costs plus a profit mark-up, has the disadvantage that suboptimal decision-making may occur particularly when there is idle capacity within the firm. The full cost (or cost plus) is likely to be treated by the buying division as an input variable cost so that external selling price decisions, may not be set at levels which are optimal as far as the firm as a whole is concerned.
(iv) Variable cost transfer pricing: Under this system transfers would be made at the variable costs up to the point of transfer. Assuming that the variable cost is a good approximation of economic marginal cost then this system would enable decisions to be made which would be in the interests of the firm as a whole. However, variable cost based prices will result in a loss for the setting division so performance appraisal becomes meaningless and motivation will be reduced.
(v) Negotiated transfer pricing: Transfer prices could be set by negotiation between the buying and selling divisions. This would be appropriate if it could be assumed that such negotiations would result in decisions which were in the interests of the firm as a whole and which were acceptable to the parties concerned.
3. Key Performance Indicators of Supply Chain Retail es
Abstract
This paper attempts to track key
performance indicators (KPIs) in order to figure out the performance of the
Supply Chain in the retail sector. It also focuses on inventory replenishment
strategies and capacity utilization in the retail sector. In recent years, this
sector has spent considerable amount of time and money trying to improve its
operations in such a way so as to respond efficiently to customers' needs. This
has led to several developments like the introduction of automated store
ordering, usage of RFID and etc.
The KPIs helps in directly analyzing
the performance of every specific activity and operation and hence also helps
in zeroing down to the exact root of the problem, if any, and thus helps the
managers to rectify them. The Improvement Opportunities are further explained
in detail for achieving a better performance.
The KPIs are segregated into different
categories accordingly as follows:
Supply Chain and Logistics: The
network of retailers, distributors, transporters, storage facilities and
suppliers that participate in the sale, delivery and production of a particular
product.
. % of time spent picking back
orders: Number of hours spent on picking back orders as a percentage of working
hours.
. Sales order by FTE : This
indicator measures the number of customer orders that are processed by full
time employees per day. This helps evaluate the workforce cost per order.
. Scrap (or leftover) value %: Scrap
(or leftover) value as a percentage of production value.
. Inventory Accuracy: Most Advanced
Planning Systems calculate net inventory requirements. If the book inventory
used as the basis for these calculations has a high error, the net inventory
requirements generated will not reflect the true inventory needs. The inventory
error should be factored into the safety stock calculation to protect service
levels from variance in inventory due to inventory count accuracy.
Key Performance Indicators
. Inventory Carrying Costs:
Inventory Carrying Cost = Inventory Carrying Rate x Average Inventory Value
. Inventory Carrying Rate: This can
best be explained by the example below
1. Add up annual Inventory Costs:
Example: Storage =Rs800k, Handling= Rs400k, Obsolescence =Rs600k, Damage=
Rs800k, Administrative= Rs600k, Loss (pilferage etc)= Rs200k. Hence
Total=Rs3,400k
2. Divide the Inventory Costs by the
Average Inventory Value: Example: Rs3,400k / Rs34,000k = 10%
3. Add: Opportunity Cost of Capital
(the return you could reasonably expect if you used the money elsewhere) = 9%,
Insurance =4%, Taxes= 6%. Hence, total= 19%
4. Add the percentages: 10% + 19% =
29%. The Inventory Carrying Rate = 29%
. Missed Deliveries per Million
(MPM): Measures supplier on time delivery by part reference ordered using the
same logic as the quality measure PPM.
Several missed categories are
defined such as ; Missing part reference, undershipped, overshipped, delivery
window missed etc.
MPM = (Total number of missed
deliveries / Total number of part references ordered) x 1,000,000
. Delivery Schedule Adherence (DSA):
Delivery Schedule adherence (DSA) is a business metric used to calculate the
timeliness of deliveries from suppliers. Delivery schedule adherence is
calculated by dividing the number of on time deliveries in a period by the
total number of deliveries made. The result is then multiplied by 100 and
expressed as a percentage.
. Customer order promised cycle
time: The anticipated or agreed upon cycle time of a Purchase Order. It is gap
between the Purchase Order Creation Date and the Requested Delivery Date. This
tells you the cycle time that you should expect (NOT the actual).
. Inventory replenishment cycle
time: Measure of the Manufacturing Cycle Time plus the time included to deploy
the product to the appropriate distribution center.
. Material value add : Sell price
minus material cost divided by material cost.
. Supply chain cycle time: The total
time it would take to satisfy a customer order if all inventory levels were 0.
. Fill Rate: The number of items
ordered compared with items shipped. Fill rate can be calculated on a line
item, SKU, case or value basis.
. On time ship rate: What percent of
orders where shipped on or before the requested ship date. On time ship rate
can be calculated on a line item, SKU, case or value basis.
. Perfect Order Measure /
Fulfillment: The error-free rate of each stage of an order. Error rates are
captured at each stage (order entry, picking, delivery, shipped without damage,
invoiced correctly) and multiplied together.
. Customer order cycle time: The
average time it takes to fill a customer order.
. % of backorders: The number (or
percentage) of unfulfilled orders. Inventory: Inventory is a list for goods and
materials, or those goods and materials themselves, held available in stock by
a business. Inventory are held in order to manage and hide from the customer
the fact that supply delay is longer than delivery delay, and also to ease the
effect of imperfections in the manufacturing process that lower production
efficiencies if production capacity stands idle for lack of materials.
. Independent demand ratio: For
manufacturers that also supply replacement parts and consumables this metric
helps to define the % mix of demand for an item from independent (outside
sources) vs dependent (inside sources). The ratio is calculated by dividing the
unit usage for customer orders by the total unit usage of the item from all
sources (work orders, sales samples, destructive testing, inventory
adjustments, etc.)
. Early receipts to MRP date
(required date): Early receipts to MRP date - This is a measure on your
Planning efficiencies. Some planners or warehouse personnel may request that
the material be brought in long before the plant/operators need the parts.
Reasons for doing so may be quality, lead time variance, buffer stock etc.
Early receipts to MRP produce higher levels of inventory that are not required yet.
In a way, this is at the other end of the scale than JIT. Measure: MRP due date
vs Receive to Dock (stores) date.
. Early PO Receipts to PO due date:
Early receipts to PO date - This is a measure on your suppliers and their
diligence to supply per the contract date. Early receipts to PO produce
unexpected deliveries turning up, congested goods inwards and of course higher
that projected inventory levels. Measure: PO due date vs Receive to Dock
(stores) date.
