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D I A S

Vol. 8 No. 2

OCTOBER 2011 - MARCH 2012

PLOT NO.6, SECTOR 25, ROHINI, DELHI 110085Tel.: 011-27932742/27934011/27934400, www.dias.ac.in, [email protected]

ISSN 0972-9658

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ARTICLES

14

27

An Empirical Test of Fundamental Analysis in India

Christopher Luchs, Suneel K. Maheshwari, Mark Myring

A Case Study of Acquisition of Spice Communications by Idea Cellular Limited

Hamendra Kumar Porwal, Ankur Gupta, Anchal Khaneja

Mapping Career Aspirations to Combat Attrition: A Study of Leading Multi National BPO Operating in India

Shalini Garg, Shilpa Jain

An Empirical Study of Employer Branding in Information Technology Companies

N Malati, Pratiksha Tiwari, Ruchika Sharma

Trade Openness, Exports and Economic Growth Relationship in India: An Econometric Analysis

Rajwant Kaur, Amarjit Singh Sidhu

Corporate Governance-A Tool for Effective Financial Reporting & Control

S.N. Maheshwari

DOCTORAL ABSTRACTS

Labour Legislation on Working Conditions for Competitive Advantage

Tapomoy Deb

Buying Behaviour of Consumers with Respect to Durable Products: A Case Study of Personal Computers

I.B.Singh

BOOK REVIEWS

Industrial Relations: A Contemporary Approach

N.Malati

Customer Relationship Management

Ritika Maheshwari

36

8

43

54

68

71

76

78Fundamental Analysis in India.....Pg. 8

The International Journal for Business & IT

CABELL'S DIRECTORY, U.S.A.David W. E. Cabell, EditorMcNeese State UniversityLake Charles, LouisianaDeborah L. English, Editor

Cabell's DirectoryOf Publishing OpportunitiesIn ManagementVOLUME I A through HNINTH EDITION 2004-2005

STATEMENT ABOUT OWNERSHIP AND OTHER PARTICULARS OF THE JOURNAL

DIAS Technology Review

Listed In th10 Edition of

DIAS TECHNOLOGY REVIEW ¡ VOL. 8 NO. 2 ¡ OCTOBER 2011 - MARCH 20122

&

SOCIAL SCIENCE RESEARCH NETWORKAccessible at : www.ssrn.com

A BI-ANNUAL JOURNAL OF DELHI INSTITUTE OF ADVANCED STUDIES

Plot No.6, Sector 25, Rohini, Delhi 110 085, India,Website: http://www.dias.ac.in, [email protected]

Editorial Board

MEMBERS

Prof. T.N. KapoorEx Vice-Chancellor, Punjab University,

Chandigarh, India

Dr. Angappa “Guna” GunasekaranProf. of Operations Management, University of Massachusetts, USA

Dr. Chong W. KimDean and Professor of Management, Lewis

College of Business, Marshall University, USA

Dr. Gin ChongAssociate Professor,

Department of Accounting, Finance & MIS, College of Business, Prairie View

A & M University, Prairie View, USA

Dr. Atul GuptaAssociate Professor of Management,School of Business and Economics,

Lynchburg College, USA

Dr. Anand KrishnamoorthyAssociate Professor of Business and

Management, Troy University, Atlantic, USA

Dr. P.Raj DevasagyamProfessor, Marketing and Management,

Siena College, USA

Dr. Rajendar K. GargProfessor of Marketing,

Eberly College of Business and IT,Indiana University of Pennsylvania, USA

Dr. David RossProfessor & Chair of Flexible Delivery, Management and Commercialization,

Faculty of Engineering & Surveying, University of Southern Queensland,

Australia

Dr. Ibrahim J. AffanehChairman, Deptt. of Finance & Legal

Studies, Indiana University of Pennsylvania, USA

Dr. Jagdish PathakAssociate Professor , Accounting Systems,

University of Windsor, Canada

Dr. Michael NewsomeAssociate Professor of Economics,

Marshall University, USA

Dr. Rakesh K. AgrawalManaging Director/Principal

BCI Centre Pty Ltd &Sydney International College of Business &

Technology , Australia

Dr. Sandeep PatelAssociate Professor,

Information Science and Systems, School of Business, Morgan State

University, Baltimore, Maryland, USA

Dr. Purnendu MandalProfessor & Chair, Department of

Information System & Analysis, Lamar University, Beaumont, Texas, USA

3DIAS TECHNOLOGY REVIEW ¡ VOL. 8 NO. 2 ¡ OCTOBER 2011 - MARCH 2012

ASSISTANT EDITORDr. Vibha Dua

Reader, Department of ManagementDelhi Institute of Advanced Studies

CHIEF EDITORDr. S.N. Maheshwari

Director General Delhi Institute of Advanced Studies

PATRONShri S.K. Sachdeva

ChairmanDelhi Institute of Advanced Studies

EDITORShri Sanjay Sachdeva

Director, Exponential Commodities Services

Pvt. Ltd.

ASSOCIATE EDITORDr. Suneel K. MaheshwariProfessor of AccountingMarshall University, USA

INDEX MARCH 2012

The International Journal for Business & IT

ARTICLES

08


14

27


An Empirical Test of Fundamental Analysis in India


The results of study reveal a significant relationship between fundamental signals and returns in India, suggesting that investors in Indian stock markets find fundamental signals relevant in making investment decisions. The results of the study also highlight the potential differences in Indian and US capital markets.

A Case Study of Acquisition of Spice Communications by Idea Cellular Limited


The study investigates the impact of mergers on the operating performance of the merged entity by examining the pre-merger and post-merger ratios. It also studies the behavior of share prices and returns 20 days before and after the announcement of the acquisition deal of Idea Cellular and Spice Communications.

Mapping Career Aspirations to Combat Attrition: A Study of Leading Multi National BPO Operating in India


In this study employee turnover is studied in specific to a leading Multi-National BPO operating in India-Global Pvt. Ltd. The study is an attempt to identify the major reasons of employee turnover in this Company and what initiatives it took to combat the employee turnover rate. An extensive exit analysis is done to understand the key factors and employee attitude to conclude the reasons behind employee turnover.

An Empirical Study of Employer Branding in Information Technology Companies

N.Malati, Pratiksha Tiwari, Ruchika Sharma

The objective of the study is to examine the likenesses and differences between employer External and Internal Brand Images of three IT companies namely Infosys, TCS, & Wipro.

Trade Openness, Exports and Economic Growth Relationship in India: An Econometric Analysis


The present study examines the validity of the Export-Led Growth (ELG) hypothesis implemented in India during the post WTO period. An attempt also has been made to analyze the relationship between three variables i.e. trade openness, export growth and their impact on economic growth within the framework of Vector Error Correction Model using the Johansen technique of Co-integration and Block Exogeneity Wald Test.

Corporate Governance-A Tool for Effective Financial Reporting & Control

S.N. Maheshwari

The article examines the emergence of the concept of corporate governance through a historical discussion. It briefly describes the emergence of certain global institutions enunciating the basic principles of good Corporate Governance. It discusses the role of there main authorities involved in coporate governance in India. A critical evaluation of different corporate governance measures has also been done.

DOCTORAL ABSTRACTS

Labour Legislation on Working Conditions for Competitive Advantage

Tapomoy Deb

Buying Behaviour of Consumers with Respect to Durable Products: A Case Study of Personal Computers

I.B.Singh

BOOK REVIEWS

Industrial Relations: A Contemporary Approach

N.Malati

Customer Relationship Management

Ritika Maheshwari

36

68

43

71

78

76

54

54

43

36

27

14

From The Editor's Desk


DIAS fraternity feels delighted in placing before you the 16th issue of its research journal DIAS Technology Review.

Advancement of the technology, at an astounding pace, has led to the travel of information from one place to another in a jiffy, while the arrival of quick information has resulted in making the business world more challenging and competitive. The business structures have also moved from brick and mortar models to click and mortar, thereby adding huge value to speed. Precise and quick decision making has therefore become essential in this tough and competitive global environment to retain and maintain the profitability and sustainability of business organizations. In the first article of this issue, “An Empirical Test of Fundamental Analysis in India” the authors provide new grounds of optimism to Indian investors by exploring the relationship between fundamental signals and returns in India. It has been derived that significant relationship between fundamental signals and returns in India exists, thereby, suggesting that investors in Indian stock markets find them relevant in making investment decisions.

Wealth maximization is the prime aspiration for business organizations. Business leaders are opting for financial reengineering to tackle the ever increasing demands of the business world and to maximize the shareholders' wealth. In the next article “A Case Study of Acquisition of Spice Communications by Idea Cellular Limited,” the authors have investigated the impact of mergers and acquisitions on the operating performance of the merged entity by examining pre-merger and post-merger ratios in the Indian scenario. The authors have also made an attempt to judge the informational efficiency of the Indian stock market by observing the behavior of share prices and returns around the announcement date of the acquisition deal between Idea Cellular and Spice Communications.

Employees are the key to success of any organization. Due to increasing work pressures and competition, the stress levels are increasing as a result the employee's welfare has become the major concern for the business managers. Creating and adopting a well-rounded approach to retain the workforce is a big challenge since attrition in the BPO sector is area of major concern for employers. The paper titled, “Mapping Career Aspirations to Combat Attrition: A Study of Leading Multi National BPO operating in India”, provides a solution through focusing on creating a learning and development culture to engage the employees to realize their full potentials which can help an organization to successfully combat attrition.

In the changed competitive scenario, whereas employers want to capitalize the best talents in the organizations, employees also want to work with the best of organizations. Prospective employees are investigating the employer's brand before accepting the offer. Employer branding in a nutshell is match-making to create the perfect relationship between the employer and the employee. The article titled, “An Empirical Study of Employer Branding in Information Technology Companies” examines the likenesses and differences between employer external and internal brand images of IT companies.

Growing at an estimated rate of 7%, the Indian economy is the fourth largest in the world, and is exponentially expanding. The potent resources for development are trade openness and exports which both are fuelling the economic growth of the country. India has witnessed a paradigm shift in its economic and business environment due to the Liberalization, Privatization, Globalization (LPG) Policies of Government. This all has resulted in a significant increase in terms of still better growth prospects of the country. The article of the issue titled, “Trade Openness, Exports and Economic Growth Relationship in India: An Econometric Analysis”, examines the validity of the export led growth hypothesis implemented in India during the post WTO period. An attempt has been made here to analyze the relationship between three variables i.e. trade openness, exports and their impact on economic growth. Corporate governance is perhaps one of the most important differentiators of a business that has impact on the profitability, growth and even sustainability of business. It is a multi-level and multi tiered process that distilled from an organization’s culture, its policies, values and ethics, especially of the people running the business and the way it deals with various stakeholders. The last article titled, “Corporate Governance- A Tool for Effective Financial Reporting & Control”, examines the emergence of the concept of corporate governance through a historical discussion. It briefly describes the emergence of certain global institutions enunciating the basic principles of good Corporate Governance. A critical evaluation of different corporate governance measures has also been done.

In order to acquaint and update the readers with the latest publications and also to develop their research potentials in the different areas of business and IT, we have continued in this issue the practice of incorporating book reviews and abstracts of doctoral dissertations by eminent scholars. We are confident that the present edition of the journal with all its welcome features will be informative and all the more interesting to our esteemed readers.

Regards,

Vibha

ABOUT THE CONTRIBUTORS

6 DIAS TECHNOLOGY REVIEW ¡ VOL. 8 NO. 2 ¡ OCTOBER 2011 - MARCH 2012

Dr. Christopher Luchs

Dr. Luchs is an Assistant Professor of Accounting at Ball State University. His specialization areas of teaching and research are International Accounting and Managerial Accounting. His work has been published in several journals and he has also presented papers in various National and International Conferences. He is currently a member of the American Accounting Association and Beta Alpha Psi.

E-mail: [email protected]

Dr. Suneel K. Maheshwari

Dr. S.K. Maheshwari is presently Professor, Marshall University, USA. He holds a Doctorate in Accounting from Florida Atlantic University, USA. He also has an MBA Degree from Bombay University along with a Master in Accountancy (with double major in Accounting and Taxation) from Miami University (Oxford, USA). Dr.S.K.Maheshwari has more than five dozen books/monographs to his credit and has contributed a number of articles in the areas of Accounting and Finance with several leading national and international journals. His research areas include Executive Compensation; Activity Based Costing and interdisciplinary application for both practical and theoretical. He is also involved with many community-based services. He was nominated for “Who's Who among America Teacher 2002”. He also bagged the coveted Summer Research Award for three consecutive years between 1999 and 2000, and the University's Merit Award for teaching and research in 2000. Dr. Maheshwari has also contributed his services to many corporate sector giants such as Holiday Inn and Tata Consultancy Services.

Email: [email protected]

Dr. Mark Myring

Dr. Myring is a Professor of Accounting at Ball State University. Dr. Myring's current research focuses on the use of accounting information and analysts' forecasts for security valuation in US and international capital markets and the accounting standard setting process in both the US and emerging economies. His work has been published in the reputed National and International Journals and also presented papers in the various National and International conferences. His core area of teaching is Financial Accounting. He is currently a member of the AAA, Beta Gamma Sigma, Beta Alpha Psi, and the IMA.

E-Mail: [email protected]

Dr. Hamendra Kumar Porwal

Currently, Dr. Porwal is working as an Associate Professor in Shaheed Sukhdev College of Business Studies, University of Delhi, Delhi. He has teaching experience of more than two decades at National and International universities including City University of Hong Kong, Tenaga National University, Malaysia and at Majan College in Muscat, Sultanate of Oman.

He has received his Ph.D degree from University of Rajasthan, Jaipur, India in the year 1994 and MBA from California State University, USA in the year 1988. He has also completed his Chartered Accountancy from India in the year 1991. His specialized areas of teaching are Accounting and Financial Management. He has published several research papers in refereed National and International Journals and also presented papers in various conferences held in India and abroad.


Mr. Ankur Gupta

Mr. Gupta has completed his Bachelor of Business Studies (Finance Specialization) from Shaheed Sukhdev College of Business Studies, University of Delhi, Delhi, India. He has worked on various projects during his graduation such as project with ICICI Prudential Life Insurance on Insurance Sector in India, Impact of Global Financial Crisis on Indian Economy and Health South Accountancy Fraud etc. He has also earned Certification in the various modules of NSE i.e, Financial Market, Capital Market, Derivatives Market and Investment Analysis and Portfolio Management.


Ms. Anchal Khaneja

Ms. Khaneja is pursuing her Master of International Business from Department of Commerce, University of Delhi, Delhi, India. She has completed her Bachelor of Business Studies from Shaheed Sukhdev College of Business Studies, University of Delhi, Delhi, India. She has worked on various projects such as Impact of Global Financial Crisis on Indian Economy, Takeover Code and Consumer Perception about the Indian Insurance Industry.


Dr. Shalini Garg

Dr. Garg is currently serving as an Associate Professor at the University School of Management Studies GGSIP University, Delhi, India. She has teaching and research experience of more than a decade. She has to her credit many papers published in National and International Journals and has presented papers at National and International conferences. Her specialized areas of research are Human Resource Management, Organisation Behavior and Organisation Development. Specific areas of interest in HR include Talent Management, Training and Development, Organizational Learning, Motivation and Leadership issues.E-mail: [email protected]

Dr. Shilpa Jain

Dr. Shilpa Jain is currently working as an Assistant Professor at the University School of Management Studies, GGS IP University, Delhi, India. She has teaching experience of more than four years. She has conducted many workshops and training programs for the students of university school of management studies and for corporates. She has to her credit many research papers published in refereed journals of National and International repute. Her research interest areas include, Human Resource Management, Organizational Behaviour, Organizational Development, Competency Mapping etc.


ABOUT THE CONTRIBUTORS


Ms. N.Malati

Ms. N.Malati is currently working as Reader & Head, Department of Management, Delhi Institute of Advanced Studies, Delhi, India. She has 12 years of teaching experience. She holds an MBA degree from Andhra University, Andhra Pradesh, India. Her areas of specialization in teaching and research are Marketing and Human Resource Management. She has presented papers in National and International conferences/seminars and has also published papers in various referred journals.


Ms. Pratiksha Tiwari

Ms. Pratiksha Tiwari is currently working as Lecturer in the Department of Computer Applications at Delhi Institute of Advanced Studies, Delhi, India. She has 10 years of teaching experience. She holds her M.Phil. degree in Mathematics from University of Delhi, Delhi, India. Her areas of specialization in teaching and research are Quantitative Methods, Operations Research and Business Research. She has presented papers in National and International conferences and has also published papers in various referred journals.


Ms. Ruchika Sharma

Ms. Sharma is currently working as Lecturer at Chander Prabhu Jain College of Higher Studies and School of Law, Delhi, India. She is the gold medalist of 2011in MBA from GGSIP University, Delhi, India. She has also presented papers in National conferences. Her specialized areas in teaching are Human Resource Management and Marketing.


Ms. Rajwant Kaur

Ms. Kaur is currently working as Senior Research Fellow at Department of Commerce and Business Management, Guru Nanak Dev University, Amritsar, India. She is pursuing her PhD (Commerce) from Guru Nanak Dev University, Amritsar. Her areas of specialization are International Finance, Strategic Management, Financial Management and Management Accounting. She has published three research papers in the International journals and also presented papers in various National and International conferences.


Dr. Amarjit Singh Sidhu

Dr. Sidhu is presently working as a Professor at Department of Commerce and Business Management, Guru Nanak Dev University, Amritsar. He has teaching and research experience of 27 years. His areas of specialization are International Business and Human Resource Management. He has published numerous research papers in National and International refereed journals.


Dr. S.N.Maheshwari

Dr. Maheshwari is presently Director General, Delhi Institute of Advance Studies, Delhi, India. He is also the Chairman, Indian Society of Accounting and Management, New Delhi. During his long and varied experience, he worked as Principal, Hindu College, University of Delhi; Professor and Dean, Faculty of Commerce and Business Management, Goa University; Director, Institute of Management Science and Productivity Research, New Delhi; Director (Academic), BLS Institute of Management, Mohan Nagar; Vice-Principal, Shri Ram College of Commerce, University of Delhi and Principal, Staff Training College, New Bank of India, Chandigarh.

Dr. S.N. Maheshwari has been a rank holder throughout his academic career. He has more than five decades of teaching, research and administrative experience. He has authored more than hundred books/monograms and got several articles published in leading journals of Accounting and Finance.

E-mail:

Ms. Ritika Maheshwari

Ms. Maheshwari is currently working as Lecture in the Department of Management at Delhi Institute of Advanced Studies, Delhi, India. She has 3 years of teaching experience. She holds an MBA degree from GGSIP University, Delhi, India. Her areas of specialization in teaching and research are Marketing and Human Resource Management. She has presented papers in National and International conferences/seminars and has also published papers in various referred journals.


Dr. I.B.Singh

Currently, Dr. Singh is the Director of Delhi Institute of Advanced Studies, Delhi, India. He has rich experience of 32 years in Industry and 8 years in Academia. He received his Ph.D degree in Marketing Management from Lucknow University, Lucknow, India. His teaching and research areas are Logistics and Supply Chain Management, Project Management, Business Communication, Business Ethics, Services Marketing and Business Environment.

E-mail:

Dr. Tapomoy Deb

Dr. Deb is currently working as Dy. General Manager (HR), JK Lakshmi Cement Ltd., New Delhi, India. He received his Ph.D degree from Jamia Millia Islamia (A Ccentral University) New Delhi in July 2010.


[email protected]


An

Eof Analysis

in India

mpirical Test

Fundamental Fundamental

ABSTRACT

Fundamental analysis examines the relation between financial statement data and returns. Previous studies show a link between fundamental signals (which include ratios and other financial performance measures) and returns in the US capital markets. This study extends this line of research by examining the relation between fundamental signals and returns in India. Indian accounting standards and capital markets differ significantly from those in the US. Using the methodology developed by Lev and Thiagarajan (1993), we examine the relationship between these financial measures and returns in India. Our results reveal a significant relationship between fundamental signals and returns in India, suggesting that investors in Indian stock markets find fundamental signals relevant in making investment decisions. Comparison of results obtained using Indian data to those studies based in the US provides insight into the differences between the two countries.

Keywords: Fundamental, Signals, Returns

INTRODUCTION

Using data from publically traded firms in India, we examine the relationship between accounting information and firm valuation. A fundamental construct used to determine the quality of accounting disclosures is whether they are useful in making investment decisions. Research both in the US [See Ohlson (2009) for a discussion of the major themes] and abroad [See Dykxhoornand Sinning (2010) for a discussion] provide evidence that accounting information is useful to investors. In addition, studies using data from India similarly provide evidence that earnings are useful to investors. For example, Ghosh (2008) examines the use of debt by Indian firms on corporate profitability. In addition, Sarkar et al. (2008) finds that the composition of the board of directors affects the probability of earnings management in Indian firms. We extend this body of knowledge by examining a broader array of financial statement information to determine if it is relevant to investors.

Specifically, this paper examines the association between fundamental signals and returns. Fundamental signals are key financial statement data believed to be associated with returns. The association between fundamental signals and returns is well established in the US. Ou and Penman (1989) conducted a statistical search for fundamental signals. Later, Lev and Thiagarajan (1993) examined the information

used by security analysts to refine the set of fundamental signals. This resulted in a set of twelve signals that are thought to be value-drivers of firms. Incorporating the fundamental signals in market-based accounting models shows an increase the explanatory power of these models. Abarbanell and Bushee (1997), Abarbanell and Bushee (1998) and other studies use the framework developed by Lev and Thiagarajan (1993).

We obtained data for 291 Indian firms. Given both data limitation of the Global Vantage database and Indian accounting rules we are able to construct only five of the twelve signals from Lev and Thiagarajan (1993). We then regress the fundamental signals on returns. The results show support for the statistical relevance of fundamental signals in India. Specifically, the inventory, accounts receivable, R&D, and effective tax rate signals are significantly associated with returns.

The remainder of the paper is organized as follows. Section 2 provides a discussion of the prior literature concerning fundamental signals. Section 3 describes the research design. Section 4 reports the results from regression analysis. Section 5 compares the results of our study to those of Lev and Thiagarajan (1993). Section 6 summarizes this paper.

Analysis Fundamental Fundamental


inventory, accounts receivable, capital expenditures, gross margin, selling and administration expense, effective tax rate and the labor force signals provide additional explanatory power. Taken together, both analyses showed support for the authors' contention of the importance of the signals.

Aggarwal and Gupta (2009) examined the market performance of high book-to-market stocks in India using fundamental signals. The authors selected the top 20% of firms, according to the book-to-market ratios, in India that had data available during 2003-2007. The authors constructed an F_Score which captured the firm's financial performance utilizing financial statement data concerning profitability, leverage, liquidity, and operating efficiency. Specifically, the signals examined include: ROA, cash flows from operations, change in ROA, accruals, change in amount of long-term debt to total assets, change in current ratio, current equity offering, change in gross margin, and finally change in asset turnover ratio. Each signal is individually scored as either good (1) or bad (0). An F_Score of 0 would represent a firm where all of the nine signals were coded as bad. A majority of the firms had F_Scores between 3 and 7, suggesting mixed signals. The authors randomly selected 20 stocks from each of the low, mid, and high F-Scores for the final sample. The performance of a buy and hold strategy for all three portfolio were compared to market and risk-adjusted returns. The portfolio of the high F_Scores firms exceeds both the market and risk-adjusted returns, suggesting that fundamental analysis contained value relevant data.

We add to this stream of literature by providing a comprehensive examination of the relation between fundamental signals and returns using Indian data. This study differs from the Aggarwal and Gupta (2009) in several important ways. First, the sample used in their analysis includes only high book-to-market firms while our sample includes firms with a broad range of characteristics. Second, we use a set of fundamental signals that is consistent with those commonly used in research of U.S. markets. This approach allows for a comparison between two capital markets.

ETHODOLOGY

The sample for this study was drawn from the Global Vantage database. Data was obtained for 291 firms incorporated in India, yielding 594 observations. Due to certain data

limitations and accounting rules, not all twelve signals used by Lev and Thiagarajan (1993) could be constructed. For example, the LIFO Earnings signal was dropped from the analysis since Indian GAAP does not permit other inventory valuation methods. Data was available for five of the twelve signals. The signals available for this study are: inventory, accounts receivable, R&D, auditor qualification, and effective tax rate. Table 1 provides a short description of each of the fundamental signal used in this study.

ITERATURE REVIEW

Many studies have examined the association of accounting information and returns since the pioneering work of Ball and Brown (1968) and Ball and Watts (1972). Studies like Easton

et al. (1992) and Lipe and Freeman (1986) specifically examined the information contained in earnings. Later studies like Ou (1990), Mahehwari et al. (2003) and Riley et al. (2003) examined the information content of non-earnings financial data. Interest in fundamental signals was advanced by Ou and Penman (1989) and Holthausen and Larcker (1992). Both of these studies relied on a statistical search to identify 'signals' associated with firm value. Ou and Penman (1989) examined the ability of 68 financial signals to predict the sign on the change of earnings. The authors screened the signals one-by-one, dropping variables with coefficients that do not have a significant relationship with future earnings. As a result of this process, 34 variables were identified that potentially have a significant relationship with earnings changes. Next, the authors load these variables using a step-wise regression technique and find that 18 variables bear a significant relation with earnings changes. Many of these variables are also found be significantly related to future stock returns.

Holthausen and Larcker (1992) incorporated the 68 signals from the Ou and Penman (1989) study into their analysis of the variables ability to predict the sign of the following year excess returns. This method provides an additional test of the information content of the signals. The authors created a trading strategy based on the association of the signals and the direction of year ahead excess returns. The results suggest that it is possible to earn abnormal returns based on this trading strategy. Their study provides additional evidence that the information contained in the signals is value relevant.

Lev and Thiagarajan (1993) furthered our understanding of fundamental signals by evaluating the information used by analysts instead of relying on an extensive list of signals as the previous studies had done. This examination identified the following fundamental signals concerning inventories, accounts receivable, capital expenditures, research and development (R&D), gross margin, selling and administrative expenses, provision for doubtful receivables, effective tax rate, order backlog, labor force, LIFO earnings and audit qualification. The authors then regressed the twelve signals and the change in pretax earnings adjusted for the effective tax rate on the 12 month excess stock returns. The first set of analyses examined the relation between returns and the fundamental signals for firms in which all signals were available. This was a significantly smaller sample due to the lack of reporting of the order backlog signal by the majority of the firms. The results indicated that the inventory, accounts receivable, capital expenditures, gross margin, selling and administration expenses, and order backlog signals are associated with the dependent variable of excess stock returns. The second set of analyses involved regressing returns on only nine of the signals. The R&D, provision for doubtful receivables and the order backlog signals were dropped from the analyses. This action results in a much larger sample as three signals were not available for many of the firms. The results from the reduced model show that the

LL

MM

AN EMPIRICAL TEST OF FUNDAMENTAL ANALYSIS IN INDIA

Inventory An disproportionate increases in inventory in relation to an increase in sales suggest that the firm may have difficulty in generating sales.

Accounts Receivable A large increase in accounts receivable without the offsetting increase in sales can suggest to analysts that the firm may be experiencing trouble in selling their products. Analysts view the disproportionate increase in accounts receivable signaling the firm having to resort to offering credit extensions to generate sales.

Research and A decrease in the relative level ofDevelopment (R&D) R&D is interpreted as negative

news.

Audit Qualification When an auditor issues an adverse, qualified or disclaimed audit opinion negative news is perceived by analysts.

Effective Tax Rate Given the transitory nature of the f irms' effective tax rate as extraordinary decrease in the effective tax rate is considered as a negative s ignal concer ning earnings persistence.

Table 1Fundamental Signals

In order to empirically test the incremental value of the five fundamental signals over earnings, a base model must be established. The base model involves regressing the annual change in EPS on returns.

The conventional returns-earnings regression:

R = α + β∆EPS + ε ; (1)it it it

Where:

R = 12 month return for the current fiscal year.it

∆EPS = The annual change in EPS (primary, excluding it

extraordinary items), deflated by beginning-of-year share price.

e = Error term from regression analysisit

i = 1, 2, 3,…, n, number of firms

The next model incorporates the five fundamental signals:

R = α+ β ∆PTEPS + β INV + β AR + β RD +β AOit 0 it 1 it 2 it 3 it 4 it

+β EffTax +e (2)5 it it

Where:

R = 12 month return for the current fiscal year.it

∆PTEPS = The annual change in Pretax EPS (primary, it

excluding extraordinary items), deflated by beginning-of-year share price.

INV = Inventory measured as (∆Inventory) – (∆Sales)it

The Inventory variable used is 'Finished Goods' when available, and 'Total Inventory' otherwise.

AR = Accounts Receivable measured as (∆AR) – it

(∆Sales)

R&D = Change in firm-specific R&Dit

AO = Auditor Qualification, 1 for Qualified, 0 for it

Unqualified

EffTax = PTE (T – T ), PTE = pretax earnings at time it it ti-1 it t

t, deflated by beginning price T = Effective tax rateit

e = Error term from regression analysisit

i = 1, 2, 3,…, n, number of firms

Comparing the results of the two models allows for the examination of the information content of the individual signals. Significance of a particular coefficient indicates an association of that signal and annual returns. Also included in the model are fixed year effects to control for the effect of time period specific conditions. To control for bias of extreme observations the data was winsorized at 5%. The process

th threaligns the data below the 5 percentile and above the 95 thpercentile to the 5th and 95 percentiles, respectively.

ESULTS

Table 2 presents the pearsoncorrelation matrix. As expected, returns are positively correlated with both current change in earnings and current pretax change in

earnings. Returns are also positively correlated with inventory, R&D, auditor qualification, and effective tax rate fundamental signals. The coefficient for the accounts receivable signal is negatively correlated with returns.None of the correlations between independent variables are high enough to suggest a problem with multicollinearity. Further, we compute variance inflation factors in regression analysis to test formulticollinearity. The results of this analysis provide no evidence of a multicollinearity problem.

Table 2Correlations

RET CEPS CEPS PT INV AR RD AO Efftax

RET • 0.328 0.139 0.022 -0.0716 0.098 0.006 0.008CEPS • 0.328 -0.029 -0.099 0.065 -0.006 -0.002CEPS_PT • -0.025 -0.068 0.052 0.014 -0.257INV • 0.044 -0.043 0.09 0.001AR • -0.022 0.025 0.04RD • 0.062 0.011AO • 0.016EffTax •

Column 2 of Table 3 provides the results from regressing the 2

current change of EPS on returns. The adjusted R is 0.2765, indicating considerable explanatory power for the earnings-returns model. The coefficient on change of EPS is significant at p<0.01, indicating a positive relationship between the



RR

change in current EPS and contemporaneous returns in India. This result suggests that accounting information is incorporated in stock prices and is relevant to investors in India.

Column 3 of Table 3 shows the results of the regression of returns on change in earnings and fundamental signals. The f-statistic on the regression is 13.92 (significant at p<0.01) which suggests the model has considerable ability to explain returns. The coefficient on change in EPS is significant at p<0.01, suggesting that there is a significant relation between earnings and returns. Coefficients on four of the five fundamental signals (inventory, accounts receivable, R&D, and effective tax rate) are significant suggesting that these signals have a significant association with returns.

The coefficient for the inventory variable is negative. The negative coefficient is expected since this variable is constructed to capture a disproportionate change in inventory with respect to sales. The negative coefficient for the accounts receivables suggests that adisproportionate increase in accounts receivables with respect to sales is viewed negatively by market participants. The coefficient for the R&D variable is positive and significant. This variable is constructed as the firm-specific change in R&D. Given its significance, there seems to be a positive association between returns and the amount of R&D.The coefficient for the effective tax rate signal is significant and positive. This result suggests a positive association between a change in a firm's effective tax rate and contemporaneous returns. The positive coefficient for the effective tax rate signal was not expected since Lev and Thiagarajan theorize that a reduction in a firm's effective tax rate would be a negative signal to the market. However, this result from our study suggests a reduction in the firm's effective tax rate is positively associated with contemporaneous returns. The significance for these variables suggests that they possess additional explanatory power of returns over that of earnings. According to the results, the auditor opinion signal does not add significantly to the explanatory power of the model. Taken together there is evidence the fundamental signals provide additional information that is value relevant in the Indian capital market.

As a robustness check, we re-estimate the model using stepwise regression (not reported in tables). As expected, the change in EPS variable and the four significant fundamental signals load in this analysis. Thus, the results from this alternative estimation procedure confirm our results reported in the tables.

