CHAPTER-I INTRODUCTION

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9

Introduction Statement of problems The financing pattern of the corporate sector Importance of Study Survey of related literature Perceptible Gap Objective of the study Plan of study Methodology

1.10 Limitations of the study

1.1

INTRODUCTION
Corporate sector in India occupies a pivotal position in the economy

of India. It has come to play a predominant role in the economic life of our country. Corporate sector in India has made extraordinary strides in post independence era. The rapid growth of this sector in India and increasing scale of its operation and investments has turned it into the most vibrant and dominant form of economic organization. It is the only single biggest contributor to India's economic growth. From a layman's perception, corporate sector includes all forms of business pursued by man. But technically, it refers to all the complex form of monolithic business houses operating in the field of Industries, trade or services employing huge capital contributed by public at large in the name of ' Joint stock company.

The company form of business in one form or the other existed in ancient past. Proper attention, care and patronage have not been paid to it at its early past. But over years, it has come to play a predominant role in the economic life of India. This sector has recorded a phenomenal growth over the years due to patronage and conducive policies pursued by Government for its growth. It is the life line of the India economy. It helps in maximizing GDP and tax revenue to Government. It contributes towards balanced and all round development. It helps in bridging the gap of regional imbalances. It provides right kind of impetus for the accelerated growth of the economy. The Indian economy is a mixed economy. The blossoming and the

proliferations of public as well as private sectors in India brought their importance into sharp focus under the system of mixed economy, the intention was to let all the flowers bloom. In this arrangement the public sector remained overwhelmingly involved with the development of industries of basic and strategic importance, while the bulk of development in terms of overall scope and quantum remained with the private sector.

The following are some features of Indian economy: A positive role of the state in economic activity is not just tolerated but is deemed to be desirable for promoting economic growth as well as the distributional objectives. However, the rule of democratic framework requires that the pursuit of the distributional objectives be constrained by the negative attitude towards coercion of any kind. The expansion of public sector is considered to be a major instrument with which the state in a mixed economy operating under the democratic framework can influence the pace as well as the composition of economic activity with a view to pursuing the social objectives. An economic counterpart of the democratic framework

consists of permitting private ownership of the property and it is the means of production and freedom of the owners to utilize them in productive activity with private profits as a motive force. The democratic political framework implies that a state may

represent a coalition of different interest groups in the society and it can be subjected to pressures from different quarters as part of the established political processes. These pressure groups influence the action of the state in their favor. Thus the mixed economy in Indian context can be characterized as essentially a capitalistic economy that is modified by the direct participation as well as intervention by the state in economic activities, which in turn, are further, counteracted by the countervailing forces of various interest groups in a democratic frame work.

Corporate sector is now considered to be the economic pulse of the nation and a powerful means to address our longstanding concern for social development, generation of employment and eradication of poverty. Also, it is now augmenting our hope that the much coveted superpower position of India can only be achieved by the efficient and effective functioning of the corporate sector as "Corporate imperialism" has taken the place of political and military dominance in the present day world order. So, from a command and control- regime we are in an era of liberalization, privatization and globalization to achieve the much desired growth in the corporate sector in a bid to materialize our long cherished goal to sit in the seat of high offices in the comity of nations.

1.2

STATEMENT OF PROBLEMS
The success of corporate sector is as delectable as its failure is

debilitating and devastating for it gobbles up inordinately large resources. So this thrust area for our dream fulfillment is fraught with numerous problems and issues. Apart from politico-legal and socio-cultural problems etc., the other important dimension of corporate problem is the problem of finance. Hence, financial management of a company is the area of sharp focus of all the stakeholders and requires rapt attention, particularly, of its financial managers.

Internally generated funds have contributed enormously to the financing and growth of corporate sectors in recent times. Enough attention has been paid to logically explaining the role of internally generated funds in the financing of growth and development of a firm. One of the main advantages of internal funds is that its cost is relatively low. The performance of internal funds also minimizes solvency risks. A substantial proportion of expansion is also financed through reinvestment internally generated funds have contributed enormously to the financing and growth of corporate sectors in recent times. Corporate financing trend in the advanced countries point to a synchronization of trusts in internal funds both a micro and macro levels.

In spite of the fact that internal source of finance has attracted attention of the corporate world in recent years, the problem of identifying

and explaining corporate financing trends patterns and retentions has received relatively scant attention in India.

The enormity of the problem faced by financial management of the corporate sector in shaping and operating an optimal but workable financial structure is a fact to be reckoned with. The scholastic efforts put in by the experts in the field since more than half a century is too simplistic and partial. There is no one-size-fit-all" prescriptive financial policy. The empirical studies in this field are also numbered and very often the practical findings belie the much-touted financing theories commonly held, so far, to be true. In the context of the emerging world economic order a sincere attempt to look into the pattern and trend of internal funds in the corporate sector in practice is awaited. Hence, at this structure an analysis of the various aspects of internal financing is felt relevant in Indian private corporate sector during 2001-2008. Indian corporate sector has experienced a paradigm shift over the last two decades with the initiation of certain measures of financial liberalization.