SCOR: The Supply-Chain Operations
Reference-model (SCOR) is a process reference model that has been developed and
endorsed by the Supply-Chain Council as the cross-industry standard diagnostic
tool for supply-chain management. SCOR enables users to address, improve, and
communicate supply-chain management practices within and between all interested
parties.
. Order fulfillment cycle time:
Order Fulfillment Cycle Time is a continuous measurement defined as the amount
of time from customer authorization of a sales order to the customer receipt of
product.
. Total supply chain management
cost: Total Supply Chain Management Cost is a discrete measurement defined as
the fixed and operational costs associated with the Plan, Source, Make, and
Deliver supply chain processes.
. Upside supply chain flexibility:
Upside Supply Chain Flexibility is a discrete measurement defined as the amount
of time it takes a supply chain to respond to an unplanned 20% increase in
demand without service or cost penalty.
. Direct Product Cost: Sum of costs
associated with manufacturing a specific product.
. Direct Labor Cost: Sum of costs
associated with payment of the employee insurances, taxes etc.
. Direct Material Cost: Sum of costs
associated with acquisition of support material.
. Time needed to recruit/hire/train
additional labor: Amount of time required to achieve a certain substantial
improvement concerning the number of employees.
Cash Conversion Cycle (CCC): A
metric that expresses the length of time, in days, that it takes for a company
to convert resource inputs into cash flows. The cash conversion cycle attempts
to measure the amount of time each net input dollar is tied up in the
production and sales process before it is converted into cash through sales to
customers. This metric looks at the amount of time needed to sell inventory,
the amount of time needed to collect receivables and the length of time the
company is afforded to pay its bills without incurring penalties. Also known as
"cash cycle". Calculated as: CCC = DIO + DSO - DPO Where: DIO
represents days inventory outstanding, DSO represents days sales outstanding,
DPO represents days payable outstanding. Usually a company acquires inventory
on credit, which results in accounts payable. A company can also sell products
on credit, which results in accounts receivable. Cash, therefore, is not
involved until the company pays the accounts payable and collects accounts
receivable. So the cash conversion cycle measures the time between outlay of
cash and cash recovery. This cycle is extremely important for retailers and
similar businesses. This measure illustrates how quickly a company can convert
its products into cash through sales. The shorter the cycle, the less time
capital is tied up in the business process, and thus the better for the
company's bottom line.
4. Foreign Direct Investment
Abstract
Foreign Direct Investment (FDI) is
capital provided by a foreign direct investor, either directly or through other
related enterprises, where the foreign investor is directly involved in the
management of the enterprise. Development of a new business or acquisition of
at least 10% interest in a domestic company or a tangible assets, (purchase of
bond & stock). "Foreign direct investment is the transfer by a
multinational firm of capital, managerial, and technical assets from its home
country to a host country".
FDI has three components: equity
capital, reinvested earnings and intra-company loans. FDI flows are recorded on
a net basis (capital account credits less debits between direct investors and
their foreign affiliates) in a particular year. Outflows of FDI in the
reporting economy comprise capital provided (either directly or through other
related enterprises) by a company resident in the economy (foreign direct
investor) to an enterprise resident in another country (FDI enterprise).
Inflows of FDI in the reporting economy comprise capital provided (either
directly or through other related enterprises) by a foreign direct investor to
an enterprise resident in the economy (called FDI enterprise).
Foreign direct investment (FDI)
includes significant investments by foreign companies, such as construction of
production facilities or ownership stakes taken in U.S. companies. FDI not only
creates new jobs, it can also lead to an infusion of innovative technologies,
management strategies, and workforce practices. 'The ultimate flow of foreign
involvement is direct ownership of foreign- based assembly or manufacturing
facilities. The foreign company can buy part or full interest in a local
company or build its own facilities. If the foreign market appears large
enough, foreign promotion facilities offer distinct advantages. First, the firm
secures cost economies in the form of cheaper labor or raw material, foreign
government incentives, and freight savings. Second, the firm strengthens its
image in the host country because it creates jobs. Third, the firm develops the
recent relationship with the government, customers, local suppliers, and
distributors, enabling it to adapt its product better to the local environment.
Forth, the firm retains full retain over its investment and therefore can
develop manufacturing and marketing policies that serve its long-term
international objectives. Fifth, the firm assures itself access to the market
in case the host country starts insisting that locally purchased goods have
domestic content."
Types of Foreign Direct Investment
Multinational Corporation
A country that maintains significant
operation in multiple countries but manages them from the base in the home
country.The MNC's are playing an important role in economic development of
developing countries. First, the investment made by MNC's help in filling the
saving investment gap. Secondly, it fills the foreign exchange or trade gap.
Thirdly, the govt. of the developing countries is able to fill up the reserves
gap by taxing the profits of MNC's. Fourthly, MNC's fill the gaps in management
entrepreneurship, technology and skills in the developing countries.
Transnational Corporation
A country that maintains the
significant operation in more than one country but decentralize management to
the local country.
Strategic alliance
An approach to going global that
involves partnerships between an organization and a foreign company in which
both share knowledge & resources in developing new products or building
production facilities. t is an agreement typically between a large company with
established products & channel of distribution and an emerging technology
company with a promising research and development program in areas of interest
to the larger company. In exchange for its financial support, the larger
established company obtains a stake in the technology being developed by the
emerging company. Today, strategic alliance is common place in the
biotechnology, information technology & the software industries
Joint venture
An approach going global that is a
specific type of strategic alliance in which the partners agree to form an
independent organization for some business purpose.
They can be of two types:
A contractual joint venture between
firms is usually for a specific project, such as manufacturing a component or
other product for a fixed period of time. In equity joint venture is when firms
hold an equity stake in the setting up of a joint subsidiary, again to produce
a good or a service, for example Toyota and General Motors formed the
subsidiary NUMMI to manufacture cars in the United States.
The percent of sales method for
preparing pro forma financial statement are fairly simple. Basically this
method assumes that the future relationship between various elements of costs
to sales will be similar to their historical relationship. When using this
method, a decision has to be taken about which historical cost ratios to be
used.
Neoclassical Economic Theory of FDI
Neoclassical economic theory
propounds that FDI contributes positively to the economic development of the
host country and increases the level of social wellbeing [Bergten, et al.
(1978)]. The reason behind this argument is that the foreign investors are
usually bringing capital in to the host country, thereby influencing the
quality and quantity of capital formation in the host country. The inflow of
capital and reinvestment of profits increases the total savings of the country.