Table 3Contemporaneous Returns on EPS

and Fundamental Signals

Intercept 0.630 0.643(7.53)*** (7.19)***

Current Change EPS 1.783(7.82)***

Current Pretax EPS 0.002(3.48)***

Variable Coefficients US Sample India Sample

INV Significant Significant

AR Significant Significant

RD Significant

AOEffTax Significant

INV -0.0208(-1.65)*

AR -0.123-(1.83)*

RD 0.07(2.12)**

AO -0.009-0.16

EffTax 0.001(2.47)**

R-square 0.2765 0.2334f-value 26.22 13.92Fixed Year Effects Included Yes Yes

*** Significant at the 1% level, ** significant at the 5% level, *significant at the 10% level.

Variable Coefficients

Comparison of Results of the Lev and Thiagarajan US Sample and the Indian Sample

Comparison of the results of this study and the results of Lev and Thiagarajan (1993) study allows for not only an examination of the role of individual signals but also for analysis of the capital markets. Table 4 presents the significant signals from both the Lev and Thiagarajan (1993) study and this study. This comparison is limited only to the five fundamental signals present in both studies. The coefficient for the inventory variable in the US sample [Lev and Thiagarajan (1993)] is significant and negative. This is consistent with our results, suggesting that market participants in both countries interpret the information contained in the signal in a similar fashion and both capital market participants view a disproportionate increase of inventory with respect to sales as negative news. The coefficient for the accounts receivable signal is significant and negative in both studies. This signal is designed to capture the market's reaction to a disproportionate increase in receivables with respect to sales, suggesting that in both capital markets returns are associated with a disproportionate increase in accounts receivable. The R&D variable in the Lev and Thiagarajan (1993) study is not significant, indicating no discernable relationship between returns and this particular signal. In contrast, the R&D signal is significant in our study. The coefficient for the R&D variable is positive suggesting that investors view an increase in R&D expenditures as a positive signal.

Table 4Comparison of Results



In both the Lev and Thiagarajan (1993) found in their study that the audit qualification signal is not significant. In both capital markets, participants do not incorporate a qualified, disclaimed, or even an adverse opinion from the audit firm as negative news that is reflected in their expectation for the firm. The coefficient for the effective tax rate signal is significant in our study. Thus, it appears that market participants in India view the information in the effective tax rate signal as value relevant. The coefficient for the effective tax rate signal in the Lev andThiagarajan (1993) study is not significant.

ONCLUSION

Our study of fundamental signals in India is derived from the Lev and Thiagarajan (1993) study. The purpose of this study is to examine fundamental signals that researchers have

posited to capture value relevant information of a firm in the US capital market and test whether these signals have similar properties in the Indian capital market. This stream of research of fundamental signals started with Ou and Penman (1989) who used 68 common financial ratios as signals and examined their merits within the context of a trading strategy. After eliminating insignificant variables, the authors were able to identify some of the variables as value relevant. Holthausen and Larcker (1992) provide an extension to Ou and Penman (1989) by examining the predictive ability of 68 financial ratios.

Lev and Thiagarajan (1993) chose a different approach towards analysis of fundamental signals. Their approach was to identify a set of signals from the financial press. This process gave the authors a set of 12 signals that have been

CC

purported to be used by analysts. This approach is markedly different than the previous studies, in which, the authors included 60 or more possible signals. The results of analysis based on the full sample from the Lev andThiagarajan (1993) study indicated that the inventory, accounts receivable, capital expenditures, gross margin, selling and administration expense, and order backlog signals are value relevant.

Our study of the Indian capital market follows the second approach in that we use the refined set of signals created by Lev andThiagarajan (1993). However, given the data limitation of the Global Vantage database we were only able to create five of the signals. These five signals include inventory, accounts receivable, R&D, audit opinion, and effective tax rate. The results of our analysis reveal that inventory, accounts receivable, R&D, and effective tax rate signals are value relevant. These results suggest that investors incorporate the information contained in these signals in their investment decisions. In addition to an examination of the signals in the Indian capital market, we can compare the US and India capital markets given the results of both Lev and Thiagarajan (1993) study and our study. The results suggest that market participants in both capital markets incorporate the information in the inventory and accounts receivable signals in a similar fashion. Results for the audit opinion signal are similar in both studies. The coefficients for this signal are insignificant and appear to be ignored by investors in both countries. Differences in the results of the two studies appear in the analysis of the R&D and effective tax rate signals. The information contained in the R&D and effective tax rate signals are associated with the behavior of investors India but not with those in the US. These results highlight potential differences in the two capital markets and serves as a viable avenue of future research.



REFERENCES

1 Abarbanell, JS, and BJ Bushee (1997). “Fundamental Analysis, Future Earnings, and Stock Prices”, Journal of Accounting Research, 35(1), PP. 1-24.

2 Abarbanell, JS, and BJ Bushee (1998). “Abnormal Returns to a Fundamental Analysis Strategy”, The Accounting Review, 73(1), PP. 19-45.

3 Aggarwal, N, and M. Gupta (2009). “Do High Book-to-Market Stocks Offer Returns to Fundamental Analysis in India?”, Decision 36(2), PP. 155-175.

4 Ball, R, and P Brown (1968). “An Empirical Evaluation of Accounting Income Numbers”, Journal of Accounting Research, 6(2), PP. 159-178.

5 Ball, R, and R Watts (1972).“Some Time Series Properties of Accounting Income”, Journal of Finance, 27(3), PP. 663-681.

6 Dykxhoorn, HJ, and KE Sinning (2010). “A Review and Analysis of International Accounting Research in JIAAT: 2002-2010”, 19(2), PP.137-153.

7 Easton, P, T Harris, and J Ohlson (1992).“Aggregate accounting earnings can explain most of security returns”, Journal of Accounting & Economics, 15(2/3), PP. 119-142.

8 Ghosh, S (2008). “Leverage, Foreign Borrowing and Corporate Performance: Firm-Level Evidence for India”, Applied Economics Letters, 15(8), PP. 607-616.

9 Holthausen, RW, and DF Larcker (1992). “The Prediction of Stock Returns Using Financial Statement Information”, Journal of Accounting and Economics, 15, PP. 373-411.

10 Lev, B, and SR Thiagarajan (1993). “Fundamental Information Analysis”, Journal of Accounting Research, 31(2), PP. 190-215.

11 Lipe, RC, and RN Freeman. (1986). “The information contained in the components of earnings/discussion”, Journal of Accounting Research, 24, PP. 37-68.

12 Mahehwari, S, A Krishnamoorthy, W Berry and J Stone (2003). “Lack of Timeliness in Reported Earnings and Fundamental Financial Statement Analysis”, Delhi Business Review,4(2), July-December, 2003.

13 Ohlson, JA (2009). “Accounting Data and Value: The Basic Results”, Contemporary Accounting Research, 26(1), PP. 231-259.

14 Ou, JA (1990). “The Information Content of Nonearnings Accounting Numbers as Earnings Predictors”,Journal of Accounting Research, 28(1), 144-163.

15 Ou, JA, and SH Penman (1989).“Financial Statement Analysis and the Prediction of Stock Returns”, Journal of Accounting and Economics, 11. PP. 295-329.

16 Riley, RA, TA Pearson, and GTrompeter (2003). “The value relevance of non-financial performance variables and accounting information: the case of the airline industry”, Journal of Accounting & Public Policy, 22(3), 231-254.

17 Sarkar, J, S Sarkar, and K Sen (2008).“Board of Directors and Opportunistic Earnings Management: Evidence from India”, Journal of Accounting, Auditing & Finance, 23(4) PP. 517-551.


A Case Study of

Acquisition of

Communications

by

Cellular Limited

ABSTRACT

Mergers and acquisitions (M&A) are increasingly being adopted by organizations today to maintain a competitive advantage in the market. The assessment of shareholders' wealth effects is one of the most researched areas in the field of finance. This paper is aimed at studying the impact of mergers on the operating performance of the merged entity by examining pre-merger and post-merger ratios. It also studies the behavior of share prices and returns 20 days before and after the announcement of the acquisition deal of Idea Cellular and Spice Communications. The study highlights that shareholders do not get value addition to their wealth around the announcement date.

Keywords: Cumulative Abnormal Returns, Merger and Acquisition, Shareholder Wealth Effects.

INTRODUCTION

Mergers and acquisitions and corporate restructuring are a big part of the corporate finance world. Every day, investment bankers arrange M&A transactions, which bring separate companies together to form larger ones.

A merger is when two companies, more or less on equal footing, decide to join forces. Acquisitions are different in the sense that one company is, in fact, taking over another company. Of course, some companies want to be taken over and some do not.

Broadly, there are two ways to grow a business - through organic growth and through inorganic growth. While taking the organic growth path, the company incrementally grows its people, customers, infrastructure resources and thus revenues and profits, an inorganic growth would provide instantaneous growth enabling the company to skip a few steps on the growth ladder. Mergers and acquisition is an inorganic growth strategy.

There are several reasons for M&A. M&A has been widely used in developed economies as a growth strategy and is now increasingly getting accepted by Indian businesses as a critical tool of business strategy. It is increasingly becoming the order of the day in businesses especially in rapidly evolving businesses like information technology, telecommunications, business process outsourcing as well as in traditional businesses. Indian businesses are also rapidly using M&A to grow internationally.

There are several advantages attached with M&As:

Economies of Scale

The largest single driving force behind mergers and acquisitions is probably economies of scale. Economies of scale mean that if you have a large company, you can leverage your suppliers. This is a very powerful capability, and exercising it can be a strategic move for a company's operations.

Saturated Market Consolidation

Another driving force for mergers and acquisitions is the consolidation of saturated markets. If you have a market that is saturated – one in which there are many players in the space with a lot of competition – you can take over one of your competitors and then automatically increase your market share.

Competitive Position Improvement

The third driving force has to do with simply improving your competitive position because you end up with a larger asset base and increased notoriety.

Synergy

Synergy is what organizations are attempting to achieve when they engage in mergers and acquisitions. It is the “Cooperative interaction among groups, especially among the acquired subsidiaries or merged parts of a corporation that creates an enhanced combined effect”.


cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc. The human resource system issues that become important in M&A activity are human resource planning, compensation selection and turnover, performance appraisal system, employee development and employee relations.

OST MERGER ISSUES

Creating shareholder value through corporate acquisitions means negotiating a deal that includes a favourable price and favourable terms, but it also requires a successful

integration program. Poor integration is repeatedly cited as one of the primary reasons that corporate acquisitions fail to meet the purchaser's expectations.

Integration Difficulties

Integration problems or difficulties that companies often encounter can take many forms. Major amongst them are linking different financial and control systems, building effective working relationships (especially when management styles differ), problems related to differing status of acquired and acquiring companies' executives and melding disparate corporate cultures.

Inadequate Valuation of Target

Another potential problem is that acquiring companies may pay too much for acquired businesses. Acquiring companies may not thoroughly analyze the target company, failing to develop adequate knowledge of its true market value.

Large or Extraordinary Debt

Many acquirers, in addition to overpaying for targets, may be forced, due to market conditions, to finance acquisitions with relatively high-cost debt. The use of debt has both positive and negative effects. On the one hand, leverage can be a positive force by allowing the company to take advantage of expansion opportunities; however, excessive leverage can lead to negative outcomes such as postponing or eliminating the investments that are necessary to maintain strategic competitiveness over the long term.

Inability to Achieve Synergy

Acquiring companies also face the challenge of correctly identifying and valuing any synergies that are expected to be realized from the acquisition. This is a significant problem because, to justify the premium price paid for target companies, managers may overestimate both the benefits and value of synergy. And, to achieve a sustained competitive advantage through an acquisition, acquirers must realize private synergies and core competencies that cannot easily be imitated by competitors.

ERGER TYPES

When companies decide to engage in a merger their reasons typically fall into one of six categories. The first type of merger is a Horizontal Merger. This is when two

companies who are currently in direct competition join together and share their product lines, their markets, and their customer base.

A Vertical Merger is when a company, and perhaps one of their suppliers, join together to be able to offer a contiguous, non-interrupted supply of merchandise to their companies. An example might be an ice cream cone manufacturer merging with an ice cream maker so that both products can be acquired from a single entity, thereby presumably making it easier for the customer.

A Market Extension Merger is with two companies that sell the same product in different markets. This is an interesting type of merger because companies can be regional. Companies can have different segments of the marketplace in which they have gained a reputation. By acquiring another company that has a foothold in another market, you can automatically increase the markets that you address.

A Product Extension Merger is when two companies selling different products in the same market merge.

A Conglomeration Merger is where two companies who don't have a lot to do with one another decide to merge. The reason for this would be economies of scale, and getting a larger identity and more assets to be able to leverage for loans and other financial purposes.

And finally, a Strategic Merger is the newest type of merger that may involve some or all of the features of the other merger types mentioned above.

In today's globalized world, businesses need to invent new ways of competing. M&A have thus become universal tools to attain greater market share, acquire additional brands, create new synergies and capitalize on economies of scale.

This study examines the acquisition of Spice Communications Limited by Idea Cellular Limited. It investigates the effect of merger announcement on the wealth of the shareholders of Idea Cellular and Spice Communications. It also examines the post merger corporate performance of the merged entity.

RE MERGER ISSUES

While deciding on entering a merger or an acquisition, the bidder firm faces the following financial issues:

• It needs to evaluate the portfolio of the target company

• It has to evaluate the fixed assets of the target firm.

• It then needs to calculate the value of the deal.

The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life

MM

PP

PP

A CASE STUDY OF ACQUISITION OF SPICE COMMUNICATIONS BY IDEA CELLULAR LIMITED

OTIVATION BEHIND THE STUDY

The Indian telecom industry is the most dynamic in the world with an evolving regulatory environment. It is the second

fastest growing telecom market in the world after China. Indian telecom operators are driven towards specialization and consolidation to achieve economies of scale and improve margins. The industry is changing at a rapid pace with constantly changing policies, new players, alliances and partnerships being announced on daily basis. Mergers and acquisitions (M&A) are increasingly being adopted by organizations today to maintain a competitive advantage in the market. So it becomes very important to study the gains and costs relating to a merger strategy in the real world.

In the Indian telecom industry there have been quite a few merger and acquisition cases. But in our belief, no research has been taken up yet. This was the main motivation behind the study undertaken on acquisition and we studied various acquisition deals before settling on Idea and Spice which was one of the major deals happening in India. It included two domestic players and one Telecom Company of Malaysia to make it a perfect piece to study.

This study examines the acquisition of Spice Communications Limited by Idea Cellular Limited. It investigates the effect of merger announcement on the wealth of the shareholders of Idea Cellular and Spice Communications. It also examines the post merger corporate performance of the merged entity.

COPE

The scope of this paper is to examine the value addition to the shareholders' wealth by the means of an event study of the abnormal stock returns of the merging entities.

The paper also analyses the corporate performance of the merged entity by using the following set of ratios: Current Ratio, Return on Assets, Return on Equity, Return on Capital Employed, Profit Margin and Earning Per Share.

IMS AND OBJECTIVES

The objectives of the present study are:

• To examine the effect of mergers on the wealth of the shareholders.

• To analyze the immediate impact of mergers on the share prices of the merging companies.

• To examine the post merger corporate performance of the merged entity.

YPOTHESES

To attain the above objectives the following hypotheses will be tested:

H1 (null hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the bidding firm.

H2 (null hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the target firm.

H3 There is zero or negative combined excess return for the merging entities.

HEORY AND METHODOLGY

Operating Performance Study

This kind of research, along with their explanations, could partially not be correct, as

many other factors influence stock prices and their conclusions do not provide clear and conclusive results argumentation. In this context, the use of post-merger accounting data and, in particular, financial ratios from financial statements that have been examined for their credibility is a better and safer path to test directly for changes in operating performance that result from mergers than stock price studies.

Although, there is not a commonly accepted concrete set of financial ratios as a successful operating performance measure, profitability ratios are widely used for the purpose. Accordingly, our study also uses primarily profitability ratios for measuring operating performance of Idea Cellular Limited after merger. We have used the following six ratios in order to measure the profitability:

1. Return on Assets (ROA)

ROA measure company's earnings in relation to all of the resources it has employed. It tells us what earnings were generated from the invested capital (assets). Net income is taken as Profit after Tax (source: Capitaline Database)

ROA= Net income/Total Assets

2. Return on Capital Employed (ROCE)

ROCE is a significant measure of return that a company is realizing from its capital calculated by the profit before interest and tax divided by the capital employed. Profit before Interest and Tax (PBIT) and Capital Employed (Assets-Liabilities) are taken from Capitaline Database. It is calculated as

ROCE= PBIT/Capital Employed

3. Earnings Per Share (EPS)

EPS is per share earnings of a company for a given period. It is calculated as Net Income divided by the number of equity shares. EPS values are directly taken from audited results of the company

EPS= Net Income/The number of equity shares

MM

SS

AA

HH

TT



EE

4. Profit Margins

It gauges a company's operating success over a given period of time. Net income again is taken as Profit after tax.

Profit Margins= Net Income/Sales

5. Current Ratio

It measures the ability of a company to pay its debts in the short-term and to meet unexpected cash needs.

Current Ratio= Current assets/Current liabilities

6. Return on Equity (ROE)

The amount of net income (Profit after Tax) returned as a percentage of shareholders equity (Shareholders capital, Outstanding Employee Stock Options, Reserves and Surplus).

Return on Equity= Net income/Shareholders' Wealth

FFICIENT MARKET HYPOTHESIS (EMH)

EMH forms the base of using event study method which is employed in this study. Hence, it is very important to understand the basic concepts of EMH.

EMH asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.

There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". Weak EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. Semi-strong EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. Strong EMH additionally claims that prices instantly reflect even hidden or "insider" information. There is evidence for and against the weak and semi-strong EMH, while there is powerful evidence against strong EMH. Studies of the semi-strong form of the EMH can be regarded as tests of the speed of adjustment of prices to new information. The leading research tool in this area is the event study method.

VENT STUDY RESEARCH METHOD

The core assumption of the event-study methodology is that i f infor mation communicated to the market contains any useful and surprising content an abnormal

return will occur. In a capital market with semi-strong efficiency one can assesses the impact of the event in question on the market value of the company by calculating the abnormal return - the difference between the actual post-event return and the return expected in the absence of the event. An event study can be roughly categorized into the following five steps:

EE

1. Identifying of the events of interest and defining the event window size.

2. Selection of the sample set of firms to include in the analysis.

3. Prediction of a “normal” return during the event window in the absence of the event.

4. Calculation of the abnormal return within the event window, where the abnormal return is defined as the difference between the actual and predicted returns.

5. Testing whether the abnormal return is statistically different from zero.

Estimation Period, Event Date and Event Window

The event of this study is the M&A announcement (t=0) of Idea Cellular with Spice Communications. It is the date on which the information about a merger bid first appeared in the financial dailies. In this case, Idea cellular first announced its plan to acquire Spice Communications on 25th June, 2008.

thHence 25 June, 2008 is taken as t=0 in this study.

The significance of an event can be identified by examining its impact on the firm's stock price. To accomplish this, a period of days is defined over which the impact of the event will be measured. This period is known as the event window. The event window covers 41 days (-20 to +20 days).

The estimation window is the control period preceding the event period. In this study, the estimation window for the event ends 20 days before the event and extends back to 250 days (210 days for Spice) prior to it. Estimation periods generally end before the event of interest so that the returns during the event window will not influence the model parameters.

Sample Set

This paper is a case study based research and therefore the sample includes the acquisition of Spice Communications Limited by Idea cellular Limited.

Abnormal/Excess Shareholder Return (AR)

It measures the stock market's initial reaction to a merger bid and division of any gains from any new information which becomes available to the market. Daily share price changes were tracked to compute daily excess returns (AR ) for the it

security i as on a particular day (t) by employing market model denoted by equation (1):

XR = R – E (R )………………………..........……………….(1)it it it

T0 0T1 T2

Estimation Period Event Window



LL

Where,

t = day measured relative to an event,

XR = excess return on security i for day t,it

R = return on security i during t, it

E (R ) = expected rate of return on security i that it would it

ordinarily earn for a given level of market performance for day t. This is measured using the market model denoted by the equation (2):

E(R ) = α + β R ………………………...........………………(2)it i i mt

The study deduced the market performance by taking the BSE SENSEX Index as the market benchmark. Values of α and β were estimated by regressing R (dependent variable) on Rit mt

(independent variable) for the 250 day period.

Cumulative Abnormal/Excess Returns (CAR)

CAR in the days surrounding the merger (equation 3) were needed to examine whether shareholders of merging firms gained from the merger.

CAR = ΣAR ………………………………(3) for i=-20 to +20it

Excess Returns of the Combined Firm

Excess returns of the combined firm (equation 4) were calculated for assessing the market expectations from the merger of the two companies. It is a weighted sum of bidder and target firms' excess return.

AR = [AR * MV + AR * MV ] / [MV + MV ]……………. (4)(bt,t) (b,t) b (t,t) t b t

Where, MV and MV are market values (i.e. market b t

capitalization) of the bidder and target respectively as at the day before the announcement date (t=-1).

AR is the excess returns of bidder firm as on day t and AR is (b,t) (t,t)

the excess return of the target firm as on day t.

ESTING THE STATISTICAL SIGNIFICANCE

The Paired t-test

A paired t-test is used to compare two population means. Here it is used to

determine whether there is a significant difference between the average values of event-window abnormal returns. This averaged difference is calculated based on the paired differences between the two values of each event-window day.

ATA

The historical share prices of BSE SENSEX Index were taken from Yahoo Finance for the estimation period of 250 days. The stock

returns of Idea Cellular and Spice Communications were extracted from Capitaline database for the estimation period as well as event window. The data used for calculating various ratios was extracted from the Capitaline database and the company websites.

ITERATURE REVIEW

The assessment of shareholders' wealth effects (value creation or destruction) of Mergers and Acquisitions is one of the most researched areas in the field of finance.

Anita Shukla & Mouni Geoffrey Gekara (2010) - Effects of Multinational Mergers and Acquisition on Shareholders' Wealth & Corporate Performance. This research aimed at studying the impact on the operating performance of the acquiring firm by examining the pre merger & post merger financial ratio. It analyzed Tata Steel's merger with Corus Steel, the largest ever foreign merger by an Indian company. It compared the pre & post financial ratios & behavior of share prices. The results failed to support the hypothesis that bidder's gains are captured at the beginning of merger program. It observed that negative excess returns prevail in the market between the announcement & the outcome date. It exhibited negative average returns in almost every interval surrounding the announcement period.

Barbara Dozier (2010) - Mergers & Acquisition as A Means of Creating Shareholders Wealth- A Case of Lloyds TSB & HBOS. The study investigated the profitability for shareholders by examining the daily excess returns that accrue to the shareholders around the date of announcement of the merger deal. Three levels of analysis were carried out: excess return for the shareholders, announcement effect and finally excess return for the combined entity. The study showed huge positive excess returns for the shareholders of both firms around the announcement date. However, the study also stated that these excess returns cannot be solely attributed to the merger announcement. External economic conditions also play a role in this.

M Jayadev and Rudra Sensarma (2009) - Mergers in Indian Banking: An Analysis. This paper analyzed some critical issues of consolidation in Indian banking with particular emphasis on the views of two important stake-holders viz. shareholders and managers. It reviewed the trends in consolidation in global and Indian banking. To ascertain the shareholders' views, the paper conducted an event study analysis of bank stock returns which revealed that in the case of forced mergers, neither the bidder nor the target banks' shareholders have benefited. But in the case of voluntary mergers, the bidder banks' shareholders have gained more than those of the target banks. In spite of absence of any gains to shareholders of bidder banks, a survey of bank managers strongly favored mergers and identified the critical issues in a successful merger as the valuation of loan portfolio, integration of IT platforms, and issues of human resource management.

B. Rajesh Kumar and K.M. Suhas (2010) - An Analytical Study on Value Creation in Indian Bank Mergers. This study, based on Indian banking mergers, examined the impact of mergers on

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both the stock market wealth creation and operating performance. The study also analyzed the performance of the merged banks in relation to a control group based on financial ratios. The results of cumulative abnormal returns analysis signify that merger announcements are value-creating activities for the acquirer banks. At the same time, merger announcements erode shareholder wealth for the target banks. The framework of pre-merger and post-merger comparison of the operating performance of the acquirer banks was based on three models whereby the cash flow was deflated by market value of assets, book value of assets, and income. The result did not provide evidence to support the view that corporate performance improves after mergers.

Guntur Anjana Raju and Dipa Ratnakar Gauncar - Is M&A a Wealth Creation Vehicle for Business Houses in India? Case of the Tata Group of Companies. The study examined the impact of M&A on corporate performance and shareholders wealth of acquiring companies of Tata Group of companies in different industries from 1996 and 2008. The article analyzed with whether Tata as a Business House created wealth through M&A. It was concluded that the majority of the acquiring companies were not able to add value to the shareholders' wealth in Post M&A announcement period. The market reacted to the news of the M&A in a negative manner expecting that the M&A would not improve the performance of the company.

Casper Flught (2009) - Shareholders' wealth effects of M&A, An Empirical Investigation of Short Term Performance in the European market. The paper focused on European M&A profitability from a quantitative perspective by examining the abnormal stock returns to shareholders in the period surrounding the announcement date using the event study methodology in a short term window to see whether the findings of the 80s and 90s merger waves were still applicable to the European data from the 2000s. Analysis found evidence that target shareholders receive positive and significant abnormal return. The paper also examined whether the market expectations about M&A profitability depend on different attributes of the deal. Means of Payment - all cash payments likely to have a large impact on the share price of the target & the bidder. Domestic vs. cross border M&A face cultural, legal and transaction barriers. No difference could be found between focus oriented vs. diversification M&A for target as well as bidding firms. Finally, it was demonstrated that the premium paid statistically depends on the location of the target.

Ruud A.I Van Frederickslust examined in his paper (Shareholder Wealth effects of M&A) the wealth creation and redistribution theories of M&A using a Dutch sample in the period 1954 till 1997. The research found that 60% of the merger partners had positive total return. Also research pointed out that the method of payment had a large influence on performance. Payment in shares had a significant negative relation while payment in cash a positive influence on the total return. It also showed that takeover targets had a better positive share price performance than the takeover bidders. The study analyzed the various merger motives and found out that synergy was the most convincing.

Olaf Rieck (2007) in his paper investigated M&A in the telecom industry and analyzed the conditions under which such M&A can be considered successful. The study applied the event study method to examine the shareholders' value effects of M&A. The findings showed that there was an overall positive shareholders wealth effect associated to M&A announcement. This was especially true for communication operators engaging in cross border M&A. They experience positive abnormal returns and outperform firms that expand domestically. In addition, it found that mergers (that are both non conglomerate and cross border) add value to the acquiring telecommunication operator, whereas no significant stock reactions are found when acquirers engage in conglomerate domestic mergers.

DEA CELLULAR'S ACQUISITION OF SPICE COMMUNICATIONS

About the Companies

IDEA Cellular: A leading GSM mobile services operator, Idea Cellular has licenses to operate in all 22 service areas of India with commercial operations in 11 service areas. With a customer base of over 26 million, Idea Cellular runs operations in Delhi, Himachal Pradesh, Rajasthan, Haryana, Uttar Pradesh (East), Uttar Pradesh (West) & Uttaranchal, Madhya Pradesh & Chattisgarh, Gujarat, Maharashtra & Goa, Andhra Pradesh, and Kerala, holds spectrum for Mumbai, Bihar, Orissa, Tamilnadu (including Chennai), and Karnataka, and licenses for the remaining 6 service areas. Idea is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India. Idea Cellular is a part of the US $ 28 billion Aditya Birla Group, Indias first truly Multinational Corporation. The group has a market cap in excess of US $ 31.5 billion, operates in 20 countries, and is anchored by 100,000 employees belonging to 25 nationalities.

Spice Communications Limited: Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private limited company. Spice subsequently became a deemed public company under Section 43(1A) of the Companies Act, 1956 of India with effect from 1 April 1999 and its name was changed to Modicom Network Limited. Spice assumed its present name via a fresh Certificate of Incorporation dated 3 December 1999. As of 30 April 2008, Spice had 4.4 million subscribers representing a 1.7% market share in India, and was the second and fifth largest mobile telecommunication service provider within the Punjab and Karnataka circles, respectively. Spice was listed on the Bombay Stock Exchange Limited on 19th July 2007 and on the National Stock Exchange of India Limited on 16 June 2008.

II

1Extracted from the website of Idea Cellular

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Acquisition Background

Idea Cellular acquired the 40.8% stake of the promoter group (Modi group) in Spice Communications for a price of Rs77.30 per share in the FY08. Apart from this, it also made a payment of Rs544cr to the promoter group of Spice as non-compete fee. As per Indian securities laws, Idea made an open offer along with Telecom Malaysia International (TMI) and its affiliates and associates for a further 20% stake in Spice Communications (Telekom Malaysia, which initially had a 39.3% stake in Spice Communications, got a proportional stake in the combined entity). The Boards of Idea and Spice approved the merger of Spice into Idea and the swap ratio has been determined at 49 shares of Idea for every 100 shares of Spice. Idea made a preferential allotment to TMI of 46.473cr equity shares at a price of Rs156.96 per share, which represents 14.99% of Idea's equity capital post allotment.

Primary Benefits

• Idea gains entry in the contiguous wireless markets of Punjab and Karnataka, which account for 11% of India's total wireless subscribers.

• Spice, a pioneering operator, delivers a strong running start in Punjab and Karnataka

• 4.4 million subscribers as at 30 April 2008, equivalent to a 15.1% market share in the two service areas

• wireless operator in Punjab with a 22.3% market share.

• Idea to consolidate its position with its all-India subscriber market share increasing from 9.5% to 11.1%. Importantly, Idea would be No.1 in 3 service areas, in the top 3 in 5 more service areas, and with a rapidly improving share in all its other operating service areas.

Step 1: Idea acquires Spricepromoters' 40.8% stake @ Rs77.30 per share

Exit of Modi Groupfrom SpiceCommunications

Step 2: Idea to make 20% openoffer to Spice shareholders @Rs 77.30 per share

Idea gets 60.8%stake in Spicealongwith TMI

Step 3: Idea to make preferential issue of 46.473cr equity shares toTMI @ Rs 156.96 per share

TMI gets 14.99% inIdea's equity capitalpost the issue

Step 4: TMI to get shares in Ideathrough share swap in the ratio of49:100 (49 shares of Idea forevery 100 shares held in Spice)

TMI gets around 18.20% in Idea Cellularpost the share swap

• Ideas operations in the 900 MHz GSM spectrum band will increase from the current 7 service areas to 9 service areas, driving scale economies and operational synergies resulting in lower operating and capital expenditure.

2Current State

Additional Solicitor General Amarjit Singh Chandhiok said in his legal opinion dated February 15 that Idea violated laws by holding more than 10% stake in two mobile companies operating in the same regions. Idea holds overlapping mobile permits in six telecom circles after its acquisition of Spice Communications in October 2008. If Chandhiok's view is accepted, the Aditya Birla Group Company will also lose the Rs 843-crore refund that it has been demanding from the government for surrendering the overlapping mobile permits. In a letter to the telecom department, Chandhiok said Idea Cellular and Spice Communications also violated the April 2008 merger guidelines, which prohibited new entrants from selling stakes within three years of obtaining licenses. Spice had obtained four of its six mobile permits in 2008 ahead of the deal with Idea. Idea-Spice must also pay penalties for failing to roll out services in the six circles where it has two mobile permits, the letter adds, citing laws that mandate mobile companies to launch commercial services within 12 months of obtaining licenses. The telecom department had sought the law ministry's opinion on the Idea-Spice deal last year and had asked if the overlapping mobile permits could be cancelled. The additional solicitor general said Idea Cellular be imposed a fine of Rs 50 crore each in the six circles where it holds two licenses. He has also recommended a total of six show-cause notices to Idea and Spice each as both companies were in violation of the law.

NALYSIS AND OBSEVATIONS

Operating Performance Study

Particulars 2009-10 2008-09 2007-08 2006-07 2005-06

Market Capitalization 21597.45 15547 27078.32 24515.49 0ROA 0.05 0.04 0.09 0.06 0.03ROCE 0.09 0.09 0.16 0.13 0.12ROE 0.08 0.06 0.21 0.11 0.07EPS 3.07 3.01 3.96 2.19 0.74Profit Margin 0.08 0.09 0.16 0.12 0.07Current Ratio 0.90 1.33 0.57 1.15 0.48

AA

Operating Performance Analysis

Post Merger Pre Merger

From the year 2007-08 to 2008-09 (year in which merger took place), Market Capitalization has decreased from 27,078.32 crores to 15,547 crores which can be due to fall in share prices (Table 1). ROA has gone down from 9% to 4% and ROCE has fallen from 16% to 9%. ROE has decreased from 21% to 6%. Profit Margins have decreased from 11% to 9%. Although there is growth in sales but expenses have also increased more than the sales proportionately. Current ratio has increased from 0.57 to 1.33 which could be due to preferential allotment of shares to TMI.

Table 1Pre and Post Merger Financial

Performance of Idea Cellular Ltd.

