"INTERNATIONAL FINANCIAL MANAGEMENT"

“INTERNATIONAL FINANCIAL MANAGEMENT” (Based on theoretical discussion and analysis) (Suitable for Accounts ang Management Professional) *** A. The main object of financial management is to raise fund and utilize the same in most effectively. This also hold good for the procurement of fund in the international capital markets, for a multinational organization in any currency. As a student of MBA-Finance in modern scientific business world, in depth study of national as well as international financial management is not only necessary but is a life partner of carrying such profession. Therefore I am trying to represent an overall summarized thought about the subject matter in my project based on theoretical discussion and analysis. There are various avenues for a multinational organization to raise funds either through internal or external sources. These are summarized as under:- 1. Commercial banks: Like domestic loans ,commercial banks all over the world extend foreign currency loans also for international operation. They play a vital role in financing foreign trade and provide loans and overdraft facilities. They provide credit to the exporters from the date of shipment to the date of receipt of funds from the importers, provide guarantee on behalf of the importers , arrange for inward and outward remittance etc. 2. Development Bank and Financial Institutions: All most in all the countries development banks offer long and medium term loan including foreign currency component. Many agency at the national level offer a number of concessions to foreign companies to invest within their country and to finance export from their countries. An example of such functioning is EXIM Bank of United states of America which offer loans to buyers outside USA for purchasing US manufactured good. Similarly EXIM Bank of India also performing this type of functioning to promote Indian business and foreign exporters. [login to view URL] of trade bills: Under this arrangement companies holding bills of exchange, get the bills discounted by commercial bank before their maturity. Thus it is used as a short term financing method. This method is widely used in Europe and Asian countries to finance both domestic and international business. [login to view URL] agency: There are many international agencies which are engaged to promote and financed international business. The International Finance corporation (IFC), the International bank for Reconstruction and development(IBRD), the Asian Development Bank(ADB), the International Monetary Fund (IMF), the Aid India Club etc. are some of the agencies which may be quoted in this respect. 5. International Capital market: Modern organization including multinationals are largely depend upon sizable borrowings in rupees as well as in foreign currencies to finance their project involving huge outlays. The taxation benefit available on borrowings as against their capital is also influences this course of finance as interest payment on borrowed fund is an allowable expenditure for tax purpose. In order to cater to the financial needs of such organizations international capital market or financial centres have sprung up wherever international trade centres have developed. Leading and borrowing in foreign currencies to finance the international trade and industry has lead to the development of international capital market. International capital transactions also taken place in the domestic capital markets of various countries. USA, Japan, UK, Switzerland and west Germany have active such domestic capital market. Foreign borrowers raise money in these market through issue of foreign bond. In international market , international bond are known as “Euro bond”. The issue of Euro bond is managed by a syndicate of international banks and placed with investors and lenders world-wide. The issue may be denominated in any of the countries for which liquid market exist. In international capital market, the availability of foreign currency is assured under the four main systems viz. i. Euro currency market. ii. Export credit facilities. iii. Bond issues and iv. Financial institutions. Euro currency market was organized with dollar dominated bank deposits and provide loan in Europe particularly, in London. These also available at foreign branches of US Banks and at some foreign banks. Those deposits are acquired by these banks from foreign Governments and various firms and individuals who want to hold dollars outside USA. Banks based in Europe accept dollar dominated deposits and make dollar dominated loans to the customers. This form of Euro currency market spread over the various parts of the world. The creditors however insist on bank guarantee. Several multinational banks of Japanese, American, British, German and French origin operate all over the world, extending financial assistance for trade and projects. Several multinational Banks like Citi Bank, ANZ Grindlays bank, standard chartered bank, American Express, Bank of America etc. are aggressive players in India and they issue specific Bank guarantee to facilitate the business transactions between various parties, including government agencies, commercial borrowings as well as Exim bank finance. B. INSTRUMENTS OF INTERNATIONAL FINANCE There are various financial instruments dealt with in the international market which are briefly described below:- 1. Euro Bond:- It is a debt instrument denominated in a currency issued outside the country of that currency e.g. A Yen floted in Germany; a yen bond issued in France. 2. Foreign Bond:- These debt instrument denominated in a currency which is foreign to the Borrower and is sold in a country of that currency. A British firm placing $ denominated bonds in USA is said to be selling foreign bond. 3. Fully Hedged Bond:- In case of foreign bond , the risk of currency fluctuations exist but fully hedged bond eliminate that risk by selling in forward market the entire stream of interest and principal payments. 