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Chapter 1

INTRODUCTION
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CHAPTER I

INTRODUCTION

1.1 BACKGROUND

The financial success of a firm depends mainly on its capital structure. Firms with
unplanned Capital Structure can prosper in short run but face difficulties in mobilizing
additional funds and in increasing the value of the business in the long run. The choice
of debt and equity in the capital structure of corporate firms is an important financial
decision because it influences both the return and the risk of shareholders.
The excessive use of debt may endanger the survival of the corporate firm, at the same
time, non-use of debt prevents the firm from an opportunity to enhance the rate of return
to its equity holders. “Capital Structure refers to the proportionate relationship between
different components of financing mix or long term sources of funds such as debentures,
long term debt, preference capital and equity share capital including reserves and
surplus”(Brealy and Myers). Capital structure is dependent on the financing decision of a
firm. “A firm may decide to finance its investment requirement either only through equity
or only through debt or a mixture of both. Normally firms follow the third option”
(Bhattacharyya and Banerjee)

It is generally understood that the optimal capital structure of a firm is the

composition of debt and equity which results in the minimum cost of capital and thus
determination of an optimal capital structure is not an exact science. The firms have to
analyze a number of factors such as the firms business risk, its financial flexibility,
shareholders’ wealth maximization, survival against competitors, assurance of a steady
source of funds, acquisition and maintenance of a good rating in the market, profitability
and growth rate before deciding upon an appropriate capital structure. All these factors
are a pointer to one important fact, that companies will have to search for the right
capital structure which enhances its value while minimizing costs. A corporate capital
structure depends on the companies financial solutions which may either be a random
one or reflects the results of rational selection. The importance of the corporate capital
structure is related to the fact that big capital expenses generated due to excessive use
of establish additional obstacles helps in the growth of the companies.
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A rapid development of capital markets creates new possibilities of capital rising

for companies. Rational financing solutions can be an important determinant to create
value. According to the original idea of Modigliani and Miller “In the of absence of taxes,
the corporate market value does not depend on the structure of capital, and therefore
financing solutions are not important in striving for the key aim-corporate value
maximization”. The originators of pecking order theory (Myers and Majluf) relate capital
structure solutions to the asymmetry of information.

“Neither theory nor research has been able to provide satisfactory agreement as
to what factors effect the capital structure decision” (Rao and Sadanandam).
The theories suggest that firms select capital structures depending on characteristics
that determine the various costs and benefits associated with debt and equity financing.
“Empirical work in this area has lagged behind the theoretical work, as the relevant firm
characteristics are expressed in abstract concepts and are rarely directly observable”
(Suresh and Jain). In spite of the fact that each management makes its own decisions
regarding its capital structure, there may be certain common factors, which will influence
the capital structure of the enterprise. “In general, companies in need of funds, issue
shares, if they are above their target debt level and issues debt instruments, if they are
below. A company’s choice of financing instruments will depend on the difference
between its current and target debt equity ratio. Since targets are unobservable, we
need to concern ourselves with their likely determinants” (Titman and Wessals).

In a study conducted by the RBI, on the basis of sample of about 1950

non-government companies covering the period from 1984-1985 to 1997-1998, it was
disclosed that relevant share of internal sources tended to decline, while that of external
sources tended to move up in the total capital structure of the companies. The internal sources
include bonus shares, provisions, reserves and surplus. The external sources of funds on the
other hand comprises of an increase in paid up capital, borrowings and trade dues. Among the
external sources, corporate reliance on debt financing has been much more than the equity
financing, even as the share of latter has gone up over the years (RBI).

1.2 CAPITAL STRUCTURE

A growing firm needs capital in order to run and manage a company. Right from the
promotional stage up to the end, finance plays an important role in a company’s life. If funds
are inadequate, the business suffers and if the funds are not properly managed, the entire
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organization suffers. It is, therefore necessary that correct estimate of the current and future
need of capital be made to have an optimum capital structure which shall help the organization
to run its work smoothly and without any stress. Estimation of capital requirements is
necessary, but the formation of a capital structure is more important.

The term capital structure of the company refers to the mix of the long-term
finances used by the firm. It is the financing plan of the company perhaps, no area of
financial management has commanded as much attention as the capital structure
problem. The capital structure problem, then, deals with the firms’ choice of the types of
securities it has to issue in the current market oriented policies. The corporate financial
managers have been motivated to use more debt-financing for several powerful reasons.
On one hand, owners, including the ever more powerful institutional investors, have
confronted the management with incremented demands for performance, generally
expressed as a desire for a continuous increase in the earnings per share. On the other
hand low-debt usage companies are extremely attractive to leverage-minded
conglomerate managers. Increased use of leveraged often offers a way to improve a
company’s earnings and at the same time removes some of the attractiveness of the
firm as a takeover target with given the objective of maximization of shareholders wealth
and the need for an optimal capital structure cannot, therefore, be overemphasized.

Thus, it is one of the formidable tasks of every finance manager to design an

optimum capital structure. But the precise per cent of debt and equity that will maximize
price pre share is defined in the theory of finance. Hence, till today, it has been remained
an unsolved mystery for the financial experts.