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Table 2Share Price Study

Day t Idea Cellular Limited Spice Communications Limited

AbnormalReturn (%)

Cumulative Abnormal Return (%)

Abnormal Return (%) Cumulative Abnormal Return %

-20 -0.14 -0.14 8.17 8.17-19 0.54 0.40 1.42 9.59-18 0.16 0.56 9.54 19.13-17 -0.19 0.37 -0.02 19.11-16 0.76 1.13 -1.75 17.37-15 1.77 2.90 -6.05 11.31-14 -0.78 2.12 0.69 12.00-13 -1.06 1.06 -1.86 10.14-12 -0.77 0.29 5.00 15.15-11 -0.94 -0.65 5.12 20.27-10 -4.06 -4.72 2.31 22.58-9 10.78 6.06 5.21 27.79-8 0.87 6.93 2.19 29.98-7 -1.08 5.85 2.90 32.88-6 0.19 6.04 -4.49 28.39-5 0.04 6.08 2.80 31.18-4 1.58 7.65 2.70 33.89-3 -0.55 7.11 0.06 33.95-2 -0.58 6.53 -1.44 32.51-1 -2.43 4.10 -8.49 24.020 2.39 6.49 32.56 56.581 -2.74 3.75 -1.11 55.482 0.45 4.20 3.06 58.543 -2.57 1.62 2.27 60.804 -3.53 -1.91 3.10 63.905 3.57 1.66 -3.80 60.106 -3.84 -2.18 3.65 63.757 -0.65 -2.83 -1.93 61.828 -0.27 -3.10 0.13 61.959 -2.02 -5.12 1.42 63.37

10 -1.06 -6.18 -3.10 60.2711 -0.98 -7.16 0.82 61.0912 -0.05 -7.22 2.55 63.6313 -1.72 -8.94 0.60 64.2314 -4.22 -13.16 3.88 68.1215 1.51 -11.65 0.75 68.8716 -1.98 -13.62 -3.18 65.6917 1.51 -12.11 -2.91 62.7818 2.93 -9.18 -3.11 59.6819 2.71 -6.47 -0.67 59.0120 0.20 -6.26 -4.14 54.86

The above table displays the Abnormal returns (ARs) and Cumulative Abnormal Returns (CARs) of Idea Cellular and Spice Communications for the event window (-20 to +20), i.e. from 20 days before the announcement date to 20 days after the announcement.

The Table 2 shows that the shareholders earned an excess return of 2.39% on the announcement day which reflects that the shareholders expected benefits from the merger. The return on the announcement date is not highest in the pre announcement period signifying that there might be a possible leakage of the information. A few days before announcement CNBC brought out news that Modi was exiting Spice and Idea would pick up his share. The CAR of idea shows a gradual decrease and becomes -6.26% at the end of the event window. This can be attributed to the global financial recession that

took place during the same period which led to negative investor sentiments and hence a falling market.

The mean CAR in the 41 day window is -0.97% but is +5.01% in 5 day window (-21to +21) signifying the immediate effect of announcement (Table 4).

For Spice Communications, the announcement day return was 32.56% (Table 2) which was the highest in the event window. This signifies the immediate advantage of the announcement for Spice's shareholders. The CAR of Spice increased and was 42.29% (Table 6) at the end of period.

The largest firm gets premium from the bidder for acquiring it. And therefore, shareholders of the target firm earn higher returns than those of the bidding firm.

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Table 3 Mean and Median AR% Based on Market Model Method for Different Time

Window Periods- Idea Cellular Limited

(-)20 TO +20 Days (-)10 TO +10 Days (-)5 TO +5 Days (-)2 TO +2 Days

MEAN -0.15 -0.26 -0.40 -0.58

MEDIAN -0.27 -0.58 -0.55 -0.58

Table 4 Mean and Median CAR% Based on Market Model Method for Different Time Window

Periods- Idea Cellular Limited


MEAN -0.97 2.29 4.30 5.01

MEDIAN 0.37 4.10 4.20 4.20

Table 5 Mean and Median AR% Based on Market Model Method for Different Time Window

Periods- Spice Communications Limited


MEAN 1.34 1.90 2.88 4.92

MEDIAN 0.72 2.19 2.27 -1.11

Table 6Mean and Median CAR% Based on Market Model Method for Different Time Window

Periods- Spice Communications Limited


MEAN 42.29 45.89 46.45 45.43

MEDIAN 54.86 55.48 55.48 55.48

Table 7 Paired t-test for Pre and Post-Merger AR and CAR (Idea)

Mean Number SD

Part 1: Pre-Merger AR 0.205117118 20 2.81085255

Post-Merger AR -0.637724732 20 2.271501506

Part 2: Pre-Merger CAR 2.983827822 20 3.415277505

Post-Merger CAR -5.291095791 20 5.412829849

Paired Samples

On comparing the means of pre and post periods in both ARs and CARs, we observe that both show a decrease. The standard deviation of AR decreases in the post period whereas standard

deviation of CAR increases. This represents a state of uncertainty in the minds of the shareholders of Idea regarding the success of the merger deal (Table 7).

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Testing Hypothesis: Idea cellular

Table 8Paired Samples for Pre and Post Merger AR and CAR(Idea)

Pair 1: Pre Merger AR and 0.84 3.49293 0.78104 -0.7919 2.4775 1.0791 19 0.294Post Merger AR

Pair 2: Pre Merger AR 8.27 8.01924 1.79315 4.5218 12.0280 4.6147 19 0.000 and Post Merger CAR

Paired Samples

Paired Differences

Mean SDStd.

ErrorMean

95% Confidence Interval of the

Differencet value

Deg

ree

of F

reed

om

Pro

bab

ilit

y

Lower Upper

Critical value of t at 5% level of significance and df 19 = 2.093

On comparing the calculated value of t with the critical value at 5% level of significance (Table 8), we find

|t calculated|(1.0791) < t critical for AR (2.093)

This implies that the difference in the means of pre and post period AR is statistically insignificant.

On the other hand, for CAR

|t calculated| (4.6147)> t critical (2.093)

This implies that the difference is significant.

The significance that has been observed in CARs and was not observed in the ARs may be due to the fact that a small sample had been taken and that CARs may not give accurate answers when compared to ARs.

Hence we do not reject our Null Hypothesis. This means that the difference in the pre and post announcement day return cannot be attributed to the merger announcement alone.

H1 (null hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the bidding firm.

Spice Communications

On comparing the means of pre and post periods in AR we find that it decreases whereas the mean CAR increases in the post period (Table 9).

The standard deviation is lowest during the post period in both ARs and CARs at 2.69 and 3.58 respectively. This implies stability in the post merger period.

Table 9Paired t-test for Pre and Post-Merger AR and CAR (Spice)

Part 1: Pre-Merger AR 1.201262623 20 4.4783448

Post-Merger AR -0.086064862 20 2.688770566

Part 2: Pre-Merger CAR 21.97125932 20 8.966635975

Post-Merger CAR 61.89628186 20 3.581185589

Paired Samples Mean Number SD

Table 10 Paired Samples for Pre and Post Merger AR and CAR(Spice)

Pair 1: Pre Merger AR 1.29 4.8400 1.0822 -0.9778 3.55252 1.18948 19 0.248and Post Merger AR

Pair 2: Pre Merger AR -39.93 8.34529 1.86606 -43.830 -36.019 -21.395 19 0.00and Post Merger CAR

Paired Samples

Paired Differences

Mean SDStd.

ErrorMean

95% Confidence Interval of the

Differencet value

Deg

ree

of F

reed

om

Pro

bab

ilit

y

Lower Upper

Critical value of t at 5% level of significance and df 19 = 2.093

24



On comparing the calculated value of t with the critical value at 5% level of significance (Table 10), we find

|t calculated| (1.18948)< t critical for AR (2.093)

This implies that the difference in the means of pre and post period AR is statistically insignificant.

On the other hand, for CAR

|t calculated| (21.395)> t critical (2.093)

This implies that the difference is significant.

The significance that has been observed in CARs and was not

observed in the ARs may be due to the fact that a small sample had been taken and that CARs may not give accurate answers when compared to ARs.

Hence we do not reject our Null Hypothesis. This means that the difference in the pre and post announcement day return

Table 11Combined Returns

Dat t Daily Excess Return Combined Excess Return

Idea Spice Based on Market Value

As on (t = - 1) Cumulative Gain/Loss

1 -2.74 -1.11 -2.54 -2.54

2 0.45 3.06 0.78 -1.76

3 -2.57 2.27 -1.96 -3.73

4 -3.53 3.10 -2.70 -6.43

5 3.57 -3.80 2.64 -3.79

6 -3.84 3.65 -2.90 -6.69

7 -0.65 -1.93 -0.81 -7.49

8 -0.27 0.13 -0.22 -7.71

9 -2.02 1.42 -1.59 -9.30

10 -1.06 -3.10 -1.31 -10.62

11 -0.98 0.82 -0.76 -11.38

12 -0.05 2.55 0.27 -11.10

13 -1.72 0.60 -1.43 -12.53

14 -4.22 3.88 -3.20 -15.74

15 1.51 0.75 1.41 -14.32

16 -1.98 -3.18 -2.13 -16.45

17 1.51 -2.91 0.96 -15.49

18 2.93 -3.11 2.17 -13.31

19 2.71 -0.67 2.28 -11.03

20 0.20 -4.14 -0.34 -11.37

cannot be attributed to the merger announcement alone.

H2 (Null Hypothesis): There is no significant difference in the mean abnormal returns of the pre and post merger announcement period for the target firm.

The table depicts the combined ARs for 20 days after the announcement date. The combined returns gradually fall and reach to -11.37% (Table 11). This signifies that there was no additional wealth creation for the shareholders of the firm. This confirms the common hypothesis that a merger is either a zero sum game or a loss game for the combined firm.

H3 There is zero or negative combined excess return for the merging entities.

ONCLUSIONS

The study analyzed Idea Cellular's acquisition of Spice Communications. It examined the effect of the merger on the wealth of shareholders of both the companies by

CC

25



Another limitation of the study lies in market orientated nature of the analysis. The model we used relies heavily on market values, and there may be a possibility of shareholders overvaluing the shares.

Some researchers are of the view that shorter event windows (5-day or 3-day) are more reliable and longer windows have some serious limitations. One disadvantage of using longer windows is that other, unrelated events may be confounded with the event of interest. If other relevant events occurred during the event window, it is hard to isolate the impact of one particular event.

The study doesn't look at other factors that can affect shareholders' returns such as means of payment (equity, cash), international diversification, merger motives and the nature of markets.

The long term effects of a merger in terms of financial performance can be analyzed only in due course of time. Finally, the study cannot be generalized as it could not be justified on the basis of a single case study.

UGGESTIONS FOR FURTHER RESEARCH

Similar studies can be carried out on a larger set of merger deals. Future research might investigate whether the shareholders' returns vary with the mode of payment. Also the

research can cover a wider set of ratios to measure corporate performance.

comparing pre and post merger financial ratios and the behavior of share prices.

The results failed to support the fact that value is created for the shareholders of the merging entities. Focusing on the period around the announcement date, it is observed that negative excess returns prevail in the market. Also the difference in the returns cannot be attributed to merger announcement alone. There are external factors also in play that affect an organization.

EY CONTRIBUTIONS OF THE STUDY

This study will add to the literature of M&As. Although there have been M&As in the Indian telecom sector, to our belief, no such study has been taken up in this sector yet. This paper will

help the readers gain an insight into the problems and gains associated with an acquisition. The case that we have picked up involves players that are domestic and hence it helps to understand the Indian scenario better.

IMITATIONS OF THE STUDY

There were few limitation in the study carried out in this dissertation. The first and the foremost limitation of this study is that we didn't take in to account the external

economic conditions to analyze the shareholders' wealth. The excess returns may be due to some external factors affecting the stock price of target or bidding firm and in these conditions it could be erroneous to conclude that shareholders wealth is maximized by acquisition or merger.

KK

LLSS

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No. 301, March 2000, available at: http://www.cds.edu/admin/homeFiles/CV1_bpl.pdf3 BhallaPriya (2010), “Mergers and Acquisitions in India with Special Reference to the Financial Sector: Recent Trends and Patterns”, The IUP Journal of

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University, Singapore, available at:http://www.itseurope.org/ITS%20CONF/istanbul2007/downloads/paper/01.08.2007_Rieck%20Canh.pdf16 Selvam M, Vanitha S, Gayathri J, Bennet E and Nageswari P (2010), “The Determinants of Shareholders’ Wealth of Acquiring Firms in India”, Journal of

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5, pp. 194-208.

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ABSTRACTDuring the past decade employee turnover have become a very serious problem for Organisations. Managing retention and keeping the turnover rate below the target and Industry norms is one of the most challenging issues. Even as economic times changed, Turnover will continue to be an important issue for most of the job groups. Yet despite these facts employee turnover continues to be the most appreciated and under –valued issue facing business leaders. In this study employee turnover is studied in specific to a leading Multi- National BPO operating in India-Global Pvt. Ltd. (Name changed). What are the major reasons of employee turnover in this Company and what initiatives it took to combat the employee turnover rate. An extensive exit analysis is done to understand the key factors and employee attitude to conclude the reasons behind employee turnover. This study contributes to the BPO Industry a classic example of retention, purely focusing on creating a learning and development culture to engage the employees and realize their potential.

Keywords: Attrition, Attrition Rate, IJP's (Internal Job Postings), GPL University, Exit Interviews, Performance Development Plan (PDP), Career Path, On-the-Job Training (OJT).


apping Career Aspirations to Combat Attrition:

A Study of Leading Multi National BPO Operating in India

M

28

BACKGROUND

The Indian Economy is no more passive and reluctant. During the past few years the Country had many reasons to smile as it has developed in its various phases. BPO is one of the sectors that have driven the Country into the epicentre of change. The expansion in this sector can be attributed to the leading IT giants, captive players and third party service providers who dominate the Indian ITES/BPO market. India became familiar with the “BPO” only in the early 1990's but today after 17 odd years India is quivering with the 'BPO fever' and call centres contribute the major to the BPO Industry. Employment opportunities are boon in India because of BPO and the standard of living also increased for people.

However one of the biggest challenges that look straight on the face of these big shots, in spite of the so-called world class working environment is Attrition. The first signs appeared in the mid-90s with the advent of the software services industry. By the turn of the century, this problem had reached epidemic proportions as the IT industry matured and ITES-BPO sector kicked into high gear. Attrition, a crippling HR headache that has plagued organizations across India Inc says Business Today (2008). It can be defined as "A reduction in the number of employees through retirement, resignation, terminations or death" and "the rate of shrinkage in size or number” is called Attrition Rate. In the best of worlds, employees would love their jobs, like their co-workers, work hard for their employers, get paid well for their work, have ample chances for advancement, and flexible schedules so they could attend to personal or family needs when necessary, and never leave. But then there's the real world. And in the real world, employees, do leave, either because of better opportunity, they want more money, strained relationship with their supervisors, unfavourable working conditions.

The rate of attrition has risen to 55 per cent in the Indian BPO industry, which is also facing a shortage of skilled and educated workers, said a study by industry body Assocham (2011). The attrition rate has jumped to 55 per cent in the December 2010-April 2011 period from the 40 per cent level of the same period in the previous year, said the study in a report published in The Economic Times. The Assocham study said there was 60 per cent attrition in the pharmaceuticals and financial services domain, while in the automobiles, FMCG, infrastructure, retail and IT sectors, the figure was 50 per cent. Assocham secretary general DS Rawat said the increasing tendency of employees to switch jobs may hit the industry hard and may hinder its growth. This is all the more so as the Indian BPO industry is facing stiff competition from countries such as Mexico, the Philippines, Malaysia, China, Canada, and Ireland. The study further emphasized that the rapid job switching has put a cloud over India's competitiveness and companies must counter this by investing in training and emphasizing on work experience. (BPO Watch Bureau; April 15, 2011)

A further report by Assocham on BPO Watch Bureau (2011) says that India's position as the dominant destination for BPO

activities could be compromised soon enough due to the very high levels of attrition that the industry has seen over the past few months, an apex industry association has claimed in a recent report. The Assocham report believes that the $14.7 billion industry is in dire straits due to the fact that the Indian youth no more perceive the BPO industry as a career option for the future that guarantees stability at work and consistent growth. Attrition levels are as high as 55% in the industry that employs more than a million people, says the report quoting figures for December-March time frame. What's even more worrisome is that a significant part of the attrition came at the middle and senior levels in the absence of a diversified career stream and lack of opportunity for lateral movement within a company. The study says that the BPO-ITeS industry accounted for the highest attrition rates ranging around 65% during the past couple of years, a figure that experts believe does not augur well for the overall industry prospects. Most BPO companies fail to offer its employees a career plan and growth path though some of the larger ones are now investing in employee retention schemes like training, reward and recognition and clear career options within the existing set-up. Companies like Infosys BPO, TCS and Wipro offer continuous skill development courses and training to their staff while pureplay BPOs like Genpact and 24/7 Customer initiate degree and diploma programs via institutional tie-ups. The study also says that services offered by IT/ITes and BPO in the domains of pharma and BFSI have registered an attrition rate of around 60%, while in the domains of retail and IT, an attrition of about 55% has been recorded during the period under review. Earlier, Nasscom has suggested that attrition rate for voice-based BPOs is 55-60% and 15-20% for non-voice based processes. It had predicted that the industry could face a staffing shortage of 2.62 lakh professionals by 2012.

Although attrition has been spiralling out of control for some time, especially in fast-growing industries such as IT, BPO, retail and infrastructure, few companies have been willing to discuss this hot button issue, instead preferring to sweep it under the carpet. What was a problem restricted to just a couple of sunrise sectors has today become a widespread problem. While dozens of surveys were conducted on the rise of attrition in Indian industry, few have been able to get to the heart of this menace and suggest meaningful and long-term solutions. (Business Today 2008).

ITERATURE REVIEW

Attrition in the BPO industry is two fold. One part of the attrition is where the employee leaves the industry entirely. The other section of attrition is where the employee joins

another firm in the industry. Both the sections have separate reasons which need to be identified. The primary reason for people leaving the industry is due to the cause that the industry is viewed as a gap filler occupation. There seems to be a flaw in the way the industry is structured. The industry has been mainly dependent on youth who take out time to work, make money in the process while thinking of career alternatives. Hence for this group BPO is never a long term career but only as a part time job. The easy availability of BPO

LL

MAPPING CAREER ASPIRATIONS TO COMBAT ATTRITION: A STUDY OF LEADING MULTI NATIONAL BPO OPERATING IN INDIA


29


jobs is only a source of easy money till the time there is no other source of funding. Also the unfriendly working conditions, late night work shifts, high tension jobs acts as a deterrent for people to stick to this industry for long time. In addition, the BPO jobs are not being taken with a positive spirit 15 by the society on a large. Research says that nearly 50 per cent of those who quit leave the industry (Prakash and Chowdhury 2004).

Carruthers (2011) wrote in an article on why employees leave that most employees leave their work for reasons other than money - and your organization can correct these reasons. Most leaving employees seek opportunities that allow them to use and develop their skills. Leaving employees want more meaning in their work ... they often indicate that they want to use their qualities and skills in challenging teamwork led by capable leaders. Hourly employees notice whether they are treated with respect, have capable management and interesting work. Clerical employees voice concerns such as "type of work," "use of skills and abilities" and "opportunities to learn". Professional employees cite concerns about "supervisory coaching and counseling," "company direction" and interesting work. Managerial staff cite "career growth" and "leadership" as the major factors that influence their decisions to stay or leave, together with "opportunities for management" "ability of top management" "use of skills and abilities" and "work/family balance."

Demand Media (2011) in an online article mentioned that a lack of personal or career development is one of the primary reasons for employee attrition. Training programs, development opportunities, further education or a promotion will help employees stay at a company because their job prospects increase. However, if the employee does not feel he can progress or receive further job opportunity, then he is more likely to leave. An employee cannot utilize his skills or develop new ones if no personal or career development is available at a particular company.

As mentioned by Ganesh (2011) in an article on attrition in BPOs, Nasscom figures place attrition in non-voice BPOs at 35% and 45% at voice-based call centers. The study states that about 80% of these people change over to better opportunities within the same industry – read competition. The decision to hop jobs is triggered by a number of reasons. They could run the gamut from compensation to recognition to sheer boredom at one place. Says N. Muralidharan, managing director, Jobstreet.com: “It could be due to better opportunities for some while it is lack of growth for many. Poor job satisfaction is another reason as there is no addition to intellectual or analytical capabilities. Insufficient recognition on the job, lack of comfort with continuous night shifts and being a problem handler daily lead to high attrition in the industry.”

A survey of more than 700 HR professionals was conducted by Assess People in 2008 with the objective to reveal the key factors that impact attrition, so that organizations may be able to address the problem at the root level and improve retention. Survey participants represent diverse industries including Information technology ITES Manufacturing, Financial

services, FMCG, Pharma, Telecom, Retail, Diversified and others. The survey results revealed that Employees tend to leave at a higher rate in the first 2 years. A substantial percentage of employees leave within the 2 months. The higher the qualification, the more likely the employee is to leave. Males are more likely to leave than females. Single employees are more likely to leave than those who are married and employees with an Urban Background are more likely to leave than those from rural backgrounds. Employees in the age group 25-30 most likely to leave. Work culture, supervisor's management style (or even ability to supervise) and profile of people in the company are clearly key factors that should be paid attention to. Further the report emphasize that a look at the retention strategies from an overall perspective indicate that HR professionals believe that it is through providing people opportunity to grow and develop that you can retain talent.

Garner (2008) wrote in article that regardless of economic conditions, top engineering talent always has other career options. If engineers don't perceive or know that career opportunities exist, they'll seek them elsewhere. Some organizations assume that employees know how careers develop. This can be a costly assumption. Other organizations believe that communicating how careers develop will be interpreted as a promised promotion; therefore, they avoid these conversations. Again, this can be a costly mistake. Managers are usually surprised to learn that a perceived lack of career opportunity led to attrition, because they had a clear vision of the individual's career path. Unfortunately, the vision, or a recommended approach for career development, was never articulated to the engineer. Because it takes a long time to groom talent and today's new engineers expect to advance quickly, it is important to have a consistent and clear message about career development within the organization. This certainly doesn't mean that promotions are promised. Instead, guidance should be provided on how to manage one's career within the organization. Some organizations use engineering development councils for this purpose. These committees of mid- or high-level managers designs programs that help engineers understand what they need to do to advance within the organization. Other organizations use HR experts to help engineers execute development plans. Begin grooming talent early. It doesn't have to be costly. Leveraging in-house expertise, vendor relationships, and local universities can result in a clear, current, and consistent message about managing an engineering career within the organization.

Jagannathan (2008) in a report on attrition in BPOs says that A number of professionals are looking at more challenging jobs. "In several cases, faced with a choice between more money and a challenging job, employees have opted for the latter as it allows them to learn new technology and increase domain expertise." People analyze the training programmes of prospective companies with those of their current organization, which means that how an organization grooms an employee is weighed to a greater extent. This is because they know that developing next-level skills will keep them ahead in the job market, and finally result in better


30


compensation. They also look for a job with higher levels of responsibility, better learning opportunities.

Srikanth (2006) in a blog wrote that attrition issues in Indian BPOs are not salary oriented anymore, but due to perceived lack of long-term career growth in the sector, according to international risk management and business intelligence firm Hill and Associates. Speaking to FE, Hill and Associates country manager Ashish Sonal said, “The number of people, who leave BPO companies due to life style issues such as salaries and bonuses, have decreased significantly over the past years. Companies have taken enough initiatives to contain such issues, because the industry itself is associated with high salaries and good incentives.” However, BPOs are not prioritizing enough on solving perceptions on work and career growth-related issues in BPOs, he said. “Hiring practices in the sector are wrong and there is a huge expectation and qualification mismatch. The aspirations of employees are not managed well.” “A good number of employees leave the sector because they feel that their long-term career growth prospects are better in some other sector,” he added. Currently, average attrition rate in the Indian BPO industry is over 30% The rapid growth of the sector left no space and time for players to take care of “career issues” of employees. “This industry will take at least three years to settle its issues. But the coming years are crucial because if the growth is not well managed, the whole system will be hurt badly,” he added.

Elsdon (2002) reported that the recent studies show the major reason people consider leaving an organization is lack of career development support. As the balance of power shifts to more equality between the individual and the organization, so the importance of providing career development support elevates. It will be needed to build the bond of affiliation between the individual and the organization. It will be needed for the organization to secure employment continuity. It will be needed for the financial health of the organization. Recent work has shown the cost impact of attrition being equivalent to a decrease in market value of more than 10% in a single year for some organizations. This is a tough statistic to ignore. Is there any hard data that demonstrates the financial impact of organizational career development programs? One example is a study conducted at Sun Microsystems that showed a 183% return on investment for a comprehensive career development program. This program, based on individual career counseling, helped employees better understand themselves and their options and choices. As a result they chose to stay with the organization rather than leave it.

Doshi (2000) in an article in Indian Express wrote that there are a number of factors leading to high rate of attrition and believes that the problem begins with recruitment practices. Further it has been suggested that mapping out a career path for employees would provide an added incentive for them to hang on and improve efficiency. It is often good to know that there is a career path within an organization into which an individual can map his or her own personal and career development.

Noh & Beggs (1993) after an initial study indicated that the most significant factor affecting retention for Physiotherapists in Northern Ontario was perceived opportunity for career

development. A follow-up study was completed two years later to determine: 1) actual job turnover and regional attrition among physiotherapists in Northern Ontario; and 2) the predictive validity of variables identified in the first study regarding job turnover and regional attrition. Job turnover occurred in 29.5% of those sampled and the regional attrition rate was 12%. Discriminant function analysis revealed factors affecting job turnover and regional attrition including professional experience, practice location, opportunity for career development and size of community of residence.

ATIONALE OF PRESENT STUDY

This contagion problem of attrition in BPO sector where it is heading to compromise India's position in global BPO industry has instilled the authors to brainstorm on this

issue. On the basis of the statistics available and literature review it is well established that the major reason of attrition in this industry is lack of career growth. Now how to combat this issue can well be understood through witnessing a success story. Global Pvt Ltd (name changed) is one such organization who is a major player of BPO industry in India. They practically implemented the career growth plans for their associates and combated the attrition in their organization. This study provides indepth view of how the organization combated attrition through mapping career aspirations.

OMBATING ATTRITION BY MAPPING CAREER ASPIRATIONS AT GLOBAL PVT. LTD.

The following data clearly depicts the challenge faced by Global Pvt. Ltd. and the steps taken by the Organisation to overcome

these challenges.

Table 1 give the details of the attrition rates of Global Pvt. Ltd. for the year 2006.

RR

CC

Table 1Percentage of Overall Attrition at Global

Private Ltd. During 2006

Year-06 Attrition %

Jan-06 12%

Feb-06 10%

Mar-06 11%

Apr-06 11%

May-06 12%

June-06 11%

July-06 13%

Aug-06 10%

Sep-06 09%

Oct-06 08%

Attrition % = Quits/ Average Headcount X 100


31


Table 2 produce three major reasons of attrition in Global Pvt. Ltd.

• Better Opportunity

• Further Studies

• Dissatisfied with work

Table 2 explains the distribution of the attrition rate in different factors of Global Pvt. Ltd. for the year 2006 from Jan-06 to Oct-06. The data for this period has been taken because based on this data the management planned to launch a special program in addition to IJP's (Internal Job Postings) called GPL University.

Month BetterOpportunity

FurtherStudies

Dissatisfieddue to

GrowthOpportu-

nities

OtherReasons

Jan-06 52% 5% 0% 43%

Feb-06 40% 2% 6% 52%

Mar-06 44% 13% 3% 40%

Apr-06 39% 4% 8% 49%

May-06 28% 14% 6% 52%

Jun-06 34% 14% 5% 47%

Jul-06 28% 19% 7% 46%

Aug-06 26% 15% 2% 57%

Sep-06 38% 14% 0% 48%

Oct-06 38% 5% 0% 57%

Note: Other Reasons include Personal Reasons, Health Reasons, Disciplinary Issues and Performance Issues.

From the research done it is concluded that tenured people (with the Company for more than a year) are leaving more often than other employees who have joined 6 months back. An exit interview was conducted with some of the associates and as per them:

Rakesh Sharma while leaving and spending 3 years with Global Pvt. Ltd. said “Stagnancy and monotony in the current role/profile and he is leaving the organisation in order to learn more and add on to his skills”.

Ruchika Jain worked with Global Pvt. Ltd. for more than two years and at the time of leaving she commented “ I am opting for a management course and the objective behind it is the probability to have better career and faster career growth opportunities”.

Sachin Tyagi worked with Global Pvt. Ltd. for one and a half year “I have been offered a better role which would in cash my potential and groom me better for higher position.”

While going through the entire data analysis/ statistics and personal interviews with the associates on the basis of exit

interview form (Annexure 1), it was concluded that employees do not leave the organization but they look forward for a better career and growth opportunity which would enhance their skills and also increase their knowledge. Global Pvt. Ltd. then came to a decision to control the employee turnover by analyzing the reasons of attrition and to provide its employees with sufficient growth opportunities and also a chance to groom them and to have their choice of career. Looking at this thought process GPL University Launched which became the USP (unique selling proposition) for the organization.

Global Ltd is dedicated to assisting its employees to reach their professional goals through internal promotion and transfer opportunities. One of the tools the company makes available to its employees in managing their career is IJP's (internal job postings). This procedure enables current employees to apply for any available position within the Company.

Internal Job Postings are regularly communicated to employees through internal mails and notice boards through which employees get to know about the current positions or the positions that are coming to them in the near future. Internal Job Postings provide complete job descriptions. A wel l-constr ucted job descr ipt ion communicates competencies needed, Organisational goals and objectives. By also including information on performance standards IJP's send signals to employees about what is valued. The entire eligibility criteria are set for each position and if an employee meets the set criteria they can apply for an IJP.

Following are the steps, which an employee has to follow to apply for an IJP:

To Apply for an Opening:

Step 1 Ensure that you meet the following eligibility requirements.

a. You are a regular employee of the Company.

b. You have been in your current position for at least six months. (Exceptions to this six-month requirement can be made by your current supervisor and should be consistent with company business needs.)

c. Your performance meets performance development plan (PDP) standards or established work standards in your current position.

d. Your average performance rating for the last 6 months should be at least ME (Meeting expectations).

e. You have not had an employee counseling or corrective action within six months. You are not following a performance improvement plan for your current position.

f. You meet the qualifications listed for the position on the job posting.

Step 2 Complete an on-line Internal Job Application through People soft.Every employee in the Company has his/her personal People soft ID and


Table 2Distribution of Attrition Rate to Different Factors at

GPL from Jan-06 to Oct-06

32


password. They can login to the same and can apply for IJP. For any assistance HR Department is available for the clarification(s).

Step 3 Submit the Internal Job Application to your supervisor for approval.

Step 4 Submit your complete and approved Internal Job Application to HR.Once the IJP form is filled up by an employee, it will automatically route through his supervisor with his/her approval to HR.

Step 5 All the Resumes received by HR Department will be screened and the employees’ meeting the criteria will get short-listed.

Step 6 Short-listed employees and their supervisors are informed well in advance through internal mails.

Step 7 Employees whose resume are short listed are called up for a Group Discussion by the head of the department for which IJP has been rolled out with the HR manager.

Step 8 Employees who get selected in the Group Discussion are called up for a personal interview by the head of the department for which IJP has been rolled out and with the HR manager.

Step 9 The hiring manager and the releasing manager finalizes on the release date of the employee. No employee is released to their new program until after a full transition of their duties and a handover of their ongoing assignments.

Step 10 After receiving the released date the offer is made to the employee.

Step 11 Feedbacks are shared with all the employees who are not selected in the presence of their supervisors by the HR department.

Step 12 Once feedbacks are shared, result is announced for the employees selected for the new role and is moved to the new department.

Step 13 The result is communicated to all the employees of the Company through notice boards and internal mails.

There are so many examples in Global Pvt. Ltd, employees who were earlier working in Operations as Customer Care Officers moved to the positions with HR, OD, Training and other support functions. They are all promoted/transferred through IJP's and this is one of the reasons why employees stick to Global Pvt. Ltd. for long. On an average the Company rolled out 8-10 IJP's per month. In a span of six months there were 168 vertical movements done within the Organisation.

As and when any new position comes up instead of hiring a new candidate from outside Global Pvt. Ltd. first gives a chance to their current employees through IJP's. Global Pvt. Ltd. make its employee believe that it contribute to an atmosphere of openness, trust and confidence and its employees also feel that they have been given priority and a better opportunity to improve and grow in their career which is not in any other Company in such a vast frame. Global Pvt. Ltd. also believes that it is more cost-efficient to hire a proven internal candidate rather than pay recruiter fees, relocation

costs and all other avoidable costs related to new hire orientation and training. Current employees already know the culture, have established relationships, and understand the way things are done. But the biggest advantage is the morale-boosting message an internal hire sends to all employees: “Your contributions and talent have not gone unnoticed”.