4. Floating Rate Note:- These provide cheaper money than foreign loan and are issued up to 7(seven) years maturity. Interest rates are adjusted to reflect the prevailing exchange rates. 5. Euro commercial papers:- It is a short term money market instrument designated in US Dollar, issued with a maturity period less than one year. 6. Foreign currency options:- A Foreign currency option is a right to buy or sell ,spot future or forward, a specific foreign currency. It provides a hedge against financial and economic risks. 7. Foreign currency Futures:- It is an obligations to buy or sell a specific currency in the present for settlement at a future date. The most common period for a future contract is a week, a month or two months. C. FINANCIAL SECTOR REFORMS IN INDIA The Government of India as a part of liberalization and deregulation of industry and to augment of financial resource of Indian companies has allowed the companies to directly tap foreign resources for their requirement. The Govt. has allowed foreign institutional investors to invest up to 24% in the secondary market. The Govt. has given signals that foreign investment is now welcome and that non-priority industries are not prohibited. The reason for the foreign Investors interest in Indian market are the low returns in USA and in Europe. India’s large middle class in even more than the population of some of the countries and provide good marketing potential. Besides this, availability of large nos of india’s skilled and cheap labour, wide spread use of English language and the India’s legal, law and order system are also some of the contributory factors for the globalization of Indian business. It is now possible in India that a foreign company can invest directly in a joint venture or in an Indian subsidiary. Most of foreign company are interested to make joint venture with aan Indian partner who understand the local environment. The liberalized measures have boosted the confidence of foreign investors and also provided an opportunity to Indian companies to explore the possibility of tapping the European market for their financial requirements, where the resources are raised through the mechanism of Euro issue i.e. Global Depository Receipts(GDRs) and Euro-Bond. The impact of this policy is the present scenario of the Indian stock exchange glooming and the index of Bombay stock exchange exceeding 12000 mark. D. INTERNATIONAL FINANCIAL INSTURMENT AND INDIAN COMPANIES:- Indian companies have been able to tap the global market to raise foreign currency funds by issuing various types of financial instruments which are discussed shortly as follows:- 1. Foreign currency convertible bonds(FCCBs) These are issued in accordance with the guideline dated 12th. Nov,1993 as amended from time to time and subscribed for by Non Resident in foreign currency and convertible in to ordinary/equity shares of the issuer company in any manner whether in whole or in part or on the basis of any equity related warrants attached to debt instruments. Advantages of FCCBs:- i. The convertible bond gives the investor the flexibility to convert the bond in to equity at a price or redeem the bond at the end of a specified period. ii. Companies prefer bonds as it lead to delayed dilution of equity and allows company to avoid any current dilution in earning per share that a further issuance of equity would cause. iii. It is easily marketable as investors enjoys option of conversion in to equity if resulting to capital appreciation. Further investor is assured of a minimum fixed interest earnings. Disadvantages of FCCBs:- i. Exchange risk is more in FCCBs as interest on bond would be payable in foreign currency. Thus companies with low debt equity ratios, large forex earnings potential only opted for FCCBs. ii. FCCBs means creation of more debt and a forex outgo in terms of interest which is in foreign exchange. iii. In case of convertible bond the interest rate is low (around 3 to 4%) but there is exchange risk on interest as well as principal if the bond are not converted in to equity. The only major advantage would be that where the company has a high growth rate in earnings and the conversion takes place subsequently, the price at which share can be issued can be higher than the current market price. 2. GLOBAL DEPOSITORY RECEIPTS (GDRs):- A depository receipt is basically a negotiable certificate denominated in US Dollars, that represents a non US company’s publicly traded local currency(Indian Rupees) equity shares. DRs are created when the local currency shares of an Indian company are delivered to the depository’s local custodian bank, against which the depository bank(such as the bank of New York) issues depository receipts in US Dollar. These depository receipts may trade freely in the overseas market like any other dollar dominated security, either on a foreign stock exchange or in the over-the-counter market, or among a restricted group such as Qualified Institutional buyers(QIBs). Indian issues have taken a form of GDRs to reflect the fact that they are marketed globally, rather than in a specific country or market. Rules 144A of the Security and Exchange Commission of USA permits companies from outside USA to offer their GDRs to certain Institutional buyers. They are known as Qualified Institutional Buyers(QIBs). There are Institution in USA which in the aggregate own and invest on a discretionary basis at least US $ 100 million in eligible securities. It has been perceived that a GDR issue has been able to fetch higher prices from international investors(evev when Indian