Though it is almost impossible to state accurately a suitable financing mix,

however every finance manager tries his level best to determine the approximate
proportion of debt to use in the financial plan in conformity with the object of maximizing
the share price.

1.2.1 Meaning of Capital Structure

A firm’s capital structure represents the mix of securities that it has sold in order
to finance its asset acquisitions. In other words, the term capital structure implies the
proportion of debt and preference and equity shares of a firm’s capitalization.
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According to Richard “The term ‘capital structure’ is used to mean the financial
plan according to which all assets of a corporation are financed. This capital is supplied
by long and short term borrowings, the sale of preferred and common stock and the
reinvestment of earnings”. He further stated that “In analyzing the capital structure of an
enterprise, short-term is often excluded from consideration” many other include only long
term sources of funds under the capital structure.

Harry and Herbert, stated that “phrase” capital structure may be used to cover
the total combined investment of the bondholders, including any long term debts, such
as mortgages and long term loans as well as total stock holder’s investment including
retained earnings as well as original investment” Both the concepts of capital structure
have their own merits and demerits and only long term sources have been used in
explaining the composition of capital structure.

1.2.2 Composition of Capital Structure

Broadly speaking, the capital structure is composed of owned funds and

borrowed funds. The owned funds include the share capital, free reserves and the
surplus and the borrowed funds represent debentures and long term loans provided by
various financial institutions where capital structure of a company may be either simple,
compound or complex. A simple capital is composed of one single security base, for
example, the equity share capital issued by a company.

A compound capital structure indicates a combination of two security base in the

form of equity and preference share capital. The complex capital structure is made up of
a multi-security base, consisting of equity and preference share capital, and a series of
debentures or bonds and loans from other sources. Financing the firm’s assets is a very
crucial problem in every business and as a general rule there should be a proper mix of
debt and equity capital in financing the firm’s assets. The use of long-term fixed interest
bearing debt and preference share capital along with equity share is called financial
leverage or trading on equity. The long term fixed interest bearing debt is employed by a
firm to earn more from the use of these sources than their cost so as to increase the
return on owner’s equity, the capital structure cannot affect the total earnings of a firm
but it can affect the share of earnings available for equity shareholders.
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1.2.3 Patterns of Capital Structure

In case of a new company the capital structure may be of the following four patterns:

1. Capital Structure with equity shares only.

2. Capital Structure with Both equity and preference shares.

3. Capital Structure with Equity share and debentures,

4. Capital Structure with Equity share, Preference share and debentures.

The choice of an appropriate capital structure depends on a number of factors

such as the nature of the company’s business, regular earnings, condition of the money
market, attitude of the investors, etc.,

1.3 MANUFACTURING INDUSTRIES IN INDIA

Manufacturing Industry in India has gone through various phases of development

over the period of time. Since independence in 1947, the Indian manufacturing sector
has traveled from the initial phase of building the industrial foundation in 1950’s and
early 1960’s, to the license–permit Raj in the period of 1965–1980, to a phase of
liberalization of 1990’s, emerging into the current phase of global competitiveness. It has
grown at a robust rate over the past ten years and has been one of the best performing
manufacturing economy. Manufacturing sector contributes about 15% of India’s GDP
and 50% to the country’s exports. The Manufacturing sector employed 58 million people
(about 12% of the workforce) in 2008. The Manufacturing industry in India, has all the
qualities which enhance economic development, increase the productivity of the
manufacturing industry and face competition from the global markets. The manufacturing
industry in India is believed to have the potential of improving the economic condition of
India. The profile of the selected manufacturing Industries in discussed below.

1.3.1. Indian Automobile Industry

The Automobile Industry in India is one of the largest in the world and one of
the fastest growing globally. India's passenger car and commercial vehicle
manufacturing industry is the sixth largest in the world, with an annual production of
more than 3.9 million units in 2011. According to recent reports, India overtook Brazil
and became the sixth largest passenger vehicle producer in the world (beating such old
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and new auto makers as Belgium, United Kingdom, Italy, Canada, Mexico, Russia,
Spain, France, Brazil), growing 16 to 18 per cent to sell around three million units in the
course of 2011-12.

According to the research Society of Indian Automobile Manufacturers (SIAM),

the overall vehicle sales grew by 30 Per cent in May 2010 to 1,208,851 units, and
8 per cent over the previous month of April 2010. Two wheeler sales rose 29 Per cent, with
motorcycle sales increasing 26 Per cent to 725,311 units, and scooter sales rising 20 per cent
to 157,509 units in May 2010. Commercial vehicle sales rose 58 Per cent in May 2010.
The medium and heavy commercial vehicle (M&HCV) segment grew to 33.5 per cent at
245,058 units and total commercial vehicle (CV) sales went up to 38.3 per cent to 531,395
units in 2009-10. At an estimated 25 Per cent growth, the M&HCV segment would be about
306,000 units; total CV sales would be about 664,000 units in 2010-11. Mahindra and
Mahindra (M&M) is the world's number one tractor company by selling a record of 1.59 lakh
tractors in 2009 surpassing John Deere of the US.