For the success of IJP's and for the employees to get better view of IJP's GPL University has also been launched especially who are working at agent level. Agents play a critical role in the success of the Company. Global Pvt. Ltd. is making an endeavour to ensure that Agents have the resources required to continually learn and develop. GPL University aims to create awareness of all possible career opportunities within Global Pvt. Ltd. across sites and verticals and helps employees to take charge of their own careers. It prepares employees via a leaning environment that is targeted at imparting structured learning for Industry specific roles. The system will also enable employees to be better prepared to move into alternate roles or new job responsibilities within Global Pvt. Ltd.

It helps employees develop a career plan and the skills and know how to develop the plan. GPL University is of the utmost importance to its employees to gain exposure and information. GPL University provides various career path options to its employees in different areas such as Training (Customer Care Officer to Trainer), Quality (Customer Care Officer to Quality Supervisor), Technology (Customer Care Officer to Support Engineer), Human Resources (Customer Care Officer to Officer HR) and Transport (Customer Care Officer to Transport Officer) and this kind of facility is not provided in any other Organisation where employees not only work but also grow and enhance their skills.

HumanResources

Training Quality/TME

TechnologyAssets/

Transport

Sr. CCO (I)

HR Officer/Recruiter(B1)

Sr. HR Officer/Recruiter(B2)

Sr. CCO (I)

In-teamTrainer (I)

Commu-nicationCoach (A4)/FST

Sr. Trainer(B2)

Manager(B3)

Sr. CCO (I)

In-team QE (I)

QualityExecutive (A4)

QualitySupervisor(B1)

QualitySupervisor(B2)

Sr. CCO (I) Sr. CCO (I)

AssociateTechnicianIV (A4)

AssociateTechnician/Sup Engineer(B1)

Sr.Technician/SupportEngineer(B2)

TransportCoordinator(A4)

TPT Sup(TO/TL)/AsstAsset orFacilityOfficer (B1)

Sr. TPTSup/ FacilityOfficer (B2)

Current Career Path Options

Figure 1


Levels

Level 1-Introduce

Create Awareness on Functionality of the Role

40% self paced 60% Classroom

Levels 2-Build

Build Skills for Success


Levels 3 Reinforce

Reinforce Skills for Success


Figure 3

The learning module for GPL University is for 12 weeks, which includes 3 levels as mentioned below:

1. Introduce - Introduce the tools of trade. Create awareness on functionality of the Role.

2. Build - Build Skills for Success.

3. Reinforce - Reinforce Skills for Success.

After each level, the agent would get a participation certificate.

At the completion of the course, the agent would get a Certificate, which qualifies them as knowledgeable in the specific role. Employees in Global Pvt. Ltd. can enroll themselves to GPL University by registering themselves with their concerned Team Leaders or Managers who in turn forward the names to the HR /OD department. Each session will help an employee to understand their current profile and the alternate role they can choose as per their interest and k n ow l e d g e. T h e s e s s i o n s a re t a k e n by t h e Sr. Managers/Director of the development team.

Table 3 Show the change in attrition figures after the Implementation of IJP's and GPL University.

The overall attrition at Global came down to 5% in 2008 and 6% in year 2009. Thus, the above Table prove that it is important as an employer to realize the growing need of mapping the potential of employees and filling in the gaps by appropriate career path to enhance their skill set and emerge as future leaders.

In the United States, many companies reimburse employees for advanced degrees or certifications that relate to their area of expertise. Until recently, the opposite was true in India, but after witnessing the success of Global Pvt Ltd in curbing attrition through focusing on career aspirations and worldwide supportive evidences the trend has begun to change as businesses have discovered that a significant

Month BetterOpportunity

FurtherStudies

Dissatisfieddue to

GrowthOpportu-

nities

OtherReasons

June-07 17% 7% 1% 75%

July-07 24% 5% 0% 71%

August-07 22% 6% 0% 72%

July-08 16% 4% 0% 80%

August-09 18% 5% 0% 77%

Table 3Distribution of Attrition Rate to Different Factors at

Global Pvt. Ltd. Post GPL University

33



Learning Framework

Figure 2

• 6 months in production

Level 1 Training

Level 2 Training

• Implementation through off the job Training

• Implementation through On the Job Training• Certification

IJP

• Internal Job Posting

Level 3 Training

CC

portion of their attrition problems stem from employees leaving to pursue a master's degree. Following in the footsteps of Global Pvt Ltd. several offshore service providers have teamed with universities to offer their workers management-level master's courses at a subsidized rate, and watched attrition rates drop as a result.

For example, Cognizant Technology Solutions, an IT service firm with 17,000 employees, partially reimburses Indian staff that pursues master's degrees at BITS, a higher-education institution located in Pilani, India.

ICICI OneSource gives employees who have been with the company for more than 18 months an option to switch to positions in other ICICI group companies. The system works as a big assurance for BPO employees that the skills they have learnt such as customer friendliness and rapid response to customer problems have wider applications and market demand. This is important considering the fact that the cost of attrition in the industry is 1.5 times the annual salary.

Phoenix Global Solutions, recently acquired by TCS, recorded attrition well within the stipulated limits. Says Vasantha Kalbagal, general manager: “This could be attributed to the rotation policy, onsite training, transition & work assignments, giving additional responsibility etc.”

24/7 Customer with attrition rates in the region of 25% has a well-oiled staff retention program that maps every employee across the employee lifecycle in the organization. The program has as its components the boot camp, career counseling immediately after induction, coaching and

mentoring for fresh recruits. For lateral hires and tenured employees, the challenges revolve mainly around growth. 24/7 Customer has designed learning and development programs that play a major role in developing, empowering and retaining quality resources. Says S Nagarajan, COO, 24/7 Customer: “The thrust is on fostering a sense of belonging, nurturing career aspirations and enabling career growth.” 24/7 Customer, in association with the Indian Institute of Management Bangalore, launched a management-education seminar series called "Beyond Knowledge," through which 24/7 aims to educate employees about the BPO industry and discuss related careers.

Companies like GE, Wipro Spectramind offer management diplomas and MBA courses to their employees, as most fresh graduates want to study further. Further, they also give innovative incentives like scholarships. Many companies like HCL Tech BPO Services, GTL, Tracmail, and Vertex India believe that giving career counseling and planning career paths to its employee help to control attrition.

ONCLUSION

Thus, from the diagnosis above it can be concluded that the reason behind attrition is a push from within rather than a pull from outside. GPL University helps its employees to

grow and gain knowledge on the subject of their interest and grooms them to take up the role of their choice through IJP's and successfully handle the challenges. This is the first step towards transitioning a JOB to a CAREER taken by an Organisation for its Assets.

34


REFERENCES

1 Assess People (2008) India Attrition Survey 2008. http://www.assesspeople.com/india-attrition-survey-2008.asp

2 BPO Watch India Bureau (April 15, 2011) Attrition rate rises to 55 per cent: Assocham http://www.bpowatchindia.com/bpo_news/attritionassocham/april-15-2011/attrition_rate_rises_to_55_per_cent_assocham.html

3 BPO Watch India Bureau (April 29, 2011) BPO industry stymied by high attrition www.bpowatchindia.com/bpo_industry.../bpoindia/april-29-2011/bpo_industry_stymied_by_high_attrition.html

4 Business Today (August 24 2008). India Attrition Study 2008. p 190 http://www.bpowatchindia.com/bpo_industry_report/bpoindia/april-29-2011/bpo_industry_stymied_by_high_attrition.html

5 Carruthers, M. (2011). Reduce Employee Turnover. http://www.systemiccoaching.com/attrition.htm

6 Demand Media Inc (2011). What Are the Causes of Employee Attrition?. http://www.ehow.com/info_8518233_causes-employee-attrition.html

7 Doshi, M. (2000). How call centres can combat attrition. Indian Express Group (Mumbai, India). http://www.itpeopleindia.com/20021216/management1.shtml

8 Elsdon, R. (2002). Why is Career Development Important for the Organization of the Future? California Career Development Association News, Vol XVIII, No. 1. October 2002.

9 Ganesh, U. (2011). BPOs work hard to fight attrition. http://www.bpowatchindia.com/BPO_Features//More/bpo-attrition-nasscom-hewitt.html

10 Garner, G. (2008). Five Attrition Factors and What You Can Do About Them. By Geraldine Garner National Society of Professional Engineers, May 2008 the magazine for professional engineers

11 Jagannathan, A.N. (2008). A Project on Attrition. Unpublished Research Work submitted to University of Mumbai

12 Noh, S. & Boggs, C.E. (1993). Job turnover and regional attrition among physiotherapists in northern Ontario. Physiother Can. 1993 Fall; 45(4):239-44.

13 Prakash, S. and Chowdhury, R. (2004). “Managing attrition in BPO”, In search of Excellence, Cool Avenues, http://www.coolavenues.com/know/hr/s_1.php. Last accessed on: February 06, 2010.

14 Srikanth. (2006). Career growth concerns trigger attrition in BPO http://www.citehr.com/6179-career-growth-concerns-trigger-attrition-bpo.html


Personal Information: Name: Date of joining: Position: Date of Resignation: Program Details:Program Name:Ops Manager Name/Training Manager:Team Leader name/Trainer: Last Day Worked:What are the reason(s) for your leaving Global Pvt. Ltd.? (Check all that apply)Return to Studies Better Opportunity Dissatisfied with Location Family Reasons Dissatisfied with Salary Illness in Family Dissatisfied with Incentives Child Care Dissatisfied with Supervisor/Manager Marriage Dissatisfied with Work Load Relocation Dissatisfied with Work Conditions Dissatisfied with Training Dissatisfied with Benefits Transportation ProblemsDissatisfied with Performance Rating Health reasons Night Shifts Dissatisfied with Promotion Opportunity Dissatisfied with Working Hours Other - Voluntary __________________ (e.g. self employment, transportation) Explain:What was the single, most compelling factor in your decision? What other factors contributed to your decision? What, if anything, could Global Pvt. Ltd. have done differently that would have changed or delayed your decision? If you have spent less than a year with Global Pvt. Ltd. – Was your Orientation sufficient to help you perform your duties? If no, Why? What did you most like about your Job, Global Pvt. Ltd. and the Program? What did you like least about your job, Global Pvt. Ltd. and the Program? Under what circumstances would you consider returning to work for Global Pvt. Ltd.? Are you leaving for a daytime job? If leaving for better opportunity: With whom: What Designation: Was the Performance Appraisal Process clear (In case of resignation because of Dissatisfaction on Appraisal)? Clear? _________ Ambiguous? _________ Not Applicable? _______ Would you recommend Global Pvt. Ltd. to a friend as a place to work? ____________Yes____________NoWHY_____________________________________________________________________Summary (to be completed by HR Manager):

(SIGNATURE OF HR)

35


Annexure 1Exit Interview


ABSTRACTThe demand for qualified personnel is increasing faster than the offering. The competition in the market has intensified compelling companies to show an ever-increasing interest in the formulating strategies to differentiate amongst them. Strong demand for specific skills, in addition to tight marketing, is making it much more difficult to retain current employees and recruit new employees.

Employer Branding is called the 'hottest strategy in employment'. Employer brand is the image of the organization as a 'great place to work' in the mind of current employees and other key stakeholders in the external market. Focus on common images found externally and internally becomes imperative. In order to develop a strong employer brand, it is necessary to demonstrate what is specific about an organization and its culture. However, awareness of possibly existing differences and likeness in attitudes within certain groups would make the strategy work more efficiently.

The objective of the research paper is to examine the likenesses and differences between employer External and Internal Brand Images of three IT companies namely Infosys, TCS, and Wipro. The survey was based majorly on fifteen parameters that a prospective or a current employee always looks at for in an organisation. This includes competitive compensation, career or growth opportunity, financial strength, proper management and leadership style etc .It has been observed that the branding activities of TCS and Infosys have been rated better over that of Wipro.

Keywords: Branding, Internal Branding, External Branding, Employer Brand Management.

N Malati, Pratiksha Tiwari, Ruchika Sharma

An Empirical Study of

Employer Branding in Information Technology

Companies

EmployerBranding

EmployerBrand

Associations

EmployerImage

EmployerAttraction

EmployeeProductivity

EmployerBrand

Loyalty

OrganizationIdentity

OrganizationalCulture

37

INTRODUCTION

Job market for employees, all around the globe experiences highs and lows. When it comes to exploring the possibilities of recruiting, companies, large and small adopt different strategies to tide over the situations. The demand for qualified working personnel is increasing faster than the offering, both in India and abroad. As competition in the market has intensified, companies have shown an ever- increasing interest in strategies to differentiate themselves. Strong demand for specific skills, in addition to ever tight markets, is making it much more difficult, both to retain current employees and recruit new ones who fit the bill perfectly. “The hottest strategy in employment”, in the words of Dr. Sullivan, is summarized through the concept of “Employer Branding”.

Minchington (2005) defines employer brand as “the image of the organization as a 'great place to work' in the mind of current employees and key stakeholders in the external market (active and passive candidates, clients, customers and other key stakeholders). The art and science of employer branding is therefore concerned with the attraction, engagement and retention of initiatives targeted at enhancing the company's employer brand."

Employer branding is one of the few long-term solutions to offset the “shortage of talent”. It has been observed that most employment strategies are short term and “reactive” to job openings, while building an Employment Brand is a long-term solution designed to provide a steady flow of applicants. The Employer Brand concept is borrowed from marketing. It helps organizations focus on how they can identify themselves within their markets as an employer of current staff, as a potential employer to new recruits and as a supplier or partner to customers. Employer branding is a relatively new idea, but in practice some organizations have been making use of the idea implicitly for some time now.

AN EMPIRICAL STUDY OF EMPLOYER BRANDING IN INFORMATION TECHNOLOGY COMPANIES\

Employer branding can improve an employee's job satisfaction when the employer's brand matches his or her personal values. Employer branding can also reduce the recruitment costs.

According to Figure 1, potential employees develop an employer brand image to form brand associations that are an outcome of a firm's employer branding.

Prospective employees also develop employer brand associations based on information sources that are not employer-controlled. Effective employer branding takes a proactive approach by identifying desired brand associations and then striving to develop these associations. As brand awareness heightens, consumers begin to develop positive identification with the brand. The more positive the brand is perceived to be, the more highly identified the consumer becomes with the product. The ability to use a brand to convey symbolic benefits to prospective employees makes employer branding especially useful. Much of the strength of branding lies within the power of the symbolism of the brand. A brand can convey meaning beyond tangible benefits, Hirschman, E.C. (1980). The branding activity can be extended to all the sectors, including the Information Technology sector.

Information Technology is an important indicator to gauge a country's economic growth and India is no exception. Therefore, organizations, financial bodies and media houses conduct surveys time and again to arrive at revenue structure of reputed IT companies of India.

As per the survey of the year 2010, the Top 10 IT companies are as given in the Figure 2. This research identifies the top three IT companies in India -Infosys, TCS, and Wipro (based on Market Capitalization).

Figure 1


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180,000.00

160,000.00

140,000.00

120,000.00

100,000.00

80,000.00

60,000.00

40,000.00

20,000.00

0.00INFOSYS

TECHTCS LTD. WIPRO

LTD.HCL

TECHNOMPHASIS

LTDORACLE

FINFINANCTECHN

PATNICOMPUT

TECHMAH

ROLTAIND

Full Mkt. Cap. (Rs. crore)

Full Mkt. Cap. (Rs. crore)

Top 10 Most Valuable Technology Companies in India

IT sector in India is one of the most growing sectors. Companies like Wipro, Infosys, and TCS have made a huge contribution in providing services globally. It is one of the sector which hires people in large numbers. Huge Competition in the IT market is providing impetus to the concept of EMPLOYER BRANDING as companies try to attract the maximum talent and retain them for a maximum period. Their long term association affects the success of companies.

ITERATURE REVIEW

The three fundamental forces behind the war for talent are: The irreversible shift from the industrial age to the information age, demand for high calibre talent, and growing propensity

of people to switch from one job to another. At this juncture, the relevance of `employer branding' in recruiting, increases. Levering (1996) has opined that a good workplace is believed to produce higher quality products, support more innovation, have the ability to attract more talented people, experience less resistance to change and incur lower turnover costs, all of which translate directly into a better bottom line

The concept of 'employer brand' has become an important development since the early 1990s. Simon Barrow is considered to be the creator of the term `employer brand'. Ambler, T. and Barrow, S. (1996), defines the employer brand in terms of benefits, calling it “the package of functional, economic and psychological benefits provided by employment, and identified with the employing company.” In addition they state that besides helping create a workforce that is hard to duplicate, internal marketing also contributes to employee retention.

Organizational relationship provides a second foundation for employer branding. Hendry, C. and Jenkins, R. (1997) feel that in the traditional concept of the psychological contract

Source: India Business Blog, Trak. in, June 2010 Figure 2

between workers and employers, workers promised loyalty to the firm in exchange for job security. Baruch, Y. (2004) however observed that the recent trend toward downsizing, outsourcing, and flexibility on the part of the employer has imposed a new form of psychological contract, in which employers provide workers with marketable skills through training and development in return for effort and flexibility. Sullivan (1999) supposes it to be 'the hottest strategy in employment' and also states that it is fundamental to employer branding that the employer brand be consistent with all other branding efforts of the firm. Peters, T. (1999) purports that branding was originally used to differentiate tangible products, but over the years it has been applied to differentiating people, places and firms. Priem, R.L. and Butler, J.E. (2001) opine that we commonly think of plant, equipment and capital as resources that create competitive advantage, human capital has also been shown to operate as an important resource creating competitive advantage.

Employer brand equity also propels potential applicants to apply. According to Sutherland, Torricelli, & Karg (2002), skilled employees are hard to attract and difficult to retain and they have become critical to business success. The employer branding is used for corporate identity, building reputation and communicating its image to current and potential employees. Luthans and Peterson (2002) have found that employees who are engaged in their organization with satisfaction, demonstrate good performance and achieve success.

In the face of negative perceptions of a new employment reality, firms use employer branding to advertise the benefits they still offer, including training, career opportunities, personal growth and development. In general, firms have been perceived to fail to deliver some of these offerings, so employer branding campaigns are designed to change perceptions of the prospective employees towards the firm. In


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terms of employer branding, brand equity applies to the effect of brand knowledge on the potential and existing employees of the firm.

The Employer Branding Survey (2006) by Hewitt Associates and Accor Services covered 105 IT/ITES organizations. The study emphasized that there is a need for employer brand even when a strong and organization/customer brand exists. 85% of surveyed managers feel that employer branding would become more important in future. Three employer brands of the country were Infosys, Tata Consultancy Services, WIPRO. Top 3 aspects of employer branding (What employers feel) were: Company's Success and Reputation in the market, Career progression and Compensation while in the top 3 aspects of (what employees feel) were:- Compensation, Career progress and Nature of work. Dawn and Biswas (2010) state that a successful employer branding strategy can have a far reaching impact in increasing the number and quality of applicants.

BJECTIVES OF THE STUDY

• To identify the factors affecting employer branding in select IT companies.

• To compare and contrast the student perception and employer perspectives of branding strategies adopted by select IT companies.

ESEARCH HYPOTHESES

The following hypotheses have been framed and tested:

H : There is a significant difference in student 1

perception and employee perspective of TCS.

H : There is a significant difference in student perception and 2

employee perspective of Wipro.

H : There is a significant difference in student perception and 3

employee perspective of Infosys.

ESEARCH DESIGN

A structured questionnaire was designed to collect the data. Different factors were identified through literature review and exploratory study. Questionnaires were

prepared for students and employees of the company. Validity of the questionnaires was checked through face validity method and was found to be high. Items were rated on Likert scale of five points which is the most popular choice for ordinal scale. The opinion indicated as 'highly satisfied' has been assigned a weight of 5. Both of the questionnaires were pre-tested on a sample of 30 each and then reliability test was carried out using SPSS 17.0 .The Cronbach's Alpha for students(for 15 items) was 0.799 while for the employees it was 0.964.

AMPLING AND DATA COLLECTION

The study was conducted in Delhi-NCR region. A data of 50 employees from each company, through convenience sampling was collected. A sample of 50 students each who

chose either TCS/Wipro/Infosys as their most preferred prospective employer was collected. The responses were collected through structured questionnaire via personal interviews. The effective sample size in both the categories turned out to be 150 each.

ATA ANAYLSIS AND RESULTS

Mann -Whitney test (for independent samples) has been applied to test the difference between student's perception and employee's perspective toward their

respective company's as five point Likert's rating scale has been employed to measure all the factors.

RR

RR

SS

DD

Balance between personal life and career 1234.000 2509.000 -.114 0.907A good reference for your future career 920.500 2195.500 -2.397 0.017Flexible working hours 728.000 2003.000 -3.739 0.000Quality of Work 1081.500 2356.500 -1.238 0.216Strong clear company culture 1237.500 2512.500 -.091 0.928International career opportunities 824.500 2099.500 -3.013 0.003Competitive Compensation 1060.000 2335.000 -1.358 0.174Possibility of enhancement and promotion 1081.500 2356.500 -1.210 0.226Secure employment 11232.500 2507.500 -.127 0.899Challenging work opportunities 928.000 2203.000 -2.311 0.021Good leadership and management 793.000 2068.000 -3.292 0.001Financial strength 714.500 1989.500 -3.817 0.000Good ethics and high morale 1130.500 2405.500 -.867 0.386Exciting products and services 1098.500 2473.500 -1.086 0.277Corporate social responsibility 1039.000 2314.000 -1.519 0.129

Table 1Comparative Factor Wise Analysis of Student and Employee's (For Infosys)

Mann-Whitney U Wilcoxon W Z Asymp. Sig. (2-Tailed)

Grouping Variable: Employee's of Infosys and Students identifying Infosys as prospective employer.


Table 1 shows a comparative analysis of student perception and employee perceptive of Infosys on respective issues. It describes that student perception and employee perspective differs on “a good reference for your future career, Flexible working hours, International career opportunities, Challenging work opportunities, Good leadership and management and financial strength”. Further it has been observed that the employee perspective regarding flexible working is more favourable in comparison to students

perception. The other parameters of difference -“a good reference for your future career, International career opportunities, Challenging work opportunities, Good leadership and management and financial strength” have shown a favourable trend of the students' perception over employees' perspective.

Table 2 shows that over all there is no significant difference between student perception and employee's perspective of Infosys.

Overall comparison Equal variances - 1.266 98 0.209 -3.78000 2.98679 -9.70718 2.14718between employee's assumedperspective and Equal variances not -1.266 97.579 0.209 -3.78000 2.98679 -9.70750 2.14750student's perception assumed

Table 2 Independent Samples Test (For Infosys)

95% ConfidenceInterval of the

Difference

T-test for Equality of Means

Lower UpperStd. ErrorDifference

MeanDifference

Sig.(2-tailed)

dft

Balance between personal life and career 929.500 2204.500 -2.398 0.016

A good reference for your future career 958.000 2233.000 -2.171 0.030

Flexible working hours 1219.000 2494.000 -.224 0.823

Quality of work 708.500 1983.500 -3.907 0.000

Strong clear company culture 1247.000 2522.000 -.022 0.983

International career opportunities 1054.500 2329.500 -1.397 0.163

Competitive compensation 721.000 1996.000 -3.854 0.000

Possibility of enhancement and promotion 936.000 2211.000 -2.264 0.024

Secure employment 1197.000 2472.000 -.381 0.703

Challenging work opportunities 730.500 2005.500 -3.737 0.000

Good leadership and management 1240.000 2515.000 -.073 0.942

Financial strength 1183.500 2458.500 -.485 0.628

Good ethics and high morale 1229.500 2504.500 -.148 0.882

Exciting products and services 1073.000 2348.000 -1.269 0.205

Corporate social responsibility 1104.000 2379.000 -1.051 0.293

Table 3Comparative Factor Wise Analysis of Student and Employee's (For TCS)


a. Grouping Variable: Employee's of TCS and students having TCS as prospective employer.

Table 3 gives a comparative analysis of student perception and employee perceptive of TCS. A difference in student perception and employee perspective has been observed on “Balance between personal life and career, A good reference for your future career, Quality of work, Competitive compensation, Possibility of enhancement and promotion,

Challenging work opportunities,”. Further ,it has been observed that perception of students shows a favourable trend with respect to “A good reference for your future career, Quality of work, Competitive compensation, Possibility of enhancement and promotion, Challenging work opportunities over perspective of TCS employees', barring “Balance between personal life and career”.

40



Overall comparison Equal variances -4.660 98 0.000 -13.18000 2.82857 -18.79320 -7.56680between employee's assumedperspective and Equal variances not -4.660 92.007 0.000 -13.18000 2.82857 -18.79777 -7.56223student's perception assumed

Table 6Independent Samples Test (For Wipro)


Difference



MeanDifference

Sig.(2-tailed)

dft

Overall comparison Equal variances -1.423 98 0.158 -4.46000 3.13435 -10.68002 1.76002between employee's assumedperspective and Equal variances not -1.423 89.953 0.158 -4.46000 3.13435 -10.68698 1.76698student's perception assumed

Table 4Independent Samples Test (For TCS)


Difference



MeanDifference

Sig.(2-tailed)

dft

According to the Table 4, there exists no significant difference between student perception and employee's perspective of TCS.

Balance between personal life and career 869.500 2144.500 -2.804 0.005A good reference for your future career 536.500 1811.500 -5.130 0.000Flexible working hours 577.000 1852.000 -4.766 0.000Quality of work 618.500 1893.500 -4.562 0.000Strong clear company culture 679.000 1954.000 -4.133 0.000International career opportunities 588.000 1863.000 -4.766 0.000Competitive compensation 590.500 1865.500 -4.723 0.000Possibility of enhancement and promotion 470.000 1745.000 -5.610 0.000Secure employment 948.500 2223.500 -2.158 0.031Challenging work opportunities 922.000 2197.000 -2.392 0.017Good leadership and management 548.000 1823.000 -5.081 0.000Financial strength 430.500 1705.500 -5.856 0.000Good ethics and high morale 773.500 2048.500 -3.409 0.001Exciting products and services 925.500 2200.500 -2.345 0.019Corporate social responsibility 1053.000 2328.000 -1.450 0.147

Table 5Comparative Analysis of Student and Employee's (For Wipro)


a. Grouping Variable: Employee's of Wipro and Students having Wipro as prospective employer.

As given in Table 5, the student perception and employee's perspective for Wipro depicts a difference on all the factors except for corporate social responsibility. It has also been observed that perception of students shows a favourable trend in all the factors wherein gap exists.

Table 6 supports the results explained above, that there is a significant difference in over all perception of students and employees' perspective of Wipro.

41



CC ONCLUSION

It can be concluded that the communication strategies adopted by TCS and Infosys have been successful in helping the prospective employees see the company as a good

employer. It is also evident through the financial performance and market capitalization of the companies that being a good employer translates into positive organization performance. This enables the organizations to attract the best of talents thereby providing them with a steady flow of recruits. In the case of WIPRO, better internal brand management strategies be adopted to enhance their employee perspectives. It has been rated third in terms of its market capitalization too.

The Companies all over are scouting for talent and talented workforce has become a priced commodity. Organizations also understand that human beings are the real assets which appreciate with the passage of time and it becomes imperative to handle them carefully, lest the companies lose their competitive advantage. With the continued influx of multinational corporations in India—as well as Indian

corporations expanding beyond their own borders—the opportunities and challenges for India to contribute to the world economy has significantly increased. Thus, as India, Inc. forges forward to make a wider mark in the world, the employer brand as a strategic HR tool will take on greater importance in Indian organizations—in how it is developed, communicated, marketed to yield growth, profits and sustainability for both today and tomorrow. The organizations should aim at developing better internal and external brand management activities to woo skilled talent for further expansion and growth. A powerful employer brand has the strength to attract and retain talent and also achieve the organizational objectives. A strong employer brand also increases productivity, lowers the cost, results in greater retention of employees and customers. Successful alignment of employer with corporate brand will yield better success. Every employer brand is an investment that should demonstrate a return comparable to other forms of business investment. The key to a successful employer brand is to ensure that expectations are fully aligned with the realities of working for the organization and the gap between the employee perspectives and employer perception is minimized.

REFERENCES

1 Ambler, T. and Barrow, S. (1996), “The employer brand”, Journal of Brand Management, Vol. 4(3), pp. 185-206.

2 Baruch, Y. (2004), Managing Careers: Theory and Practice, Prentice-Hall, Harlow.

3 Barrow, S. and Mosley, R. The Employer Brand, Bringing the Best of Brand Management to People at Work, John Wiley & Sons, Chichester.

4 “Dawn, S.K. and Biwas, S. (2011) “Employer Branding: A new strategic dimension of Indian Corporation”, Asian Journal of Management Research, OOAP, Vol.1 (1), pp 21-33. Retrieved from http://ipublishing.co.in/ajmrsp1no12011.html

5 Employer Branding Survey and Poll 2006". NASSCOM HR CONNECT, Issue 2, June, 2006. Pp-4.

6 Hendry, C. and Jenkins, R. (1997), “Psychological contracts and new deals”, Human Resource Management Journal, Vol. 7(1), pp. 38-44.

7 Hirschman, E.C. (1980), “Comprehending symbolic consumption”, in Hirschman, E.C. and Holbrook, M.B. (Eds), Symbolic Consumer Behavior, Association for Consumer Research, Ann Arbor, MI, pp. 4-6.

8 Levering, R. (1996, September 12): “Employability and trust”. Conference Board meeting, Chicago, Retrieved from thepeoplegroupllc.com/wp.../04/article-employability-and-trust.pdf

9 Lloyd, S (2002), ‘Branding from the inside out’, Business Review Weekly, Vol 24 No 10, pp64-66.

10 Luthans F. & Peterson S.J. (2002): “Employee engagement and manager self efficacy: Implications for Managerial Effectiveness and Development”, Journal of Management Development, 21(5), pp. 376–387

11 Minchington, B (2010) Employer Brand Leadership – A Global Perspective, Collective Learning Australia.

12 Peters, T. (1999): “The Brand You 50: Fifty Ways to Transform Yourself from an Employee into a Brand that Shouts Distinction, Knopf Publishers”, New York, NY.

13 Priem, R.L. and Butler, J.E. (2001), “Is the resource based view a useful perspective for strategic management research”, The Academy of Management Review, Vol. 26(1), pp. 22-40

14 Sullivan (1999) “The changing nature of careers: a review and research agenda”, Journal of Management, Vol. 25(3), pp. 457-75.

15 Sutherland, M. M., Torricelli, D. G., & Karg, R. F. (2002): “Employer of choice branding for knowledge workers”, South African Journal of Business Management, 33(4), pp.1320

42



Trade Openness, Exports and Economic Growth Relationship in India :

ABSTRACTDrastic changes have been taken place at the global level during the last two decades of liberalization and globalization. In the light of global changes, Indian government also initiated the process of domestic and external economic reforms in the early 1990s. So a shift took place in regard to trade liberalization with special emphasis on export-led growth policy. So the present study has been designed to examine the validity of the export-led growth (ELG) hypothesis implemented in India during the Post WTO Period. The study is based upon quarterly time series data covering the period from 1996-97 to 2008-09. An attempt has been made to analyze the relationship between three variables i.e. trade openness, export growth and its impact on economic growth within the framework of Vector Error Correction Model (VECM) using the Johansen Technique of Co-integration and the Block Exogeneity Wald Test. The study found that there is bi-directional causality running from GDP to export growth and vice versa for India. The ELG and GLE hypothesis is valid for India and empirical evidence supports the existence of long-run equilibrium relationship between export growth and economic growth. The unidirectional causality has also been observed among trade openness and economic growth (GDP), which is running from trade openness to GDP. In the light of above findings, the present study supports the hypothesis that there is a positive correlation between export growth and economic growth in India during the post reforms.

Keywords: Export-led Growth Hypothesis, GDP, Co integration, Granger Causality Test

An Econometric Analysis


INTRODUCTION

Export growth is important because of its effect on internal trade and economic stability of an economy. Moreover, the rate of economic growth and the distribution of income and wealth in a country are closely related to export growth (DeeKay, 2009). Empirical evidences supports that growth of an economy is directly related to exports. Therefore, the relationship between export and economic growth has become a crucial issue of debate among economists and researchers all over the World. An agreement has emerged on theoretical ground among Neo-classical economists in regard to export-led–growth (ELG) strategy as an instrument of economic progress. This agreement has got more support due to the success of free-market, and outward-oriented policies

1of Asian Tigers (World Bank, 1991).