issues were being sold at a discount to the prevailing domestic share prices) than those that a domestic public issue would have been able to extract from Indian investors. IMPACT OF GDR ON INDIAN CAPITAL MARKET:- Since the inception of this scheme a remarkable changes in Indian capital market has been observed as follows:- i. Indian stock market to some extent is shifting from Bombay to Luxemberg. ii. There is arbitrage possibility in GDRs issue. iii. Indian stock market is no longer independence from yhe rest of the world. This puts additional strain on the investors as they now need to keep updated with world wide economic events. iv. Indian retail investors are completely sidelined. Because of this issue they can no longer expect to make easy money on heavily discounted rights/public issues. MARKETS OF GDR’S:- i. GDR’S are sold primarily to institutional investors. ii. Demand is likely to be dominated by emerging market funds. iii. Switching by foreign institutional investors from ordinary share in to GDRs is likely. iv. Major demand in UK, USA, South East Asia and to some extent continental Europe. PROFILE OF GDR INVESTORS:- The following parameters have been observed in regard to GDR Investors:- i. Dedicated convertible investors. ii. Equity investors who wish to add holdings on reduced risk or who require income enhancement. iii. Fixed income investors who wish to enhance returns. iv. Retail investors, whose money normally managed by continental Europian banks on an aggregate basis provide a significant base for Euro convertible issues. 3. GLOBAL DEPOSITORY RECEIPT WITH WARRANT:- These receipt are more attractive than plain GDR in view of additional value of attached warrants. However, the Govt. of India has prohibited Indian companies to issue GDRs with warrant as per guideline issued on 28.10.1994. The mechanics of a GDR issue may be described with the help of the following diagrame:- Company issues ^ Ordinary shares ^ Kept with custodian/depository banks ^ Against which GDRs are issued ^ To foreign Investors CHARACTERISTICS:- i. Holders of GDRs participate in the economic benefits of being ordinary shareholders though they do not have voting right. ii. GDRs are settled through CEDEL& Euro clear international book entry system. iii. GDRs are listed on the Luxemberg stock exchange. iv. Trading takes place between professional market makers on an OTC( over the counter) basis. As far as the case of liquidation of GDRs is concerned, investor may get the GDR cancelled any time after a cooling off period of 42 days. A non resident holder of GDRs may ask the overseas bank to redeem(cancel) the GDRs. In that case overseas bank shall request the domestic custodian bank to cancel the GDR and to get the corresponding underlying shares released in favour of non-resident investor. The price of the ordinary shares of the issuing company prevailing in the Bombay stock exchange or National stock exchange on the date of advice of redemption shall be taken as the cost of acquisition of the underlying ordinary share. 4. EURO-CONVERTIBLE BONDS:- It is a debt instrument which gives the holder an option to convert the bond in to a predetermined number of equity shares of the company. The bond carry a fixed rate of interest. If the user company desires, the issue of such bonds may carry two options viz- Call option i.e. the issuer company has the option of calling(buying) the bond for redemption before the date of maturity of the bonds. Where the issuer’s share price has appreciated substantially, i.e. far in excess of the redemption value of the bonds, the issuer company can exercise this option. This call option forces the investors to convert the bond in to equity. Usually this arises when the share prices reach a stage near 130% to 150% of the conversion price. Put option : A provision of put option give the holder of the bonds a right to put(sell) his bonds back to the issuer company at a predetermined price and date. In case of Euro convertible bonds, the payment of interest on and the redemption of the bonds will be made by the issuer company in US Dollars. 5. AMERICAN DEPOSITORY RECEIPTS (ADRs):- Depository receipt issued by a company in the United State of America is known as American Depository Receipts which is govern by Securities and Exchange Commission of USA. An ADRs is generally created by the deposit of the securities of an non united states company with a custodian bank in the country of incorporation of the issuing company. The custodian bank informs the depository in the U.S. that the ADRs can be issued. ADRs are united states dollar denominated and are traded in the same way as are the securities of the U.S. companies. Several variation on ADRs have developed over time to meet more specialized demands in different market. One such variation is the GDR which are identical in structure to an ADR, the only difference being that they can be traded in more than one currency and within as well as outside the United state. There are three types of ADRs which are shortly described as below:- i. Unsponsored ADRs: These are issued without any formal agreement between the issuing company and the depository, although the issuing company must consent to the creation of the ADR facility. Under this, certain costs including those associated with disbursement of dividends are borne by the investor. They are exempted from most of reporting requirements of the securities and exchange commission. ii. Sponsored ADRs : These are created by a single depository which is appointed by the issuing company under rules provided in a deposits agreement. There are two broad types of sponsored ADRs, those that are restricted with respect to the types of buyer which is allowed and are therefore privately placed and those that are unrestricted with