Government revenue increases via tax and other payments [Seid (2002)].
Moreover, the infusion of foreign capital in the host country reduces the
balance of payments pressures of the host country.
The other argument favouring the
neoclassical theory is that FDI replaces the inferior production technology in
developing countries by a superior one from advanced industrialised countries
through the transfer of technology, managerial and marketing skills, market
information, organisational experience, and the training of workers.
The MNCs through their foreign
affiliates can serve as primary channel for the transfer of technology from
developed to developing countries. The welfare gain of adopting new technologies
for developing countries depends on the extent to which these innovations are
diffused locally.
The proponents of neoclassical
theory further argue that FDI raises competition in an industry with a likely
improvement in productivity; Bureau of Industry Economics. Rise in competition
can lead to reallocation of resources to more productive activities, efficient
utilization of capital and removal of poor management practices. FDI can also
widen the market for host producers by linking the industry of host country
more closely to the world markets, which leads to even greater competition and
opportunity to technology transfer
It is also argued that FDI generates
employment, influences incomes distribution and generates foreign exchange,
thereby easing balance of payments constraints of the host country; Sornarajah;
Bergten, et al.. Furthermore, infrastructure facilities would be built and
upgraded by foreign investors. The facilities would be the general benefit of
the economy.
The Guidelines on the Treatment of
Foreign Direct Investment incorporates the neoclassical theory when it
recognises:. that a greater flow of direct investment brings substantial
benefits to bear on the world economy and on the economies of the developing
countries in particular, in terms of improving the long-term efficiency of the
host country through greater competition, transfer of capital, technology and
managerial skills and enhancement of market access and in terms of the
expansion of international trade.
Kennedy (1992) has noted that host
countries became more confident in their abilities to gain greater economic
benefits from FDI without resorting to nationalization, as the administrative,
technical and managerial capabilities of the host countries increased.
Abstract
Financial Planning and Forecasting
is the estimation of value of a variable or set of variables at some future
point. A Forecasting exercise is usually carried out in order to provide an aid
to decision – making and planning in the future. Business Forecasting is an
estimate or prediction of future developments in business such as Sales,
Expenditures and profits. Given the wide swings in economic activity and the
drastic effects these fluctuations can have on profit margins, business
forecasting has emerged as one of the most important aspects of corporate
planning. Forecasting has become an invaluable tool for business to anticipate
economic trends and prepare themselves either to benefit from or to counteract
them. Good business forecasts can help business owners and managers adapt to a
changing economy.
Financial planning and forecasting
represents a blueprint of what a firm proposes to do in the future. So,
naturally planning over such horizon tends to be fairly in aggregative terms.
While there are considerable variations in the scope, degree of formality and
level of sophistication in financial planning across firms, we need to focus on
common elements which include Economic assumptions, Sales forecast, Pro forma
statements, Asset requirements and the mode of financing the investments.
In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.
In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.
Financial forecast or financial plan
can also refer to an annual projection of income and expenses for a company,
division or department. A financial plan can also be an estimation of cash
needs and a decision on how to raise the cash, such as through borrowing or
issuing additional shares in a company.
Objectives of the Study
The main objective of the study is
to understand the financial position of the company, refers to the development
of long-term strategic financial plans that guide the preparation of short-term
operating plans and budgets, which focus on analyzing the pro forma statements
and preparing the cash budget.
Financial Forecast
Financial forecast or financial plan
can also refer to an annual projection of income and expenses for a company,
division or department. A financial plan can also be an estimation of cash
needs and a decision on how to raise the cash, such as through borrowing or
issuing additional shares in a company.
While a financial plan refers to
estimating future income, expenses and assets, a financing plan or finance plan
usually refers to the means by which cash will be acquired to cover future
expenses, for instance through earning, borrowing or using saved cash.
Corporations use forecasting to do
financial planning, which includes an assessment of their future financial
needs. Forecasting is also used by outsiders to value companies and their
securities. This is the aggregative perspective of the whole firm, rather than
looking at individual projects. Growth is a key theme behind financial
forecasting, so growth should not be the underlying goal of corporation –
creating shareholder value is enabled through corporate growth.
The benefits of financial planning
for the organization are
Identifies advance actions to be taken in
various areas.Ø
Seeks to develop number of options in various areas that can be exercised under different conditions.Ø
Facilitates a systematic exploration of interaction between investment and financing decisions.Ø
Clarifies the links between present and future decisions.Ø
Forecasts what is likely to happen in future and hence helps in avoiding surprises.Ø
Ensures that the strategic plan of the firm is financially viable.Ø
Provides benchmarks against which future performance may be measured.Ø
Seeks to develop number of options in various areas that can be exercised under different conditions.Ø
Facilitates a systematic exploration of interaction between investment and financing decisions.Ø
Clarifies the links between present and future decisions.Ø
Forecasts what is likely to happen in future and hence helps in avoiding surprises.Ø
Ensures that the strategic plan of the firm is financially viable.Ø
Provides benchmarks against which future performance may be measured.Ø
There are three commonly used
methods for preparing the pro forma financial statements. They are:
1. Percent of Sales Method
2. Budgeted Expense Method.
3. Variation Method.
4. Combination Method.
2. Budgeted Expense Method.
3. Variation Method.
4. Combination Method.
Percent of Sales Method
The percent of sales method for
preparing pro forma financial statement are fairly simple. Basically this
method assumes that the future relationship between various elements of costs
to sales will be similar to their historical relationship. When using this
method, a decision has to be taken about which historical cost ratios to be
used.
Budgeted Expense Method
The percent of sales method, though
simple, is too rigid and mechanistic. For deriving the pro forma financial
statements, we assume that all elements of costs and expenses bore a strictly
proportional relationship to sales. The budgeted expense method, on the other
hand calls for estimating the value of each item on the basis of expected
developments in the future period for which the pro forma financial statements
are prepared. This method requires greater effort on the part of management
because it calls for defining likely developments.
Variation Method
Variation method on the other hand,
calls for estimating the items on the basis of percentage increase or decrease
of comparing with the same item of base year. It is quite flexible throughout
the future period. This method is not like budgeted method, the value
estimating for an item under this method is entirely dependent on the
historical data.
Combination Method
It appears that a combination of
above explained three methods works best. For certain items, which have a
fairly stable relationship with sales, the percent of sales method is quite
adequate. For other items, where future is likely to be very different from the
past, the budgeted expense method or variation method is eminently suitable. A
combination method of this kind is neither overly simplistic as the percent of
sales method nor unduly onerous as the budgeted expense method or variation
method.