Neoclassical economists have strongly argued that export has emerged as an important factor, which make major contributions to economic growth. There are four major reasons for the support of export-led-growth hypothesis: (a) fostering specialization helps to benefit from the comparative advantages; (b) helps to utilize the full capacity of the plant size, where domestic demand is less than the full capacity production; (c) generate benefits of the greater economies of scale due to large market; and (d) increase the rate of investment and technological change (Dash, 2009). Therefore, export promotion strategy is considered as an important instrument of economic growth.

The early empirical studies of international trade and growth were stimulated by the divergent trends in economic growth

2throughout the world . Most of the countries that had adopted protectionist Import Substitution Policies after World War II experienced lower growth rates by the 1970s whereas a small number of East Asian Economies made the growth of international trade a central part of their overall economic policies, as a result of which these countries experienced unprecedented rates of economic growth2. The experience of China, Mexico, South Africa and Israel etc. during the eighties and nineties provides further support to the argument that trade openness is a mechanism for attaining a higher level of economic growth. The success of export-led growth model motivated many LDCs which were facing economic instability to further stimulate their export-led orientation through implementing adjustments and stabilization programmes (Shirazi, et al. 2004).

During the last four decades, economists had produced a sufficient literature with statistical evidences on the relationship between international trade and economic growth (Lewer and Berg, 2003). Economists have estimated correlation coefficients, regression coefficients, tested for cointegration and performed a variety of other statistical tests to prove or disprove the existence of a relationship between

2international trade and economic growth . These studies have used the data sets covering a variety of countries, time periods and economic variables and the results of these research studies largely support the hypothesis that, all other things remaining equal, countries open to international trade had


TRADE OPENNESS, EXPORTS AND ECONOMIC GROWTH RELATIONSHIP IN INDIA : AN ECONOMETRIC ANALYSIS

succeeded to achieve higher incomes and higher rates of 2

economic growth . The findings of these research studies are even more definitive in its rejection of the alterative hypothesis that there is no convincing statistical evidence suggesting that trade and economic growth are negatively

2correlated .

In the light of above scenario, the aim of the present paper is to examine the causality relationship among export growth, trade openness and economic growth for India during the Post WTO covering period from (1996-97[Q1] to 2008-09[Q4]) on the basis of quarterly data. The uniqueness of the present study is due to the following three reasons, namely, (i) it is based on the empirical evidences of ELG hypothesis implemented during the Post WTO regime; (ii) The advanced time series techniques are used to get more reliable results for feasible policy decision making; (iii) Trade openness has been an important element of economic development strategy adopted by the Indian government during the post reforms period. It is pertinent to mention that trade openness leads to efficient allocation of resources through comparative advantage; allows the diffusion of knowledge and technological progress and promote competition in domestic and international markets. Moreover, the present study is an attempt to analyze the association between trade openness and economic growth.


No doubt, a vast literature is available to address this issue and economists have attempted to explain this hypothesis with their own logic since 1960s, but all the studies are

not unanimous in regard to its impact on developed, developing and least developing countries at the global level. This is the main rationale why large number of researchers and research organizations are focusing on this area. To build a theoretical framework that links international trade and economic growth, a careful examination of empirical evidences is required to find out relationship between trade and growth on the basis of micro level studies. In light of this, the present paper is an attempt to examine causal relationship between the three variables, namely, Economic Growth (GDP), Exports, and Trade Openness of India during the Post-Liberalization period as defined above.

For the purpose of the analysis, this paper is organized as follows: the review of literature on the ELG hypothesis and data and methodology are discussed in Section-II; and Section-III outlines the analysis of the Indian Economy and Export Sector Performance. The empirical results and conclusions are presented in Section-IV.

SECTION-II

EVIEW OF LITERATURE

The extensive literature concerning the relationship between export and growth is also the results of the fast changes that have taken place in the field of development economics

OO

RR



and international trade in the last two decades (Dash, 2009). The International Trade and Development theory argued that exports growth (due to export oriented policies) contributes positively to economic growth and vice versa. Various economists and scholars have attempted in their respective studies to establish causal relationship between export and output growth.

Michaely (1977) used the spearman's rank correlation to examine a sample of 41 LDCs to detect the association between export growth and economic growth. The study found that there is a positive relationship between export growth and economic growth and the economic growth tended to be affected significantly by exports only when countries achieve some minimum level of development. Balassa (1978) studied the correlation between export growth and economic growth of a sample of 11 developing countries having a substantial industrial base. He found that the export growth favourably affects the rate of economic growth.

Tyler (1981) empirically analyzed the relationship between export expansion and economic growth of 55 middle income developing countries using the inter-country cross section analysis. The study found that there is a strong positive association between export expansion and economic growth and export expansion significantly enhances gross national product growth. The higher rates of economic performance have been associated with the higher rates of export growth (Kavoussi, 1984). The researchers like Feder (1983) and Rati (1985) examined ELG hypothesis and they argued in favour of exports, which help in reducing the foreign exchange constraints that facilitate in the imports of modern technologies and new production methods. Chow (1987) examined the causal pattern between export growth and growth in manufacturing output of 8 new industrialized countries (NICs) with the help of Granger Causality test. The study found the bi-directional causality in the case of Brazil, Hong Kong, Israel, Korea, Singapore and Taiwan and no

causality in the case of Argentina.

The views regarding the effects of export growth on economic growth are divided as some scholars argue that export growth have a positive effect on the Gross Domestic product while other argue that there is no-causality between export and GDP growth. A group of studies had found the bi-directional causality between exports and economic growth, including, Oskooee (1993), Doraisami (1996), Ghali (2000), Summer (2004) Musonda (2007), Husein (2009), Bhattacharya et al. (2009) and Gazda (2010).

Oskooee et al. (1993) applied Co-integration and Error Correction Model (ECM) on the Quarterly data from 1973 (I) to1988 (IV) of the nine countries. They found that strong empirical support for bidirectional causality between export growth and output growth, which receives in almost all nine countries and there is long-run relationship exist between real exports and real output and this relation is a positive one. A one way causality from economic growth to exports growth is justified by, for instance, Oskooee (2005), Shah and Tian (1998) and Henriques and Sadorsky (1999). They observed that economic growth has upgraded the level of productivity growth and improved productivity is expected to facilitate exports. In reciprocal to ELG Hypothesis, GLE (Growth-led Export) Hypothesis has also been proved by Shirazi and Manap (2004, 2005), Mohan and Nandwa (2007) and Ferda (2007). The studies of Boltho (1996) and Medina-Smith (2001) challenge the empirical literature of ELG Hypothesis and generate suspicions in regard to export promotion strategy as a comprehensive development strategy. Dutt and Ghosh (1996) and Maneschiold (2008) had found mixed results for ELG Hypothesis for all the countries. Like the other countries, the results for India are also mixed and contradictory, which is appeared from Table 2.1. The empirical literature focusing on the export-led growth hypothesis related to single country studies is presented in Table2.1.

Table 2.1Empirical Literature Focusing on the ELG and GLE Hypothesis Related to Single Country Studies

Author (Year) Country Variable Period Results

Krueger (1978) India Real GNP and Real Exports 1954-71 ELG

Ram (1987) India Real GDP, Real exports and 1960-82 No causality Export share

Nandi (1991) India Exports and GDP 1960-1985 ELG

Bhat (1995) India Exports and GDP 1950-1990 BDC

Doraisami (1996) Malaysia Real Exports and Real GDP 1963-1993 BDC

Dutt and Ghosh (1996) India Real Exports and Real GDP 1953-91 No co-integration

Mallick (1996) India Real GNP and Exports 1951-92 GLE

Shan and Tian (1998) Shanghai Real GDP, Exports, Imports, 1990-96 GLE(China) Labour, GFCE and FDI

Dhawan and Biswal (1999) India Real Exports, TOT and GDP 1963-1993 GLE

Henriques and Sadorsky (1999) Canada Real Exports, TOT and GDP 1877-1991 GLE

Ghali (2000) Tunisia Real Exports and Real GDP 1963-1993 BDC



Author (Year) Country Variable Period Results

Medina-Smith (2001) Costa Rica GDP, GDI; , Exports of goods 1950-97 No relationand services; real GFCF and Population series

Lin and Li (2002) China GDP, Investment, 1981-2000 ELGConsumption, Imports and Exports

Awokuse (2002) Canada Real Exports, GDP, TOT, GFCF. 1960-2000 ELG

Shirazi and Abdul Manap (2004) Pakistan Exports, Imports and Output 1960- 2003 ELG

Mamun and Nath (2005) Bangladesh Industrial Production, 1976 -2003 ELGExports of Goods and Services, Exports of Goods only

Dawson (2005) India Exports and GDP 1950-99 BDC

Abou-Stait (2005) Egypt Exports, Imports, GDP and Capital 1977 -2003 No Co-inFormation (investment) tegration

Keong et al. (2005) Malaysia Economic Growth, Exports, ELGImports of consumption goods, GFCF, Labour Force and Exchange Rate.

Musonda (2007) Zambia GDP, Exports, Imports, GFCF, 1970-2003 BDC Labour Force, Real Exchange Rate, TOT and Degree of Openness

Uddin and Noman (2007) Bangladesh Industrial Production 1973-2006 BDCIndex and Exports

Jordaan and Eita (2007) Botswana GDP and Exports 1995-2005 BDC

Jordaan (2007) Namibia GDP and Exports 1970-2005 ELG

Mohan and Nandwa (2007) Kenya Exports and GDP growth 1960-70 to ELG 1970-80

Ferda (2007) Turkey Exports, Industrial Production 1980 -2005 ELGand Terms of Trade

Bhattacharya et al. (2009) India FDI inflow, Exports, Imports 1996-2008 BDCand GDP (quarterly data from

Husein (2009) Jordan GDP; Exports and TOT 1969-2005 BDC

Dash (2009) India Real Exports, IIP, Imports, 1992-2007 ELGReal Exchange Rate

Ullah et al. (2009) Pakistan Real GDP, Exports, Imports, 1970-2008 ELGGFCF and per capita income.

Elbeydi, Hamuda and Gazda (2010) Libya Exports, GDP and Exchange Rate 1980-2007 BDC

Note: Gross Domestic Investment (GDI), TOT (Terms of Trade), GDP (Gross Domestic Product), GNP (Gross National Product), GFCF (Gross Fixed Capital Formation)BDC (Bi-directional Causality), ELG (Export led Growth), GLE (Growth led Export)

Consensus has not been emerged that trade always has a positive influence on a country's rate of economic growth. All empirical studies could not provide definitive proof that international trade causes a country's economy to grow faster,

2as compared to others . It is evident from the analysis of table 2.1 that a group of studies like Krueger (1978), Ram Rati (1987), Nandi (1991), Bahmani-Oskooee and Alse (1993 and 2005), Bhat (1995), Doraisami (1996), Shan and Tian (1998), Dhawan and Biswal (1999), Henriques and Sadorsky (1999), Ghali (2000), Awokuse (2002), Hatemi, J. and Irandoust (2002), Shirazi and Abdul Manap (2004), Mamun and Nath (2005),

Uddin and Noman (2007), Ferda (2007), Husein (2009), Eusuf and Ahmed (2007), Dutt and Ghosh (1996), Boltho (1996), Dash (2009), and Gazda and E. Hamuda (2010) have used time series data to investigate causality but all these studies were failed to provide uniform support for export-led growth hypothesis. This is due to the fact that a uniform relationship between export growth and economic growth among countries is not feasible because of the extensive differences in economic structure exhibited by developing economies and least developed countries. A one way causality (ELG) is justified by several studies like Krueger (1978), Nandi (1991),

λ =trace ∑−Ν 2In [1-(r*) ]

m

i=r+1



Shah and Tian (1998), Henriques and Sadorsky (1999). Oskooee (2005), Ferda (2007), Dash (2009). On the other hand, GLE hypothesis has been proved by Mallick (1996), Dhawan and Biswal (1999), Henriques and Sadorsky (1999), and Shirazi and Manap (2004). A group of studies had found the degree to which the relationship between exports and economic growth is genuine (in both directions), including, Bhat (1995), Doraisami (1996), Ghali (2000), Summer (2004) Uddin and Noman (2007), Jordaan and Eita (2007), Husein (2009), Bhattacharya et al. (2009) and Gazda and E. Hamuda (2010). The test of the relationship between trade and economic growth is not a simple task. Therefore, regular testing of relationship between trade and economic growth is required. The present study is an effort to address this issue.

ATABASE AND RESEARCH METHODOLOGY OF THE STUDY

Database

The present study is based primarily on secondary data. The quarterly data of India relating to all the variables, namely, real exports real GDP and Trade openness under study has been taken from Handbook of Statistics of Indian Economy, 2009 published by the Reserve Bank of India (RBI). The quarterly data have been used in the study from the period of 1996-97 Q1 to 2008-09 Q4, which comprises 52 observations. There are several deflators, which have been used to remove the inflationary effects on the data, but the appropriate deflator was chosen on the basis of the nature of data used. Asafu-Adjaye and Charaborty's analysis was based on data in rupees at current prices; exchange rate fluctuations were therefore, accounted for and the use of the GDP deflator was considered appropriate (Dawson, 2005). In the present study, we have taken data for analysis in rupees terms at current prices. Therefore, it is appropriate to apply the GDP deflator, which gives its value in real domestic purchasing power terms.

The GDP deflator (2000 as base year) was applied as price deflator for all nominal series to deflate the inflationary effects. The value of the real exports is obtained by the value of nominal series in domestic currency divided by the GDP deflator index. Trade openness is defined as the ratio of exports plus imports to GDP. All variables are also transformed to natural logs denoted as lnGDP (real Gross Domestic Product), lnX (real exports), and lnTO (Trade Openness).

Methodology

Granger-Causality test in a multivariate Vector Auto-regression (VAR) framework has considered appropriate to analyze the causal links among the Exports, Trade openness and the GDP, covering the period 1996-97 to 2008-09. The rationale for the selection of this period is that it corresponds with the post WTO period, in which a wide range of reforms have been implemented with a view to convert the Indian economy from closed economy to an open economy. The VAR methodology in econometric modeling was the firstly introduced by the Sims (1980). This model is used to examine the dynamic impact of random disturbances on the systems of

variables. In the standard VAR model, each endogenous variable in the system is modeled as a function of its own past lags, and the past lags of other endogenous variables (Bhattacharyya, 2009).

Unit Root Test (Non-Stationary)

4A time series must be required to be stationary for feasibility of inference and forecasting. A number of unit root tests namely, Augmented Dickey Fuller (ADF) Test, Phillips Perron (PP) Test and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) Test are available to test the stationarity of a time series. In the present paper, we used the Phillips–Perron test to examine whether a variable has a unit root or not. The null hypothesis H0 is that the variables contain a unit root and the alternative hypothesis H1 is that a stationary process has generated the variable. It is based on the

The variables must fulfill two conditions, i.e. (i) all the variables are stationary at same order; and (ii) differenced series or the residual series are stationary at level for the application of Johansen Co-integration Test. PP test has also been used to check the integration order of the variables.

Johansen Co-integration Test

The concept of Co-integration was introduced by Granger (1981, 1983) and Engle and Granger (1987) to explain stationary equilibrium relationship among the non-stationary variables. The Co-integration test was conducted to determine the long-run economic relationship between the variables (Thomas, 1993). This is the first step in exploring the causality relation between the variables. The maximum likelihood test procedure {established by Johansen and Juselius (1990) and Johansen (1991)} was also used to find out the co-integration rank and the number of co-integrating vectors. The null hypothesis of no co-integration is rejected, if there is exist, at least, one co-integrating vector, which exhibit a stable long-run relationship between the variables. The hypotheses of Johansen Co-integration test are as follows.

H : r=0; H : r=10 1

In this case two likelihood ratio tests are considered, namely, the trace test and Maximum Eigen value tests.

Trace Test

In the equation form, trace test is presented as:

Here, N is the number of observations; m is the number of thvariables; and r * is the i correlation between i- pair of i

variables. λ has a chi-square distribution with M-r degrees trace

of freedom. Large values of λ give evidence against the trace

hypothesis of r or fewer co-integration vectors.

–DickeyFuller test of the null hypothesis δ = 0 in Λ y = δ y + u ; where λ is the first difference t t-1 1

operator.

DD



Maximum Eigenvalue Test

According to Johansen and Juselius (1990), this test is more influential than the trace test. Maximum Eigenvalue test evaluates the null hypothesis H : r=0 against alternative 0

hypothesis H : r=1. The following equation is considered for 1

this test:

λ -T In (1-λr+1)max=

Tests for Granger Causality with VECM

The existence of co-integrating vector implies that causality exists in at least one direction. According to Engle and Granger (1987), if two series, say X and Y, are integrated of order one i.e. I (1) and co-integrated, then there is possibility of a causal relationship in at least one direction. In case of existence of no co-integrated vector in the model, the standard VAR should be applied to examine the causal relation between the variables.

Engle and Granger (1987) found that, in the existence of co-integration, there always presents a corresponding error-correction representation, captured by the Error Correction Term (ECT). The ECT means that changes in the dependent variable are a function of the level of disequilibrium in the co-integrating relationship as well as changes in other explanatory variables (Bhattacharya, 2009). It is used to determine long run adjustment of co-integrated variables and the incorporation of ECT in the VECM which allow us to detect both short and long run causal relationship among variables. We applied the Vector Error-Correction Model (VECM) to examine the direction of long-run and short run Causality among real exports, real GDP and trade openness and whether or not the ELG or GLE or both hypotheses are existing in case of India.

Block Exogeneity Wald Test

Finally, the direction of the export-economic growth relationship was attained by using Block Exogeneity Wald Test. The Granger causality test in VAR framework is known as Block Exogeneity Wald Test. This test is used in a multivariate context, when we have two variables; we are interested to know if some of these variables are generated independently of other variables considered (Badani, 2009).

SECTION-III

NDIAN ECONOMY AND EXPORT SECTOR PERFORMANCE DURING THE POST REFORMS PERIOD

Prior to the formation of WTO, India had largely been remained insulated from the

world trading system for more than four decades since independence (Srinivasan, 2001). It has been argued that decades of pursuit of an inward-looking development strategy, almost hostile attitude towards foreign trade, technology and investment and by pessimism about export markets, inevitably led India to become marginalized in world trade (Ibid, 2001). The fluctuations in export earnings had

directly effected the economic growth of the country, therefore, a number of reforms have been taken in the foreign trade policy of India during the liberal trade regime3. The Government of India had launched various incentives schemes to facilitate the Indian exporters that helped in removing the foreign exchange constraints. Efforts have also been made to reorient institutional infrastructure towards creating an export friendly environment to achieve the higher economic growth (Economic Survey of India, 2009-10).

A liberal trade policy was expected to positively influence the performance of Indian trade as like the other countries, namely, East Asian countries (Malaysia, Korea and Philippines), China and Mexico etc. These reforms were concerned with adoption of policies that encourage private domestic and foreign investments; reduction of the government interventions in the economy; and the other policies, which are intended to enhance efficiency and better allocation of resources. These reforms have put a great impact on external sector policy of India and which primarily focused on promotion and development of foreign trade instead of control and regulation over trade.

The performance of Indian exports during the post WTO period is presented in Table 3.1 The data reveals that Indian export sector has expanded during the post WTO period from 1994-95 to 2009-10. The study analyzes the performance of Indian exports by examining the changes in terms of value, volume and unit value of Indian exports. The value of Indian exports has shown a rising trend except in 2001-02. Indian exports also increased in terms of volume till 2002-03, which got reversal in 2003-04. However, the unit value of exports has increased which contributed positively to the Export performance. The increase in the unit value of Indian exports may be resulted due to the change in the commodity composition of the Indian exports during the post-WTO period. Subsequent years witnessed a surge in exports both in terms of volume and unit value with a relatively higher growth of volume.

Export volume increased by 10.2 per cent in 2006-07 mainly due to items like crude materials, machinery and transport equipments, and mineral fuels and lubricants. The unit value of such exports has increased by 13.7 per cent in 2006-07 mainly due to increase in competition of manufactured goods classified chiefly by materials, food and food articles and mineral fuels and lubricants. However, Growth of the unit value index of exports, decelerated in the late 1990s and early 2000s, which declined to 1 per cent in 2001-02. Again it accelerated and attained an average growth of 10.7 per cent per annum during 2003-04 to 2007-08. The data reveals that the export growth in value terms was 8.1 per cent (in US$) in 1990-95 which declined to 7.3 per cent in 1995-00. The value of export growth reached to 21.0 per cent in 2000-01, 20.3 percent in 2002-03, 21.1 per cent in 2003-04 and 30.8 per cent in 2004-05 except 2001-02 in which it turned negative i.e.-1.6 per cent. It reached to 29 per cent in 2007-08 in spite of global recession. However, in 2008-09, the value of Indian export growth rate declined to 13.6 per cent (in US$). The volume of export was 10.2 per cent in 1995-00, which increased sharply to 23.9 per cent in 2000-01. However, it declined to 10.2 per cent in 2006-07, which further declined to 7.9 per cent in recession period 2007-08 and again rose to 9.0 per cent in 2008-09.

II



The study found that the performance of Indian exports in terms of value, volume and unit value has increased during the post WTO period, but in an inconsistent manner.

Table 3.1Performance of Export Sector of India

(Annual Percentage Change)

Year

Value (US$) Volume Unit Value

Export Growth

1990-00 7.7 10.6 8.41990-95 8.1 10.9 12.61995-00 7.3 10.2 4.32000-01 21.0 23.9 3.32001-02 -1.6 0.8 1.02002-03 20.3 19.0 2.92003-04 21.1 7.3 7.52004-05 30.8 11.2 14.92005-06 23.4 15.1 6.12006-07 22.6 10.2 13.72007-08 29.0 7.9 5.12008-09 13.6 9.0 16.92009-10 -20.3 -

Source: - Economic Survey of India 2009-10, and 2003-04

The picture of India's exports, imports, trade balance and the percentage of export and import as GDP of India during the post WTO period are presented in graph 3.1 and 3.2. The share of exports in GDP of the country was 8.92 per cent in 1995-96, which increased to 15.80 per cent in 2008-09, and the share of imports in GDP was 10.29 per cent in 1995-96, which increased to 25.83 per cent in 2008-09.

The growing share of export and import as a percentage of GDP shows the positive impact of liberal policies on the Indian economy. The balance of trade shows a negative balance of (-) Rs. 16326 in 1995-96, which increased to (-) Rs. 511344 in 2009-10. The analysis reveals that both exports and imports have increased during the post reforms period but higher increase in imports has further widened the trade deficits.

SECTION-IV

MPIRICAL RESULTS

Unit Root Test Results

The results of Phillips Perron Test of Unit root are shown in Table 4.1. The test is conducted on both the level and first difference of the

lagged variables. The critical values for the variables are based on Mac Kinnon (1996) i.e. -3.5683, -2.919 and -2.597 at 1 per cent, 5 per cent, and 10 per cent significance level respectively. All variables, 'Exports',' Trade openness', and 'GDP' are non-stationary at the level but all are stationary at the first difference according to this test. This implies that all variables are integrated of order 1 i.e. I (1). We have also checked unit root of the differenced variables series. The results indicate that the differenced series are not stationary at level; therefore we have test the stationarity of residuals series with the help of the following regression equation.

GDP = a+ßX+µ

The residuals in unit root are stationary at level; therefore, the data has justified the properties for the application of Co-integration test.

Johansen Co-integration Test Results

On the basis of results of the PP Test, we observed that all variables, namely, real exports; real GDP; and trade openness have the same order of integration, i.e. I(1), and therefore, the Johansen Co-integration Test has been used to find out the co-integration rank and the number of co-integrated vectors. Prior to conducting this test, the lag length of the test VAR has to be specified. The optimal lag length is chosen based on the minimum values of AIC (Akaike Information Criterion); SBIC (Schwarz' Bayesian Information Criterion); and HQIC (Hannan-Quinn Information Criterion), which is 4 in the present study. The results of Johansen Co-integration Test for the co-integration rank are presented in Table 4.2.

EE

Table 4.1 Univariate Stationary Properties of Time Series Phillips

Perron Test Results (Intercept)

VariableTest Critical Test Critical

statistics values statistics values

LnX -0.5029 (0.8819) -3.5683 -13.526 (0.000*) -3.5683

LnTO -1.783 (0.3842) -3.5683 -15.342 (0.000*) -3.5683

LnGDP -0.4116 (0.8991) -3.5683 -16.625 (0.000*) -3.5683

*MacKinnon (1996) one-sided p-valuesAll the variables are stationary at their first difference and 1 percent level of significance is used.

Level First difference

Imports (% of GDP)

Export (% of GDP)

Valu

e i

n P

erc

en

tag

es

Exports and Imports as % of GDP45

40

35

30

25

20

15

10

50

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

Source: CMIE, 2010 Figure 3.1

Exports

Imports

Trade Balance

1500000

1000000

-1000000

500000

0

-500000

1995

-96

1996

-97

1997

-98

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

1998

-99

Figure 3.2Source: CMIE, 2010



Table 4.2Johansen Co-integration Test Statistics

Hypothesized No. of CE(s)

None * 0.478112 35.47272 29.79707 0.0100

At most 1 0.099159 4.908528 15.49471 0.8185

At most 2 9.72E-06 0.000457 3.841466 0.9847

Trace test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

Eigenvalue TraceStatistic

0.05 Critical Value

Prob.**

Unrestricted Cointegration Rank Test

Hypothesized No. of CE(s)

None * 0.478112 30.56419 21.13162 0.0018

At most 1 0.099159 4.908072 14.26460 0.7534

At most 2 9.72E-06 0.000457 3.841466 0.9847

Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values

Eigenvalue Max-eigenStatistic

0.05 Critical Value

Prob.**

The statistics of the Johansen's λ and λ in Table 4.2 trace max

reveals that long-run relationship exist among the variables under study because the rejection of null hypothesis is suggesting that there is, at least, one co-integrating vector in each sample to exhibit a stable long-run relationship among these three variables.

The results suggest rejection of the null hypothesis of no co-integration presence on the basis of existence of 1 co-integration equation (both tested at 5 per cent significance level). This implies that the alternative hypothesis (H : r=1) 1

could be accepted. According to Trace test, the null hypothesis (H : r=0) is rejected against the alternative hypothesis (H :: 0 1

r=1) at the 5 per cent level of significance. Similarly, in case of Max-Eigen value statistics, the null hypothesis (H : r=0) is 0

rejected against the alternative hypothesis (H : r=1) at the 5 per 1

cent level of significance. Thus, the existence of one co-integrated vector is supported by the empirical evidence, which implies that long-run relationship exist among the variables like export growth, real GDP and Trade Openness in India during the Post-WTO reforms.

VECM Test Results

The results of statistics of the Johansen's λ and λ has trace max

proved that there is long-run relationship exists among the variables under study. According to Engle and Granger (1987), if the variables are co-integrated, then there exists a valid error correction representation of the data. The results of the vector error correction model are summarized in Table 4.3.

The term ECM (Error Correction Model) is used to determine the speed of adjustment of the system towards a long-run equilibrium and, the short-run dynamics are captured through the individual coefficients of the difference terms. The coefficient of Error correction tells us about whether the past values of the variables affect the current values of the variables under study and, a significant coefficient means that past

equilibrium errors plays a role in determining the current outcomes (Bhattacharyya, 2009). The co-integrating equations are shown in Table 4.3 and the detailed results VECM is presented in Annexure-I. The changes in Export are shown in first column, changes in Trade Openness are shown in second column, and changes in GDP are shown in third column. The lagged coefficient of ÄX and ÄX are negative t-2 t-3

and statistically significant at the 1 per cent level of significant, which implies that uni-directional causality running from exports to GDP.

The estimate of ECT is positive and is statistically significant t-3

at the 5 per cent level of significance, which implies that error term contributes in explaining the GDP changes and a long-term relationship exists between independent variables and the GDP. The lagged coefficient of ÄTO is positive and t-2

statistically significant, indicates that higher trade openness has a positive impact on the GDP.

Table 4.3Summarized Form of Results of VEC Model

LNX(-1) 1.000000

LNTO(-1) -0.543131

(0.06205)

[-8.75372]

LNGDP(-1) -1.116951

(0.05508)

[-20.2778]

C 2.971911

Error Correction: D(LNX) D(LNTO) D(LNGDP)

CointEq1 -0.851289 -0.290856 0.118067

(0.44675) (0.45288) (0.05854)

[-1.90553] [-0.64224] [ 2.01694]**

R-squared 0.518908 0.632384 0.988150

Adj. R-squared 0.329388 0.487566 0.983482

Sum sq. resids 0.277015 0.284670 0.004756

S.E. equation 0.091621 0.092878 0.012005

F-statistic 2.738001 4.366736 211.6864

Cointegrating Eq: CointEq1

Note: * and ** denote statistical significance at 1 per cent and 5 per cent levels of significance respectively.

Vector Error Correction EstimatesSample (adjusted): 6 52Included observations: 47 after adjustmentsStandard errors in ( ) & t-statistics in [ ]

Causality Test with VECM

The results of the causality test with VECM are presented in Table 4.4. The analysis of Table reveals that bi-directional causality exists among the export growth and GDP of India. Uni-directional causality can also be noticed between the trade openness and GDP, which is running from the trade openness to the GDP of India. It implies that Trade openness has positively influenced the GDP of India.



Table 4.4VEC Granger Causality/Block Exogeneity Wald Tests

Excluded Chi-sq df Prob.

D(LNX) 16.07821 4 0.0029

D(LNTO) 14.57859 4 0.0057

All 21.90103 8 0.0051

Dependent variable: D(LNGDP) 6a

D(LNX)------- D(LNGDP)D(LNTO)------- D(LNGDP)


D(LNGDP) 10.95593 4 0.0271

D(LNTO) 4.809719 4 0.3074

All 12.75518 8 0.1206

Dependent variable: D(LNX) 6b

D(LNGDP)------- D(LNX)


D(LNGDP) 7.783849 4 0.0998

D(LNX) 3.463586 4 0.4834

All 22.80008 8 0.0036

Dependent variable: D (LNTO) 6c

ONCLUSIONS AND RECOMMENDATIONS

Different trade models have provided useful insights into how international trade increases

2human welfare . Therefore, the testing of the hypothesis that trade have positive influence

on economic growth had remained a crucial issue in the present times. As trade and growth depend on many other economic, social, and political factors, therefore, the study of relationship between trade and economic growth is a complex one. The early empirical studies on international trade and growth relied more on correlation and simple regression methods that could be performed on mechanical calculations. However, by the 1980s multiple regression analysis had

2become the standard tool of analysis . As a result, much of the research on the relationship between trade and growth over the past two decades had increasingly applied more sophisticated statistical methods to seek more accurate

2estimates of the relationship between trade and growth . The study in question has attempted to analyze the relationship between three variables i.e. export growth, trade openness and economic growth within the framework of Vector Error Correction Model (VECM) using the Johansen technique of co-integration and the Granger test of causality.

The analysis of statistical data with the help of advanced techniques shows that there exist a bi-directional causality between exports and economic growth during the study period. The findings of our study are in consonance with number of studies, namely, Oskooee (1993), Doraisami (1996), Ghali (2000), Summer (2004), Dawson (2005), Musonda (2007), Noman (2007), Husein (2009), Bhattacharya et al. (2009) and Gazda (2010). The implementation of Economic reforms in regard to trade liberalization during the Post-WTO

period has led to a favorable foreign trade policy during this period. The liberalization in imports has also contributed to the growth of exports which has led to higher import intensity in Indian Exports, which has resulted into negative impact on the balance of trade during the period under study.

Numbers of measures have been introduced during the Post-WTO Era, namely, simplification of Import-Export procedure, reduction in Tariffs and Non-Tariffs barriers, Foreign Currency reforms, Liberal Credit, setting up of Export Promotion Zones, incentives for the Foreign Companies and Joint Ventures etc. The formation of WTO, growth and improvement in infrastructure (i.e. roads, railways and ports etc), both in terms of quantity and quality, are the positive developments in India. The reduction in tariff rates and removal of non-tariff barriers as per the provisions of WTO compliance has also contributed to the higher growth in exports.

The study also found the Uni-directional causality among the trade openness and GDP of India. The analysis of data reveals that higher trade openness has a positive impact on the GDP of India during the Post-WTO period. It is clear from the empirical evidences that globalization and liberal trade regime have helped to create a more open trade environment which led to positive spillover effects on the economic growth of the country.

The findings of the study support the outward looking policies (Trade Openness) and Exports expansion approach. In case of India as it happened in others cases. Export expans² has contributed to the economic growth of India during the Post-WTO period which has become an integral part of economic development strategy. At the same time, the finding of our study does not undermine the contribution of other factors that are indispensable for economic growth.

