CAPITAL STRUCTURE IS A FUNCTION OF...

Volume 4, Number 2, April – June’ 2015

ISSN (Print):2279-0896, (Online):2279-090X

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International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1705 |P a g e

CAPITAL STRUCTURE IS A FUNCTION OF UNIQUENESS OF FIRMS:

EVIDENCE FROM THE INDIAN CORPORATE SECTOR

Gurnam Singh Rasoolpur11

ABSTRACT

This empirical paper attempts to study whether capital structure is a function of uniqueness of firms through a case of Indian

corporate sector by classifying the capital structure of sample companies by uniqueness over a period under study. The study

is limited to top 298 firms from different industries out of the list of top 500 manufacturing firms from the Indian corporate sector selected on the basis of turnover for the year 2004-2005 which covers the time span of eleven years commencing from

1995-96 to 2005-06. The study reveals that the largest number of companies, i.e. 55.84 percent and 63.29 percent, is lying in 0-100 percent capital structure range, which is below the well-established standard of 2:1, during 1995-96 and 2005-06

respectively which represents use of less amount of debt (conservative approach) by the largest number of companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital

structure over the period under study. It is also observed that under 0-100 percent capital structure range the number of

companies are increasing by 7.35 percent (i.e. 63.07-55.72=7.35) during 2005-06 as compared to the number of companies during 1995-96 which represents use of less amount of debt by such companies in their capital structure as compared to even

their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also observed that under 100-200 percent capital structure range, the number of companies is decreasing in the higher

uniqueness ranges which further means that companies having higher uniqueness are using less amount of debt (liberal and safe approach) in their capital structure as compared to even their own capital when the uniqueness of companies is examined

in relation to capital structure during the period under study. It is also observed that under 100-200 percent capital structure range the number of companies are decreasing by 10.03 percent (i.e. 36.16-26.13=10.03) during 2005-06 as compared to the

number of companies during 1995-96 which represents companies using higher debt in their capital structure are decreasing

by 10.03 percent when the uniqueness of companies is examined in relation to capital structure over the period under study. However, number of firms in 200-300 and more than 300 percent capital structure ranges are considerably less i.e. 4.02

percent each in the year 1995-96 and 7.34 percent and 3.50 percent in the year 2005-06 which represents companies using higher debt (aggressive approach) in their capital structure as compared to even their own capital are considerably less when

the uniqueness of companies is examined in relation to capital structure over the period under study. Overall, rise in uniqueness results in the shrinkage of number of capital structure ranges as well as decline in the distribution of companies to

the higher capital structure ranges during the period under study. Thus, it emerges that at lower uniqueness, there exists higher capital structure ranges and vice-versa, which represents negative relationship between capital structure and uniqueness ranges

which further concludes that capital structure is a function of uniqueness of firms during the period under study. Higher

uniqueness means more outflows of cash for creating specialization in marketing. Consequently, the companies can’t afford more amount of debt in their capital structure due to the risk of fixed interest commitments and repayment of principal

amount. It shows that due to high uniqueness, companies are using lesser amount of debt for financing purposes. However, debt capital is a cheaper source of finance, thus, the use of debt may maximize the value of wealth of shareholders. It is also

concluded that largest number of companies are following conservative approach, very lesser number of companies are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through

debt when the uniqueness of companies is examined in relation to capital structure over the period under study. It is also found

that in our empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during 1995-96 and 2005-06 which are near to the well-established standard range of 200 percent (2:1) when

the uniqueness of companies is examined in relation to capital structure over the period under study.

KEYWORDS

Uniqueness of Firms, Capital Structure Ranges, Shareholders etc.

INTRODUCTION

The question of the optimal capital structure of a business firm has attracted considerable attention by the economists in recent years. The company will have to plan its capital structure initially at the time of its promotion. Subsequently, whenever funds have

to be raised to finance investments, a capital structure decision is involved. “A company can finance its investments through debts/or equity. The company may also use preference capital. The rate of interest on debt is fixed irrespective of the company’s

rate of return on assets. The company has a legal binding to pay interest on debt. The rate of preference dividend is fixed, but preference dividends are paid when the company earns profits. The common shareholders are entitled to the residual income. That

is, earnings after interest and taxes (less preference dividends) belong to them. The rate of equity is not fixed and depends on the

11Associate Professor (Commerce), P.G. Department of Commerce & Business Management, Guru Nanak College, Punjab, India,

[email protected]

mailto:[email protected]





dividend policy of the company.” (Pandey, I. M., 2010, p 317-18). The choice between debt and equity to finance a firm’s assets involves a trade-off between risk and return (Pandey, Chotigeat & Ranjit, 2000). The excessive use of debt may endanger the

survival of a firm, while a conservative use of debt may deprive the firm in leveraging return to equity owners. Therefore, for

taking more benefits of debt capital also by keeping away firms from risks, a desirable debt equity combination must be used in the total capital structure. The primary aim of corporate management is to maximize shareholders’ value and the value o f a firm in

a legal and ethical manner. So, a financial manager should consider a number of factors to set an optimal capital structure for a firm giving considerable weight to earning rate, collateral value of assets, age, cash flow coverage ratio, non-debt tax shield, size

(net sales), dividend payout ratio, debt service ratio, cost of borrowing, corporate tax rate, current ratio, growth rate, op erating leverage and uniqueness (selling cost/sales) etc. However, the choice between debt and equity from the point of view of

shareholders and lenders is an important one and it will be useful to list the special advantages of either form of capital relative to

the other.