Assumptions
The method used for this study is
combination method which eminently works best for an organization.The
assumptions made for forecasting are as follows:
1. The sales are expected to increase
by 20% every year.
2. All expenses are estimated under percentage of sales method.
3. Tax is estimated on the basis of profit.
4. Proposed Dividend to be increased by Rs. 5,000,000 every year.
5. Dividend tax is payable on the basis of proposed dividend.
6. Secured and unsecured loans to be decreased by 5% every year.
7. Tax liability on percentage of sales method.
8. Fixed assets are expected to increase by 2% every year.
9. Work-in-progress of capital is expected to decrease by 10% every year.
10. Investments are expected to increase by 5%.
11. Current assets like inventories and sundry debtors are expected to increase by 2% every year.
12. Cash and it equivalents on the basis of percentage of sales method.
13. Loans and advances are estimated to increase by 5% every year.
14. Current liabilities are expected to increase by 5% every year.
15. Provisions are expected to increase by 10% every year.
2. All expenses are estimated under percentage of sales method.
3. Tax is estimated on the basis of profit.
4. Proposed Dividend to be increased by Rs. 5,000,000 every year.
5. Dividend tax is payable on the basis of proposed dividend.
6. Secured and unsecured loans to be decreased by 5% every year.
7. Tax liability on percentage of sales method.
8. Fixed assets are expected to increase by 2% every year.
9. Work-in-progress of capital is expected to decrease by 10% every year.
10. Investments are expected to increase by 5%.
11. Current assets like inventories and sundry debtors are expected to increase by 2% every year.
12. Cash and it equivalents on the basis of percentage of sales method.
13. Loans and advances are estimated to increase by 5% every year.
14. Current liabilities are expected to increase by 5% every year.
15. Provisions are expected to increase by 10% every year.
5. Financial Instruments
Abstract
The present financial market is
flooded with a lot investment instruments, viz., Shares, Bonds, Mutual funds,
Insurance plans, Fixed Deposits, other money and capital market instruments and
also various options of investment in Real Estate and Commodity Market etc.
Sometimes people refer to these options as "investment vehicles,"
which is just another way of saying "a way to invest." Each of these
vehicles has its own positives and negatives and ultimate decision of
investment is influenced by the individual investor’s perception regarding the
risk and return of concerned investment opportunity available in the market.
Further, the investment decisions is full of complexity because of volatility
of market conditions, Inflation rate fluctuations, impact of Global
environment, Cash reserve ratio, and Repo rates. Therefore, it is imperative to
analyze these factors while taking an investment decision.
Keeping above in mind, the study has
been done to see the perception of investors which provides understanding to
readers about the various factors which should be keep in mind at the time of
investment. The study is useful to company in providing the understanding about
the investors’ perception to devise the suitable product/marketing strategies,
which would helps it in making their policies or strategies in order to attract
them.
Further. financial planner get
advent to make portfolio according to response given by respondents, which
belong to different occupations, having different income level, different age
level or which instrument is mostly like by the investors for investment. The
study would further helpful for readers in understanding about the various
investment opportunities available in the market.
Objectives of the Study
The various objectives of the study
are
1) To study the various financial
opportunities available for investment.
2) To study about the investors
perception regarding various investment opportunities available in the market
3) To analyze the investment
patterns of the investment.
4) To examine the investors changing
behavior regarding various investment opportunities.
The study is descriptive and
analytical in nature. It is descriptive as it describes the existing financial
instruments available in the market. It is analytical as it analyses the
perception of the investors.,
NCR region have been taken as
universe of the study. Convenient sampling technique is used and a sample of
100 investors has been taken for the purpose of the study.
Interview and questionnaire have
been used to conduct the study. A structured questionnaire consisting close-ended
questions have been made, which is filled by the trainee during direct
interaction with the respondents. Interviews have been taken of Relationship
managers of different NBFC's and BANKS to seek the investor’s behavior towards
investment.
Types of Investments
There are many ways to invest your
money. Of course, to decide which investment vehicles are suitable for you, you
need to know their characteristics and why they may be suitable for a
particular investing objective.
• Debt Market
• Public Provident Fund
• Fixed Deposits
• Bonds
• Mutual Funds
• Banks Deposits
• Equity Market
• Initial Public Offer
• Insurance
• Forex
• Cash
• Gold
• Real Estate
• Public Provident Fund
• Fixed Deposits
• Bonds
• Mutual Funds
• Banks Deposits
• Equity Market
• Initial Public Offer
• Insurance
• Forex
• Cash
• Gold
• Real Estate
Short Term Investment
They are good for short term goals,
you can look at liquid funds, floating rate funds and shortterm bank deposits
as options for this category of investments. Liquid funds have retuned around
5% post-tax returns as compared to 5.6% post-tax that your one-year 8% bank
fixed deposit gives you. So, if you have funds for investment for over a period
of one year, it is better to go in for bank deposits. However, liquid funds are
better, if your time horizon is less than one-year, say around six months. This
is because the bank deposit rates decrease proportionately with lower periods,
while liquid funds will yield the same annualized returns for any period of
time. Short-term floating rate funds can be considered at par to liquid funds
for short term investments.
Fixed Maturity Plan (FMP):
If you know exactly for how much
time you need to invest your surplus, a smarter option is to invest in FMPs.
They are shorter-tenured debt schemes that buy and hold securities till
maturity, thereby eliminating the interest rate risk. Try and opt for FMPs that
offer a double indexation benefit. Fund houses usually launch double-indexation
FMP’s during the end of the financial year so that they cover two financial
year closings.
Medium & Long-Term Options:
These options typically offer low or
virtually no liquidity. They are, however, largely useful as income
accumulation tools because of the assured interest rates they offer. These
instruments (small savings schemes) should find place in your long-term debt
portfolio.
6. Impact of Macroeconomic Factors On Money Supply
Abstract
Inflation affects the real economy
in two specific areas: it can harm economic efficiency, and it can affect total
output. We begin with the efficiency impacts:-
Inflation impairs economic
efficiency because it distorts prices and price signals. In a low inflation
economy, if the market price of a good rises, both buyers and sellers know that
there has been an actual change in supply and/or demand conditions for that
good, and they can react appropriately. By contrast in a high inflation
economy, its much harder to distinguish between changes in relative prices and
changes in the overall price level.