respect to buyer and are publicly placed and traded. Restricted ADRs are allowed to be placed only among selected investors and face restriction on their re-sale. As those are not issued to general public, they are exempted from reporting to the commission and are not even registered with them. Unrestricted ADRs are issued to and traded by the general investing public in US capital market. There are three classes of UR ADR’s , each increasingly demanding in terms of reporting requirement to the commission as well as attractive in terms of degree of visibility provided. Level 1 UR ADR,s are exempted from confirming their financial statistic to the US SE commission . Generally accepted accounting principles (GAAP) as well as from full reporting to the commission resulting a low cost. Level II UR ADR,s are generally issued by companies that wish to be listed on one of the US National Exchanges. The issuing company must meet the full requirement of Securities and Exchange commission’s. They are therefore most costly for the issuing company but the public listing allows much higher visibility and makes the facility more attractive to potential investors. Level III UR ADR’s are issued by companies which seek to raise capital in the US Security market by making a public offering of their securities. They must also make full securities and Exchange commission’s disclosure, confirm to US GAAP and meet relevant exchange requirements and provide highest degree of visibility of any ADR. As per the estimates, the cost of preparing and filing US GAAP Accounts only ranges from $ 500000 to $ 1000000 with the ongoing cost of $150000 to $ 200000 per annum. Because of the additional work involved, legal fees are considerable higher for an US listing, which ranges between $ 250000 to $ 350000 for the underwriter, to be reimbursed by the issuer. In addition the initial securities Exchange commission registration fees which are based on a percentage of the issue size as well as “blue sky” registration cost for traded in all state of US will have to be met. For increasing legal problem and cost involvement Indian company’s are shifting from ADR’s to GDR’s investment. 6. FOREIGN INSTITUTIONAL INVESTORS(FII’s):- FIIs continue to play a significant role in share market in India. As in previous years, share prices in India have been influenced by the behaviour of FIIs. A major percentage of investments and transactions in our stock exchange is made by FII’s through FDI or otherwise. E. The Investment Strategy in the stock exchange play a vital role for international as well as national economic development through its various technique. Some of the strategy and dealing system are discussed hereunder in India’s context for better representation of the overall subject matter of my project. I. MEANING OF INVESTMENT MANAGEMENT:- Investment management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize returns to suit the objectives of an investor. In India, as well as in a number of western countries, portfolio management service has assumed the role of a specialized service now a days and a number of professional merchant bankers compete aggressively to provide the best to high net worth clients, who have little time to manage their investments. The idea is catching on with the boom in the capital market and an increasing number of people are inclined to make profits out of their hard-earned savings. Investment management service is one of the merchant banking activities recognized by Securities and Exchange Board of India(SEBI). The service can be rendered either by merchant bankers or portfolio managers or discretionary portfolio manager as define in clause (e) and (f) of Rule 2 of Securities and Exchang Board of India(Portfolio Managers)Rules, 1993 and their functioning are guided by the SEBI. II. OBJECTIVES OF INVESTMENT MANAGEMENT:- The major objectives of Investment management are summarized as below:- i. Keep the security, safety of Principal sum intact both in terms of money as well as its purchasing power. ii. Stability of the flow of income so as to facilitate planning more accurately and systematically the re-investment or consumption of income. iii. To attain capital growth by re-investing in growth securities or through purchase of growth securities. iv. Marketability of the security which is essential for providing flexibility to investment portfolio. v. Liquidity [login to view URL] to money which is desirable for the investor so as to take advantage of attractive opportunities upcoming in the market. vi. Diversification: The basic objective of building a portfolio is to reduce the risk of loss of capital and income by investing in various types of securities and over a wide range of industries. vii. Favourable tax status : The effective yield an investor gets from his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved. III. BASIC PRINCIPLES OF INVESTMENT MANAGEMENT:- There are two basic principles for effective Investment management which are given below:- 1. Effective investment planning for the investment in securities by considering the following factors- a. Fiscal, financial and monetary policies of the [login to view URL] India and the Reserve Bank of India. b. Industrial and economic environment and its impact on industry Prospect in terms of prospective technological changes, competition in the market, capacity utilization with industry and demand prospects etc. 2. Constant review of investment: Its require to review the investment in securities and to continue the selling and purchasing of investment in more profitable manner. For this purpose they have to carry the following analysis: a. To assess the quality of the management of the companies in which investment has been made or proposed to be made. b. To assess the