The greater use of debt, where the interest rate is lower than the average rate of return on the investment, increases the

net return to equity shareholders.

Higher debt does not impair the control of shareholders over the enlarged operations of the company/firm.

Debt is cheaper source of finance, cost of debt is lower than cost of preference share capital as well as equity share

capital because debt holders’ first claim on the firm’s assets at time of its liquidation, payment of interest before any dividend is paid to preference and equity shareholders, and interest is an item chargeable to profits of a company/firm.

Deductibility of the interest on debt before computing profits charge to tax, as against payment of dividends out of

profits after tax, implies an effective lowering of the tax rate on a company/firm more or less in proportion to the extent

to which debt is substituted for equity in the company is financing pattern.

However, it is not desirable to resort to excessive debt financing because the excessive proportion of debt in the capital structure increases the financial risks of the firm. This is because debt being a contractual obligation. The same along with interest must be

paid out ultimately. Any failure in doing so shall result in technical insolvency if not a real one. Further, the use of debt capital will not automatically improve the overall return of the firm. It will increase the return if the firm’s rate of return on assets is

higher than the cost of debt capital. Therefore, in order to take the benefit of debt financing and protecting the firm risks , it is better to have an appropriate debt-equity mix in the total capital structure. Thus, the decision regarding debt equity mix in the

capital structure of a firm is of critical one and has to be approached with a great care. The paper is organized into five s ections.

Section I provides the introduction about the capital structure. Section II shows the objectives of the present study. Section III deals with data source and sample size. Section IV deals with research methodology: selected variable, its definition and exp ected

relationship with capital structure. Section V presents reports and analyses the empirical results of the study. Section VI summarizes and concludes the study.

OBJECTIVES OF THE STUDY

The main objective of the present paper is to study whether capital structure is a function of uniqueness of firms through a case of

Indian corporate sector by classifying the capital structure of sample companies by uniqueness which covers a time span of eleven

years commencing from 1995-96 to 2005-06 over a period under study. DATA SOURCE & SAMPLE SIZE

In order to study whether capital structure is a function of uniqueness of firms in the Indian corporate sector, the firm level data is

collected from the corporate data base PROWESS maintained by the Center for Monitoring the Indian Economy (CMIE). This database contains the detailed information on the financial performance of all the public listed companies in all the segments in

India, compiled from various sources such as profit and loss accounts and balance sheets, stock price data, the annual reports etc.

The database also contains background information including ownership pattern, products, profit, plant location, new investment and so on for the companies. This is a reliable source of information and many researchers in India have used the data for their

empirical analysis. The data used in the analysis consists of the manufacturing firms listed on the Bombay Stock Exchange (BSE). We have also restricted our analysis to firms that have no missing data continuously for eleven years. Therefore, the sample size is

a function of available data. Finally, we ended up with 298 out of the list of top 500 private sector manufacturing firms published in the Business Today, based on sales turnover for the year 2004-05. Therefore, these 298 firms constitute sample for our

empirical study. The study covers time span of eleven years commencing from 1995-96 to 2005-06. RESEARCH METHODOLOGY: VARIABLE, DEFINITION AND EXPECTED RELATIONSHIP WITH CAPITAL

STRUCTURE

The following table exhibits the selected variable to be used for studying whether capital structure is a function of uniqueness of firms in the Indian corporate sector i.e. Uniqueness, its definition and expected relationship with capital structure. In the present

study, the ratio of total borrowings to net worth is being used for measuring the capital structure (debt–equity ratio) of a firm. Here, borrowings include all forms of debt-interest bearing or otherwise. All secured and unsecured debt is included under total

borrowings. Thus, total borrowings include debt from banks (short term as well as long term) and financial institutions, inter-

corporate loans, fixed deposits from public and directors, foreign loans, loan from government, etc. Funds rose from the capital





market through the issue of debt instruments such as debentures (both convertible and non-convertible) and commercial paper are also included here while net worth includes equity share capital, preference share capital and reserve & surpluses minus

revaluation reserves & miscellaneous expenses not written off. Preference share capital is irredeemable in nature. So, it is

considered as a part of net worth. Short-term borrowings are included in the debt or total borrowings because it is observed that short-term borrowings are being used as a long-term source of finance in the Indian contest. The capital structure has been

divided into thirty one ranges (i.e. 0-10 percent, 10-20 percent, 20-30 percent …> 300 percent) and uniqueness has been divided into nine ranges (i.e. 0-2, 2-4, 4-6, 6-8, 8-10, 10-12, 12-14, 14-16 and more than 16 percent) during the period for our empirical

study for doing comprehensive analysis. These capital structure ranges are classified into four broader categories – i.e. 0-100 percent (for deciding conservative approach), 100-200 percent (for deciding liberal and safe approach), 200-300 percent and more

than 300 percent (for deciding free aggressive approach) for deciding which financing policy is being used by the companies with

respective to uniqueness further analysis. For studying whether capital structure is a function of uniqueness of firms in the Indian corporate sector, the capital structure of all the firms is also classified based on uniqueness of firms over the period under study.

