Overview of Financial environment

The financial decisions of a firm are significantly influenced by the legal form of its organisation, the regulatory framework governing it, the tax laws applicable to it and the features of the financial system. 

The important forms of business organisations are: sole proprietorship, partnership, cooperative society, private limited company, and public limited company. Wild each form of organisation has certain advantages and limitations, the public limited company form of organisation is most appropriate from the point of value maximization. 

There is a fairly elaborate framework for regulating the industrial sector in India. D principal elements of this regulatory framework are:

1. Industrial policy resolution

2. Industries (development and regulation) act

3. Companies Act

4. SEBI Act

There are two broad categories of taxes: direct taxes and indirect taxes. Income tax, the most important direct tax, is governed by the income tax Act. The most important indirect taxes are the Central exercise duty, sales tax and customs duty.

The financial system consisting of a variety of institutions, markets and instruments which provides the principal means by which savings are transformed into investments.

Financial assets represents claims against the future income and wealth of others. Financial liabilities, the counter parts of financial assets, represent promise to pay some portion of prospective income and wealth to others.

The important financial assets and liabilities in an economy are money, demand deposit, short term debt, intermediate-term debt, long term debt and equity stock.

The primary role of a financial institution is to serve as an intermediary between lenders and borrowers. Financial institutions in the organised sector function under the overall surveillance of The reserve Bank of India, the central banking athority in India.

The major financial institution in India commercial banks, development Financial institutions, insurance companies, mutual funds and non banking financial corporations. 

A financial transaction involves creation of transfer of a financial asset. Financial markets, which exist where our financial transaction occur, are quite pervasive.

There are two broad segments of the financial market, that is, the money market and capital market. The money market deals with short-term debt, where as the capital market deals with the long-term debt and stock (equity and preference). Further, each of these markets has a primary segment and secondary segment. New financial assets are issued in the primary market, whereas outstanding financial assets are traded in the secondary market.

Despite a good deal of deregulation in recent years, interest rates in India continue to be substantial regulated. Some of the key trends discernible in the Indian financial system are: increase in the Ambit of market determine interest rates, greater emphasis on prudential regulation, gradual integration with the world financial system and rise in financial innovation.

Reference: Security Analysis and Portfolio Management by Punithavathy Pandian