Hence, in case of India, the study recommends that in order to make Indian exports more competitive in the international market, and to improve level of productivity of Indian export sector, a number of measures, including, the diversification of export commodities, infrastructure development, further more reduction in tariff barriers and quantitative restrictions, increase in the incentives and subsidies to exporters and operationalization of Export Processing Zones (EPZs) are required. It is pertinent to mention that in spite of existence of the positive relationship between the GDP, export growth and trade openness, there is question mark how this development has contributed to the level of income inequalities, impact on poverty reduction and generation of employment in India.

Therefore, the study suggests that further empirical investigation is required to see the impact of these variables on the overall welfare of the society during the Post-WTO period in general and India in particular.

Important Notes

1Asian tigers include Taiwan, Hong Kong, Singapore and Korea

have been successful in achieving high and persistent rates of economic growth since early 1960s; because of their free market, outward oriented economies.

CC



2 Berg, Hendrik V. D. and Joshua J. Lewer (2007), “International

Trade and Economic Growth” published by Prentice Hall of India Pvt. Ltd, New Delhi.

3 The philosophy behind the trade liberalization was that the

role of government in making decisions on resource

allocation should be lessened and the incentive structure should change in favour of exports through import liberalization in order to follow an export promotion lane.

4 A time series is stationary (in the sense of weak stationarity) if

its mean, variance and covariance remain constant overtime.

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167-182. 14 Gazda and Elbeydi, Khaled (2010), The Relationship between Export and Economic growth in Libya Arab Jamahiriya, Theoretical and Applied Economics,

XVII 1 (542): 69-7615 Ender, W (1995), Applied Econometric Time Series, John Wiley & Sons, New York 16 Ferda, Halicioglu. (2007), A Multivariate Causality Analysis of Export and growth for Turkey, MPRA Paper No.3565, Munich Personal RePEc Archive 17 Ghali, Khalifa H. (2000), Export Growth and Economic Growth: The Tunisian Experience, The Journal of King Saud University, Administrative Science,

12(2): 127-140. 18 Hamilton, J.D (1994), Time Series Analysis, published by Princeton University Press, Princeton, New Jersey 19 Henriques, I. & Perry Sadorsky. (1999),Export-led Growth-Driven Exports? The Canadian Case, Canadian Journal of Economics, 29(3): 540-555.20 Husein, Jamal (2009), Export- Led Growth Hypothesis: A Multivariate Co integration and Causality evidence for Jordan, in The Journal of Developing Areas,

42 (2): 253-266.21 J. Bhatta-charya. and Mousumi Bhatta-charya. (2009), ‘India’s Exports, Imports, FDI and Economic Growth after Liberalization-A Causal Analysis’, NICE

Journal of Business, 4(2) July-December.22 Kavoussi, R. M.(1984), Export Expansion and Economic Growth: Further Empirical Evidence, Journal of Development Economics, 14: 241-250.23 Krueger, Anne O. (1998), Why Trade Liberalization is Good for Growth, The Economic Journal, Vol. 108, issue 450, September, pp.1513-22.24 Summer Musleh-UD Din (2004), Exports, Imports, and Economic Growth in South Asia: Evidence using a Multivariate Time Series Framework, The

Pakistan Development Review, 43(2): 105-12425 Lin, Justin Yifu. and Yongjun Li. (2002), Export and Economic Growth in China: A Demand-Oriented Analysis, China Economic Quarterly, 2 (4): 779-794.26 Mallick, S. K. (1996), Causality between Exports and Economic Growth in India: Evidence from Co integration Based Error-Correction Model, Indian Journal

of Economics, LXXVI, 302 : 307-320. 27 Mamun, Khawaja Abdullah Al. and Hiranya K Nath. (2005), Export-led Growth in Bangladesh: A Time Series Analysis, Applied Economics Letters, 12: 1-11.28 Maneschiold Per-Ola (2008), A Note on the Export- Led Growth Hypothesis: A Time Series Approach, Cuadernos De Economia, 45 (132): 293-302.29 Medina-Smith, Emilio J. (2001), Is The Exports-Led Growth Hypothesis Valid For Developing Countries? A Case Study of Costa Rica, United Conference on

Trade and Development, United Nations, Geneva 2001.30 Michaely, M. (1977), Exports and Growth: An Empirical Investigation, Journal of Development Economics, 4, 49-53. 31 Mohan, R and Boaz Nandwa (2007), Testing Export-led Growth Hypothesis in Kenya: An ADRL Bounds Test Approach, MPRA, No. 5582, Munich Personal

RePEc Archive.32 Musonda, Ireen. (2007), Is Economic Growth Led By Exports in Zambia, Ministry of Finance and National Planning-Planning and Economic Management

Lusaka, Zambia. 33 Nandi, S. (1991), Export and Economic Growth in India: Empirical Evidence, Indian Economic Journal 38: 3, 53-5934 Ram, Rati. (1985), Exports and Economic Growth: Some Additional Evidence, Economic Development and Cultural Change, 33(2), January, 415-425. 35 Shan, Jordan and Gang Tian Gary. (1998), Causality between Exports and Economic Growth: The Empirical Evidence from Shanghai, Australian Economic

Paper: pp. 195-202.36 Shirazi, Nasim Shah. and Turkhan Ali Abdul Manap. (2004), Exports and Economic Growth Nexus: The Case of Pakistan, The Pakistan Development Review,

43 (4): 563-581.37 Shirazi, Nasim Shah. and Turkhan Ali Abdul Manap (2005), Export-Led Growth Hypothesis: Further Econometric Evidence from South Asia, The Developing

Economics, XLIII: 472-488.38 Srinivasan, T.N. (2001), Economic Reforms in South Asia, in Krueger, A.O. (edit book), Economic policy reforms: the second stage, Chicago University Press,

Chicago. 39 The Government of India (2010), Economic Survey 2009-10, Ministry of Finance, Oxford University Press, New Delhi 40 Thomas, R.L (1993), Introductory Econometrics: Theory and Applications 2nd ed. (London: Longman)

Tyler, W. (1981), Growth and Export Expansion in Developing Countries: Some Empirical Evidence, Journal of Development Economics, 9(1):121-130.41 World Bank (1991), World Development Report 1991, Oxford University Press, New York.42 Uddin, M Gazi Salah and Abdullah M. Noman. (2009), Causality between Industrial Production and Exports in Bangladesh’, Business and Economics, 44-

57, accepted to the second International Conference of Global Business and Management Forum 2009, Department of Finance, University of Dhaka, Bangladesh and Global Business and Management Forum, USA, Dec 22-23.



LNX(-1) 1.000000LNTO(-1) -0.543131

(0.06205)[-8.75372]

LNGDP(-1) -1.116951 (0.05508)[-20.2778]

C 2.971911Error Correction: D(LNX) D(LNTO) D(LNGDP)CointEq1 -0.851289 -0.290856 0.118067

(0.44675) (0.45288) (0.05854)[-1.90553] [-0.64224] [ 2.01694]**

D(LNX(-1)) 0.408141 0.415777 -0.082686 (0.47424) (0.48075) (0.06214)[ 0.86061] [ 0.86485] [-1.33062]

D(LNX(-2)) 0.506403 0.730298 -0.212900 (0.41903) (0.42478) (0.05491)[ 1.20852] [ 1.71925] [-3.87757]*

D(LNX(-3)) 0.209450 0.462458 -0.142726 (0.48999) (0.49672) (0.06420)[ 0.42745] [ 0.93102] [-2.22299]*

D(LNX(-4)) -0.111810 -0.055510 -0.034603 (0.44703) (0.45317) (0.05857)[-0.25012] [-0.12249] [-0.59076]

D(LNTO(-1)) -0.316233 -0.359916 0.025074 (0.42090) (0.42667) (0.05515)[-0.75133] [-0.84354] [ 0.45465]

D(LNTO(-2)) -0.582056 -1.082091 0.184689 (0.37684) (0.38201) (0.04938)[-1.54459] [-2.83265]* [ 3.74038]*

D(LNTO(-3)) 0.077682 -0.209741 0.061884 (0.45947) (0.46578) (0.06020)[ 0.16907] [-0.45030] [ 1.02790]

D(LNTO(-4)) 0.378020 0.101028 0.020304 (0.43163) (0.43755) (0.05656)[ 0.87580] [ 0.23090] [ 0.35901]

D(LNGDP(-1)) 0.791547 0.831774 -0.220958 (0.79684) (0.80777) (0.10441)[ 0.99336] [ 1.02971] [-2.11625]**

D(LNGDP(-2)) -0.398790 -0.367372 -0.090570 (0.83896) (0.85048) (0.10993)[-0.47534] [-0.43196] [-0.82389]

D(LNGDP(-3)) 1.166018 0.947577 -0.143736 (0.70946) (0.71920) (0.09296)[ 1.64353] [ 1.31755] [-1.54619]

D(LNGDP(-4)) 1.064136 0.088653 0.653098 (0.73505) (0.74514) (0.09631)[ 1.44770] [ 0.11898] [ 6.78087]

C -0.040990 -0.034192 0.021989 (0.05240) (0.05312) (0.00687)[-0.78231] [-0.64372] [ 3.20281]*

R-squared 0.518908 0.632384 0.988150 Adj. R-squared 0.329388 0.487566 0.983482 Sum sq. resids 0.277015 0.284670 0.004756 S.E. equation 0.091621 0.092878 0.012005 F-statistic 2.738001 4.366736 211.6864

Cointegrating Eq: CointEq1

ANNEXURE IResults of VEC Model

Note: * and ** denote statistical significance at 1 per cent and 5 per cent levels of significance respectively

Vector Error Correction EstimatesSample (adjusted): 6 52Included observations: 47 after adjustmentsStandard errors in ( ) & t-statistics in [ ]

ABSTRACT

The article examines the emergence of the concept of corporate governance through a historical discussion. It briefly describes the emergence of certain global institutions enunciating the basic principles of good Corporate Governance. It discusses the role of Four main authorities involved in corporate governance in India. A critical evaluation of different corporate governance measures has also been done. It finally concludes that proper implementation of the code of corporate governance requires a judicious mix of stakeholders' vigilance, effective legislative measures, positive institutional support and self-regulation by the professional accountants and the top managerial personnel involved in this process.

Corporate Governance - Corporate Governance - A A Tool Tool For For Effective Effective FinancialFinancial

Reporting & Control Reporting & ControlS.N. Maheshwari

CONCEPT OF CORPORATE GOVERNANCE

The good governance is the expectation of a stakeholder in every walk of life. This expectation has lately come to be recognized as a right in the corporate world also. Corporate Governance is, therefore, the new buzzword in corporate jargon. Its concept has emerged over the last two decades. It requires, by corporations, timely and accurate disclosures on all material matters relating to them, viz., financial position, performance, ownership and governance of the corporation etc.

The objective of corporate governance is compliance with corporate laws and rules on the legislative side and proper accountability to the stakeholders, legally and morally. Corporate governance is a compulsion of long-term corporate existence. Its importance and significance has greatly increased in the present era of liberalization, privatization and globalization. The concept of corporate governance has been well spelt over by Sir Adrian Cadbury, in the following words: “Corporate Governance is considered with holding the balance between economic and social goals and between individual and community goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society”.

According to Organization for Economic Co-operation & Development, “Corporate Governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth”.

Thus, corporate governance aims at enhancement of the long-term shareholder value while at the same time, protecting the interests of other stakeholders' viz., the suppliers, customers, creditors, bankers, employees, government and the society at large. Good corporate governance is essential not only for gaining credibility and trust but also as a strategy for survival, consolidation and growth. The main constituents of corporate governance are the Shareholders, the Board of Directors and the Management.

The need and importance of corporate governance can best be conveyed from the following statement of Benjamin

1Franklin .

“A little neglect may breed great mischief – for the want of a nail, the shoe was lost; for the want of a shoe, the horse was


CORPORATE GOVERNANCE - A TOOL FOR EFFECTIVE FINANCIAL REPORTING & CONTROL

lost; for the want of a horse, the rider was lost; and for the want of a rider; the battle was lost”.

MERGENCE OF CORPORATE GOVERNANCE

The concept of corporate governance gained prominence in academic and professional literature towards the end of 20th century, particularly in the year 1980 and onwards. In

UK, many corporations collapsed in the late 1980s and the early 1990s. Notable cases were BCCI, Polly Peck and pension funds of the Maxwell Communication Group. The impact of the failures of these corporations was quite severe on the society as a whole resulting in boost of the debate on corporate governance. The resultant focus on the issue of corporate governance culminated in the Cadbury Report on the financial aspects of the corporate governance in 1992, the Green Bury Report on Directors' Remuneration in 1995, the Preliminary and Final Hampel Report on Corporate Governance in 1997 and 1998. The stock exchange listing rules were also amended in UK w.e.f. July 1993 in compliance with the Cadbury Committees' Report.

In the US, the intensive debate on the corporate governance system was initiated in the 1980s during a period of widespread corporate restructuring and takeovers. Tread Way Commission Report was published in the US in October 1987. The report was essentially in respect of fraudulent financial reporting. The Securities and Exchange Commission of the US updated the listing requirements for the corporation in 1988 following the above reporting. Later on, the collapse of Enron, large scale misreporting of World Dotcom, Quest and action against a leading auditing company KPMG, and the resultant public annoyance, all made the US Government to take appropriate legislative measures. Consequently, the Sarbanes-Oxley Act was passed by the US Congress in June, 2002. This is, by far, the most sweeping reform of corporate governance in USA since the great depression of thirties. The most outstanding aspect of the Act is the better regulation of auditors and restrictions on what they can and cannot do.

In India, the history of corporate governance dates back to the year 1998 with the setting of corporate governance code developed by the Confederation of Indian Industries (CII). The initiative got momentum by constitution of the Corporate Governance Committee by SEBI under the chairmanship of Shri Kumar Mangalam Birla. The recommendations of the Committee were accepted by the SEBI vide press release dated 21.02.2000, as a result of which, a Clause 49 on corporate governance was incorporated in the Listing Agreement of the stock exchanges. Simultaneously, the Central Government came forward with the Companies (Amendment) Act, 2000, which introduced many provisions relating to corporate governance, viz., additional grounds of disqualification of directors in certain cases, setting up of audit committees, directors' responsibility statement as a part of Directors' Report etc.

The Enron debacle of 2001, the scam involving the fall of

EE

1 th thOne of the founding fathers of United States ( Jan. 17 , 1706 - April 17 , 1790)


corporate giants in the US like World Com, Quest, Global Crossing and the enactment of stringent Sarbanes – Oxley Act in the US, referred earlier, were some important factors which led the Indian Government to wake up and appoint in the year 2002, the Naresh Chandra Committee. The Committee was asked to examine and recommend drastic amendments to the law involving Auditors-Client relationships and the role of the individual auditors. The committee, in its report, made several recommendations regarding auditor company relationship, independence of auditors, disqualification for audit assignments, prohibition of non-audit services by the auditors, rotation of audit firms, disclosures by auditors, appointment and remuneration of auditors etc. In 2002, SEBI itself constituted a Committee under the chairmanship of Narayan Murthy, Chairman of Infosys Technologies limited, to review the performance of corporate governance in India and make appropriate recommendations. The Committee submitted its report to the SEBI on 8th February, 2003. In the meantime, the government accepted most of the recommendations of Naresh Chandra Committee and consequently significant changes were introduced by SEBI in Clause 49 of the Listing Agreement. The Report also became a basis for major changes in the laws governing professional bodies and The Companies Act, 1956.

stOn 1 July, 1949, under an Act of Parliament. The Institute of Chartered Accountants of India (ICAI) was established as a statutory and autonomous body for regulating the profession of chartered accountants in India. The ICAI is basically responsible, through its members, for transparency in accounting and financial reporting. It is now accepted all over the globe that there is a close nexus between the accounting profession and good corporate governance. Realizing this responsibility, the Institute has reviewed and is constantly reviewing many fundamental standards and practices of the accounting and audit profession. It has, therefore, come out with appropriate accounting and audit standards from time to time, which are bound to promote excellence in corporate governance. Post – Enron the ICAI has also established Peer Review Board for the purpose of enhancing quality of professional work, transparency in technical standards resulting into more reliable and useful audit and reports.

The establishment of Institute of Company Secretaries of stIndia (ICSI) on 1 January, 1981 under an Act of Parliament was

another landmark development to develop and regulate the Company Secretaries profession. Keeping pace with developments in corporate environment, the ICSI, as a responsible professional body, is taking a number of initiatives for promoting Good Governance in Corporate India.

LOBAL INSTITUTIONS FOR CORPORATE GOVERNANCE

Good Corporate Governance has always been considered as a distinctive brand and benchmark in the profile of corporate

excellence all over the business world. This is evident from the continuous updation of guidelines, rules and regulations by the concerned voluntary or statutory bodies established on a national or global basis.

We are giving below the principles/guidelines concerning Corporate Governance framed by two major global institutions.

I O rg a n i s a t i o n f o r Ec o n o m i c Co - o p e r a t i o n & Development (OECD):

This is an international economic organization of 34 countries founded in 1961 to stimulate economic progress and world trend. It has its head quarters in Paris, France.

OECD first released its principles of Corporate Governance in May, 1999 and later revised them in 2004. The principles are intended to assist governments in different countries to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries and to provide guidelines and suggestions for stock exchanges, investors, corporations and other parties that have a role is the process of developing good corporate governance. They are not intended to substitute for government, semi-government or private sector initiatives to develop more detailed “best practices” in Corporate Governance.

OECD Principles of Corporate Governance cover six key areas as given below:-

(i) Ensuring the basis for an effective corporate governance framework: The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

(ii) The rights of shareholders and key ownership functions: The corporate governance framework should protect and facilitate the exercise of shareholders' rights.

(iii) The equitable treatment of shareholders: The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

(iv) The role of stakeholders in corporate governance: The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

(v) Disclosure and transparency: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

(vi) The responsibilities of the board: The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of

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management by the board, and the board's accountability to the company and the shareholder.

It is heartening to note that recently the market regulator SEBI has declared its intentions to keep the domestic corporate governance norms aligned with global standards ratified by the Organization for Economic Co-

2operation and Development (OECD) .

II. World Council for Corporate Governance (WCFCG):

The Council, with headquarters in London (UK), has been established to help improve the quality of corporate governance practices worldwide by promoting greater transparency, integrity, probity, accountability and responsibility. It aims to achieve its vision through a four-pronged action plan called IDEA.

(i) Interaction: Broaden the interaction among all stakeholders involved in corporate governance process;

(ii) Dialogue: Identify specific needs of developing and transition economies and use the power of dialogue to build a consensus and create partnerships among all stakeholders especially public and private sectors and capital providers with a view to adopting best corporate governance practices;

(iii) Exchange: Exchange information, experience and knowledge about best practices in corporate governance worldwide through conferences, seminars, workshops and roundtables;

(iv) Action: Provide hands-on technical support to help developing and transition economies to bridge the gap between them and developed countries.

In recognition of adoption of excellent corporate governance practices, the council honors a corporate by its “Golden Peacock Award” for excellence in Corporate Governance. Some of the Indian Companies which have received this award are DLF Ltd., Reliance Industries Ltd. and Satyam Ltd. etc.

In recognition of adoption of excellent corporate governance practices, the council honors a corporate by its “Golden Peacock Award” for excellence in Corporate Governance. Some of the Indian Companies which have received this award are DLF Ltd., Reliance Industries Ltd. and Satyam Ltd. etc.

UTHORITIES INVOLVED IN CORPORATE GOVERNANCE IN INDIA

It is a well established fact that good corporate governance practices enhance company's value and stakeholders' trust. This results in

robust development of capital market, the economy and the constructive shareholders activism.

In India efforts have been made to bring good corporate 2 thPTI News, Friday May 25 , 2012

governance through both regulatory and voluntary measures besides involving all stakeholders.

Some of the important authorities involved in Corporate Governance in India are as under:-

1. The Central Government

2. The Securities Exchange Board of India (SEBI)

3. The Institute of Chartered Accountants of India (ICAI)

4. The Institute of Company Secretaries of India

The relevant steps taken by the above authorities are being explained in the following pages:

1. THE CENTRAL GOVERNMENT

The Central Government has taken several measures for effective corporate governance. They can broadly be discussed under the following heads:-

(1) The Companies Act, 1956

(2) The Companies Bill, 2011

(3) Corporate Governance – Voluntary Guidelines 2009

(1) The Companies Act, 1956

The Central Government has incorporated appropriate legislative measures pertaining to corporate governance in The Companies Act, 1956. The Act has been amended from time to time. Some of the important amendments have been in 1960, 1963, 1966, 1969, 1974, 1977, 1985, 1988, 2000, 2001 and 2002 and most recently in 2006. The Companies Act 1956 may be totally replaced by a New Companies Act, as and when the Companies Bill 2011, now before in Parliament, is passed and becomes an Act. The bill when passed, will grant shareholders greater powers and help make boardroom decisions transparent. The main provisions of the Companies Act, as amended up to date, relating to disclosure and transparency in the working of companies with the objective of better corporate governance are being summarized below:-

a. Laying before company, annual accounts and balance sheet (Sec. 210): At every annual general meeting of a company the Board of Directors of the company are required to lay before the company:

(i) A Balance Sheet as at the end of the period specified.

(ii) A Profit and Loss Account for that period.

b. Form and contents of balance sheet and profit and loss account (Sec. 211): Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit.



Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of part II of Schedule VI, so far as they are applicable thereto.

Every profit and loss account and balance sheet of the company shall comply with the accounting standards.

Where the profit and loss account and the balance sheet of the company do no comply with the accounting standards, such company shall disclose in its profit and loss account and balance sheet, the following, namely:-

(I) The deviation from the accounting standards;

(ii) The reason for such deviation; and

(iii) The financial effect, if any, arising due to such deviation.

c. Balance sheet of holding company to include certain particulars as to its subsidiaries (Sec. 212): There shall be attached to the balance sheet of a holding company having a subsidiary or subsidiaries, at the end of the financial year as at which the holding company's balance sheet is made out, the following documents in respect of such subsidiary or of each such subsidiary, as the case may be: Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set

(i) A copy of the balance sheet of the subsidiary;

(ii) A copy of its profit and loss account;

(iii) A copy of the report of its Board of directors;

(iv) A copy of the report of its auditors; and

(v) A statement of the holding company's interest in the subsidiary

d. Profit and loss account to be annexed and auditors' report to be attached to balance sheet (Sec. 216): The profit and loss account shall be annexed to the balance sheet and the auditor's report (including the auditors' separate, special or supplementary report, if any) shall be attached thereto.

e. Board's report (Sec. 217):

(i) There shall be attached to every balance sheet laid before a company in general meeting, a report by its Board of Directors, with respect to:

(a) The state of the company's affairs;

(b) The amount, if any, which it proposes to carry to any reserves in such balance sheet;

(c) The amount, if any, which it recommends should be paid by way of dividend;

(d) Material changes and commitments, if any, affecting the financial position of the company which have

occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report;

(e) The conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed.

(ii) The Board's report shall, so far as is material for the appreciation of the state of the company's affairs by its members and will not in the Board's opinion be harmful to the business of the company or of any of its subsidiaries.

(iii) The Board's report shall also include a Directors' Responsibility Statement, indicating therein:

(a) That in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;

(b) That the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period.

(c) That the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d) That the directors had prepared the annual accounts on a going concern basis.

f. Right of member to copies of balance sheet and auditors' report (Sec. 219):

A copy of every balance sheet (including the profit and loss account, the auditors' report) which is to be laid before a company in general meeting shall, not less than twenty-one days before the date of the meeting, be sent to every member of the company.

g. Appointment, removal, qualifications, powers duties etc. of the auditors (Secs. 224-230): The statutory auditor in a company is the lead actor in the disclosure front. This has been amply recognized vide Sections 224 to 230 of the Companies Act, as summarized and discussed below:

(I) Auditors are appointed by the shareholders. Hence, they have a fiduciary relationship with them. (Sec. 224)

(ii) The independence of the auditors is guaranteed by the fact that the provisions relating to removal of auditors are more stringent than that for reappointment. Appointment or reappointment can be done by an ordinary resolution while removal requires a special notice to be given to



the company, besides an ordinary resolution. A copy of such a notice has to be sent to the concerned auditor to enable him to represent his case. (Sec. 225)

(iii) The statutory auditor has a right of access at all times to the books of account and vouchers of the company. (Sec. 227)

(iv) The auditor has to include the following matters in his report:

(a) Whether in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give true and fair view –

• In the case of the balance sheet, of the state of the company's affairs as at the end of its financial year; and

• In the case of the profit and loss account, of the profit or loss for its financial year.

(b) Whether he has obtained all the information and explanations, which to the best of his knowledge and belief were necessary for the purposes of his audit;

(c) Whether, in his opinion, proper books of account as required by law have been kept by the company so f a r a s a p p e a r s f r o m h i s e x a m i n a t i o n o f those books, and proper returns adequate for the purpose of his audit have been received from branches not visited by him;

(d) Whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns;

(e) Whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards as prescribed.

(f) Whether any director is disqualified from being appointed as director because of the public company in which he is a director, has failed to file the annual accounts or failed to repay its deposit or interest thereon or redeem its debentures on due date or pay dividend and such failure continues for at least one year. (Sec. 227)

(v) The auditor's report shall be read in general meeting and shall be open to inspection by any member of the company. (Sec. 230)

h. Power of Central Government to direct special audit in certain cases (Sec.:233 A)

(a) The central Government has also power to direct

special audit of company's accounts. If it is of the opinion that the affairs of the company are not being managed in accordance with sound business principles or product commercial practices: or

(b) That the company is being managed in a manner likely to cause serious injury or damage to the interests of the trade, industry or business to which it pertains; or

(c) That the financial position of any company is such as to endanger its solvency.

(2) The Companies Bill 2011

The bill contains following important provisions for enforcement of good Corporate Governance:-

(a) National Financial Reporting Authority:

Clause 132 of the bill authorizes Government to constitute by notification, National Financial Reporting Authority for matters relating to accounting and auditing standards. It shall perform the prescribed functions including monitoring the compliance and overseeing the quality of service professionals associated with ensuring the compliance with such standards. The authority shall have the power to investigate the matters of misconduct by any member of Institute of Chartered Accountants of India, Institute of Cost Accountants of India or Institute of Company Secretaries of India or any other prescribed profession.

(b) Corporate Social Responsibility Committee (CSR):

Each business entity is expected to have a CSR Policy to guide its strategic planning and provide a road map for its CSR initiatives. The Policy has to care for all stakeholders and the governance system should be ethical, transparent and accountable. Keeping this mind, Clause 135 of the bill provides that every company having the prescribed net worth or turnover or net profit during any financial year shall constitute a Corporate Social Responsibility Committee of the Board. The committee shall formulate the policy and place on its website. The Board shall endeavor to ensure that at least 2% of the average net profits of the company made during the three immediately preceding financial years shall be spent on such policy every year.

(c) Appointment of Independent Directors:

Clause 150 of the Bill provides that the method of selection of independent directors and maintenance of Data Bank of independent directors. Schedule IV attached to the bill gives code for Independent Directors.

The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfillment of their responsibilities in a professional and faithful manner will



promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.

It also contains Role, Functions, Duties, Manner of Appointment, Reappointment, Resignation or Removal, Separate Meetings and Evaluation Mechanism etc. of Independent Directors.

(d) Appointment of Director by Small Shareholders:

Clause 151 of the Bill provides that a listed company may have one director elected by small shareholders in such manner and with such terms as may be specified. This provision is expected to protect the interests of the small shareholders.

(e) Audit Committee:

Clause 177 of the bill provides that the Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority:

(f) Nomination and Remuneration Committee and Stakeholders Relationship Committee: Clause 178 of the bill provides as under:

(i) The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one half shall be independent directors.

(ii) The Board of Directors of a company which consists of more than one thousand shareholders, debenture-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.

(g) Disclosures:

Schedule V attached the bill requires the following disclosures in the Board of Director's Report under the heading “Corporate Governance”:-

(i) all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors;

(ii) details of fixed component and performance linked incentives along with the performance criteria;

(iii) service contracts, notice period, severance fees;

(iv) stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.

(3) Corporate Governance – Voluntary Guidelines 2009

The Ministry of Corporate Affairs, Govt. of India, realizing that there are inherent limitations in enforcing many aspects of corporate governance through legislature or regulatory means has come out with a set of “Voluntary Guidelines 2009”, for considerations and adoption by corporates.

These guidelines are not intended to be a substitute for or additions to the existing laws but are recommendatory in nature. As discussed later, the Securities Exchange Board of India (SEBI), has incorporated many of these guidelines, amending wherever necessary in clause 49 & listing agreement. These voluntary guidelines are briefly given below:

1. Appointment of Directors

(i) Appointments to the Board: Companies should issue formal letters of appointment to Non-Executive Directors (NEDs) and Independent Directors – as is done by them while appointing employees and Executive Directors. The letter should specify:

• The term of the appointment;

• The expectation of the Board from the appointed director, the Board-level committee(s) in which the director is expected to serve and its tasks;

• The fiduciary duties that come with such an appointment along with accompanying liabilities;

• Provision for Directors and Officers (D&O) insurance, if any,;

• The Code of Business Ethics that the company expects its directors and employees to follow;

• The list of actions that a director should not do while functioning as such in the company; and

• The remuneration, including sitting fees and stock options etc., if any.

Such formal letter should form a part of the disclosure to shareholders at the time of the ratification of his/her appointment or re-appointment to the Board.

(ii) Separation of Offices of Chairman & Chief Executive Officer: To prevent unfettered decision making power with a single individual, there should be a clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/Chief Executive Officer (CEO).

(iii) Nomination Committee: The companies may have a Nomination Committee comprising of majority of Independent Directors, including its Chairman. The major function of this Committee is to consider proposals



for searching, evaluating and recommending appropriate Independent Directors and Non-Executive Directors (NEDs).

(iv) Number of Companies in which an Individual may become a Director: In case an individual is a Managing Director or Whole-time Director in a public company the maximum number of companies in which such an individual can serve as a Non-Executive Director or Independent Director should be restricted to seven.

2. Independent Directors

(i) Attributes for Independent Directors: The Board should put in place a policy for specifying positive attributes of Independent Directors such as integrity, experience and expertise, foresight, managerial qualities and ability to read and understand financial statements.

(ii) Tenure for Independent Director

(i) An Individual may not remain as an Independent Director in a company for more than six years.

(ii) No individual may be allowed to have more than three tenures as Independent Director.

(iii) The maximum number of public companies in which an individual may serve as an Independent Director should be restricted to seven.

3. Remuneration of Directors

a. Guiding Principles-Linking Corporate and Individual Performance

(i) The companies should ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully. It should also be ensured that relationship of remuneration to performance is clear. Incentive schemes should be designed around appropriate performance benchmarks and provide rewards for materially improved company performance. Benchmarks for performance laid down by the company should be disclosed to the members annually.

(ii) Remuneration Policy for the members of the Board and Key Executives should be clearly laid down and disclosed. Remuneration packages should involve a balance between fixed and incentive pay, reflecting short and long term performance objectives appropriate to the company's circumstances and goal.

(iii) T h e p e r f o r m a n c e - r e l a t e d e l e m e n t s o f remuneration should form a significant proportion of the total remuneration package of Executive Directors and should be designed to align their

interests with those of shareholders and to give these Directors keen incentives to perform at the highest levels.

b. Remuneration of Non-Executive Directors (NEDs): The companies should have the option of giving a fixed contractual remuneration, not linked to profits, to NEDs. The companies should have the option to:

(i) Pay a fixed contractual remuneration to its NEDs, subject to an appropriate ceiling depending on the size of the company; or

(ii) Pay up to an appropriate percent of the net profits of the company.

c. Remuneration of Independent Directors (IDs): In order to attract, retain and motivate Independent Directors of quality to contribute to the company, they should be paid adequate sitting fees which may depend upon the twin criteria of Net Worth and Turnover of Companies.

d. Remuneration Committee: Companies should have Remuneration Committee of the Board. This Committee should comprise of at least three members, majority of whom should be non executive directors with at least one being in Independent Director.

4. Responsibilities of the Board

(i) Training of Directors: The companies should ensure that directors are inducted through a suitable familiarization process covering, inter-alia, their roles, responsibilities and liabilities.

(ii) Risk Management: The Board, its Audit Committee and its executive management should collectively identify the risks impacting the company's business. They should also document their process of risk identification, risk minimization, risk optimization as a part of a risk management policy or strategy.

5. Audit Committee of Board

(i) Audit Committee – Constitution: The companies should have at least a three-member Audit Co m m i t t e e, w i t h In d e p e n d e n t Di re c t o r s constituting the majority. The Chairman of such Committee should be an Independent Director. All the members of audit committee should have knowledge of financial management, audit or accounts.

6. Auditors

(i) Appointment of Auditors: The Audit Committee of the Board should be the first point of reference regarding the appointment of auditors.