Source: www.indianmirror.com/2012

FIGURE 1

SEGMENT WISE MARKET SHARE

The share of Automobile industry in the last decade in the Indian economy was
around 5 Per cent of GDP. The Indian Automobile industry has become the seventh
largest in the world with an annual production of over 2.6 million units in 2009.
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TABLE 1

AUTOMOBILE PRODUCTION
(in units)

Type of Vehicle 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Passenger Vehicles 1,209,876 1,309,300 1,545,223 1,777,583 1,838,697 2,357,411 2,987,296

Commercial
353,703 391,083 519,982 549,006 417,126 567,556 752,735
Vehicles

Three Wheelers 374,445 434,423 556,126 500,660 501,030 619,194 799,553

Two Wheelers 6,529,829 7,608,697 8,466,666 8,026,681 8,418,626 10,512,903 13,376,451

Total 8,467,853 9,743,503 11,087,997 10,853,930 11,175,479 14,057,064 17,916,036

Sources: “Automobile Industries India”, Imaginmor. Com and “Production Trend:: SIAM”.

TABLE 2

STATE WISE LIST OF MANUFACTURING COMPANIES IN AUTOMOBILE

S.NO STATE MANUFACTURING COMPANIES

1 Gujarat  General Motors India Private Limited

 Chevrolet Sales India Private Limited – Halol
 Tata Motors – Sanand
 Asia Motor Works AMW – Bhuj
2 Haryana  Hero MotoCorp – Dharuhera, Gurgaon
 India Yamaha Motor – Faridabad
 Honda – Manesar
 Suzuki – Gurgaon
 Maruti Suzuki – Gurgaon, Manesar
3 Himachal Pradesh  TVS Motors – Nalagarh
 International Cars & Motors Limited –Amb
 TAFE Tractors – Parwanoo
4 Jharkhand  Tata Motors – Jamshedpur
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S.NO STATE MANUFACTURING COMPANIES

5 Karnataka  TVS Motor – Mysore

 Mahindra REVA Electric Vehicles – Bangalore
 Toyota Kirloskar Motor Private Limited – Bidadi
 Scania Commercial Vehicles India Private Limited Bangalore
 TAFE Tractors – Doddaballapur
 Tata Motors – Dharwad
 Volvo Buses India Private Limited – Hoskote

6 Madhya Pradesh  Mahindra & Mahindra – Pithampur

 Eicher Motors – Pithampur
 Hindustan Motors – Pithampur
 Force Motors Private Limited – Pithampur
 TAFE Tractors – Mandideep
7 Maharashtra  Bajaj Auto – Waluj Aurangabad, Chakan
 KTM Sportmotorcycles – Chakan
 Vespa Scooters – Baramati Pune
 Kinetic Engineering – Ahmednagar, Pune
 Mahindra & Mahindra Automotive Division – Chakan
 Sangyong Motor Company – Chakan
 Tata Motors Limited
 Tata Motors – Pimpri Chinchwad
 Jaguar Cars and Land Rover – Pune
 Mercedes-Benz Passenger Cars – Chakan
 Fiat Automobiles – Ranjangaon Pune
 Volkswagen Group Sales India Private Limited
 Volkswagen – Chakan
 Audi AG – Aurangabad
 Škoda Auto – Aurangabad
 Chinkara Motors – Karlekhind Alibag
 Premier Automobiles Limited – Pimpri Chinchwad
 Ashok Leyland – Bhandara
 Bajaj Auto – Waluj Aurangabad
 Force Motors – Pune
 Mahindra Navistar – Chakan
 MAN Trucks India – Akurdi Pune
 Mercedes-Benz Buses India – Chakan
 Piaggio Vehicles – Baramati Pune
 Premier Automobiles Limited – Pimpri Chinchwad
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S.NO STATE MANUFACTURING COMPANIES

8 Punjab  SML Isuzu Limited – Nawanshahar

9 Rajasthan  Honda Siel Cars India – Tapukara
 Ashok Leyland – Alwar
 TAFE Tractors – Alwar
10 Tamil Nadu  TVS Motor – Hosur
 Royal Enfield – Chennai
 BMW India – Chennai
 Ford India Private Limited – Maraimalai Nagar
 Hyundai Motor India Limited – Sriperumbudur
 Mitsubishi – Tiruvallur
 Renault Nissan Automotive India Private Limited
 Nissan Motor India Private Limited – Oragadam
 Renault India Private Limited – Oragadam
 Ashok Leyland – Ennore, Hosur
 BharatBenz – Oragadam
 Kamaz Vectra Motors – Hosur
 TAFE Tractors – Chennai
11 Uttar Pradesh  India Yamaha Motor – Greater Noida
 Honda Siel Cars India – Greater Noida

sources: http://imaginmor.com/Automotive_industry_in_India

1.3.2. Indian Cement Industry

The Cement Industry in India is the second largest in the world. Cement Industry
constitutes of 140 large and more than 365 mini cement plants. The Indian Cement
Industry's capacity at the beginning of the year 2009-10 was 217.80 million tonnes.
The Indian Cement Industry comprises of 125 units with an installed capacity of
148.28 million tonnes and more than 300 mini cement plants with an estimated capacity
of 11.10 million tonnes per annum.