Table-1: Variable, Definition and Expected Relationship with Capital Structure

S. No. Variables Definition Expected Relationship

1 Uniqueness Selling Cost/Sales Negative

Sources: Authors Compilation

EMPIRICAL RESULTS

It is evident from that Table 2 & 3 more than two third of the companies are in three ranges of uniqueness of 0-2, 2-4 and 4-6 during 1995-96 (70.11 percent) and slightly less than three fifth of the companies are in the three ranges of uniqueness of 0-2, 2-4

and 6-8 during 2005-06 (58.19 percent), respectively. Uniqueness wise, the highest number of companies is in 0-2 uniqueness range during 1995-96 (29.15 percent). However, during 2005-06 (24.74 percent), the highest number of companies is in 2-4

uniqueness range. The lowest number of companies is in 14-16 uniqueness range during 1995-96 (1.48 percent) and in 12-14

uniqueness range during 2005-06 (3.48 percent) respectively. Under 0-2 and 2-4 uniqueness ranges, where highest number of companies is lying, it has been observed that 77.18 percent and 71.81 percent companies are in only thirteen and nine out of thirty

one capital structure ranges during 1995-96 and 2005-06, respectively. It has been observed that, in 1995-96, when uniqueness ranges are moving from 0-2 to more than 16 in relation to capital structure ranges, initially the spread of number of companies

starts expanding over the entire capital structure ranges. This spread, then, contracts from higher capital structure ranges to the lower capital structure ranges with the rise in uniqueness. Similar trend has been observed in 2005-06 with a few exceptions here

and there. Notably, the contraction in this year is somewhat lower. Capital structure range wise, it has been observed that the

highest number of companies (8.12 percent) is in 100-110 percent capital structure range, followed by 7.38 percent companies in 60-70 percent capital structure range, while no company is lying in 260-270 percent, 280-290 percent and 290-300 percent capital

structure ranges during 1995-96. During 2005-06, the highest number of companies (19.51 percent) is in 0-10 percent capital structure range, followed by 6.27 percent companies in 110-120 percent capital structure range. No company is lying in 270-280

percent and 280-290 percent capital structure ranges during this year. It has been observed that largest number of companies is in 0-100 percent capital structure range which is below the well-established standard of 2:1 during 1995-96 (minimum = 39.29

percent, maximum = 75 percent, industry average = 55.72 percent) and 2005-06 (minimum = 57.14 percent, maximum = 80 percent, industry average = 63.07 percent), respectively, which represents that the largest number of companies are using les ser

amount of debt in their capital structure as compared to even their own capital when the uniqueness of companies is examined in

relation to capital structure over the period under study. It means that such companies are following conservative approach o f financing through debt although it is a cheaper source of finance. With the rise in uniqueness ranges, the number of companies is

shifting to this broader capital structure range and reaches to more than 70 percent in four ranges of uniqueness during 1995-96. However, declining trend has been observed during 2005-06 in this broader range of capital structure. It is also observed that

under 0-100 percent capital structure range the number of companies are increasing by 7.35 percent (i.e. 63.07-55.72=7.35) during 2005-06 as compared to the number of companies during 1995-96 which represents use of less amount of debt by such companies

in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to

capital structure over the period under study. In 100-200 percent capital structure range, declining trend in 1995-96 but mixed trend in 2005-06 has been observed. Such companies are following liberal and safe approach of financing through debt. These

companies are using more amount of debt in their capital structure than their own capital but less than the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period

under study. It is also observed that under 100-200 percent capital structure range the number of companies are decreasing by 10.03 percent (i.e. 36.16-26.13=10.03) during 2005-06 as compared to the number of companies during 1995-96 which means that

companies using more debt in their capital structure as compared to even their own capital are decreasing when the uniqueness of companies is examined in relation to capital structure over the period under study. The lowest number of companies is in 200-300

percent and more than 300 percent capital structure ranges during 1995-96 (4.06 percent each) and 2005-06 (7.32 percent and 3.48

percent), respectively. It means that such companies are using debt freely as a source of finance. Such companies are using debt beyond the well-established standard range of 200 percent (2:1). However, these companies are very lesser in number which

alternatively represents use of less amount of debt by the large number of companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. In





