It is the one factor of production that has been freed. And the results of this liberalisation have been dramatic. Financial markets have grown, instruments have proliferated?Indeed, for the CFO, the landscape has been completely redrawn. And this may only be the beginning. BT examines the 2000 trends that are shaping the revolution in corporate finance.

A new charter for corporate finance is being hammered out. And with it, the flexibility for the CFO to design the financing mix to suit every need. To use an assortment of financial products that both lowers financing costs and minimises risks. In short, to evolve a financing strategy that dovetails with the firm's competitive strategy tomorrow. Of course, the twin drivers of this revolution--globalisation and deregulation--are fresh. Since 1991, the reform of the financial sector boast of an impressive roster of achievements: interest rate decontrol, the free pricing of equity, the quantum jump in the inflow of foreign funds. And the resultant transformation of the CFO's environment has been profound.

Of course, in the world of finance, change is rarely gradual. Since the collapse of the Bretton Woods system in 1973, the world's financial markets have seen more change, and more growth, than they ever did before. Until 1991, the Indian CFO was untouched by this revolution. Since then, financial deregulation has telescoped an already rapid change process, resulting in an explosion of choice for the CFO. Sure, the basic components of the finance mix--debt and equity--remain the same. But the controls on the prices of these components have been lifted.

In a capital-scarce economy, that has made all the difference. The loosening of the restrictions that constrict the circulation of capital has caused markets to boom (equity, convertible and non-convertible debentures, bank credit, leasing, and term-loans), created new instruments (commercial paper, deep discount bonds, optionally convertible debentures, venture capital, and currency options), and opened up new markets (global depository receipts, foreign currency convertible bonds, and external commercial borrowings). For the first time, the CFO has been able to toggle between financial instruments, and between financial markets.

But the removal of state control has also pushed up the cost of capital, notably debt capital. Since administered rates translate into subsidised rates for the recipients of state-rationed credit, the lifting of controls has intensified the search for cheaper funds. It has also catalysed the search for more stable, and safer, sources of funding. With prices, interest rates, and exchange rates in constant motion, the cost of capital for the CFO is not merely variable; it is volatile.

Inevitably, the process of financial deregulation has become bumpy. Liberalisation usually results in a burst of activity, which is followed by a dizzying, and inevitable, drop. Witness the collapse of the primary market, the puncturing of the global depository receipt (GDR) boom, and the contraction in lending. Sure, throughout this cycle, financial innovation has not been absent. But it has often been confined to the stray deal. Although deregulation has created new products and granted corporates the flexibility to alternate between these products, markets have not yet acquired the depth to offer two-way quotes. Not for much longer. For, the long-awaited revolution in corporate finance could be as near as the next millennium which is just years away.

At first glance, that may seem a far-fetched prediction to make. After all, Indian industry is in the midst of a prolonged downturn, and the global capital markets have been mauled by the long-lasting Southeast Asian currency crisis. Yet, there are reasons to believe that a boom is imminent. Liquidity has eased and, naturally, interest rates have dipped. The debt market is bustling. And the Great Global Markets Meltdown will not be more than a temporary downswing. At a price-to-earnings ratio of 14.2, the Indian equity market--unlike its Southeast Asian counterparts--is undervalued. And that augurs well for a secondary--and hence a primary market--revival.

By far the best reason to expect an enduring boom is the slew of far-reaching regulatory changes. Examine the following:

• The Big Bang Budget 97 slashed corporate tax rates, abolished the double taxation of dividends, and raised the ceiling on foreign institutional investments in Indian companies from 24 per cent to 30 per cent.
• The Monetary And Credit Policy For The First Half Of 1997-98 (M&CP, 97) has done away with the archaic concept of Maximum Permissible Bank Finance (MPBF), and has laid the groundwork for the integration of the money and foreign exchange markets. M&CP, 97-II has also reintroduced bridge loans and removed the last significant restrictions on deposit rates.
• The Companies Act, 1997, will allow share buybacks and non-voting shares to be issued apart from hiking the ceiling on inter-corporate loans and investments.
• A brand-new version of the Income Tax Act will lower the peak depreciation rate, simplify calculations of capital gains, and remove all the taxation obstacles to corporate restructuring.
• Capital account convertibility will provide corporates with unfettered access to the debt, equity, and derivatives markets abroad by 2000--if the economy hits the fiscal deficit, inflation, and Non-Performing Assets (NPA) targets in the three-year timetable, specified by the Tarapore Committee on Capital Account Convertibility, to 2000.

Clearly, the forces unleashed by these changes will coalesce to create a new mosaic of financing options. Do not expect an end to the familiar financial rhythm of boom and bust. In the financial markets, the herd mentality exerts a powerful pull, and fads will endow many instruments with short bursts of popularity. On a more long-term basis, however, two seemingly-paradoxical trends will emerge, shaping the products the CFO can deploy in future.

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