(ii) Certificate of Independence: Every company should obtain a certificate from the auditor certifying his/its independence and arm's length relationship with



the client company.

(iii) Rotation of Audit Partners and Firms

(a) In order to maintain independence of auditors with a view to look at an issue (financial o r n o n -financial) from a different perspective and to carry out the audit exercise with a fresh outlook, the company may adopt a policy of rotation of auditors which may be as under:-

• Audit partner – to be rotated once every three years

• Audit firm – to be rotated once every five years.

(iv) A cooling off period of three years should elapse before a partner can resume the same audit assignment. This period should be five years for the firm.

(v) Appointment of Internal Auditor: In order to ensure the independence and credibility of internal audit process, the Board may appoint an internal auditor and such auditor, where appointed, should not be an employee of the company.

7. Secretarial Audit

Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may g e t t h e Secretarial Audit conducted by a competent professional.

8. Institution of Mechanism for Whistle Blowing

The companies should ensure the institution of a mechanism for employees to report concerns about unethical behavior, actual or suspected fraud, or violation of the company's code of conduct or ethics policy.

2. SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

SEBI has tried to make corporate governance effective by incorporating Clause 49 on corporate governance in the Listing Agreements of each stock exchange. The clause was first inserted in Feb., 2000, and later revised from time to time. The latest revision has been in Feb., 2008. This clause is as good as any global standard on corporate governance. It has provided for the following:-

(i) Board of Directors: The board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than 50% of the Board comprising of non-executive directors. While the Board with a non-executive chairman is to have at least one-third as independent directors, the Board with an Executive Chairman is to have at least half of the Board as independent directors. If the non-executive Chairman is a promoter or is related to promoters or persons occupying management position at the Board

level or at one level below the Board, at least one half of the 3Board should consist of independent directors .

Moreover, the non-executive directors have not to hold office for more than nine years continuously.

(ii) Audit Committee: Every company is required to set up a qualified and independent Audit Committee, consisting of minimum 3 members, all being, non-executive directors and two thirds of them being independent and with at least one having financial and accounting knowledge. The Chairman of the Committee shall be an independent director. The Finance Director, Head of Internal Audit and when required, a representative of the External Auditor are to be present as invitees for the meetings of the Audit Committee. The Audit Committee shall meet at least four times in a year and time gap between two meetings should not be more than 4 months. The clause also defines the powers and the role of the Committee fairly extensively and to be approved by the shareholders in the general meeting.

(iii) Remuneration of Directors: The remuneration of non-executive directors is to be decided by the Board of Directors and to be approved by the shareholders in the general meeting. There is also a requirement of adequate disclosure of the same in the annual report. This is bound to act as a deterrent to many promoters in remunerating the directors disproportionately.

(iv) Board Meetings: There have to be at least four meetings of the Board of Directors each year with a maximum time gap of three months between two meetings. The clause requires some minimum information to be made available to the Board as per an exhaustive Annexure. Some of the information which is to be made available to Board relates to the following: - Annual Operating Plans, Capital Expenditure, Budgets and Updates, Joint Venture of Collaboration Agreements, Investments, Show-cause Notices, Demands, Non-compliances, Accidents, Effluent on Pollution Problems, Labour Problems etc. The Boards are, therefore, expected to be more well-informed and effective as a result of this requirement.

(v) Directors' Report: As part of the Directors' Report or as an addition thereto, there is a need for a Management Discussion and Analysis Report which should discuss the industry Structure and Developments, Opportunities and Threats, Segment-wise or Product-wise performance, Outlook and such other matters. All pecuniary relationship or transactions of the non-executive director's vis-à-vis the company should be disclosed in the directors' report.

(vi) Dealing with Qualified Audit Report: SEBI in its continuous endeavour to enhance the quality of financial reporting by listed companies has recently decided to put in place a mechanism to process qualified annual reports filed by the listed companies with stock exchanges. The

4mechanism is as under :-

(a) The stock exchange(s), after preliminary 3As amended by SEBI's notification dated October 23, 2008



investigation, shall refer, those cases, which in their opinion need further examination by SEBI.

(b) SEBI has constituted the 'Qualified Audit Review Committee' (QARC) with representatives from Institute of Chartered Accountants of India (ICAI), stock exchanges, etc. The QARC shall review the cases received from the stock exchange(s) and guide SEBI in processing the qualified annual audit reports referred to by the stock exchange(s).

(c) After analyzing the qualifications in audit reports, QARC may make following recommendations:-

(i) If, prima facie, QARC is of the view that an audit qualification is not significant, it may suggest steps for rectification of such qualification;

(ii) If, prima facie, QARC is of the view that an audit qualification is significant and the explanation given by the listed company concerned/its Audit Committee is unsatisfactory, the case may be referred to the Financial Reporting Review Board of ICAI (ICAI-FRRB) for their opinion on whether the qualification is justified or requires restatement of the books of account of the listed company;

(iii) If an audit qualification is not quantifiable, QARC may suggest rectification of the same within a stipulated period.

(d) If ICAI-FRRB opines that an audit qualification is justified, SEBI may ask the listed company concerned to restate its books of account in compliance with the statutory requirements and inform its shareholders about the same by making an announcement to the stock exchanges. SEBI may also direct the listed company concerned to reflect the effect of these restatement adjustments in the annual report of the subsequent financial year.

(e) IF ICAI-FRRB is of the view that an audit qualification is not justified, ICAI may ask the statutory auditor of the listed company concerned to provide necessary clarifications and may take appropriate action.

(vii) Disclosure to Shareholders: In case of the appointment of a new Director or re-appointment of a Director, the shareholders must be provided with a brief resume of the Director like nature of his expertise in specific functional areas, names of companies in which he holds directorships and committee memberships. Quarterly results and presentations made by the Company to analysts shall be put on the Company's Website.

(viii) Shareholders'/Investors' Grievances Committee: A Board Committee designated as 'Shareholders/ Investors Grievance Committee' should be constituted under the chairmanship of a Non-Executive Director to look into the redressing of shareholders and investors complaints

4Manner of Dealing with Audit Reports Filed by Listed Companies – Amendment in Equity Listing Agreement. Circular No. CFD/DIL/72/2012 dated 13.08.2012

like transfer of shares, non-receipts of dividends, warrants etc.

(ix) CEO/CFO Certification: The CEO i.e. the Managing Director/Manager and the CFO i.e. the whole-time Finance Director or any other person heading the finance function shall certify to the Board that they have reviewed the financial statements and the Cash Flow Statement for the year and that to the best of their knowledge and belief, they do not contain any material, untrue statement or omit any material information. They have also to accept that the internal control systems are effective and have disclosed to the auditors and the audit committees, all significant changes in the internal control systems or accounting policies.

(x) Report on Corporate Governance: Every listed company shall now have a separate section on corporate governance in the annual reports of the Company with a detailed compliance report on corporate governance. Suggested list of items to be included in the report has also been made pretty exhaustive to make it really meaningful and informative to the shareholders.

(xi) Compliance Certificate: The Company is required to obtain a Certificate from the Auditors of the company or practicing Company Secretary regarding compliance of conditions of corporate governance as stipulated in the Clause. This Certificate is required to be not only annexed to the Directors' Report but also sent to the Stock Exchanges along with the annual returns of the company.

(xii) Additional Disclosures under Non-Mandatory Requirements:

The following are some non-mandatory disclosures under clause 49 of the Listing Agreement:

(a) Audit Qualifications: Company may move towards a regime of unqualified financial statements.

(b) Training of Board Members: Company shall train its Board members in the business m o d e l o f t h e company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.

(c) Mechanism for evaluating Non-Executive Board Members: The performance evaluation of non-executive directors should be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated. The Peer Group evaluation should be the mechanism to determine whether to extend /continue the terms of appointment of non-executive directors.

(d) Whistle Blower Policy: The Company may establish a mechanism for employees to report to the management about unethical behavior, actual or suspected fraud or violation of the company's code of conduct or ethics policy.



3. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI)

The ICAI has issued 32 Accounting Standards so far in order to bring uniformity in terminology, approach, presentation and full disclosure of accounting results. It has also formulated 35 International Financial Reporting Standards (IFRSs) converged Indian Accounting Standards (Ind ASs) which have already been put by Ministry of Corporate Affairs (MCA) on its website. MCA has already announced that there will be two separate set of Accounting Standards. First set would comprise the Ind ASs converged with the IFRSs which shall be applicable to the specified class of Companies. The second set would comprise the existing Indian Accounting Standards and would be applicable to other companies, including Small & Medium Companies (SMCs).

The following are the main Accounting Standards (ASs) and Indian Accounting Standards (Ind ASs) issued by the Institute which are expected to help in effective corporate governance:

(I) AS 17 – Segment Reporting/Ind AS 108 - Operating Segments: The objective of this standard is to establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates. Such information helps users of financial statements to :

(a) Better understand the performance of the enterprise;

(b) Better assess the risks and returns of the enterprise; and

(c) Make more informed judgments about the enterprise as a whole.

(ii) AS 18/Ind AS 24- Related Party Disclosures: The objective of the standard is to establish requirements for disclosure of :

(a) Related party relationships; and

(b) Transactions between a reporting enterprise and its related parties.

(iii) AS 20/Ind AS 33 - Earnings Per Share: The objective of this standard is to prescribe principles for the determination and presentation of earnings per share which will improve comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise. The focus of this standard is on the denominator of the earnings per share calculation. Even though e a r n i n g s per share data has limitations because of different accounting policies used for determining 'earnings', a consistently determined denominator enhances the quality of financial reporting.

(iv) AS 21 – Consolidated Financial statements/Ind AS 27 – Consolidated & Separate Financial Statements: The objective of this standard is to lay down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. These statements are intended to present financial information about a parent and its subsidiary (ies) as a single economic entity to show the economic resources controlled by the group, the obligations of the group and the results the group achieves with its resources.

(v) AS 23 – Accounting for Investments in Associates in consolidated Financial Statements/Ind AS-28 Investment in Associates: The objective of this standard is to set out principles and procedures for recognizing, in the consolidated financial statements, the effects of the investments in associates on the financial position and operating results of a group.

(vi) AS 24 – Discontinuing Operations/Ind AS – 105 Non-current Assets held for Sale & Discontinued Operations: The objective of this standard is to establish principles for reporting information about discontinuing operations, thereby enhancing the ability of users of financial statements to make projections of an enterprise's cash flows, earnings-generating capacity, and financial p o s i t i o n by s e g re g a t i n g i n f o r m a t i o n a b o u t discontinuing operations from information about continuing operations.

(vii) AS 25/Ind AS 34 – Interim Financial Reporting: The objective of this standard is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in a complete or condensed financial statement for an interim period. Timely and reliable interim financial reporting improves the ability of investors, creditors and others to understand an enterprise's capacity to generate earnings and cash flows, its financial condition and liquidity.

(viii)AS 28/Ind AS 36 – Impairment of Assets: The objective of this standard is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and this standard requires the enterprise to recognize an impairment loss. The standard also specifies when an enterprise should reverse an impairment loss and it prescribes certain disclosures for impaired assets.

(ix) AS 29/Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets: The objective of this standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.



(x) AS 30/Ind AS 39 – Financial Instruments Recognition and Measurement: The objective of this standard is to establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.

The Institute of Chartered Accountants of India gives ICAI award for excellence in Financial Reporting, which automatically is expected to result in better Corporate Governance. The award(s) is given to corporates in the Banking, Insurance, Financial Services, Manufacturing Infrastructure Services, Transport, Power, Agriculture, Sectors etc. The awards for 2010-11 were given to Bank of Baroda, HDFC Bank, Birla Sunlife Insurance Company, Shri Ram Transport Company Ltd., Dr. Reddy Laborites Ltd., Tata Consultancy Services Ltd. and The Tata Power Company Ltd. etc.

4. THE INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI)

ICSI is one of the first professional bodies in India to initiate discussion on “Corporate Governance” in the light of Cadbury Committee Report. In the year 1997, the ICSI organized a national seminar on Emerging Dimensions of Corporate Governance.

The Institute has brought out a Concept Paper on National Corporate Governance Policy, 2012. The paper aims at laying down an overarching policy framework for promoting good governance practices amongst corporates by instilling principles of good governance in the various statutes, regulations and policies of the Government as applicable to corporates.

The paper reaffirms that good corporate practices generate long term value for all stakeholders and hence the Ministry of Corporate Affairs, “Corporate Governance – Voluntary Guidelines 2009” should be increasingly adopted by corporates. These guidelines are expected not only to serve as benchmark for the corporate sector but also help them in achieving the defined standards of corporate governance.

In order to achieve this objective, an institutional framework has been proposed by the Institute to undertake, coordinate and oversee its implementation in cooperation with Central Ministries, sectoral regulators, enforcement agencies and other stakeholders.

The Institute of Company Secretaries of India gives ICSI National Award for excellence in Corporate Governance every year. The award was instituted in the year 2001 to identify, foster and reward the culture of evolving globally acceptable standards of corporate governance among Indian Companies. The awardees for the year 2011 included Gail (India) Ltd., Hindustan Unilever Ltd., CMC Ltd., Union Bank of India etc. The award comprises of a citation and a trophy. This initiative of ICSI is expected to go a long way in encouraging and inspiring corporates for achieving excellence in Corporate Governance.

VALUATION OF CORPORATE GOVERNANCE MEASURES

In the preceding pages brief details of the Corporation Governance Measures by different authorities in India have been given.

Let us make a brief evaluation of some of the important measures:

(a) 'Independence' is the Central Theme: Independence seems to be the Central Theme of Modern Corporate Governance ethos. Independence requires a mind free from attachments. A number of legislative measures have been suggested to this end. They include independent directors on corporate boards, rotation of auditors, requiring corporates to adopt accounting and auditing standards as formulated by the concerning statutory bodies, restrictions as to managerial remuneration, competition regulations, strengthening the take over code etc. Such measures have been tried and tried again in various jurisdictions but not with much success. It should be clearly understood that independence cannot be procured only by legislating.

No single formula measure or system can beat the unbeatable voluntarism on the part of corporates and the people. Self guidance and governance leadership among the corporates will make all the difference. They will create a new cultural ethos that will be visionary and futuristic.

(b) Paucity of Independent Directors: There are not enough number of qualified and experienced persons to be appointed as effective independent directors. Under the revised clause 49, the expression “independent director” has been expanded to exclude a large categories of persons who could otherwise have been appointed as independent directors. The Companies Bill, 2011 proposes to increase steeply the fines payable and prosecutions to be launched against independent directors for breaches under the Act. This is again a deterrent factor for a person willing to be appointed as independent director of a company.

It may be interesting to add here the observations made 5by Prof. Donald C Clarke regarding the role of

independent directors. Accordingly to him, “there is no solid- evidence suggesting that independent directors improve corporate performance. Some studies have even found a negative co-relation between board independence and corporate performance. While independent directors with significant stock position may add value, others do not”. Perhaps this is because financial interest in an organization of any individual gives him greater incentive to work harder for the organization as compared to a person without any financial stake in that organization.

(c) Mandatory Expenditure on CSR: The provision in the Companies Bill 2011 making it mandatory for a company to spend every year 2 % of its average net profits for the last three years on CSR activities seems to be a bit stringent. It


EE


will be more graceful if this is left to the discretion of the corporates and positive incentives are given to corproates for undertaking CSR activities. During the last two decades many of the top Indian Industrial Houses have shown by their generous CSR activities that there is “not only time for accumulation but also time for sharing” and perhaps that time for sharing has arrived.

(d) Whistle Blower Policy: Whistle Blowing is a risky activity for anyone and more so for an employee since there is no protection for the whistle blower. Some of the guidelines for the whistle blower are vague and it is not certain for the whistle blower whether to act on them or not. For example, to judge whether the activity is unethical or a practice is improper to be fit for communication to the Audit Committee is subjective. Similarly an employee has very limited information and hence may not be in a position judge about the “Suspected Fraud”.

(e) Modifications required in Voluntary Corporate Governance Guidelines: Since everything cannot be controlled by legislative measures, the pronouncement of Voluntary Corporate Governance Guidelines by the Government is a welcome step. However, some of these guidelines need appropriate modifications as given below:

(i) The guidelines provide for issue of formal appointment letters even to non-executive directors and independent directors. This requirement can be dispensed with since firstly no such director expects a letter of appointment and secondly the Minutes of Board's Meetings are sent to all directors whether they attend or not. The records concerning notice of the meeting or minutes of the meeting are sufficient proof of a person being a director in a company. Of course a formal letter of appointment will be necessary in case of a whole-time director or an executive director.

(ii) The guidelines provide the independent directors the option and the freedom to meet company management periodically. It is not clear at which level of management such directors can meet. It may be simpler for independent director to write to the managing director about the information that he needs and later on discuss it in Board's Meeting.

(iii) The guidelines provide that Internal Auditor should not be an employee of the company. If, this is because of retaining the internal auditor's independence, he cannot properly be called internal auditor. Moreover, it may be appropriate to fix the scope of internal auditor's work to ensure that it does not get duplicated with that of the statutory auditor.

(f) Ethical Culture is Fundamental to Good Corporate 6Governance: Benjamin Disraeli , once said, “When men

are pure, laws are useless, when men are corrupt, laws are broken”. This holds good even today. Basically corporate governance is the attitude with which the set goals are

5Professor at George Washington University, USA

planned to be accomplished by an organization. The collapse of many organizations in the past decade can be attributed to “Board room failures and creative accounting”. The Satyam Scam in 2009 is the biggest proof of this fact. The fudging of the company's accounts resulted in overstating the company's operating profits by around Rs. 600 crore. It was surprising that the window dressing of accounts done by Satyam's Chairman, Shri Ramalinga Raju was so perfect that even the best accounting and corporate governance bodies could not detect it. Satyam was the recipient many awards including the best entrepreneur Award in 2007 from Ernst & Young, “Golden Peacock Award” for Excellence in Corporate Governance in 2007 & 2008 from World Council for Corporate Governance. The 2008 award was later on withdrawn in 2009 on the ground that the award was obtained as a result of non-disclosure of material facts”.

Recently Veritas Investment Research, a Canada-based equity research firm has come out with a scathing report regarding India Bulls Real Estate Ltd. (IBREL). It has observed that controlling group shareholders are running the organization (IBREL), as a piggy bank. The controlling group is misleading investors for the benefit of a few insiders. They have recommended that investors not to buy any of the group's shares at any price unless a new management is put in charge and the financials cleansed of malfeasance”. Of course, India Bulls Group has promptly denied any wrong doing. SEBI has promised to take any action in this matter only after

7reviewing the Report . In another recent development, the minority shareholders of Garware Polyester, a maker of polester films, are planning to file plea with Company Law Board against the promoters of the Company on Corporate Governance issues including paying excessive

8remuneration to directors .

However, this all has again after Satyam's fiasco, cast a shadow over the nature of Corporate Governance in India.

At present there is a growing feeling among the corporate leaders that corporate governance has to based on enduring ethical foundation. Ultimately, it is not the regulatory framework but the character of person's incharge of the governance of the company matters in deciding whether corporate governance will be of a specific standard or not. So long the directors act fairly, ethically and independently, a meaningful and successful governance regime will be established whether the Board has a super majority of Independent Directors or not.

It may be interesting to mention here the results of Annual Corporate Governance Review 2008 for Indian Companies by a global accounting and business advisory firm, Gram Thornton. The survey disclosed that only 45% of the Companies in India feel that clause 49, as a tool for good corporate governance, has actually benefitted their organizations. Among the companies giving a positive

6Former British Prime Minister, Parliamentarian and Literary Figure st th(21 Dec., 1804 - 19 April, 1881)

7 thThe Hindustan Times dt. August 9 , 2012



response about Corporate Governance, most of them have seen the results of such practices in the form of “improved processes, controls and awareness of risks.” It was also pointed out by the firm that in India, “the governance laws could have more clarity about the penalty for non-compliance as that would help the companies understand the rules better”.

ONCLUSION

The recent events worldwide, particularly in the United States have renewed the emphasis on Corporate Governance the world over. These events have highlighted the need for

ethical governance and require management to look beyond their systems and procedures. It has now been realized universally that in a global economy that is slowing down and becoming more risk averse – the race for investments is a competitive one. In order to ensure sustainable investments and economic development, government institutions must be robust and their efficacy has to be restored. The corporate sector should also be constantly persuaded as well as encouraged to enforce good corporate governance by all concerned, i.e., the Government, the Statutory Institutions and Professional Bodies. Good Corporate Governance is expected to increase the market valuation of companies by improving their financial performance, reducing the risk that boards will make self serving decisions and generally raising investor confidence. As a result, it is expected that in the


years to come corporate governance will improve both in terms of performance and accountability of the corporates and their officials. Of course, it should not be forgotten that corporate governance is a dynamic process. As such, the guidelines of corporate governance will vary according to the corporate environment prevailing in every country, but accountability itself to various stakeholders would remain central to any model of corporate governance. The regulatory framework relating to corporate governance in India is fairly strong and is not as fragile as it turned out to be in many developed countries worldwide including USA. The main weakness of Indian system is lack of speed required for plugging loopholes in the system, delays in corrective actions, wherever necessary, lack of general awareness and ineffective enforcement combined with indifference among individual shareholders. The need of the hour is that the regulators should play the role of developers and not of controllers. The role of the Government should be limited to be of a friend, philosopher and guide The best results can be obtained if the controls come from within rather than imposed from outside, i.e., there is more of self-regulation followed by more active role by all stakeholders in the affairs of the corporation. Thus all persons associated with the corporate enterprise, be the shareholders, the accountants, the secretaries, the auditors, the Board of Directors and the chief executives must honestly and effectively perform their respective functions to see that the objectives of good corporate governance are achieved in both letter and spirit.

8The Economic Times dt. July 18th, 2013

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REFERENCES

1. Chandratre K.R. “Corporate Governance vis-à-vis the Listing Agreement” Chartered Secretary, August 2001, p.861

2. Dilip Kumar Sen, “Clause 49 of Listing Agreement on Corporate Governance”, The Chartered Accountant, December 2004, p.806

3. Dani Om Prakash & Shrinivasan, MS “Guiding Values for Corporate Governance”, Chartered Secretary, December 2010, p.17134. Govt. of India, “The Companies Act, 1956”, as amended up to date

5. Govt. of India, “The Companies Bill, 2011”

6. George Joffy Dr., “Governance Compliance through Effective Employee Communication”, Chartered Secretary, August 2012, p.309

7. Kulkarni Balwant, “Corporate Governance and CSR – Only Self Guidance can help the Pedestral, Chartered Secretary, December 2010 p.1746

8. Krishna Murthy, TS “Corporate Governance”, The Chartered Accountant, August 2000, p.45

9. Maheshwari, SN “Corporate Governance” as a Measure of Accountability and Performance”, DIAS Times, October-December 2003 p.18

10. Maheswari SN & SK, Advanced Accountancy Volume – II, Tenth Edition, 2009, Vikas Publishing House p.1.159

11. Maheshwari SN & SK, A Manual of Business Laws – Fourth Edition, Himalaya Publishing House p.5.201

12. Narasimhan, VR “Effective Corporate Governance – A Reassessment”, Chartered Secretary, February 2011 p.180

13. Ramappa T. “Corporate Governance, Voluntary Guidelines, 2009, Chartered Secretary, December 2010 p.1733

14. Sharma, Anil “New Dimensions in Corporate Governance” The Chartered Accountant, October 2001, p.440

15. Sridhar J., “SEBI’s Role in Enhancing the Image of Indian Corporate Sector”, Chartered Secretary, August 2001, p.86916. The Institute of Chartered Accountants of India “Accountancy: Diverse Demands; Disciplined Approach”, 2003

17. The Institute of Chartered Accountants of India “Indian Accounting Standards, 2011”

18. The Institute of Chartered Accountants of India “Compendium of Accounting Standards”, 2012

19. The Institute of Company Secretaries of India, “Concept Paper on National Corporate Governance Policy”, 2012 & Recommendations to Strengthen Corporate Governance Framework”

20. Vyas, Amit “Corporate Governance in India: Much Celebrated but Hardly Implemented”, Chartered Secretary, August 2003, p. 1160Websites:

www.sebi.gov.in

http://www.mca.gov.in

http://www.icsi.edu

http://icai.org/

Doctoral Abstracts

Tapomoy Deb

Labour Legislation on Working Labour Legislation on Working Conditions for Conditions for

Competitive AdvantageCompetitive Advantage

LABOUR LEGISLATION ON WORKING CONDITIONS FOR COMPETITIVE ADVANTAGE


INTRODUCTION

Globalization of the world economy and subsequent liberalization of Indian economy in 1991, there is an increasing demand from the industry for reforming archaic labour legislation in order to gain and sustain competitiveness amidst global competition. However, the problem is that reforming labour legislation is a very touchy issue and there are conflicting interest groups involved, which has resulted in lack of initiative of the government to make necessary amendments. At the same time, international concern over fundamental human rights at work and the existence of dangerous working conditions has intensified. Literature review reveals that there are no studies on reforming working conditions regulations especially on competitive advantage as traditionally the focus has been on 'employment relations' rather than 'conditions of work' inspite of the fact that employees spent 80% of their waking life at their workplace.

EED FOR THE STUDY

Reforming labour legislation on working conditions has emerged from the confluence of a number of fast-emerging changes in technology, trade, tariffs and investment

flows, product cycles, and cost and scale of production through innovation and R&D, which India cannot ignore. For Indian firms to acquire and/or sustain competitive advantage, archaic, dysfunctional and restrictive labour legislation on working conditions needs to be rationalized in order to facilitate integration of Indian business into the global economy for accelerated industrial growth, prosperity and general well being of the stakeholder's viz. Workers, Industry, Society and the Government/Nation.


• To study and review various legal provisions relating to working conditions in Factories and Shop/Establishment.

• To examine the current trends in labour jurisprudence in India.

• Assessing impact of LPG (Liberalization, Privatization and Globalization) on legal perspectives of business organizations in enhancing competitive advantage.

• To suggest appropriate Reforms in Labour Legislations relating to working conditions in contemporary business environment.

COPE OF THE STUDY

The scope of the study pertains to the Factories Act, 1948 and the Delhi Shops and Establishment Act, 1954. Responses on working conditions and its impact on

competitive advantage were solicited from workers factories, call centre agents, national and state level trade unions, call centre trade union at national level, and employers association at national/state level.

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ETHODOLOGY AND SAMPLING

Given above mentioned objectives, the views of trade unions, employer's associations, government and practitioners through secondary sources were examined before

finalizing the research questions. A comprehensive overview of current literature, which is inter-disciplinary in nature, was conducted to generate important theoretical constructs on working condition regulations and competitive advantage. The study relied upon primary data and is collected through questionnaire, interview guide, discussions and observations. Purposive random sampling was employed. For the survey method, the sample size was 338 respondents, consisting of 291 workers of 13 different factories in pharmaceutical, textiles, beverages, refrigeration and air-conditioning, consumer, confectionary, auto-components and engineering products, 82 call centre agents from a leading Call Centre company, 5 office bearers of five national federation of trade unions, 25 state-level trade unions, 1 national-level call centre employees union, 11 business associations, 4 personnel of Factory Inspectorate and 1 personnel of Shop & Establishment Inspectorate of Government of NCT of Delhi. SPSS software using statistical tools like mean, standard deviation, t-test, coefficient of correlation, and chi-square test were utilized.

AJOR FINDINGS OF THE STUDY

Workers and call centre agents belonging to new economy industry have better perception than old economy industry on working conditions. Both trade unions and business

associations perceive that working condition regulations have been partially successful in protecting the interest of workers, trade unions and management. Trade unions perceive that all stakeholders are satisfied while business association finds lack of proper understanding on the significance of working condition amongst all stakeholders to be reason behind lower number of court/adjudication cases. Both trade unions and business association's favours reforming working conditions regulations albeit for contrasting reasons. While trade unions want more stringency while business associations want rationalization.

Labour department points out that most of the employer's in organized sectors are complying with working conditions. The inspectorate strongly advocates for deletion of minimum stipulation of 10 workers under section 2 (m) of the Factories Act, 1948. The number of factory inspectors is much lesser than the number of factories (1: 615 for organized sector and 1:1231 for both organized & unorganized sectors). The shops and establishment inspectorate contends that lack of registration has adversely affected the effective implementation of the Delhi Shops and Establishment Act of 1954. The Inspectorates strongly believes that working condition regulations is not an impediment in attaining or sustaining competitive advantage by firms. Judiciary has one of the major roles to play in interpreting legal provisions in wider terms not only for the benefit of workers, but also industry as a whole.

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LABOUR LEGISLATION ON WORKING CONDITIONS FOR COMPETITIVE ADVANTAGE


UGGESTIONS

Workers should insofar as possible work in sitting position. Workers must have positive attitude towards statutory inspections as audit of working conditions as they stand to gain.

Their needs, aspiration and requirements must be fulfilled by appropriately reforming working condition regulations. In this globally competitive era, unions/employers need to shift from 'conflict' to 'cooperation' for improving productivity and competitiveness of workforce and eventually firms. Business associations should themselves act as regulatory body for their members so that employers are persuaded to improve working conditions by uploading compliance report on website (self-disclosure).

Firms found complying with working condition regulations at the time of grant of license or having ISO/TS16949/GMP etc.

SS certifications should be granted immunity from further inspections for three years. Central Factory Rules must be formulated in order to bring uniformity and simplicity in procedure, process and documentation.

The law making bodies has crucial role in balancing equity with efficiency. Working condition regulations must be amended to remove obsolete and dysfunctional provisions which serve purpose of none of the stakeholders. Vibration and stress must be recognized as health and safety hazard. Working conditions of call centres must be governed by IT Act, 2000. Audit of working conditions must be laid down in the statute book which shall be conducted by a reputed, independent and specialized body. Welfare/Safety Officers should be designated as Resident Factory Inspector and they shall upload compliance report on website of labour department. The working condition regulations must contain a provision that it needs to be completely reviewed after every 10 years.

REFERENCES

1 ASSOCHAM (2006). Labour Law Reform Must For Growth, Labour Labour Reporter, XXXVII, New Delhi, 194.

2 Bacon, Nicholas and Blyton, Paul (2004). “Trade Union Responses to Workplace Restructuring: Exploring Union Orientations and Action", Work, Employment and Society, 18(4), 87-95.

3 Blanpain, Roger (2004). “Full Employment and Globalization”, The International Journal of Comparative Labour Law and Industrial Relations, 20(2), The Hague, 112-119.

4 Bheda, Dr. Rajesh (2007). “Competitiveness Through Productivity, Quality and Social Responsibility Textile Times, 3(8), New Delhi, 36-42.

5 Bhavani, T.A. and Bhanumurthy, N.R. (2007). “Potential Competition in the Indian Manufacturing Sector”, Indian Economic Journal, 55(3), 116-131.

6 Brooks, Douglas H., and Hill, Hal (2004). “Divergent Asian Views on Foreign Direct Investment and Its Governance”, Asian Development Review, Manila, 64-78.7 Bharat Forge Ltd. Vs. Uttam Manohar Nakate, Supreme Court of India, 2005.

8 Baccaro, Lucio (2008). “Labour Institutions and Inequality”, World of Work Report 2008, International Labour Organization, Geneva, 71.

9 Clerk, Dr, Rajasi (2004). “Courts & Workers”, Labour File, 2(1), New Delhi, 22-26.

10 Decent Work and Competitiveness (2003). “Decent Work and Competitiveness”, International Labour Review, 142(1), Geneva, 41-61.

11 Deb, Tapomoy (2007). “Labour Reform: Balancing Efficiency with Equity”, HRM Review, 7(2), Hyderabad, 21-22.

12 Dutt, Ruddar (2003). “National Commission on Labour & Review of Labour Laws”, The Indian Journal of Labour Economics, 46(1), New Delhi, 21-24.

13 Gill, Sucha Singh (1999). “Economic Structure, State and Trade Union”, Indian Journal of Labour Economics, 42(4), 793-801.

14 ILO (2001). “World Employment Report”, International Labour Organization, Geneva.

15 Introductory Report (2008). XVIII World Congress on Safety and Health at Work, Seoul, vii.

16 India: Ministry of Labour (2000-2001). Statistics on Employment and Labour Cost in Sample Sector, Volume I, Chandigarh/Shimla.

17 Kohli, A.S., and Sharma, S.N. (1997). Labour Welfare and Social Security, New Delhi: Anmol Publications Pvt. Ltd.

18 Kumar, H.L. (2009). “No Growth–No Job”, Business Manager, 11(12), 59-61.

19 Koshy, Prof. Abraham (2006). “Global Competitiveness–Issues and Challenges before Indian Corporates”, GIM Journal of Management, I(1), 15-17.

20 Majid, Nomaan (2001). “The Working Poor in Developing Countries”, International Labour Review, 140(3), 271-291.

21 Noronha, E. and d”Cruz, P., “Union Formation in Indian Call Centres/BPO: The Attitudes and Experiences of UNITES Members”, 2008 (b), Research Report available online www.unitespro.org. Accessed on 13.05.2009.