200-300 percent capital structure range, the number of companies in two third ranges of uniqueness is nil during 1995-96, and shows rising trend during 2005-06. No trend has been observed in more than 300 percent capital structure range during the study

period. In nutshell, it has been observed that with the rise in uniqueness ranges, the number of companies is moving from higher

capital structure ranges towards lower capital structure ranges under the four broader categories of capital structure ranges when the uniqueness of companies is examined in relation to capital structure over the period under study. Overall, rise in uniqueness

results in the shrinkage of number of capital structure ranges as well as decline in the distribution of companies to the higher capital structure ranges during the period under study. Thus, it emerges that at lower uniqueness, there exists higher capita l

structure ranges and vice-versa, which represents negative relationship between capital structure and uniqueness ranges which further concludes that capital structure is a function of uniqueness of firms during the period under study. Higher uniqueness

means more outflows of cash for creating specialization in marketing. Consequently, the companies can’t afford more amount of

debt in their capital structure due to the risk of fixed interest commitments and repayment of principal amount. It shows that due to high uniqueness, companies are using lesser amount of debt for financing purposes. It is also concluded that largest number of

companies are following conservative approach, very lesser number of companies are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through debt when the uniqueness of companies is

examined in relation to capital structure over the period under study. It is also found that in our empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during 1995-96 and 2005-06 which

are near to the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study.

Table-2: Capital Structure of Sample Companies by Uniqueness in 1995-96

Capital Uniqueness (Times) Str. (%) 0-2 2-4 4-6 6-8 8-10 10-12 12-14 14-16 > 16 Avg.

00-10 0 3.57 5.45 7.69 5.26 11.11 0 0 14.29 4.06

10-20 6.33 1.79 5.45 3.85 5.26 5.56 0 0 14.29 4.80

20-30 6.33 3.57 5.45 3.85 0 0 0 0 0 4.06

30-40 5.06 7.14 12.73 3.85 5.26 5.56 0 0 0 6.64

40-50 3.80 3.57 5.45 0 0 0 0 25 14.29 3.69

50-60 5.06 1.79 9.09 11.54 10.53 0 0 25 0 5.90

60-70 8.86 3.57 9.09 7.69 10.53 5.56 14.29 0 0 7.38

70-80 5.06 1.79 10.91 3.85 5.26 16.67 42.86 0 0 7.01

80-90 5.06 5.36 3.64 7.69 10.53 5.56 14.29 25 0 5.90

90-100 5.06 7.14 5.45 15.38 0 0 0 0 28.57 6.27

00-100 50.63 39.29 72.73 65.38 52.63 50 71.43 75 71.43 55.72

100-110 7.59 8.93 3.64 7.69 21.05 5.56 0 25 14.29 8.12

110-120 5.06 7.14 3.64 3.85 5.26 0 14.29 0 0 4.80

120-130 3.80 5.36 0 7.69 5.26 11.11 0 0 14.29 4.43

130-140 7.59 7.14 1.82 3.85 0 0 14.29 0 0 4.80

140-150 5.06 7.14 3.64 0 0 16.67 0 0 0 4.80

150-160 2.53 1.79 1.82 0 0 5.56 0 0 0 1.85

160-170 0 5.36 0 3.85 10.53 0 0 0 0 2.21

170-180 3.80 0 3.64 0 0 0 0 0 0 1.85

180-190 0 1.79 1.82 0 0 11.11 0 0 0 1.48

190-200 1.27 5.36 0 0 5.26 0 0 0 0 1.85

100-200 36.71 50 20 26.92 47.37 50 28.57 25 28.57 36.16

200-210 1.27 0 0 0 0 0 0 0 0 0.37

210-220 0 0 1.82 3.85 0 0 0 0 0 0.74

220-230 2.53 0 0 3.85 0 0 0 0 0 1.11

230-240 0 1.79 0 0 0 0 0 0 0 0.37

240-250 0 1.79 0 0 0 0 0 0 0 0.37

250-260 1.27 0 0 0 0 0 0 0 0 0.37

260-270 0 0 0 0 0 0 0 0 0 0

270-280 2.53 0 0 0 0 0 0 0 0 0.74

280-290 0 0 0 0 0 0 0 0 0 0

290-300 0 0 0 0 0 0 0 0 0 0

200-300 7.59 3.57 1.82 7.69 0 0 0 0 0 4.06

>300 5.06 7.14 5.45 0 0 0 0 0 0 4.06

Total % 100 100 100 100 100 100 100 100 100 100

Average 29.15 20.66 20.30 9.59 7.01 6.64 2.58 1.48 2.58 100






Table-3: Capital Structure of Sample Companies by Uniqueness in 2005-06

Capital Uniqueness (Times) Str. (%) 0-2 2-4 4-6 6-8 8-10 10-12 12-14 14-16 > 16 Avg.