Actual Indian cement production in 2002-03 was 116.35 million tonnes as against
a production of 106.90 million tonnes in 2001-02, registering a growth rate of
8.84per cent. Keeping in view the trend of growth of the industry in previous years, a
production target of 126 million tonnes has been fixed for the year 2003-04. During the
period April-June 2003, a production (provisional) was 31.30 million tones. The industry
has achieved a growth rate of 4.86 per cent during this period.
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The Indian Cement Industry comprises of 125 large cement plants with an
installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an
estimated capacity of 11.10 million tonnes per annum. The Cement Corporation of India
is a Central Public Sector Undertaking which has 10 units. State Governments own
10 large cement plants. Indian Cement production in 2002-03 was 116.35 million tonnes
as against a production of 106.90 million tonnes in 2001-02, registering a growth rate of
8.84 per cent. The Major players in cement production are Ambuja cement, Aditya
Cement, J K Cement and L&T cement.

Latest Developments

 The Indian cement industry is expected to grow steadily in 2010-2011 and has
increased the capacity by another 50 million tonnes in spite of the recession and
decrease in demand from the housing sector.

 The industry experts project the sector to grow by nine to ten per cent for the
current financial year which provided India's GDP growth at seven per cent.
India ranks second in cement production after China.

 The major companies have made investments to increase the production

capacity in the past few months, heralding a positive outlook for the industry.

 The housing sector accounts for 50 per cent of the demand for cement and this
trend is expected to continue in the near future.

The Indian Cement Industry with Modernization and technology up-gradation has
become a continuous process for industry. At present international standards and
benchmarks in the quality of cement and building materials produced are met in India and is
able to compete international markets. Substantial technological improvements have been
bought in the industry for which we can legitimately be proud of its state-of-the-art technology
and processes are incorporated in most of its cement plants. This particular technology up
gradation is resulting in increased capacity, reduction in cost of production of cement.

1.3.3 Indian Food Processing Industry

The Indian agriculture sector has come a long way since the time of
independence. With the emergence of green revolution, Indian agricultural Industries
have transformed itself from a country of shortages to a land of surpluses. With the rapid
growth of the Indian economy, a shift is also seen in the consumption pattern of the
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country, from cereals to more varied and nutritious diet of fruit and vegetables, milk, fish,
meat and poultry products. All these efforts have resulted in the development of a
sunrise industry namely the Food Processing Industries.

In July 1988, The Ministry of Food Processing Industries (MFPI) was set up to
give an impetus to the development of food processing sector in India. The Ministry
formulates and implements the policies & plans for the food processing industries
according to the overall national priorities and objectives. It acts as a catalyst for bringing
in greater investment into the sector while guiding and helping the industry and even
creating a conducive environment for healthy growth of the food processing industry.

Over the past three and half decades the Indian agricultural and dairy sectors
have achieved remarkable success. Besides India being one of the world's largest
producers of food-grains, India has been ranked second in the world for the production of fruits
and vegetables and regarded first in milk production providing much needed food security to
the nation. The accomplishments and achievements of the green and white revolutions have
contributed to the development of Indian Food Processing Industry.

India's Increased urbanization, improved standards of living and the convenient

need of dual income families point out to the major market potentialities in the food
processing and marketing sectors. There is also evidence that from the presence of
several global food giants and leading Indian industrial enterprises in the country's food
processing sector such as: Nestle India Ltd, Cadbury's India Ltd, Kelloggs India, Hindustan
Lever Ltd, ITC-Agro, Godrej Foods and MTR Foods Ltd. In the present world of globalized
milieu, the surplus food production, as well as the increasing preference for Indian foods
needs to be leveraged to achieve economic and strategic objectives through exports.

Latest developments

India's Position in World's Production

 Largest producer of milk in the world -105 million tonnes per annum.

 India is the largest in the livestock population with about 485 million tones per
annum.

 It is second largest producer of fruits & vegetables which accounts for 150 million
tonnes per annum.
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 India is the third largest producer of food grains accounting for 230 million tonnes
per annum.

 Third largest producer of fish - 7 million tonnes per annum

 India has 52per cent cultivable land compared to 11 per cent world average and
15 major climates in the world exist in India, there are 46 out of 60 soil types
exists in India and 20 agri-climatic regions.

1.3.4 Indian Steel Industry

Indian steel industry had organized itself as three categories such as main
producers, major producers and secondary producers. The main producers and major
producers have integrated steel making facility with plant capacities over 0.5 MT which
utilize iron ore and coal/gas for production of steel. The major producers are Tata Steel,
SAIL, and RINL, while the other producers are ESSAR, ISPAT and JVSL.