financial and trend analysis of companies balance sheet and profit&loss Accounts to identify the optimum capital structure and better performance for the purpose of withholding the investment from poor companies. c. To analysis the security market and its trend in continuous basis to arrive at a conclusion as to whether the securities already in possession should be disinvested and new securities be purchased. If so the timing for investment or dis-investment is also revealed. IV. ACTIVITIES IN INVESTMENT MANAGEMENT:- A. There are three major activities involved in an efficient Investment management which are as follows:- a. Identification of assets or securities, allocation of investment and also identifying the classes of assets for the purpose of investment. b. They have to decide the major weights, proportion of different assets in the portfolio by taking in to consideration the related risk factors. c. Finally they select the security within the asset classes as identify. The above activities are directed to achieve the sole purpose to maximize return and minimize risk in the investment even if there are unlimited risk in the market. Let us have a look on the composite risk involve in the market during operation:- i. Interest rate risk: This arises due to variability in the interest rates from time to time. A changes in the interest rates establishes an inverse relationship in the price of the security i.e. price of securities trends to move inversely with change in rate of interest. Long term securities shows greater variability in compare to short term securities by this risk. ii. Purchasing power risk: It is also known as inflation risk and the inflation affect the purchasing power adversely. Inflation rates vary over time and changes unexpectedly causing erosion in the value of real return and expected return. Thus purchasing power risk is more in inflationary conditions especially in respect of bond and fixed income securities. It is not desirable to invest in such securities during inflationary situations. Purchasing power risk is however less in flexible income securities like equity shares or common stock where rise in dividend income off-sets increase in the rate of inflation and provides advantage of capital gain. iii. Business risk: Business risk arises from sale and purchase of securities affected by business cycles, technological changes etc. Business cycles affect all types of securities viz. there is cheerful movement in boom due to bullish trend in stock price where as bearish trend in depression brings down fall in the prices of all types of securities. Therefore securities bearing flexible income affected more than the fixed rated securities during depression due to decline in their market price. iv. Financial Risk: This arises due to changes in the capital structure of the company. It is also known as leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt over equity in the capital structure of a company indicates that the company is highly geared even if the per capital earnings(EPS) of such company may be more. Because highly dependence on borrowings exposes to the risk of winding up for its inability to honour its commitments towards lenders and creditors. So the investors should be aware of this risk and portfolio manager should also be very careful. By taking in to accounts of all the above factors, investment decision are taken as followings: V. INVESTMENT DECISION: Given a certain sum of funds, the investment decision are basically depends upon the following factors:- i. Objectives of investment portfolio: This is a crucial point which a Finance Manager must consider. There can be many objectives of making an investment. The manager of a provident fund portfolio has to look for security and may be satisfied with none too high a return, where as an aggressive investment company be willing to take high risk in order to have high capital appreciation. How the objectives can affect in investment decision can be seen from the fact that the Unit Trust of India has two major schemes : Its “capital units” are meant for those who wish to have a good capital appreciation and a moderate return, where as the ordinary unit are meant to provide a steady return only. The investment manager under both the scheme will invest the money of the Trust in different kinds of shares and securities. So it is obvious that the objectives must be clearly defined before an investment decision is taken. ii. Selection of investment: Having defined the objectives of the investment, the next decision is to decide the kind of investment to be selected. The decision what to buy has to be seen in the context of the following:- a. There is a wide variety of investments available in market i.e. Equity shares, preference share, debentures, convertible bond, [login to view URL] and bond, capital units etc. Out of these what types of securities to be purchased . b. What should be the proportion of investment in fixed interest dividend securities and variable dividend bearing securities. The fixed one ensure a definite return and thus a lower risk but the return is usually not as higher as that from the variable dividend bearing shares. c. If the investment is decided in shares or debentures, then the industries showed a potential in growth should be taken in first line. Industry-wise-analysis is important since various industries are not at the same level from the investment point of view. It is important to recognized that at a particular point of time, a particular industry may have a better growth potential than other industries. For example, there was a time when jute industry was in great favour because of its growth potential and high profitability ,the industry is no longer at this point of time as a growth oriented industry. d. Once