00-10 18.18 18.31 26.47 14.63 16.67 22.22 30 21.43 20 19.51

10-20 1.82 5.63 0 4.88 8.33 0 10 7.14 10 4.53

20-30 5.45 4.23 5.88 4.88 4.17 0 10 0 10 4.88

30-40 9.09 7.04 2.94 7.32 4.17 0 0 7.14 5 5.92

40-50 7.27 5.63 5.88 7.32 0 5.56 20 7.14 0 5.92

50-60 1.82 2.82 8.82 7.32 12.5 5.56 10 0 5 5.23

60-70 12.73 0 0 2.44 8.33 5.56 0 14.29 0 4.53

70-80 0 5.63 2.94 12.20 4.17 11.11 0 0 5 4.88

80-90 9.09 7.04 2.94 0 4.17 5.56 0 0 5 4.88

90-100 1.82 1.41 5.88 4.88 4.17 5.56 0 0 0 2.79

00-100 67.27 57.75 61.76 65.85 66.67 61.11 80 57.14 60 63.07

100-110 0 4.23 11.76 0 4.17 0 0 0 5 3.14

110-120 3.64 7.04 5.88 12.20 8.33 0 0 14.29 0 6.27

120-130 1.82 0 5.88 0 0 0 10 7.14 0 1.74

130-140 5.45 7.04 0 2.44 0 0 0 7.14 5 3.83

140-150 1.82 8.45 0 2.44 4.17 5.56 0 0 0 3.48

150-160 5.45 1.41 2.94 4.88 0 0 0 0 5 2.79

160-170 0 0 0 0 0 5.56 0 0 0 0.35

170-180 3.64 1.41 2.94 0 0 5.56 10 0 10 2.79

180-190 0 0 0 0 0 5.56 0 0 0 0.35

190-200 0 0 2.94 2.44 4.17 5.56 0 0 0 1.39

100-200 21.82 29.58 32.35 24.39 20.83 27.78 20 28.57 25 26.13

200-210 0 2.82 0 0 0 0 0 0 0 0.70

210-220 0 1.41 2.94 0 0 0 0 0 0 0.70

220-230 1.82 1.41 0 2.44 4.17 0 0 0 0 1.39

230-240 0 0 0 4.88 0 0 0 0 0 0.70

240-250 0 1.41 2.94 0 4.17 0 0 0 0 1.05

250-260 3.64 1.41 0 2.44 0 0 0 7.14 0 1.74

260-270 0 0 0 0 0 0 0 0 5 0.35

270-280 0 0 0 0 0 0 0 0 0 0

280-290 0 0 0 0 0 0 0 0 0 0

290-300 0 0 0 0 0 5.56 0 0 5 0.70

200-300 5.45 8.45 5.88 9.76 8.33 5.56 0 7.14 10 7.32

>300 5.45 4.23 0 0 4.17 5.56 0 7.14 5 3.48

Total % 100 100 100 100 100 100 100 100 100 100

Average 19.16 24.74 11.85 14.29 8.36 6.27 3.48 4.88 6.97 100


SUMMARY AND CONCLUSIONS

This section examines whether capital structure is a function of uniqueness of firms through a case of Indian corporate sector by classifying the capital structure of sample companies by uniqueness over a period under study. The present study, although an

exploratory effort, is limited to 298 out of top 500 private sector manufacturing firms selected on the basis of sales turnover for the year 2004-2005, published in Business Today, which covers time span of eleven years commencing from 1995-96 to 2005-06.

The following are the conclusion and findings of the present study.

It is observed that largest number of companies, i.e. 55.72 percent and 63.09 percent, is lying in 0-100 percent capital

structure range which is below the well-established standard of 2:1 during 1995-96 and 2005-06 respectively which represents that the largest number of companies are using lesser amount of debt in their capital structure as compared to

even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under

study. It means that such companies are following conservative approach of financing through debt although it is a cheaper source of finance when the uniqueness of companies is examined in relation to capital structure over the period under

study.

It is also observed that under 0-100 percent capital structure range the number of companies are increasing by 7.35 percent

(i.e. 63.07-55.72=7.35) during 2005-06 as compared to the number of companies during 1995-96 which means that the





number of companies are increasing under this low capital structure range by 7.35 percent during the period under study which further represents use of less amount of debt by such companies in their capital structure as compared to even their

own capital when the uniqueness of companies is examined in relation to capital structure over the period under study.

Under 0-100 percent capital structure range, the number of companies is more in the higher uniqueness ranges and less

number of companies in lower uniqueness ranges which further means that companies in higher uniqueness ranges are

using less amount of debt in their capital structure as compared to even their own capital and vice-versa when the uniqueness of companies is examined in relation to capital structure during the period under study.

The number of companies is lower in 100-200 percent capital structure range, i.e. 36.16 percent and 26.13 percent, during

1995-96 and 2005-06 respectively which means that lesser number of companies are in high capital structure range which alternatively represents use of less amount of debt by the higher number of companies in their capital structure as

compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study. Such companies are following liberal and safe approach of financing through debt. These companies

are using more amount of debt in their capital structure than their own capital but less than the well-established standard range of 200 percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period

under study.