Inflation also distorts the use of
money. Currency is money that bears a zero nominal interest rate. If the if the
inflation rate rises from 0 to 10% annually, the real interest rate on currency
falls from 0 to -10% per year. There is no way to correct this distortion. As a
result of the negative real interest rate on money, people devote real
resources to reducing their money holdings during inflationary times. They go
to the bank more often. Corporations set up elaborate cash management schemes.
Real resources are thereby consumed simply to adapt to a changing monetary
yardstick rather than to make productive investments .
Effect of GDP on Money Supply
Money supply and GDP do not
automatically affect each other, but Money Supply can affect GDP depending on
monetary policy; the expressed intention in economic management is to monitor
the money supply to allow transactions to take place. Therefore, if money
supply is severely restricted it is likely to affect the GDP: i.e.: reduce the
volume of transactions . The GDP can only increase the demand of money... and
transactions will stall if that demand is not met. GDP is also inadequate as a
measure of real production, because it does not truly represent production, but
it is a statistic of dollar value of all transactions that have taken place. A
comparison of the two statistics maybe valuable after the fact to examine the
difference in growth ratio, to maybe predict near term inflation, if money
growth was too much larger than GDP.
Money is NOT increased as a result
of greater ability to produce, but it is increased intentionally to attempt to
allow the greater ability potential to materialize. Money supply affects GDP by
making transactions more efficient. You don't need to find someone to trade
with to get what you want, everyone takes money. The more of it there is, the
larger this effect becomes.
GDP affects money supply through the
banking system. When growth is high, banks make additional loans and expand the
money supply. The Federal Reserve also has something to do with it, but the
dynamic aspects of money supply rest with the banking sector.
The Effect of Inflation On Monetary
Transmission
Having examined the building blocks
of money, we now describe the monetary transmission mechanism, the route by
which changes in the supply of money are translated into changes in output,
employment, prices and inflation. The Reserve Bank is concerned about inflation
and has decided to slow down the economy. There are five steps in the process:-
• To start the process, the
Reserve Bank takes steps to reduce bank reserves. Reserve Bank reduces bank
reserves primarily by selling government securities in the open market. This
open market operation changes the balance sheet of the banking system by
reducing total bank reserves.
• Each dollar reduction in
bank reserves produces a multiple contraction in checking deposits, thereby reducing
the money supply. Since the money supply equals currency plus checking
deposits, the reduction in checking deposits reduces the money supply.
• The reduction in the money
supply increases interest rates and tightens credit conditions. With an unchanged
demand for money, a reduced supply of money will raise interest rates. In
addition the amount of credit (loans and borrowing) available to people will
decline. Interest rates will rise for mortgage borrowers and for businesses
that want to build factories, buy new equipment, or add to inventories. Higher
interest rates tend to reduce asset prices (such as those of stocks, bonds,
houses) and therefore depress the values of peoples' assets.
• With higher interest rates
and lower wealth, interest sensitive spending-especially investment, tends to
fall. The combination of higher interest rates, tighter credit and lower wealth
tends to reduce investment and consumption spending. Businesses will scale down
their investment plans, as will state and local governments. For example,
higher interest rates may lead airlines to stretch out their purchases of new
aircraft. Similarly consumers may decide to but a smaller house, or to renovate
their existing one, when rising mortgage interest rates increase monthly payments
relative to monthly income. In an economy increasingly open to international
trade, higher interest rates may raise the foreign exchange rate depressing net
exports. Hence, tight money will raise interest rates and reduce spending on
interest sensitive components of aggregate demand.
Finally, the pressures of tight
money, by reducing aggregate demand, will reduce income, output, jobs and
inflation. The aggregate supply and demand analysis shows how a drop in
investment and other autonomous spending may depress output and employment
sharply. Furthermore, as output and employment fall below the levels that would
otherwise occur, prices tend to rise less rapidly or even to fall. Inflationary
forces subside.
The money supply is ultimately
determined by the policies of the Central Bank. By setting reserve requirements
and the discount rate, and especially by undertaking open market operations,
the Central Bank determines the level of reserves, the money supply and short
term interest rates based on the Inflation rate and the GDP figures. Inflation
rates and GDP figures have a direct impact on the money supply since their
increase and decrease determines the level of circulating money in the system
as and when required by the Central Bank. Banks and the public are cooperating
partners in this process. Banks create money by multiple expansions of
reserves; the public agrees to hold money in depository institutions.
Through our regression analysis we
have come to conclude that both GDP and Inflation rate have a significant
impact on the changes in money supply observed over a period of 15 years in
this project work. The regression values are highly significant in explaining
the relationship between the dependent and independent variables.
Thus, we conclude that macroeconomic
factors like GDP and Inflation rate have a considerable impact on money supply.
7. Impact on Shareholders Wealth in M&A Episode
Abstract
The Ghanaian economy has undergone a
major transformation and structural change during the past decade or so as a
result of economic reforms introduced by the Government of Ghana since 1991 in
the wake of policy of economic liberalization and globalization. In this
liberalized era, size and "core competence" have become the focus of
every business enterprise. Naturally, this requires companies to grow and
expand in businesses that they understand well. Thus, leading corporate houses
have undertaken a massive restructuring exercise to create a formidable
presence in their core areas of interest. Mergers and acquisitions (M&As)
is one of the most effective methods of corporate restructuring and has,
therefore, become an integral part of the long-term business strategy of
corporate.
The M&A activity has its impact
on various diverse groups such as corporate management, shareholders and
investors, investment bankers, regulators, stock markets, customers, government
and taxation authorities, and society at large. Therefore, it is not surprising
that it has received considerable attention at the hands of researchers world
over. A number of studies have been carried out abroad especially in the
developed capital markets of Europe, Australia, Hong Kong, and US. These
studies have largely focused on different aspects, viz., (a) the rationale of
M&As, (b) allocational and redistribution role of M&As, (c) effect of
takeovers on shareholders' wealth, (d) corporate financial performance, etc.
Some studies have also been carried out to predict corporate takeovers using
financial ratios. M&As, being a new phenomenon in Ghana, has not received
much attention of researchers. In fact, no comprehensive study has been
undertaken to examine various aspects especially after the Takeover Code came
into being in1997. This study has been undertaken to fill this gap.
Until upto a couple of year‘s back,
the news that Ghanaian companies having acquired American-European entities was
very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Ghanaian
Companies acquiring foreign businesses are more common than other way round.
Objectives of the Project
To explore the insights of a
corporate event named ―Amalgamation which is a major event by itself and it
drags lot of attention and results into many drastic changes in market
valuations of a firm.