industries with high growth potential have been identified, the next step is to select the particular companies, in whose shares or securities investments are to be made. To identify the industries, which have a high growth potential the following techniques/approaches may be taken in to consideration:- a. Statistical analysis of past performance: A statistical analysis of the immediate past performance of the share price indices of various industries and changes there in related to the general price index of shares of all industries should be made. The Reserve Bank of India index numbers of security prices published every month in its bulletin may be taken to represent the behaviour of share prices of various industries in the last fiew years. The related changes in the price index of each industry as compare with the changes in the average price index of the shares of all industries would show those industries which are having a higher growth potential in the past fiew years. It may be noted that a Industry may not remaining a growth Industry for all the time. So we have to make an assessment of the various Industries keeping in view the present potentiality also to finalized the list of Industries in which we will try to spread our investment. b. Assessing the intrinsic value of an Industry/Company:- After identifying the Industry, we have to assess the various factors which influence the value of a particular share. Those factors generally relate to the strengths and weaknesses of the company under consideration, Characteristics of the industry within which the company fails and the national and international economic scene. The major objective of the analysis is to determine the relative quality and the quantity of the security. It is also to be seen that the security is good at current market prices. This approach is known as intrinsic value approach. Industry analysis can help to assess the nature of demand of a particular product, Cost structure of the industry and other economic and Govt. constraints on the same. An appraisal of the particular industries prospect is essential and the basic profitability of any company is depends upon the economic prospect of the industry to which it belongs. The following factors are important in this regards:- a. Demand and Supply pattern for the industries products and its growth potential: The management expert identify fives stages in the life of an industry. These are “ Introduction, development, rapid growth, maturity and decline”. If an industry has already reached the maturity or decline stage, its future demand potential is not likely to be high. b. Profitability : It is a vital consideration for the investors as profit is the measures of performance and a source of earning for him. So the cost structure of the industry as related to its sale price is an important consideration. The other point to be considered is the ratio analysis, specially return on investment, gross profit and net profit ratio of the existing companies in the industry. c. Particular characteristics of the industry: Each industry has its own characteristics, which must be studied in depth in order to understand their impact on the working of the industry. Because the industry having a fast changing technology become obsolete at a faster rate. Similarly, many industries are characterized by high rate of profits and losses in alternate years. Such fluctuations in earnings must be carefully examine. d. Labour management relations in the industry: The state of labour-management relationship in the particular industry also has a great deal of influence on the future profitability of the industry. So it is vital to see that the industry under analysis has been maintaining a cordial relationship between labour and management. e. Company Analysis: To select a company for investment a number of qualitative factors have to be seen to visualize the performance of the company in future by analyzing its past performance such as :- 1. Size and ranking: In this regard the net capital employed, the net profits,the return on investment and the sales volume of the company under consideration may be compared with similar data of other company in the same industry group to assess the risk associated with the company. 2. Growth record: Three growth indicators may be looked in to i.e. Price earnings ratio, Percentage growth rate of earnings per annum and Percentage growth rate of net block of the company in the past fiew years should be examined. 3. Financial analysis: By the help of Financial analysis we can understand the financial solvency and liquidity, the efficiency, the profitability and the financial and operating leverage of the company in which the fund are used. 4. Pattern of existing stock holding: This analysis would show the stake of Various parties associate with the company. An interesting case in this regard is that of the Panjab National Bank in which the L.I.C. and other financial institutions had substantial holdings. When the bank was nationalized, the residual company proposed a scheme whereby those shareholders, who wish to opt out, could received a certain amount as compensation in cash. It was only at the instant and bargaining strength of institutional investors that the compensation offered to the shareholders, who wish to opt out of the company, was raised considerably. 