22 Porter, M. E. (1990). The Competitive Advantage of Nations, New York: Free Press.

23 Porter, M.E. (1980). Competitive Strategy, New York: Free Press.

24 Peru-Pirotte, Laurence (1996). “Technological Change and Contract of Employment”, Innovations, 3(1), 147-185.

25 Pierre, Gaelle and Scarpetta, Stefano (2006). “Employment Protection: Do Firm's Perceptions Match with Legislation?”, Economics Letters, 90(3), 328-334.

26 Papola, T.S. and Pais, Jesim (2007). “Debate on Labour Market Reforms in India: A Case of Misplaced Focus”, The Indian Journal of Labour Economics, 50(2), 61-65.

27 Pradhan, Rudra Prakash (2005). “Globalization and Its Impact on Foreign Direct Investment in India”, Labour and Development, 11(1), 45-64.

28 Ramesh, Babu P. (2004). Labour in Business Process Outsourcing: A Case Study of Call Centre Agents, Noida: V.V. Giri National Labour Institute.

29 Sahu, Ashok (2008). “Labour Market Reforms: Looking Ahead”, Labour and Development, 14(2/1), 1-17.

30 Upadhyaya, Sanjay (2003). Status of Labour Welfare Measures in the Factories of Noida: A Case Study of Garment & Hosiery Industry, Noida: V.V. Giri National Labour Institute.

I.B.Singh

Buying Behaviour of Consumers With Respect to Durable Products:

A Case Study of Personal Computers


BUYING BEHAVIOUR OF CONSUMERS WITH RESPECT TO DURABLE PRODUCTS: A CASE STUDY OF PERSONAL COMPUTERS

INTRODUCTION

The personal computer market in India has not only grown in numbers in the last few years, but also witnessed a complete change in terms of market share enjoyed by various players in the industry. The demand for personal computers has grown many folds.

The factors affecting the demand for personal computers are:

• Growth in personal disposable income

• Growth in urbanization

• Growth in female work force

• Trend towards smaller families

• Continued penetration growth in emerging market

• Global economy recovery cycle.

• Operating system upgrades cycle.

• Aging installed base

Behaviour of a consumer is influenced by social, psychological and personal factors. Social factors that influence consumer decision making are culture, sub culture, social class, reference groups, family, and friends. Psychological factors are internal forces within people that affect buying decisions. They are motives, perception, learning and personality. Personal factors are conditions or circumstances that exist when a consumer is making a purchase decision. Demographic factors are personal characteristics such as age, sex, race and ethnic group, etc. The consumers vary in their consumption pattern based on geographical location, density of population, urban rural background, features of the consumer, age, literacy level, income level, linguistic diversity, religion and dress, food habits and festival celebrated. Since consumer is one who will decide whether or not to buy a particular product, so it becomes relevant to explore why a common man buys a personal computer and how does he/she buy.

COPE OF THE STUDY

The scope of study was restricted to selected house holds of Delhi so that findings could be applied to Metropolitan Cities of India. The survey was conducted in only those house

holds which actually possessed/owned personal computers either Desk Top or Lap Top.


The objectives of the research study were as follows:

• To examine how consumer behaves towards purchase of a personal computer.

• To identify, who in a family, influences and who makes a decision regarding purchase of personal computer.

• To examine the influence of social, economic and personal

factors affecting decision-making process of consumers.

• To determine the message content and media most appropriate to be chosen for advertisement of personal computer.

YPOTHESES OF THE STUDY

An attempt has been made by the researcher to test the following hypotheses by collecting primary data and applying Chi-square method:

• H0 I: The variable “Children's influence on the respondent's purchase decision regarding personal computers” is independent of family income.

• H0-II:The variable “Children's influence on the respondent's purchase decision regarding personal computers” is independent of education of the respondent.

• H0-III:The variable “Mother's influence on Respondent's purchase decision regarding personal computers” is independent of family income.

• H0-IV:The variable “Mother's influence on the respondent's purchase decision regarding personal computes” is independent of education of the respondent.

• H0-V:The variable “respondent's attitude towards ranking price as first preference regarding personal computers” is independent of family income.

• H0-VI:The variable “respondent's attitude towards ranking price as first preference regarding personal computers” is independent of education of the respondent.

• H0-VII:The variable “respondent's attitude towards ranking latest technology as first preference regarding personal computers” is independent of family income.

• H0-VIII:The variable “respondent's attitude towards ranking company image as first preference regarding personal computers” is independent of education of respondent.

• H0-IX:The variable “respondent's attitude towards ranking company image as first preference regarding personal computers” is independent of family income.

Research design is the plan, structure and strategy of investigation conceived so as to obtain answers to research objectives and to control variance. The plan is an outline of the research theme on which the researcher is to work. The structure of the research is more specific outline or the scheme and the methods to be used in the collection and analysis of data. Decision regarding what, when, how much and by what means concerning an enquiry or a research study constitutes 'research design'. It is a blue print for collection, measurement and analysis of data. The importance of research design lies in the fact that it makes a statement of what is to be done in order to achieve the research objectives and how it is to be done. It is an expression of what is expected of the research and of the research exercise in terms of result and the analytical inputs needed to convert data into research findings.

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OURCES OF INFORMATION AND DATA

The researcher has made efforts to collect information and data for analysis both from secondary and primary sources described in brief as follows:

Secondary Data

The researcher has collected secondary data from various resources mainly Research Journals, Books on Consumer Behaviour, Business Newspapers, Various magazines and Internet.

Primary Data

The primary data were collected by researcher during October 2009 and March 2010, from total no. of 500 house holds of Delhi. In the present study the element is house hold because focus is on buying behavior of consumers (regarding personal computers) who are inmates of a household.

One person, preferable the head in the household or the adult person who has actually purchased a personal computer, was contacted.

For survey questionnaire was used. There were 32 questions. A pilot study was conducted among 10 households selected on judgmental basis after which the number of questions were reduced to a total of 25, out of which 4 questions were open ended and remaining close ended type.

EY FINDINGS OF THE STUDY

The important findings of the research are as follows:

• H.P. emerged as the most popular brand of personal computer followed by HCL, Compaq Dell, Lenovo, Zenith, LG and Lenovo.

• The most preferred brand of personal computerwas HP which was followed by HCL, Compaq Dell, Lenovo, Zenith, ACER, LG and Lenovo.

• It was found that most of the respondents possess H.P. brand of personal computer followed by HCL, Lenova, Compaq, ACER, Zenith and LG.

• For most of respondents (89%) the mode of payment was cash down payment. Loan and installment were not promising mode of payment. It was also found that family income had no bearing on mode of payment.

• Most of the respondents (75%) were found to be loyal totheir preferred brand.

• Most of the respondents(83.8%) were satisfied with their brand of personal computer, with regard the performance, price, technology and looks & style.

• It has been found that there is very high level of satisfaction among the owners.

• People go in for maximum information search and they put

in enough efforts before committing their resources for purchase of personal computers.

• By most of the respondents company image was ranked (I) attribute of Pc, followed by latest technology (II), looks & style (III), features (IV) and price (V).

• At the time of purchasing personal computer most of buyers (75%) look for latest technology, followed by company image and price. Features like dealers gift and discount do not affect the perceptual selectivity of the respondents while purchasing personal computer.

• Before buying a personal computer, majority of respondents (57.6%) discussed with the users of the product, followed by consultation with their father, friends and relatives.

• In majority of cases (46%) it is buyers who take their own decisions. Amongst rest Mother's influence proved to be major. Friends, children and father also influence decision for PC buying. Friends proved to be the major influencer in less educated respondents.

• Majority of buyers (43%) considered 2-3 brands of personal computers before making a final purchase.

• In majority of cases (55%) personal compute buyers got an idea from visual advertisement, followed by news paper, friends and magazine.

• Electronic media (TV) followed by Newspapers strongly influenced the opinion irrespective of respondents' education.

• Hoardings and Dealers' window display were found to be influenced the opinion educated people.

• Magazines and Dealers' window display were found influential for professionally qualified people also.

• Majority of respondents (68%) subscribe 'The Times of India', followed by 'The Hindustan Times', 'Indian Express' and 'Dainik Jagran' in Delhi.

• The most popular magazine subscribed by respondents (72.4%) in Delhi is 'India Today' followed by 'Readers' Digest'.

Testing of Hypotheses

The nine hypotheses (null) tested by applying Chi-square technique show the following results:

• Family income had no positive effect “on the respondents whose purchase decisions were influenced by children.”

• Respondents' education had positive effect “on the respondents whose purchase decisions were influenced by children”.

• Family income had no positive effect “on the respondents whose purchase decisions were influenced by mothers”.

• Respondents' education had no effect “on the respondents whose purchase decisions were influenced by mothers”.

• Respondents' attitude towards ranking price as first preference is independent of the family income of the respondents.

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• Respondents' attitude towards ranking price as first preference depends on qualification of the respondents.

• Family income of respondents has bearing on the respondent's attitude towards ranking latest technology as first preference.

• Respondents' attitude towards ranking latest technology as first preference depends on the education level of the respondents.

• Family income of respondents has bearing on the respondents' attitude towards ranking company image as first preference.

OVERALL IMPLICATIONS OF STUDY

• The increasing trend of personal computer purchase suggests that there are bright prospects for sale of personal computers in the coming years in India.

• Markters/Advertisers dealing with personal computers with different features should focus their attention on all income groups, depending on the customer's needs and price level to increase their market share in respective income groups.

• Loans and installment facilities for personal computer purchase are no more viewed as lucrative schemes by prospective buyers. Hence, promotional campaigns should take care of this aspect.

• All efforts to be made to maintain brand loyalty for preferred brand by appointing more dealers.

• There exits great potential for personal computers. Therefore, it is imperative on the part of the marketers that they should develop effective promotional and other marketing strategies so as to capture the growing market of personal computers.

• The computer manufacturing companies must focus attention on latest technology, features, looks and style as these are attributes that most of the buyers look for irrespective of their family income.

• The company must try to build the Brand/Company image in a very big way by promotional means as this is also one of the important features which a consumer/buyer looks. It has been found in the research that company image plays a major role in influencing buyers' decision.

• Buyers with urban and sub-urban background, the opinion formation for personal computer purchase takes place by consulting 'users of the product' as well as 'friends and relatives'

• Parents (Father & Mother) irrespective of the background may be approached as their opinion matters to a great extent.

• Prospective buyers, irrespective of their background, consult dealers of the product before purchasing personal computers and most of them consider 2-3 brands before making a final purchase. Therefore, the companies should carefully select dealers, and it should be also ensured that the sales staff of the dealers is properly trained.

• Promotional campaigns should be directed towards 'Children' as they prove to be the major influencer's irrespective family income.

• Continuous and intermittent schedule of visual advertisement about personal computers should be frequently given so as to create brand awareness. The themes of advertisements should be focused, utilitarian and informative.

• Advertisements should be given in electronic media & print media-both TV and newspaper/magazines.

• Dealers should arrange an attractive and eye catching window display for personal computers as it has been found more influential and effective in gaining attention of the buyers.

It can be concluded that the findings and suggestions, as above, will be of great value to the marketers/advertisers of personal computers for shaping of their future strategies.



REFERENCES

Books

1 Bennett, P.K. and Kassarjian, H.H.: Consumer Behaviour, Prentice Hall of India (P) Ltd., New Delhi.

2 Bott: Family Roles in Decision Making relating to Purchase of Products – primary Husband – Wife Role, Family Economics, Behaviour Problems and Prospects, edited by E.B.Sheldon.

3 David Loudon and Albert J.Della Bitta: Consumer Behaviour: Concepts and Applications, McGraw-Hill Book Co., Singapore.

4 Dholakia, Khurana, Bhandari & Jain: Marketing Management: Cases and Concepts, Macmillan India Ltd.

5 Donohue, Thomas R. and Mayer, Timothy, P.: “Children’s Understanding of TV Commercials” Competence in Communication, edited by Bostram, Robert, N.Sage Publication (Beverly Hill, London) New Delhi.

6 Engell J.F.: Kollat D.T. and Black Well, R.D.: Consumer Behaviour, Holt, Rinehart and Winston, Inc.

7 Kotler, Philip: Marketing Management- Analysis Planning and Control, Prentice Hall of India, New Delhi.

8 Lal, A.B. & Jain, M.K.: Consumer Behaviour, Shree Publication, New Delhi.

9 Martin Bell, L: Marketing-Concepts and Strategy, H.NI.Co., Boston.

10 Nair, Suja R.: Consumer Behaviour (Text and Cases) Himalaya Publishing House.

11 Neelmegham,S: Marketing Management and the Indian Economy, Vikas Publishing House Pvt. Ltd. New Delhi.

12 Schiffman & Kanuk: Consumer Behaviour, Prentice Hall of India, New Delhi.

13 Skinner, S.J.: Marketing, Houghton Mifflin Co., Boston.

Journals

1 Advertising Age Report: “Big ticket buyers seek fulfillment, not utility”, Advertising Age, July 4, 1977. P.3.

2 Alba, Joseph H. and Marmorstein Howard; “The effect of frequency knowledge on consumer decision making”, Journal of Consumer Research, Vol. 14, No. 1, June 1987, p. 14-24.

3 Andreasen, Alan R., “Life status changes and changes in consumer preferences and satisfaction”, Journal of Consumer Research, Vol. 2, No.3, 1984, P.784-794.

4 Berey, Lewis, A.and Pollay, Richard: “The influencing role of child in family decision making”, Journal of Marketing Research, February 1968, p. 24-30.

5 Bruks, Merrie: “The effects of product class knowledge on information search behavior” Journal of Consumer Research, Vol. 12, No. 1, June 1985. p.1-14.

6 Burr, Pat. L. and Burr, Richard, M.: “Parental responses to child Marketing’, Journal of Advertising Research, Vol. 17, No.6, December 1977, p. 17-20.

7 Carron, Andre and Ward, Scott: Gift Decisions by Kids and Parents, Journal of Advertising Research, Vol. 15, No.4, August 1975, p. 15-20.

8 Erickson, Gary M. and Johansson, J.K. : “The role of price in multiattribute product evaluations”, Journal of Consumer Research, Vol. 12, September 1985, p. 195-198.

9 Filiatrault Pierre and Ritchie Brent Jr. “Joint Purchasing Decisions-A Comparison of Influence Structure in Family and Couple Decision Making Units”, Journal of Consumer Research, Vol.7, No.2, September 1980, p. 131-140.

10 Gabor, Andrew and Granger S.W.J.: “Price sensitivity to Consumer”, Journal of Advertising Research, December 1964.

11 Gupta, Surjeet Das.: “Dual Role-It’ Still Family before Job”, India Today, November 1990, p. 135.

12 Johnson M.D.: “Consumer Choice Strategies for Comparing Non Comparable Alternatives”, Journals of Consumer Research, December 1984, p. 741-750.

13 Kenkel, William F. “Husband wife Interaction of Decision Making and Decision Choices, The Journal of Social Psychology, 1961.

14 Lazerm William and Small, John. E.: “The Changing Demographics of Women”, Journal of Marketing, American Marketing Association, July 1977.

15 Morrison, Donald G.: “Purchase Intentions and Purchase Behaviour”, Journal of Marketing.

16 Moschis George P.: “The role of family communication in consumer socialization of childrens and adolescents,” Journal of Consumer Research, Vol. 2, No.4, March 1985, p. 898-910.

17 Narayan, H.: Buyer Behaviour-Key to Marketing. Yogakshema, Vol. 32, No. 7, July 1988, Monthly, p.15-16.

18 Singh, J.D. and Singh, Raghbir: “A Study of Brand loyalty in India”, India Journal of Marketing, Vol. 11, No. 11-12, July-August 1981, p. 15-21.

19 Sitamber, G. and Murli Manohar, K. “Consumer’s Shopping Behaviour- A Study in semi-urban city”, Indian Journal of Marketing, Vol. 11, No. 3, 1980, p. 23-26.

20 Shay, Elizabeth moore and Wilkie, William: “Recent Developments in Research on Family Decisions”, Advances in Consumer Research 15, Michael Houston (ed.), Provo Utah: Association for Consumer Research 1988, p.454-460.

21 Urbany, Joel E. “An Experimental Examination of the Economics of Information”, Journal of Consumer Research, Vol. 13, No.2, September 1986, p. 257-271.

Website

1 Watt, Lesley Van Der: “Measuring the proportion of price sensitive buyer in a market”, adopted from Internet http://www.survey.co.za/articles/buyerbehave.html.



The term Industrial Relations (IR) in its widest sense includes the subtle as well as gross area of interactions, actions and reactions which affect not just a company or an industry but also the economy making it a dynamic subject of study. The area encompasses wide range right from individual grievances to organized political action, work to lack of work, disciplinary procedures to national policies. The fabric of every nation, therefore affects the formation of these policies and procedures albeit with a difference depending on the organization, there complexity, size and number of employees.

The authors of the book “Industrial Relations - A Contemporary Approach”, bring forth the changes which have taken place in the Australian Industrial Relations post year 2000 through this book.

The world over has witnessed a sea change in the area of Industrial Relations so much so that for some, the subject seems irrelevant in the 21st century- one best relegated to history.

This book reflects the new reality of Industrial Relations. For easy comprehension, the book has been categorized into three parts. The parts further divided into various chapters. The Part I comprising of the nature and context of IR comprises of two chapters which discuss at length the different approaches to IR, identify the strengths and weaknesses of different a p p r o a c h e s a n d t h e i r n u a n c e s implementations.

Chapter 2 throws light on the changing nature of work and employment in Australia over the last decade. It highlights the differences in labor market- from standard to non-standard jobs resulting in a change in the wages paid, in career advancements, training and development opportunities to the permanent and part time or casual workers. This further propels a fear in the minds of the temporary employees thereby forcing them to accept any and everything often resulting in high level of work related stress.

Authors: Mark Bray,

Stephen Deery, Janet Walsh, Peter Waring

Publisher: Tata McGraw Hill

Education

Edition & year:3rd & 2011

Price : Rs. 485/-

Pages: 424

Reviewed By: N. Malati

INDUSTRIAL RELATIONS: A CONTEMPORARY APPROACHINDUSTRIAL RELATIONS: A CONTEMPORARY APPROACH

The Part 2 discusses the various parties involved in IR. Chapter 3 explains at length the role and functions of state in advanced economies. It further asserts how IR in Australia has u n d e r s t o o d t h e i m p o r t a n c e o f s t a t e intervention particularly through social insurance provision and labor legislation to safeguard the interests of the workforce. In addition, it also highlights the changes that are being brought into the forefront due to the current patterns of public sector restructuring. Chapter 4 delineates the role of federal tribunal. Initially the tribunal had the power to make and enforce awards but with the passage of time it only had judicial powers with AIRC having arbitral powers. The Workplace Relations Act 1996 further reduced the traditional arbitral powers of the tribunal. Chapter 5 deals with the role of management in modern organizations which are categorized by separation of ownership from control and the approaches being utilized differing at the country, industry and employee levels. The management of Australian organizations is playing a more active role in the recent times. Further diversity in people and practices has forced organizations to take note and ensure that the diversity acts like a strength and not like a weakness.

Chapter 6 throws light on employee unions-their activities, types and interests. The authors explain how there has been a steady decline in membership in the Australian unions during 1980's. The major attributable causes for the dwindling membership was identified as changes in the structure of the industry, the business cycles, role of management, government and public perception of unions. But in recent times, the increased focus on the needs of women and part time workers might act as a ray of hope for the rise in union membership. Chapter 7 discusses the e m e r g e n c e o f n o n - u n i o n e m p l o y e e representation as an alternative form of representation replacing the traditional trade unions. The various forms of non-union employee representation seem to be pro-employee with little or no third party


BOOK REVIEWSBOOK REVIEWSINDUSTRIAL RELATIONSINDUSTRIAL RELATIONS

interventions. But there doesn't seem to be a significant contribution made by these mechanisms with critics feeling that they observe deepened managerial prerogative rather than advanced employee representation.

Part 3, Process and Change delves into the various techniques and issues that initiate change and development. Chapter 8 explains the bargaining structures and processes. The two techniques which have been widely used are collective bargaining and award making with the later gaining popularity since 1990. Currently the awards have been reduced to the role of “safety nets”. Further, the complex rule making processes needs to be understood better for comprehending the interconnections between the different types of bargaining and regulation. Chapter 9 throws light on the nature of conflicts and co-operations at the workplace. Conflict is inevitable and takes many forms but the most noticeable manifestations is in the form of strike, but the fact is that it is less costly in comparison to absenteeism which results in greater loss in man hours in Australia. It has been observed that in spite of increasing global competition, few Australian

organizations have adopted the integrated work practices which are widely practiced in UK and USA. Chapter 10 draws relations between IR, HRM and Performance. The bottom line for any and every organization be it in the yester years or current age is economic performance and organizations need to usher new change through people, policies and procedures to improve their performances.

All in the book is a treat to the students and academicians alike as it contains loads of value added information. The book has a lucid style of presentation through its chapterizations. Every chapter is supplemented with learning objectives, introduction, final observation, summary, discussion questions and further readings. IR news provides with insight into issues related to IR which have appeared in press. The work story enhances the understanding of the chapter theme with the help of fictional characters and hypothetical issues which affect the workplace. The case study at the end of every chapter further aids in understanding the application of the concepts. In addition the further readings encourage the student to extend his domain knowledge. All in all the book is a must read for industrial relations students, academicians and practitioners alike.


INDUSTRIAL RELATIONS: A CONTEMPORARY APPROACHINDUSTRIAL RELATIONS: A CONTEMPORARY APPROACH

Authors: Urvashi Makkar &

Harinder Kumar Makkar

Publisher:

Price : Rs. 315/-

Pages:300

Reviewed By: Ritika Maheshwari

Tata McGraw HillEducation

Edition & year:st

1 & 2011

CUSTOMER RELATIONSHIP MANAGEMENTCUSTOMER RELATIONSHIP MANAGEMENT

In present-day competitive scenario, when products are perceived by the customers as value-delivery vehicle and extensions of their personality, the companies are forced to look beyond just product innovation and price leadership to retain their strategic advantage in the market. The marketers have realized that only customer orientation can help them in inculcating enduring relations which can be sustained as strategic advantage over the competitors; provided it is nurtured and managed well. Customer Relationship Management initiatives are implemented with the objective of fulfilling the customer expectations and building, maintaining and strengthening long-term relationship with them. The benefits of retaining the customers and reducing the defection rate are beyond pure business, leading to emotional bonding with the customers, which becomes the most potent weapon for success. But achieving this milestone of consumer advocacy needs clear understanding of customer behavior, their needs and expectations during all the phases of customer life cycle.

The e-CRM system helps in capturing the required customer data and this information can be used to facilitate further interactions with the customers. Moreover, Information Technology aids in managing a large volume of customer data and makes it available at all key areas of the organization so that customer-related transactions, including sales, marketing and service provisioning, can be efficiently executed in the organization. Though there are a number of e-CRM solutions available in the market, implementation of CRM for an organization is not just planning and execution of a software system; rather it is the change in culture and philosophy of the organization. This change in culture requires orientation of people, reengineering of processes and appropriate use of the technology. This right mix of people, processes and culture is prerequisite for CRM

implementation.

In order to have the natural progression of learning process, the author has divided the book, Customer Relationship Management into three parts. Part I (Chapters 1 to 3) focuses on developing the understanding for theoretical concepts of CRM. Chapter 1 introduces the concepts and philosophy that are essential to understand CRM. The discussion on changing face of Indian market, customer-focus, voice of customer, customer ownership and customer value, customer care, touch points, moments of truth, customer loyalty and customer advocacy provides the pathway for understanding the relationship management. This foundation for understanding CRM continues in Chapters 2 and 3. These chapters provide the detailed discussion on Value Creation, Customer Life Cycle (CLC) and Relationship Marketing, which are the key facets for achieving customer focus and building, maintaining and strengthening the relationships.

Part II (Chapters 4 to 7) is geared towards offering the insights into CRM and associated concepts of customer-driven quality and loyalty management. Chapter 4 presents CRM as the system that integrates sales, marketing and service functionalities of an organization and helps in implementation of the concept of Relationship Marketing. In Chapter 5, the concepts of loyalty, loyalty management and loyalty programmes have been introduced. The steps involved in planning and implementing loyalty programmes and benefits, types of loyalty programmes have been explained. Chapter 6 presents the learning for service quality, the importance and methods of service capacity planning for an organization and service delivery systems to achieve quality parameters and standards. The concept of quality, quality management, Quality Management System (QMS), customer focus, leadership, involvement of people, process approach, system approach to management,



continual improvement, fact-based approach to decision-making and mutually beneficial supplier relationship, which are the core principles and philosophy of QMS, have been comprehensively covered in Chapter 7.

Part III (Chapters 8 to 13) focuses on planning and implementing CRM in an organization. It presents the applied knowledge required for successful implementation of CRM application. It first introduces Sales Force Automation (SFA) and discusses its objectives and features in Chapter 8. With the help of the corporate examples, the strategic advantages and critical factors for successful SFA are also elaborated. Chapter 9 is designed to explain the meaning, importance, scope and significance of e-CRM and provides insights into commercial applications, features and specifications of e-CRM solution. In chapters 10 to 12, the subject matter related to implementation and adoption of CRM in an organization has been explored. The issues like selection of the right application, carrying out Business Process Reengineering (BPR), and the alignment of all functional and operational areas within the organization are discussed comprehensively. These chapters will be of special significance to CRM project management team and top management desiring to bring customer orientation within the organization. In Chapter 13, while discussing the future of CRM, the essential concepts of two emerging technologies—Software as a Service (SaaS) and cloud computing—and their impact on CRM deployment are

outlined. SaaS has been fast emerging as a technically sound and cost-effective medium of doing business. This paradigm shift in the business scenario has been enabled by a wide range of factors like increasing broadband penetration, superiority of web technologies and tools, lower cost of hardware installation, growing number of small to medium businesses and changing customer mindset. Besides these, new customer access technologies and the way these can be used by the companies to enhance the value to customers have been studied with the help of a range of examples in the chapter.

In the end, the text is closed with eight corporate case studies, which provide the realistic learning in the practical issues while implementing CRM. These cases enhance the conceptual knowledge gained in the chapters and prepare the readers for actual implementation of the CRM concept and philosophy.

Each section of this book gives a glimpse of author's rich experience by providing review questions and especially project work exercises to 'soul search' the learning, the readers have had through this book. It beautifully covers all the aspects of CRM and provides a quality resource and guide for both the management professionals and students of management courses. The book has accomplished well its due sense of appreciation apart from a lot of fine tuning which was called under the changed scenario.



Corrigendum

The review of the book titled "Mobile Law" by Pavan Duggal written by Dr. Anju Batra, Faculty DIAS, published in the 15th issue Vol. 8 No.1, April - September 2011 of DIAS Technology Review - The International Journal for Business and IT. We regret that the name of the reviewer was inadvertently wrongly printed in the journal. The correct name of the reviewer should be read as Anju Batra Instead of Anju Batia.

Pix

DIAS Technology Review is a biannual international journal of business and IT. It aims to be a premier and prestigious journal for publishing original and well-researched papers in the areas of Management and Information Technology. Contribution to the existing literature and knowledge base are the basic hallmarks for accepting the papers for publishing in the Journal.

Authors and Reviewers, both have an important role to play in making the journal scholastic, intellectually vibrant and comprehensively informative. The authors of the research papers are expected to base, prepare and present their papers on data which is truly authentic, accurate and consistent. They are fully accountable for the information they provide. The research papers so submitted are liable to undergo blind reviews by two referees who are expected to provide their unbiased, critical, constructive and quick evaluation of such papers. The papers will be accepted for publication in the journal only when the reports of both the reviewers are favourable or papers have been redrafted, represented and resubmitted by the authors as required by the reviewers. No fee is charged from the author for publishing his paper in the journal. The author gets one complimentary copy of the relevant edition of the journal. The primary focus of the journal is on academicians, students and others interested in research or those interested in updating and upgrading their knowledge in the areas of Management and Information Technology.


DIAS Technology Review is a biannual International Journal of Business and IT. It aims to be a premier and prestigious journal for publishing original and well-researched papers in the areas of Management and Information Technology. Contribution to the existing literature and knowledge base are the basic hallmarks for accepting the papers for publishing in the Journal.

We invite you to contribute your valued paper to this journal for Spring or Fall Issue, as may be convenient. Submission deadlines for papers are March 31st for Spring Issue and September 30th for Fall Issue. The detailed guidelines for the contr ibutors are a lso avai lable at our website http://www.dias.ac.in. The Article may please be sent to the Editor, DIAS Technology Review at the following address

The Journal accepts for publication the following:

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The research papers so submitted are liable to undergo blind review by two referees who are expected to provide their unbiased, critical, constructive and quick evaluation of such papers. The papers will be accepted for being published in the journal only when the reports of both the reviewers are favorable or papers have been redrafted, represented and resubmitted by the authors as required by the reviewers. No fee is charged from the author for publishing his paper in the journal. The author gets one complimentary copy of the relevant edition of the journal.

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VISION

MISSION

DELHI INSTITUTE OF ADVANCED STUDIES is a dynamic, growth oriented institution, affiliated to G.G.S. Indraprastha University. Established by Shri Laxman Das Sachdeva Memorial Educational Society, the Institute is providing dynamic learning environment that is changing in response to changing needs of society. At DIAS, pursuit of Excellence is a way of life. The guiding philosophy behind all the academic activities of the Institute is to inculcate professionalism in management and to enhance the effectiveness of organization. The Institute seeks professional excellence through ethics, passion and perseverance.

Shri S.K. Sachdeva, a Well-known name in the educational world, is the Chairman of the Institute. Dr. S.N Maheshwari, former Principal of Hindu College, Delhi University is its Director General.

The Institute runs the following programmes affiliated with Guru Gobind Singh Indraprastha University.

Programme Duration No. of SeatsMBA (Full Time) 2 Years 120MCA (Full Time) 3 Years 60

The success of a professional educational Institution is evaluated and judged both on its academic performance and the placement of its students. DIAS has been successful on both these fronts.

ACADEMIC PERFORMANCEThe students of DIAS have excelled in the University by securing top positions in MBA and MCA programmes. The following students of DIAS were awarded Gold Medals at Annual University Convocation for standing 1st at the University Final Examinations:

MBA: Ms. Pratibha Manchanda (Batch 2000-2002), Ms. Manpreet Kaur (Batch 2001-2003), Ms. Silky Mahajan (Batch 2002-2004), Ms. Kavita Sharma (Batch 2003-2005), Mr. Rahul Gupta (Batch 2004-2006), Ms. Priyanka Rastogi (Batch 2008-2010), Ruchika (Batch 2009-2011).

MCA: Ms. Lovelina Massand (Batch 1999-2002), Mr. Pratham Kailash (Batch 2002-2005). Ms. Neha Garg (Batch 2003-2006), Ms. Neha Chaudhary (Batch 2004-2007), Ms. Shruti Gupta (Batch 2005-2008), Ms. Kanchan Agarwal (Batch 2007-2012), Richa Gupta (Batch 2008-2011) Sandhya Soman (2009-2012).

PLACEMENTDIAS provides excellent placement opportunities for its students in prestigious organization. Some of the companies where our students have been placed include: Tata Consultancy Services, IBM, Nucleus Software Ltd., caritor, Accenture, Intersolutions, Bharti Touchtell, American Express, Standard Chartered, ICICI Prudential, Infosys, Adobe, Hughes, Thomas Cook, Maspar, Quark, Syntel, BEC Foods and many others.

THE INSTITUTE

DELHI INSTITUTE OF ADVANCED STUDIESDELHI INSTITUTE OF ADVANCED STUDIES

We strive to provide a dynamic

learning environment for

imparting holistic

education that inculcates

professional excellence,

induces competitive spirit, instils leadership

quality to carve a niche in the

changing global scenario

DIAS believes in learning to excel and excelling to

serve. The aim of the Institute is to develop a unique culture that seeks to scale heights of

glory through ethics, passion

and perseverance. The guiding

philosophy of the Institute is to

enhance team spirit, integrity

and commitment to serve the cause

of humanity.

IMPORTANT DATES

Submission of Abstract

Submission of Final Paper

Acceptance of Paper

Registration

22nd February, 2013

25th February, 2013

5th March, 2013

10th March, 2013

DELHI INSTITUTE OF ADVANCED STUDIES(Affiliated to G.G.S. Indraprastha University and approved by All India Council for Technical Education)

Plot No. 6, Sector 25, Rohini, Delhi - 110 085 IndiaPh. : +91-11-2793 2742, 2793 4011, 2793 4400 Fax: +91-11-2793 4200 Email: [email protected]

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