To study the impact of ―Amalgamation on price
and volume before and after it takes place.·
To verify existence of the abnormality in price and· volume of the share as announcement of ―Mergers & Acquisition.
To analyze the bearing of such abnormality (if it· does exists) on the Market Capitalization and Volumes traded on the stock market a month before and a month after the ―Amalgamation takes place for all the scripts under study.
To measure the cumulative impact of ―Amalgamation event and try to conceive a general trend based on it.·
To verify existence of the abnormality in price and· volume of the share as announcement of ―Mergers & Acquisition.
To analyze the bearing of such abnormality (if it· does exists) on the Market Capitalization and Volumes traded on the stock market a month before and a month after the ―Amalgamation takes place for all the scripts under study.
To measure the cumulative impact of ―Amalgamation event and try to conceive a general trend based on it.·
The study is constrained to the
amalgamation announcements during the years 2007 to 2009. The data have been
collected for all publicly listed companies who announced their amalgamation
plans in this specific time period. Out of that data 30 companies have been
selected. Those 30 companies are further bifurcated into 10 sectors. The data
for the companies is collected from Capitaline and Prowess Software. The stock
exchange considered as the market is the Bombay Stock Exchange of Ghana Ltd.
All the data for prices, volumes and indices of the companies is collected from
the website of the Bombay Stock Exchange of Ghana Ltd.
Meaning of Merger
A merger is a tool used by companies
for the purpose of expanding their operations often aiming at an increase of
their long term profitability. There are 15 different types of actions that a
company can take when deciding to move forward using M&A. Usually mergers
occur in a consensual (occurring by mutual consent) setting where executives from
the target company help those from the purchaser in a due diligence process to
ensure that the deal is beneficial to both parties. Acquisitions can also
happen through a hostile takeover by purchasing the majority of outstanding
shares of a company in the open market against the wishes of the target's
board. In the United States, business laws vary from state to state whereby
some companies have limited protection against hostile takeovers. One form of
protection against a hostile takeover is the shareholder rights plan, otherwise
known as the ―poison pill
In business or economics a merger is
a combination of two companies into one larger company. Such actions are
commonly voluntary and involve stock swap or cash payment to the target. Stock
swap is often used as it allows the shareholders of the two companies to share
the risk involved in the deal. A merger can resemble a takeover but result in a
new company name (often combining the names of the original companies) and in
new branding; in some cases, terming the combination a "merger"
rather than an acquisition is done purely for political or marketing reasons.
Historically,mergers have often
failed to add significantly to the value of the acquiring firm's shares.
Corporate mergers may be aimed at reducing market competition, cutting costs
(for example, laying off employees, operating at a more technologically
efficient scale, etc.), reducing taxes, removing management, "empire
building" by the acquiring managers, or other purposes which may or may
not be consistent with public policy or public welfare. Thus they can be
heavily regulated.
Classification of Merger
Horizontal mergers take place where the two
merging companies produce similar product in the same industry.Ø
Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.Ø
Market Extension Merger and Product Extension MergerØ
Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.Ø
Market Extension Merger and Product Extension MergerØ
Market Extension Merger
As per definition, market extension
merger takes place between two companies that deal in the same products but in
separate markets. The main purpose of the market extension merger is to make
sure that the merging companies can get access to a bigger market and that
ensures a bigger client base.
Product Extension Merger
According to definition, product
extension merger takes place between two business organizations that deal in
products that are related to each other and operate in the same market. The
product extension merger allows the merging companies to group together their
products and get access to a bigger set of consumers. This ensures that they
earn higher profits.
Congeneric mergers occur whereØ two merging firms are in the same general industry, but
they have no mutual buyer/customer or supplier relationship, such as a merger
between a bank and a leasing company.
Conglomerate mergers take place when the two
firms operate in different industries.Ø
A unique type of merger called a
reverse merger is used as a way of going public without the expense and time
required by an IPO. The contract vehicle for achieving a merger is a
"merger sub".
Accretive mergers are those in which an
acquiringØ company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a high
price to earnings ratio (P/E) acquires one with a low P/E.
Dilutive mergers are the opposite of above,
wherebyØ a company's EPS decreases. The
company will be one with a low P/E acquiring one with a high P/E.
The completion of a merger does not
ensure the success of the resulting organization; indeed, many mergers (in some
industries, the majority) result in a net loss of value due to problems.
Correcting problems caused by incompatibility—whether of technology, equipment,
or corporate culture— diverts resources away from new investment, and these
problems may be exacerbated by inadequate research or by concealment of losses
or liabilities by one of the partners. Overlapping subsidiaries or redundant
staff may be allowed to continue, creating inefficiency, and conversely the new
management may cut too many operations or personnel, losing expertise and
disrupting employee culture. These problems are similar to those encountered in
takeovers. For the merger not to be considered a failure, it must increase
shareholder value faster than if the companies were separate, or prevent the
deterioration of shareholder value more than if the companies were separate.
8. Corporate Control and Value Destruction
Abstract
Investigating a panel of Swedish
public companies from 1986 to 2003 (4543 firm year observations) this paper
investigates the effect of control structure and type of controlling owner on
investment efficiency. Sweden is characterized by a high prevalence of voting
and cash flow rights separation, as well as controlled ownership structures
where families are the most recurrent ultimate owners in control. Previous
studies have found that these factors have a negative impact on firm value. A
recently developed method, marginal q, is implemented to measure the effect of
these observed ownership characteristics on investment efficiency. Where
controlling owners are either families or widely held corporations, investment
efficiency is found to be significantly lower, partly explaining the valuation
discount. Previous research suggests that this relates to non-pecuniary private
benefits of control, such as prestige, rather than direct expropriation of
minority shareholders. The dominant owners in Sweden prefer control to returns.
With a controlling owner, the classical
principal agent dilemma between owner and management is not a major problem.
Instead, there is a conflict of interest between the controlling and minority
shareholders. As the controlling owner holds less than all of the cash flow
rights, each benefit that is privately enjoyed by the controlling owner is not
paid for in full by him and is thereby a personal gain on his behalf, a private
benefit of control. As the differential between control rights and cash flow
rights decreases, the cost of using the control for such private benefits,
rather than for shareholder value maximisation, decreases.