It is also observed that under 100-200 percent capital structure range the number of companies are decreasing by 10.03

percent (i.e. 36.16-26.13=10.03) during 2005-06 as compared to the number of companies during 1995-96 which means

that the number of companies are decreasing under this high capital structure range by 10.03 percent during the period under study when the uniqueness of companies is examined in relation to capital structure over the period under study.

Under 100-200 percent capital structure range, the number of companies is lesser in the higher uniqueness ranges as

compared to the higher number of companies in lower uniqueness ranges which further means that companies in higher uniqueness ranges are using less amount of debt in their capital structure as compared to even their own capital and vice-

versa when the uniqueness of companies is examined in relation to capital structure during the period under study.

It is found that very lesser number of companies is distributed in 200-300 percent and more than 300 percent capital

structure ranges during 1995-96 (i.e. 4.06 percent each) and 2005-06 (i.e. 7.32 percent and 3.48 percent), respectively. It

means that such companies are using debt freely as a source of finance. Such companies are using debt beyond the well-established standard range of 200 percent (2:1). However, these companies are very lesser in number which alternatively

represents use of less amount of debt by the large number of companies in their capital structure as compared to even their own capital when the uniqueness of companies is examined in relation to capital structure over the period under study.

It is also found that in our empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during 1995-96 and 2005-06 which are near to the well-established standard range of 200

percent (2:1) when the uniqueness of companies is examined in relation to capital structure over the period under study.

91.88 percent and 8.12 percent companies are lying in 0-200 percent and more than 200 percent capital structure ranges

during 1995-96 while 89.20 percent and 10.80 percent companies are lying in same capital structure ranges during 2005-

06, respectively, when the uniqueness of companies is examined in relation to capital structure over the period under study.

It is also found that largest number of companies are following conservative approach, very lesser number of companies

are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through debt when the uniqueness of companies is examined in relation to capital structure over the period under study.

It is observed that under capital structure range wise, the highest number of companies is in 100-110 percent capital

structure range i.e. 8.12 percent during the year 1995-96 and in 0-10 percent capital structure range 19.51 percent during

the year 2005-06, respectively, when the uniqueness of companies is examined in relation to capital structure over the

period under study.

It is observed that under capital structure range wise, no company is lying, for the variable under study, in 260-270

percent, 280-290 percent and 290-300 percent capital structure ranges during the year 1995-96 and in 270-280 percent and 280-290 percent capital structure ranges during the year 2005-06, respectively, when the uniqueness of companies is

examined in relation to capital structure over the period under study.

It is observed that under uniqueness wise, highest number of companies, i.e. 29.15 percent, is lying in 0-2 uniqueness range followed by 20.66 percent in 2-4 uniqueness range and 20.30 percent in 4-6 uniqueness range during the year 1995-

96 and 24.74 percent in 2-4 uniqueness range followed by 19.16 percent in 0-2 uniqueness range during the year 2005-06,

respectively, when the uniqueness of companies is examined in relation to capital structure over the period under study.





Overall, rise in uniqueness results in the shrinkage of number of capital structure ranges as well as decline in the distribution of companies to the higher capital structure ranges during the period under study. Thus, it emerges that at lower uniqueness, there

exists higher capital structure ranges and vice-versa, which represents negative relationship between capital structure and

uniqueness, which further concludes that capital structure is a function of uniqueness of firms during the period under study. Higher uniqueness means more outflows of cash for creating specialization in marketing. Consequently, the companies can’t

afford more amount of debt in their capital structure due to the risk of fixed interest commitments and repayment of principal amount. It shows that due to high uniqueness, companies are using lesser amount of debt for financing purposes. It is also

concluded that largest number of companies are following conservative approach, very lesser number of companies are following aggressive approach and lesser number of companies are following liberal and safe approach of financing through debt when the

uniqueness of companies is examined in relation to capital structure over the period under study. It is also found that in our

empirical study, only 2.42 percent and 2.09 percent companies are in 190 to 210 percent (1.90:1 to 2.10:1) capital structure range during 1995-96 and 2005-06 which are near to the well-established standard range of 200 percent (2:1) when the uniqueness of

companies is examined in relation to capital structure over the period under study. REFERENCES

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ANNEXURE

List of Sample Companies

A B B Ltd. Aarti Industries Ltd.

Aban Offshore Ltd. Abbott India Ltd. Abhishek Industries Ltd.

Aditya Birla Nuvo Ltd. Ador Welding Ltd. Ahmednagar Forgings Ltd.

Alfa Laval (India) Ltd. Alok Industries Ltd. Ambuja Cement Eastern Ltd. [Merged]

Amforge Industries Ltd. Amtek Auto Ltd.

Andhra Sugars Ltd. Apar Industries Ltd. Apollo Tyres Ltd.

Areva T & D India Ltd. Arvind Mills Ltd. Asahi India Glass Ltd.

Ashapura Minechem Ltd. Ashok Leyland Ltd. Asian Paints Ltd.

Asian Star Co. Ltd. Assam Co. Ltd. Astra Microwave Products Ltd.

Astrazeneca Pharma India Ltd. Atlas Copco (India) Ltd.