5. Marketability of the shares: Mere listing of a share on the stock exchange does not automatically mean that the share can be sold and purchase. There may be inactive shares with no transaction for long period. So we have to examined the speculative interest of such scrip, extent of public holding and the particular stock exchange where it is traded. Fundamental analysis thus is basically an examination of the economics and financial aspects of a company with the aim of estimating future earnings and dividend prospect. So after having analysed of all the relevant information we have to decide whether we should buy or sell the securities. iii. Timing of Purchases:- The timing of dealings in the securities, specially shares is of crucial importance, because after correctly identifying the companies one may lose money if the timing is bad due to wide fluctuation in the price of shares of that companies. The decision regarding timing of purchases is particularly difficult because of certain psychological factors. It is obvious that if a person wishes to make any gains, he should buy cheap and sell dear, i.e. buy when the share are selling at a low price and sell when they are at a higher price. But in practical it is a difficult task. When the prices are rising in the market i.e. there is bull phase, everybody joins in buying without any delay because every day the prices touch a new high. Later when the bear face starts, prices tumble down everyday and everybody starts counting the losses. The ordinary investor regretted such situation by thinking why he did not sell his shares in previous day and ultimately sell at a lower price. This kind of investment decision is entirely devoid of any sense of timing. There are various theories and technique to deal with the portfolio management, some of their concept are discuss shortly hereunder:- Dow Jones theory: According to this theory of Charles H. Dow , purchase should be made when bull trend started i.e. when price of the share are on the rise and sells them when they are on the fall i.e. at the time when bearish trend started. Randam walk theory: Basically stock prices can never be predicted because they are not a result of any underlying factors but are mere statistical ups and downs. This hypothesis is known as Randam walk hypothesis. In the Layman’s language it may be said that prices on the stock exchange behave exactly the way a drunk would behave while walking in a blind lane, i.e. up and down, with an unsteady way going in any direction he likes, bending on the side once and on the other side the second time. Capital Assets Pricing Model(CAPM): CAPM provides a conceptual framework for evaluating any investment decision. Moving Average: It refers to the mean of the closing price which changes constantly and moves ahead in time, there by encompasses the most recent days and deletes the old one. From the above discussion it is clear that portfolio functioning is based on market risk, so one can get the help from the professional portfolio manager or the Merchant banker if required before investment. Because applicability of practical knowledge through technical analysis can help an investor to reduce risk. In other words Security prices are determined by money manager and home managers, students and strikers, doctors and dog catchers, lawyers and landscapers, the wealthy and the wanting. This breadth of market participants guarantees an element of unpredictability and excitement. If we were all totally logical and could separate our emotions from our investment decisions then, the determination of price based on future earnings would work magnificently. And since we would all have the same completely logical expectations, price would only change when quarterly reports or relevant news was released. “I believe the future is only the past again, entered through another gate” –Sir Arthur wing Pinero. 1893. If price are based on investors expectations, then knowing what a security should sell for become less important than knowing what other investors expect it to sell for. “ There are two times of a man’s life when he should not speculate; when he can’t afford it and when he can” – Mark Twin,1897. A Casino make money on a roulette wheel , not by knowing what number will come up next, but by slightly improving their odds with the addition of a “0” and “00”. Yet many investors buy securities without attempting tocontrol the odds. If we believe that this dealings is not a ‘Gambling” we have to start up it with intelligent way. F. Therefore, we can apply these strategies and concept to the international market in the same line. Coupled with the globalization of business and remarkable changes in the international business market, our Govt. has taken different measures for foreign investment for our economic development. Various fiscal, trade and industrial policy decisions have been taken and new avenues provided to foreign investors like Foreign Institutional Investors, NRI’s etc. Financial management of the multinational organizations are more complex than those of domestic organizations. Now I am trying to develop the understanding of the environment of international financial management and describe how a Finance Manager can protect his organization from the vagaries of international financial transactions:- 1. Reason for internationalization of business and investment:- The cardinal principles of financial management i.e. risk reward are also the guiding spirit of international financial management. The decision whether to invest capital in a project abroad is based upon considerations of expected risk and return, as is applicable for any other investment decision. However, the nature of investment decision in this case is more complicated because of disparities in currency exchange rate, tax structure, accounting policies and practices and other factors affecting the risk. However, once these factors have been identified and project viability established under these circumstances, the investment decision becomes easy. It will therefore be worthwhile to highlight here some of the business risks which a multinational organization faces and the reasons which encourage a company to invest abroad. 