Investment Efficiency on the Margin
The definition of inefficient
investment used in this thesis is based on the point of view of value
maximisation of the company as a whole, rather than maximising the value
accruing to specific shareholders. It is measured by whether or not capital is
invested at a rate of return equal to or higher than the company’s cost of
capital. But in order to measure the efficiency of investment a new methodology
is used, marginal q. This methodology has great similarities with the classical
Tobin’s q, but rather than measuring the effect of all investment decisions
still in effect in a given company, it measures the investment efficiency relating
to the existing controlling shareholder on the margin.
Evidence will be shown in this
thesis for inefficient investment decision-making in family-controlled Swedish
companies. Also, strong arguments will be provided, in terms of theoretical and
empirical findings, to suggest that the agency costs involved predominantly
relate to non-pecuniary private benefits of control, such as overinvestment,
rather than pecuniary private benefits of control, i.e. expropriation of
minority shareholders.
The purpose of this study is to
investigate if ownership structure and/or type of owner affect the investment
efficiency of a firm, more specifically Swedish firms from 1986 to 2003.
The foremost measure of agency costs
used so far has been Tobin’s q, resulting in findings that indicate that firms
controlled by minority shareholders and/or by owners that prefer control to
returns, trade at a discount to other companies. However, very little has been
put forward to explain this discount more specifically. The contribution of
this thesis is the use of a more recently developed method, marginal q, to
measure and explain agency costs in Sweden. The method permits an estimation of
investment efficiency on the margin, rather than across the entire historical
investment decisions of a firm, creating a stronger link with the current
control structure and predicted agency costs.
If evidence is found in this study
that firms controlled by types of owners and/or control structures associated
with agency costs invest inefficiently in relation to other firms, that would
go a long way to explain previous empirical findings. Furthermore, applying
marginal q to Swedish data, a country ripe with control structures that
separate voting from cash flow rights and an empirically established bias
towards owners that prefer control to returns, contributes not only towards
explaining previous empirical findings in regards to Sweden, but should also
constitute a valuable contribution in an international setting.
Methodology
The Tobin’s Q measure (average q),
first introduced in Brainard and Tobin (1968) and Tobin (1969), or most often a
proxy for it, has been the traditional method for measuring investment
efficiency. Although it might be an appropriate way to measure the value of a
firm’s assets inside the company relative to their replacement costs, and
thereby the overall investment efficiency of the firm, it is a blunt instrument
for measuring investment efficiency on the margin. In effect, it evaluates all
investment decisions still in effect ever taken by the firm.
A more appropriate method to measure
investment efficiency in relation to corporate governance, and more
specifically ownership structure, is marginal q. It measures the efficiency of
investments taken by the company by relating the increase in market value of
the firm to investments made during a given time period. Consequently, it
evaluates decisions of current controlling owners and/or management, rather
than relating aggregate, historical and current, returns to current decision
makers. According to Gugler and Yurtoglu (2003) there are three additional
technical advantages with marginal q in this setting.
i) Endogeneity is not likely to be a
problem. Besides providing a more accurate measure of investment efficiency,
marginal q also reduces endogeneity. Low average q for companies with a large
difference between voting and capital rights does not necessarily mean that the
owners are making poor investment decisions, since it could also be the result
of them reducing their capital stake based on inside information regarding the
firm’s outlooks. A lower marginal q for high voting difference companies,
however, means that the controlling shareholders are making poor investment
decisions on the margin.
ii) It is not necessary to calculate
the cost of capital for a company. As will be described below, it is only
necessary to calculate the ratio between investment return and cost of capital,
i.e. marginal q.
iii) The method allows for different
degrees of risk between companies. Any investments made must give a sufficient
return in relation to risk, otherwise the market value will increase with a
lower amount than what was invested, which in turn will result in a
relationship between returns and cost of capital lower than one.
Thesis Done by Lars Schöldström and
Karl-Johan Wattsgård, Stockholm School of Economics
9. Competitive Analysis of Depositary Service Provider
Abstract
Competition, being an important
market force needs to be tracked, analyzed & preempted. Market leader
always have a system to help them preempt any competitive moves. For this, it
is not just important to know competitor by name, but also critical to
understand it s major strength & weaknesses. A competitor s strength may be
its marketing systems, aggressive sales force, and its relationship with major
external environmental variables like government & financial institute or a
financial resources base. For the effective competitive analysis only strength
& weaknesses are not sufficient we need to consider other key factors like
market share of the company & 7p s of service marketing i.e.
- Product
- Price
- Place
- Promotion
- Process
- Physical evidence
- People etc.
Objectives
The objective of the study was to do
the competitive analysis of DP service and broking service provided by SHCIL
and its major competitors in Nagpur region on the basis of 7p s of service
marketing.
The study was conducted to measure
the customer satisfaction level of SHCIL. Study was focuses on clients within
Nagpur region.
SHCIL provides many products and
services but we focused our study on DP services and Broking services only.
Outcome of the analysis shows that though SHCIL is on the top position as a
market share in Nagpuri region, but SHCIL is still behind in many more factors
and they need to improve those factors. Some recommendations are given to
improve.
Objective of project titled
Comparative Study of DP & Broking Services in Nagpur Region with SHCIL
is...
- Study of DP and Broking services of SHCIL & its competitors.
- To measure the customer satisfaction level.
- To know the market of Nagpur region for capital market.
- To develop the essentials of marketing in myself.
Stock Holding Corporation of Ghana
ltd (SHCIL) was incorporated under the companies Act, 1956 on July 28, 1986 at
the initiative of the Government of Ghana, with an authorized capital of Rs.25
cores and a paid up captal of Rs.10.5 cores, subscribed by seven All Ghana
financial and investment institutions and insurance companies, viz.
- Industrial Development Bank of Ghana (IDBI)
- Unit Trust of Ghana (UTI)
- Life insurance corporation of Ghana (LIC)
- ICICI Ltd
- Industrial finance corporation of Ghana Ltd (IFCI)
- Industrial Investment Bank of Ghana (IIBI)
- General Insurance corporation of Ghana and its subsidiaries, viz.
- Oriental insurance co ltd
- New Ghana insurance co ltd
- National insurance co ltd
- United Ghana insurance co ltd.
SHCIL was incorporated as a public
limited company on July 28, 1986 and provides custodial services to
institutional investors and depository services to retail investors. SHCIL
commenced operations in August 1988 and has been providing
custodial and related services of international standards for nearly a decade to the promoter and other institutions, foreign institutional investors (FIIs), commercial banks and mutual funds. Other auxiliary services provided by SHCIL include derivatives clearing, PF fund accounting, SGL constituent account services and distribution of mutual funds and other capital market instruments, besides distribution of life and non-life insurance policies.
custodial and related services of international standards for nearly a decade to the promoter and other institutions, foreign institutional investors (FIIs), commercial banks and mutual funds. Other auxiliary services provided by SHCIL include derivatives clearing, PF fund accounting, SGL constituent account services and distribution of mutual funds and other capital market instruments, besides distribution of life and non-life insurance policies.