Atul Ltd. Aurobindo Pharma Ltd. Automotive Axles Ltd.

Avaya Globalconnect Ltd. Aventis Pharma Ltd. B A S F India Ltd.

B O C India Ltd. Bajaj Auto Ltd. Bajaj Electricals Ltd.

Bajaj Hindusthan Ltd. Balkrishna Industries Ltd.

Ballarpur Industries Ltd.

Force Motors Ltd. G M R Industries Ltd.

G S L (India) Ltd. Gillette India Ltd. Glaxosmithkline Consumer Healthcare Ltd.

Glaxosmithkline Pharmaceuticals Ltd. Glenmark Pharmaceuticals Ltd. Godfrey Phillips India Ltd.

Godrej Industries Ltd. Graphite India Ltd. Grasim Industries Ltd.

Greaves Cotton Ltd. Grindwell Norton Ltd.

Gujarat Alkalies & Chemicals Ltd. Gujarat Ambuja Cements Ltd. Gujarat Fluorochemicals Ltd.

Gujarat N R E Coke Ltd. Gulf Oil Corpn. Ltd. H B L Power Systems Ltd.

H C L Infosystems Ltd. H E G Ltd. Havell'S India Ltd.

Henkel Spic India Ltd. [Merged] Hero Honda Motors Ltd. Hikal Ltd.

Himachal Futuristic Communications Ltd. Himatsingka Seide Ltd.

Hindustan Lever Ltd. Hindustan Motors Ltd. Hindustan Oil Exploration Co. Ltd.

Hindustan Powerplus Ltd. Hindustan Sanitaryware & Inds. Ltd. Hindustan Zinc Ltd.

Hindusthan National Glass & Inds. Ltd. Honeywell Automation India Ltd. Hyderabad Industries Ltd.

I T C Ltd. Igarashi Motors India Ltd.

Ind-Swift Laboratories Ltd.

N L C Nalco India Ltd. N R B Bearings Ltd.

Nagarjuna Fertilizers & Chemicals Ltd. Nahar Exports Ltd. Nahar Industrial Enterprises Ltd.

Nahar Spinning Mills Ltd. Narmada Chematur Petrochemicals Ltd. [Merged]

Natco Pharma Ltd. National Organic Chemical Inds. Ltd. National Peroxide Ltd.

National Steel & Agro Inds. Ltd. Nava Bharat Ventures Ltd.

Navneet Publications (India) Ltd. Nectar Lifesciences Ltd. Nestle India Ltd.

Nirma Ltd. Novartis India Ltd. O C L India Ltd.

Omax Autos Ltd. Opto Circuits (India) Ltd. Orchid Chemicals &

Pharmaceuticals Ltd. Orient Paper & Inds. Ltd. P S L Ltd.

Panacea Biotec Ltd. Paper Products Ltd.

Parry Agro Inds. Ltd. Pfizer Ltd. Pidilite Industries Ltd.

Polyplex Corporation Ltd. Praj Industries Ltd. Prakash Industries Ltd.

Prism Cement Ltd. Punjab Tractors Ltd. Radico Khaitan Ltd.

Rain Calcining Ltd. Rallis India Ltd.

Rama Newsprint & Papers Ltd.

http://www.ukessays.com/essays/finance/a-study-of-the-indian-corporate-sector-finance-essay.php

http://crackmba.com/cost-of-preference-share-capital/

http://www.efinancemanagement.com/investment-decisions/cost-of-preference-share-capital

http://crackmba.com/cost-of-preference-share-capital





Balrampur Chini Mills Ltd. Bannari Amman Sugars Ltd.

Bata India Ltd. Bayer Cropscience India Ltd. [Merged] Berger Paints India Ltd.

Bhansali Engineering Polymers Ltd. Bharat Bijlee Ltd. Bharat Forge Ltd.

Bharati Shipyard Ltd. Bhushan Steel & Strips Ltd.

Birla Corporation Ltd. Blue Star Ltd. Bombay Burmah Trdg. Corpn. Ltd.

Bombay Dyeing & Mfg. Co. Ltd. Bosch Chassis Systems India Ltd. Britannia Industries Ltd.

C C L Products (India) Ltd. C E S C Ltd. Cadila Healthcare Ltd.

Carborundum Universal Ltd. Castrol India Ltd.

Ceat Ltd. Century Enka Ltd. Century Textiles & Inds. Ltd.

Chambal Fertilisers & Chemicals Ltd. Chemplast Sanmar Ltd. Chettinad Cement Corpn. Ltd.

Ciba Specialty Chemicals (India) Ltd. Clariant (India) Ltd. [Merged] Colgate-Palmolive (India) Ltd.

Coromandel Fertilisers Ltd. Crompton Greaves Ltd.

Cummins India Ltd. D C M Ltd. D-Link (India) Ltd.

Dabur India Ltd. Dalmia Cement (Bharat) Ltd. Deepak Fertilisers &

Petrochemicals Corpn. Ltd. Denso India Ltd. Dhampur Sugar Mills Ltd.