TABLE 3

PROJECTIONS OF PRODICTION
(Rs. in crore)

Current Target Target Total estimated

Sl. No Company capacity capacity by capacity by investment
2008-2009 2011-12 2019-20 (as informed by co.,)
*
1 SAIL 1284 2484 600 78,845

2 RINL 290 63 630 8,962

3 NMDC Nil Nil 30 16,000

4 Tata Steel 50 110 3350 87,900

5 Essar Steel 460 1050 2050 68,000

6 JSW Steel 410 50 310 1,11,700

7 JSPL 120 1050 265 89,387

8 Ispat Industry 30 50 170 30,400

TOTAL 3364 8514 1978 4,91,194

*SAIL estimates are for up to 2011-12 only: Capacity in million tonners.

Sources: Steel Ministry
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Indian Steel Industry has tremendously grown in records for production.

The steel production capacity of the country increased rapidly since 1991 and in 2008,
India produced nearly 46.575 million tones of finished steels and 4.393 million tones of
pig iron. In 1992, the total consumption of finished steel was 14.84 million tones.
In 2008, the total number of domestic steel consumption was 43.925 million tones.
With the growing demand in the national market, a huge part of the international market
is also served by the Indian Steel industry.

In 2005- April-December the production of the finished steel recorded a growth of

4 per cent and reached 28.3 million tones. Indian steel industry ranks 10th in the world's
scenario. The industry today represents approximately Rs. 9,000 crore of capital and
provides direct employment for more than 0.5 million people.

Strengths of Indian Steel Industry

 Low labour wage rates

 Abundance of quality manpower

 Mature production base

 Positive stimuli from construction industry

 Booming automobile industry

Latest Developments

 In 2009 according to The Press Information Bureau, the government took a

number of fiscal and administrative steps to includes in steel prices. Central
value added tax (CENVAT) on steel items was reduced from 14 per cent to
10 per cent with effect from February 2009.

 The government for the Union Budget of 2010-11, has also allocated
US$ 37.4 billion for infrastructure sector and has increased the allocation for road
transport by 13 per cent to US$ 4.3 billion which would promote the steel industry.

 The Indian steel industry has had humble beginnings. The acquisition of the
British steel giant Corus steel by Tata Steel and the acquisition of Arcelor by
Mittal Steel herald a new beginning for the Indian steel industry.
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 All these are the evidences that the Indian steel industry has acquired a global
identity and is today extremely globally competitive. Today some of the
prominent steel producers are Tata Steel, Posco, Essar, Ispat, Sail and Rinl.

 A report of research in India reveals that steel consumption in India is expected

to grow significantly in coming years as the per capital steel consumption is far
less from its regional counterparts. During the year 2008, per capital finished
steel consumption was estimated to have a volume of around 44 Kg, which
represents tremendous growth potential for coming years.

 "Indian Steel Industry Outlook to 2012" is an outcome of an extensive research

and conceptual analysis of the steel industry in India. The detailed information is
provided by the forces which have led to the industry towards remarkable
developments in the past few years. The report emphasizes an insight into the
future outlook of various vertical industry segments, including automotive,
aerospace, marine, consumer durables, power, railways, telecom and
housing. This report has classified the finished steel product market into two
categories - alloy and non-alloy. It covers the information on overall steel
consumption, industry-wise steel demand, production and trading market.

1.3.5 Indian Textile Industry

Indian Textile Industry has earned a unique place in our country. It is among one
of the industries which were earliest to come into existence in India. It accounted for
14 per cent of the total Industries production, contributes to nearly 30 per cent of the
total exports and is the second largest employment generator after agriculture. India
textile industry is one of the leading in the world. Currently the Indian Textile Industry is
estimated to be around US$ 52 billion and is also projected to be around US$ 115 billion
by the year 2012. The current Indian domestic market of textile is expected to be
increased to US$ 60 billion by 2012 from the current US$ 34.6 billion.

Indian industry of Textiles can be divided into several segments, some of which
can be listed as below:

 Cotton Textiles

 Silk Textiles

 Woollen Textiles
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 Readymade Garments

 Hand-crafted Textiles

 Jute and Coir

Indian textile industry is one of the largest Industries in Indian Economy.

In 2000-01, the textile and garment industries accounted for about 4 per cent of GDP,
14 per cent of industrial output, 18 per cent of industrial employment and 27 per cent of export
earnings. Indian textile industry is significant in global context also, ranking second to China in
the production of both cotton yarn and fabric and fifth in the production of synthetic fibers and
yarns. The Indian textile industry constitutes 14 per cent to industrial production, 4 per cent to
the country's gross domestic product (GDP) and 17 per cent to the country's export earnings,
according to the Annual Report 2009-10 of the Ministry of Textiles.

Top leading Companies

Some of the reputed names in the Textile companies in India are:

 Raymonds

 Arvind Mills

 Reliance Textiles

 Vardhaman Spinning

 Welspun India

 Morarjee Mills

 Century Textiles

 Ginni Filaments Ltd

 Mafatlal Textiles

 S. Kumar Synfabs

 Bombay Dyeing Ltd

 BSL Ltd.