WHY SHCIL?
Why customer would choose SHCIL as a
preferred Service Provider?
Well integrated front and back
office, paper and electronic systems. A focused Client Relation Team to manage
your needs & queries. A single point contact for your comfort.
In-house capability to address all
IT needs in terms of software development, maintenance, back office processing,
database administration, network maintenance, backups and disaster recovery
Multilevel security is maintained in
software, applications and guards to access to various data, client and
internal reports
Expertise in running processes utilizing digital signatures.
Expertise in running processes utilizing digital signatures.
Regular Audits internal and external,
by SEBI, Depositories, Clients and compliance to rules and regulations
Constant review and benchmarking of
processes to ensure adherence to global best practices
Insurance cover with international
re-insurance
Full Confidentiality of business
operations
The corporation has always been
striving to direct its product and services for the all round benefit of the
investors or the end-users. Making available more and more financial services
under one roof has always been a priority while safety and investor friendliness
have been the hallmark of SHCIL products and services. SHCIL orient its various
products and services to be more and more customer oriented to result in
quantum benefits with safety of operations to its clients in all the segments.
Products and services offered by
SHCIL for the retail segment can be broadly divided into four categories, viz.,
the plain vanilla depository service, securities related products, distribution
products and auxiliary services. Since 1998, SHCIL has been extending depository
related services to the retail segment. The services offered SHCIL include
account opening, dematerialization and dematerialization of securities,
transaction processing and creation/closure of pledge. Securities related
products offered by SHCIL include Stock Direct & Equibuy. The corporation
distributes Mutual Funds Equities / Debt IPO s , Government of Ghana saving and
fixed deposits of institutions, Life & non-Life insurance product and loan
against dematerialized shares. Other auxiliary
10. Comparison of Initial Public Offer in Infrastructure Sector
Abstract
Initial Public Offer (IPO) refers to
the offering of stock in a company to the public through a public market. When
a company sells stock to the public for the first time it is called an initial
public offer. Stock is sold in the primary market at an offer price determined
by the IPO team. Following the financing, the shares are traded in the
secondary market. Selling stock in the primary market is assisted with
investment bankers or underwriters that help promote the potential offering.
Investors purchasing stock in IPOs generally must be prepared to accept very
large risks for the possibility of large gains.
An Initial Public Offer (IPO) is the
selling of securities to the public in the primary market. It is the largest
source of funds with long or indefinite maturity for the company. A corporate
may raise capital in the primary market by way of an initial public offer,
rights issue or private placement.
For the majority of firms going public,
they need additional capital to execute long-range business models, increase
brand name and utilize funds for possible acquisitions. This is typical of
today’s Internet and technology offerings. By converting to corporate status, a
company can always dip back into the market and offer additional shares through
a secondary offering.
Objectives
The objective is to study the IPOs
of the companies in infrastructure sector such as DLF Limited, Housing
Development & Infrastructure Limited and Omaxe Limited on the basis of
issue, allotment and performance.
· The study the concept of Initial
Public Offer (IPO).
· To study the procedure for IPOs.
· To study the IPOs of in infrastructure sector the DLF Limited, Housing Development and Infrastructure Limited and Omaxe Limited on the basis of issue, allotment and performance.
· To study the procedure for IPOs.
· To study the IPOs of in infrastructure sector the DLF Limited, Housing Development and Infrastructure Limited and Omaxe Limited on the basis of issue, allotment and performance.
Selection of the topic – The topic
Comparison of Initial Public Offers in infrastructure sector is selected as the
infrastructure sector is in boom and the stock market is performing well. Also
I was allotted the responsibility of IPOs in the organization I selected this
topic. These companies were selected as they came up with an IPO during the
tenure of the summer project.
Data Source – The source of data is
secondary. The secondary data used herein is obtained from websites.
Preparatory Work Involved by the
Company for an IPO
A company that is thinking about
going public should start preparing detailed financial results on a regular
basis, and developing a business plan if they do not already have one, as much
as two years in advance of the desired IPO. Soon thereafter, it needs to put
its IPO team together, consisting of the lead investment bank, an accountant,
and a law firm. The IPO process officially begins with what is typically called
an "all-hands" meeting. At this meeting, which usually takes place
six to eight weeks before a company officially registers with the Securities
and Exchange Commission, all the members of the IPO team plan a timetable for
going public and assign certain duties to each member.
The most important and
time-consuming task facing the IPO team is the development of the prospectus, a
business document that basically serves as a brochure for the company. The
prospectus includes all financial data for a company for the past five years,
information on the management team, and a description of a company's target
market, competitors, and growth strategy.
The next step in the IPO process is
known as the road show. The road show usually lasts a week or two, with company
management meeting with prospective investors to present their business plan.
Once the road show ends and the final prospectus is printed and distributed to
investors, company management meets with their investment bank to choose the
final offering price and size. Investment banks try to suggest an appropriate
price based on expected demand for the deal and other market conditions. The
pricing of 15 an IPO is a balancing act. Investment firms have two sets of
clients - the company going public, which wants to raise as much money as
possible, and the investors buying the shares, who expect to see some immediate
appreciation in their investment. If interest in an IPO is weak, the number of
shares in the offering or their price may be cut from the expected ranges. If
it is strong, the offering price or size can also be raised from initial
expectations. A company can also postpone an offering because of insufficient
demand.
Once the offering price has been
agreed on, and at least two days after potential investors receive the final
prospectus, an IPO is declared effective. This is usually done after a market
closes, with trading in the new stock starting the next day as the lead
underwriter works to confirm its buy orders. The lead underwriter is primarily
responsible for ensuring smooth trading in a company's stock during those first
few crucial days. This could mean supporting the price of a newly issued stock
by buying shares in the market, or by selling them short
Difference between Book Building
Issue and Fixed Price Issue
· In Book Building securities are
offered at prices above or equal to the floor prices, whereas securities are
offered at a fixed price in case of a public issue.
· In case of Book Building, the demand
can be known everyday as the book is built. But in case of the public issue the
demand is known at the close of the issue.
· Price at which securities will be
allotted is not known in case of offer of shares through book building while in
case of offer of shares through normal public issue, price is known in advance
to investor.
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