1. For reducing risk. A multinational organization operates in more than one country. However, the degree of risk is different in countries. It has been observed that international diversification is often more effective than domestic diversification in reducing company’s risk in relation to its expected return because the economic cycles of different countries do not tend to be completely synchronized. For example , if a country is in a particular line of business, say power and telecom facilities ,invest in another unit in the same country ,both the existing and the new units are subjected to the same environmental risks and the return from the new plant is likely to be highly co related with return from existing plant. This implies that there is no change in the environmental risks and perceptions in the same country both for the existing and new units. However, had the management decided to invest the same money in the similar business but in a different country, there would have been change in environmental risk as well as reward perception since both the units now function indifferent environments. The mechanism probably reduces the risk facing the business and improves chances of rewards. 2. For higher returns ;Another reason for investing abroad is to obtain higher returns for a given risk .It may not be out of place to mention that in some countries there may be a yawning gap between the demand and supply of some of the products. If this opportunity is tapped by a firm by producing relevant goods and services in order to fill up the gap ,there are good chance of higher returns than in home country. Beside this, sometimes production of goods is cheaper in some of the countries because of cheap labour and availability of raw material in abundance in that country. A multi-national organization can efficiently produce goods in those countries by collaborating simply to operate at lower cost .This in turn will enhance the margin of profit to be enjoyed by the multinational organization. Beside this ,investment opportunities and environment presently is most conductive for foreign investors because of various policy initiatives of Government of the country. Sometimes companies invest abroad to ensure a regular supply of necessary raw –materials. All these operations are carried out with the objective of earning a higher return which may not be possible due to domestic operations . 3. For tax benefits .Since a multi-national organization functions in various different environments, it is subjected to various tax laws. The tax structure and the rates vary from country to country . In the under –developed countries generally the rates of taxation are comparatively higher. However, there is provision of a number of tax incentives in order to attract foreign investors, whereas in the case of developed countries, the rates are low , but there is a threat of higher inflation.A multi-national organisation by diversifying its portfolio of operations in different countries can enjoy the best tax-rates and incentives. 4. For seeking political stability: A multinational organisation is always subjected to environmental risk. The government’s fiscal, industrial and business policies always pose biggest threat to the existence of a multi-national organisation. The very existence of a multi-national organisation can be endangered because of whims and fancies of Government and the general public. Political risk may range from regular interference to complete confiscation of company’s assets. Between these extreme situations, the company may face discriminating treatment also such as higher taxes, higher utility changes and so on. If need be , some extraordinary controls and conditions may also be imposed upon them at any time. G. BASIC PROBLEMS IN INTERNATIONAL FINANCIAL MANAGEMENT:- A Finance Manager of a multinational organisation has to face two basic problems besides the problems which a finance manager of a domestic company faces. i. Foreign Exchange fluctuations:- When a organisation trades in more than one country, the settlement of transactions are necessarily to be made in the currencies of those countries or in a currency mutually agreed between the two companies involved in the transactions. Thus a company is exposed to a foreign exchange fluctuation risk as soon as the deal is finalized to deal in the currencies of different countries. Foreign exchange fluctuations refer to the risk which is due to the relative devaluation or appreciation in the value of currency of a country in relation to the currency of some other country. This fall or rise in value may eventually affect the future sales, costs and remittances. Thus because of foreign exchange fluctuations and risk, this become one of the most important areas of concentration for a finance manager to undertake foreign exchange risk management. ii. Raising international finance and exchange rate:- Many alternatives of raising resources are available to a company for its projects, expansion and diversification schemes. A company which is cost conscious and which raises finance from international channel is more appealing than a company which depends only on the local capital market on accounts of various advantage of the former. This become another major area of concentration for a finance manager for raising funds on most favorable terms and conditions from international agencies. Therefore by taking the measures of foreign exchange risk management one can overcome the situations. The above project details have been compiled with the help of Business News papers, Journals, different study books, help from friends etc. I hope that my presentation of this summarized discussion on “INTERNATIONAL FINANCIAL MANAGEMENT “ will be accepted by every Indian university and Institute.