 Banswara Syntex

 Grasim Industries
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 Oswal Knit India

 Fabindia

 Laksmi Mills

 National Rayon Corp.,

 Mysore Silk Factory.

Latest developments

 Indian Textile Industry covers 61 per cent of the international textile market and
22 per cent of the global market
rd
 Indian Textile Industry is known to be the 3 largest manufacturer of cotton
across the globe.
nd
 This industry of India claims to be the 2 largest manufacturer as well as
provider of cotton yarn and textiles in the world

 India holds around 25 per cent share in the cotton yarn industry across the globe

 Indian Textile Industry contributes to around 12 per cent of the world's production
of cotton yarn and textiles

1.3.6 Indian Pharmaceutical Industry

Today in India, Pharmaceutical Industry rank’s first of India’s science-based

industries with wide ranges of capabilities in the complex field of drug manufacture and
technology. The industry is estimated to be worth $ 4.5 billion, which is growing at 8 to
9 per cent annually and is one of the best and highly organized sectors. The sector
specializes in term of technology, quality and range of medicines manufactures.
The product of the industry ranges from simple headache pills to sophisticated
antibiotics and also complex cardiac compounds.

Pharmaceutical Industry promotes the sustainable development in the vital field

of medicines by boosting the quality producers and many units approved by regulatory
authorities in USA and UK. The companies associated with this sectors are
internationally stimulated, assisted and spearheaded the dynamic development in the
past 53 years and helped to put India on the pharmaceutical map of the world.
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The growth of Indian Pharmaceutical Industry has grown tremendously since 2008-09 in
terms of exports. The Indian pharmaceutical industry has grown from a humble
Rs 1,500 crore turnover in 1980 to approximately Rs 1,00,611 in 2009-10.

As India is the most advanced country among the developing countries, the
growth of Pharmaceutical industry in India is US$ 3.1 billion with growing rate at
14 per cent year.

Top leading Companies in India are

 GlaxoSmithKline (GSK)

 Novartis India Limited

 Wyeth India Limited,

 Aventis Pharma India,

 Pfizer India Limited,

 Astra Zeneca India Ltd,

 Johnson & Johnson (ETHNOR DIVISION),

 Cipla Limited

 Ranbaxy India Limited,

 Dr. Reddy Laboratories

 Nicholas Piramal India Limited

 Sun Pharma Limited

 RPG Life sciences Ltd

 UCB Pharma Ltd.

 E Merck India Ltd,

 ELI Lilly and Company (India),

 Aurobindo Pharma Ltd,

 Aventis Pharma Ltd,

 Cadila Pharmaceuticals Ltd,

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 Cipla Ltd,

 Dabur Pharma Ltd,

 Dey's Medical Stores Mfg. Ltd,

 Dr. Reddy's Laboratories Ltd,

 Elder Pharmaceuticals Ltd,

 Glenmark Pharmaceuticals Ltd.

At present, in the Indian Pharmaceutical market is worth US$ 13 billion, with the
domestic retail market expected to cross the US$ 10 billion mark in 2010 and reach an
estimated US$ 12 billion to US$ 13 billion by 2012. The outsourcing opportunities are on
the verge of growth up to US$ 53 billion in 2010 from US$ 26 billion in 2006.
The industry was estimated to be around US$ 13.2 billion in 2006-07. Out of which the
domestic consumption of pharmaceuticals accounted for nearly 57 per cent while the
rest 43 per cent was constituted by exports. In 2006, the market of Pharmaceutical
industry witnessed an accelerated growth of more than 17 per cent, primarily on account
of increased clarity on tax reforms especially the Value Added Tax (VAT)
implementation. The country's pharmaceutical market is expected to maintain a healthy
growth rate of 12-13 per cent and expected to cross the US$ 10 billion mark by 2010
and reach approximately, US$ 12 to 13 billion by 2012.

1.3.7 Information Technology Industry

The Indian IT Industry mainly comprises of instance System Integration, Software

experiments, Custom Application Development and Maintenance (CADM), network
services and IT Solutions. According to the analysis done by the annual report 2009-10,
prepared by the Department of Information Technology (DIT), the IT-BPO industry was
expected to achieve a revenue aggregate of US$ 73.1 billion in 2009-10 as compared to
US$ 69.4 billion in 2008-09, growing at a rate of over 5 per cent. The report even
predicts that the Indian IT-BPO revenues may reach US$ 225 billion in 2020.

According to Nasscom's analysis in the fiscal year 2009 Indian IT-BPO industry
expanded by 12 per cent and gained aggregate returns of US$ 71.6 billion. Out of which
the derived revenue US$ 59.6 billion was earned by only the software and services division.
Further, the industry witnessed an increase of around US$ 7 million in FY 2008-09.
 19

At present, in India the data centre services market is forecasted to grow at a

compound annual growth rate (CAGR) of 22.7 per cent between 2009 and 2011, and to
touch close to US$ 2.2 billion by the end of 2011, according to research firm IDC India's
report published in 2010. According to the report of Internet and Mobile Association of
India (IAMAI) and market research firm IMRB, the total number of Internet users in India
reached 71 million in 2009. The active users were 52 million in September 2009
when compared to 42 million in September 2008, registering a growth of 19 per cent
year-on-year, stated the report.