Divi'S Laboratories Ltd. Dr. Reddy'S Laboratories Ltd.

E I D-Parry (India) Ltd. Eicher Motors Ltd. Elder Pharmaceuticals Ltd.

Electrosteel Castings Ltd. Elgi Equipments Ltd. Emami Ltd.

Emco Ltd. Ennore Foundries Ltd. Esab India Ltd.

Escorts Ltd. Essar Oil Ltd.

Eveready Industries (India) Ltd. Exide Industries Ltd. F A G Bearings India Ltd.

F D C Ltd. Federal-Mogul Goetze (India) Ltd. Finolex Cables Ltd.

Finolex Industries Ltd. Forbes Gokak Ltd.

India Cements Ltd. India Glycols Ltd.

Indian Petrochemicals Corpn. Ltd. Indo Rama Synthetics (India) Ltd. Indoco Remedies Ltd.

Infomedia India Ltd. Ingersoll-Rand (India) Ltd. Ipca Laboratories Ltd.

Ispat Industries Ltd. J B Chemicals & Pharmaceuticals Ltd.

J B F Industries Ltd. J B M Auto Ltd. J C T Ltd.

J K Industries Ltd. J K Lakshmi Cement Ltd. J K Paper Ltd.

J S W Steel Ltd. Jagatjit Industries Ltd. Jain Irrigation Systems Ltd.

Jayaswals Neco Ltd. Jindal Poly Films Ltd.

Jindal Saw Ltd. Jindal Steel & Power Ltd. Jubilant Organosys Ltd.

Jyoti Structures Ltd. K C P Sugar & Inds. Corpn. Ltd. K S B Pumps Ltd.

Kajaria Ceramics Ltd. Kalpataru Power Transmission Ltd. Kalyani Steels Ltd.

Kesoram Industries Ltd. Kirloskar Brothers Ltd.

Kirloskar Ferrous Inds. Ltd. Kirloskar Oil Engines Ltd. L G Balakrishnan & Bros. Ltd.

Lakshmi Machine Works Ltd. Lloyds Steel Inds. Ltd. Lupin Ltd.

M R F Ltd. Macmillan India Ltd. Madras Aluminium Co. Ltd.

Madras Cements Ltd. Maharashtra Scooters Ltd.

Maharashtra Seamless Ltd. Mahindra Ugine Steel Co. Ltd. Man Industries (India) Ltd.

Marico Ltd. Marksans Pharma Ltd. Maruti Udyog Ltd.

Matrix Laboratories Ltd. Max India Ltd. Merck Ltd.

Micro Inks Ltd. Mid-Day Multimedia Ltd.

Mirc Electronics Ltd. Mirza International Ltd. Monnet Ispat & Energy Ltd.

Monsanto India Ltd. Moser Baer India Ltd. Motherson Sumi Systems Ltd.

Munjal Auto Inds. Ltd. Munjal Showa Ltd.

Ramco Industries Ltd. Ranbaxy Laboratories Ltd.

Raymond Ltd. Reliance Energy Ltd. Rico Auto Inds. Ltd.

Ruchi Infrastructure Ltd. Ruchi Soya Inds. Ltd. S K F India Ltd.

S Kumars Nationwide Ltd. S P L Industries (Shivalik Prints) Ltd.

S R F Ltd. Shreno Ltd. Shyam Telecom Ltd.

Siemens Ltd. Sintex Industries Ltd. Solectron Centum Electronics Ltd.

Sona Koyo Steering Systems Ltd. Southern Iron & Steel Co. Ltd. Sterling Biotech Ltd.

Sterlite Industries (India) Ltd. Strides Arcolab Ltd.

Sun Pharmaceutical Inds. Ltd. Sundaram-Clayton Ltd. Sunflag Iron & Steel Co. Ltd.

Supreme Industries Ltd. Supreme Petrochem Ltd. Suryalakshmi Cotton Mills Ltd.

Swaraj Mazda Ltd. T V S Motor Co. Ltd. Tata Chemicals Ltd.

Tata Coffee Ltd. Tata Metaliks Ltd.

Tata Power Co. Ltd. Tata Steel Ltd. Tata Tea Ltd.

Texmaco Ltd. Thermax Ltd. Titan Industries Ltd.

Torrent Pharmaceuticals Ltd. Torrent Power A E C Ltd. [Merged] Torrent Power S E C Ltd. [Merged]

Ucal Fuel Systems Ltd. Uflex Ltd.

United Phosphorus Ltd. Uttam Galva Steels Ltd. V S T Industries Ltd.

Vardhman Textiles Ltd. Vesuvius India Ltd. Videocon Industries Ltd.

Voltas Ltd. Walchandnagar Industries Ltd. Wartsila India Ltd.

Welspun India Ltd. Wheels India Ltd.

Whirlpool Of India Ltd. Wimco Ltd. Wyeth Ltd.

Yokogawa India Ltd. Z F Steering Gear (India) Ltd. Zuari Industries Ltd.


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