As per a Confederation of Indian Industry (CII) report, the Indian IT industry is

growing at an annual rate of 35per cent.

Top leading Companies

 Tata Consultancy Services

 Wipro Technologies

 Infosys Technologies

 HCL

 Intel

 GE

 IBM

 Dell

 Microsoft

 Cisco.

Recent Development in IT Industry

1. National e-Governance Plan (NeGP) The Government of India plans to give high
priority to improve the quality of the citizens by providing basic services at their
doorstep for which it has formulated a NeGP covering 27 mission mode projects.

2. State Wide Area Networks (SWANs) The Government has started a scheme
for establishing SWANs across the country in 29 states with a total estimation of
US$ 682.27 million over a period of five years.
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3. State Data Centres (SDCs) SDCs have been identified for the core
infrastructure of supporting e-Governance initiatives under NeGP.

4. Common Service Centres (CSCs) The main objective of CSCs is to develop a

platform that can enable Government, private and social sector organizations to
carter their social and commercial goals for the benefit of the rural population in
the country with a combination of IT-based as well as non-IT-based services.

5. Community Information Centres (CIC) Government has initiated the CIC's in

the hilly and far-flung rural areas of the country with main objective to bring the
benefits of ICT to the people for the purpose of socio-economic development.

6. Nanotechnology Department of Information Technology started nanotechnology

development programmed during the 10th plan with the aim of creating
infrastructure for research in nano electronics and Nano metrology at the
national level.

1.4 STATEMENT OF THE PROBLEM

Financial management determines how funds are procured and used and they
relate to a firm’s financing and investment policies. It involves the solution for three
decisions namely investment decisions, financing decisions and dividend decisions
which determine the value of the firm to its share holders. A firm should strive for an
optimal combination of the three interrelated decisions in order to maximize its value.
The decision to invest in new capital project necessitates financing the investment.
The financing decision, in turn, influences, and is influenced by the dividend decision, for
retained earnings used in internal financing represent dividends foregone by
stockholders. Thus, these three financial decisions are inseparable and therefore
whenever a decision has to be taken, the financial manager should give due weight age
to all of them as the situation demands.

The modern financial manager is concerned with determining the best financing
mix or capital structure. If companies can change its total valuation by varying its capital
structure, an optimal financing mix would exist, in which market price per share could be
maximized. Since, firms regularly make new investment, the need for financing and
hence the necessity of making the financing decisions are ongoing. The financial
manager should decide, when, where and how to acquire funds to meet the firm’s
investment needs. The theories suggest that firms select capital structures depending on
 21

characteristics that determine the various costs and benefits associated with debt and
equity financing. All the studies related to the relationship between industry grouping and
Capital Structure of the corporations belongs to developed capital markets and it is
important to study these in Indian companies. The existing literature identifies a number
of sources responsible for the variations in capital structure. This study checks which of
these sources can possibly be important in the Indian context, and so seeks to get
answers to the following aspects.

1. What is the capital structure of manufacturing industries in India?

2. What are the factors determining the capital structure?

3. Whether the capital structure is different among selected industries?

4. What is the extent of impact of dividend policy in maximizing the shareholders wealth?

5. Does capital structure have any impact on the shareholder value?

6. Whether there is any inter industry differences in leverage?

1.5 OBJECTIVES OF THE STUDY

1. To examine the various components of capital structure of manufacturing industries.

2. To investigate the determinants that influences the capital structure of manufacturing

industries.

3. To study the impact of dividend policy on shareholders wealth.

4. To assess the impact of capital structure on shareholder value in terms of

economic valued added.

5. To study the differences in capital structure across industry groups.

These objectives have been attempted during the course of the completion of the
study which has been analyzed in the Results and Discussion chapter.

1.6 SCOPE OF THE STUDY

To design an appropriate capital structure and to make themselves competitive

an attempt on cost effective is made in this study to the various determinants, suitable
for optimum capital structure. This study aims at investigating the relationship between
the corporate capital structure (Debt Equity Ratio) and it’s Size of Firm, Tangibility,
Growth, Profitability, Earning Risk, Non-Debt Tax Shield, Business Risk, Net Worth,
 22

Equity Capital, Reserve and Surplus and Total Borrowings. Capital Structure is one of
the most important decisions that every finance manager has to take because, the
objective of every firm is to maximize the share holder’s wealth in the Capital Structure
decision which affects the value of the firm. The capital structure that maximize, the
share holder’s wealth is referred to as the optimum Capital Structure.

This study exposes the intrinsic areas that require vigilant attention in estimating
profitability, in terms of optimum to maximize returns to equity share holders. To ensure
proper mix of Debt &Equity, the management will be able to take supportive decisions.
In India the competition is faced in the international level. In the globalized economy,
many international researchers are of the opinion that firm in all the nations are facing
similar competitive business environment. The choice of an appropriate debt policy
involves a tradeoff between foreign companies, which are exposed to lower overall risk
as well as financial risk because they procure their funds at low cost and face
competitive market in an effective way.

It would educate the shareholders to look for those companies, which maximizes
and maintain shareholders value. Hence an attempt is made in this study to ascertain
the impact of various determinants of capital structure to be designed by the companies
in order to make an effective returns.

The study restricts its scope to financial variables of the firm. The study covers a
period of Ten years from 2001-2002 to 2010-2011. The study analyses the capital
structure of 62 companies from seven Manufacturing Industries.

1.7 METHODOLOGY

1.7.1 Sources of Data

This study is based on the secondary data collected from PROWESS data base
of Centre for Monitoring Indian Economy Private limited (CMIE). The data which is taken
from the sample companies is supplemented with information from various financial
dailies, margarine reports, industry reports and annual reports of companies to enable
proper analysis and to facilitate the attainment of study objective listed earlier.

1.7.2. Selection of Sample and Period of Study

The data used in the study relates to the manufacturing companies listed in the
BSE and NSE for which the date is available in the PROWESS database of CMIE.
 23

Based on the selected, the study selects companies based on the criteria that the
companies should have maintained its identity and reported its annual accounts without
any gaps for the financial years 2001-2002 to 2010-2011. Screening for data
consistency on the basis of this criterion, led to the selection of a sample of 62
companies drawn from seven different industries such as Automobile, Cement, Steel,
Textile, Food, Pharmaceutical and Information Technology.

1.7.3 Hypothesis

The following hypothesis were framed for the purpose of the study.
1. There is no significant difference among industries with respect to Components of
capital structure.
2. There is no significant difference among the various industries with respect to the
Determinants of capital structure.
3. There is no significant difference among industries with respect to Dividend Policy.
4. There is no significant relationship between Debt Equity Ratio and Economic Value
Added.
5. There is no Significant relationship between Debt to Total Asset Ratio and
Economic Value Added.
1.7.4 Frame Work of Analysis

The following statistical tools are used to analyze the data.

(i) Descriptive Statistics, (ii) Analysis of Variance, (iii) Compound Annual Growth Rate,

(iv) Correlation, (v) Multiple Regression, (vi) Factor Analysis.

Suitable statistical hypothesis framed to supplement the results of the study and
all the tests were tested at 5 per cent level of significance.

Dependent and Independent Variables used in this study are:

i. Components of Capital Structure

• Equity Capital
• Reserves and surplus

 Net Worth

• Total Borrowings
 24

ii. Determinants of Capital Structure

• Size of the firm

• Tangibility

• Growth

• Profitability

• Earning Risk

• Non-Debt tax shield

• Business Risk.

iii. Impact of Dividend Policy on Shareholders Wealth

• Retained Earnings

• Dividend per shares

• Dividend yield shares

• Earning per shares

iv. Impact of Capital Structure on Shareholders Value

• Debt to Total Asset Ratio

• Debt Equity Ratio

v. Inter Industry differences in Capital Structure

Financial Leverage

Dependent Variables are:

 Debt Equity Ratio

 Market Prices Per Share

 Economic Value Added

 25

1.8 LIMITATIONS OF THE STUDY

The generality of this research is restricted due to certain limitations. Most of

these limitations are off shoots of the self imposed restrictions during the process of
research for keeping research within manageable limits. It may be recalled that the study
is based on secondary data collected from PROWESS developed by Centre for
Monitoring Indian Economic (CMIE).

i. The study is focused only to the seven selected Industries in India.

ii. The study has been undertaken only through the analysis of quantitative financial
data, the qualitative aspects which have a bearing on Capital Structure have not
been considered.

iii. The study is entirely based on the financial statement which shows historical data.
The limitative pertained to financing statement analysis is also applicable to the
study.

iv. The study is not focused on the fore cost.

v. Market capitalization details of companies were not accessible; therefore selection of

the sample could not be based upon it.

Thus the findings of the present study should be used judiciously and carefully
taking into account the various limitations.

1.9 CHAPTER SCHEME

The thesis report is organized into five chapters.

Chapter 1I: Introduction

This chapter contains introduction of the study, statement of the problem, scope
of the study, objectives of the study, methodology used and limitations of the study.

Chapter 2: Review of Literature

This chapter presents the review of various studies conducted in the area of
research pertaining to the objectives and hypothesis framed.
 26

Chapter 3: Methodology

This chapter deals with the methodology adopted in the analysis of data for the
studies. It depicts the variables adopted for pursuing the study.

Chapter 4: Results and Discussion

It deals with analysis and interpretation of the results related to determinants

capital structure, components of capital structure, Impact of dividend policy on
shareholders wealth, Impact of capital structure on shareholder value and Inter Industry
difference in capital structure.

Chapter 5: Summary and Conclusion.

The last chapter gives the summary of findings and conclusion that have
emerged from the analysis of the data.