1.3

It is observed from Table 1.1 that the share of internal

financing has increased sharply during 2001-2005 and it accounted for 57.8 per cent. However, this share has declined during 2006 -2009 to the level of 37.68 per cent which is still higher than the level of 26.12 per cent during 1991-94. The sharp rise in the share of internal financing since 2000 is mainly attributed to the growth of retained profits. The share of internal profit has jumped from 9.26 per cent during the first (1991-94) and 9.24 per cent in second phase ((1995-2000) to 36.5 per cent in the third phase

(2001-05) and 25.33 per cent in the last phase (2006-09). Based on ASI data, it is observed an increasing trend in the share of profit and depreciation in gross income during 1990s as compared to 1980s in many manufacturing industries. Further, we have also observed that the provision for depreciation was quite high during the first phase (1990-95) as compared to the second and third phases (1995-2000 and 2000-05). This share has, once again, declined in the last phase (2006-09) and it has declined to a much lower level than the share noticed in the first phase. The sharp decline in the share of depreciation taken by Union Budget 2005-06 to reduce general depreciation rate. External sources still contribute a major source of financing through out our study period. Table 1: Sources of Finance of Indian Manufacturing Sector (Percentage share to Total) 1991- 1994 Retained profits 9.26 Depreciation 16.86 Internal Financing 26.12 External Sources 73.88 Funds Raised from 24.68 Capital Market Fresh Capital 6.38 Raised Share Premium Borrowings Institutional 11.14 26.96 8.28 1995- 2000 9.24 20.62 30.16 69.84 16.9 4.88 6.48 26.44 6.9 26.54 2001- 2005 36.5 21.30 57.8 38.6 -0.5 1.5 1.5 15.4 -5.7 28.2 18.5 2006- 2009 25.33 12.78 37.68 62.5 NA 10.3 9.05 28.45 NA 21.8 10.83

Borrowings Current Liabilities 22.2

and Provisions Sundry Creditors 10.34 10.54 Source: CMIE, Various Issues. NA- Not Available

1.4

IMPORTANCE OF STUDY
Sectoral shift in the Indian economy- from agriculture as its main

stay to Industrial growth becoming the most happening thing -is a reality now. This is keeping in line with the classical model of structural changes with economic growth as experienced in the west earlier. From 1950 to 2003 while share of contribution of Agriculture to our national GDP declined from 60% to 24%, industrial contribution to our GDP went up from a mere 13% to 25% (World development Indicators2004, World Bank). But still there is a lot to happen in our industrial sector to enable it to contribute' around 50% to national GDP as has been evidenced in the economic growth of the developed countries of the world. With the opening up of our economy in 1990-91, the speed of this Sectoral shift has gathered momentum. Corporate growth is an important facet of industrial development of an economy. For industrial growth in general, and the corporate growth in particular, adequate amount of finance is a prerequisite. A company can acquire finance from two sources, namely internal and external sources. Internal finance is generated through operation of the business. On the other hand, external finance is raised from outside through money and capital markets and other financial institutions. Rising of funds from external sources by the corporate sector of industrially backward regions is relatively difficult as compared to the advanced regions. Eastern region is one of the industrially backward regions of India. The capital and money markets are not adequately organized in India. Moreover, the liquidity position of many companies in India is very low. Hence, maintenance of

adequate liquidity and difficulty of raising external finance compel the companies of India to rely more on internal sources of finance. At the same time the trends of internal sources of finance of different age, size, region and industry groups of companies of India are different from one another. Hence, it has been felt necessary to undertake the study on the trend and pattern of internal financing in the corporate sector of India.

1.5

SURVEY OF RELATED LITERATURE

A firms mix of internal and external sources of finance to meet its

total sources of finance needs. Internal source of finance has been a vital issue in the study of modem corporate finance. The growth of corporate sector is much influenced by the availability of adequate internal source of finance. In the 50's and onwards, several attempts were made to analyze the trend and pattern of profitability in the corporate sector. In the 70's and onwards, the trend of research on corporate sector has shifted from ownership-cum-descriptive to functional-cum-analytical approach on

specific functional areas. The research in the area of finance has covered various aspects, such as fixed investment decisions and working capital management, cost of capital, financial planning and control, and profitability. The crisis in the business world in the 70's and after was precipitated by the inflationary pressures increasing industrial sickness, credit crunch, tight money market, and delay in the execution of capital expenditure outlay leads to a state of panic for want of adequate and proper long-term resources. But increasingly, the financial management profession is moving beyond an examination of the basic leverage choice

tonsure detailed aspects of the financing decisions. So, a host of other factors like, asset structure, Capital intensity non-debt tax shields, size, volatility, profitability and regulations etc. have been highlighted by different studies and are explained out to be associated with finance and capital decisions of corporate houses. Internally generated funds have contributed a lot for the financing, expansion, enlargement, diversification and growth of corporate sector in recent time. Financing trends of corporate sector in recent years over the globe point to a synchronizations of trusts in internal funds for expansion of block asset and capital formation. These have, no doubt, been some worthy work but their focus has been different. A good number of studies have been conducted to analyze the internal source of finance of the corporate sector in India. The following scholars have put forth their views rightly in this regard. Sametzs (1970) trends in the volume and composition of equity finance may be rated as a valuable contribution is as much as it not only pinpoints the changes in business financing patterns but also develops an economic rationale. It states that corporate houses are interested primarily in minimizing the costs of finance. It also helps in deciding the choice of short or long term debts under a target debt to equity ratio. Similarly, the composition of the new external equity and new equity and new acquired namely retention is also determined by the relative cost of each. What business do is to finance their requirements largely from internally generated funds, that is undistributed profits, depreciation allowances and related charges. From

10

1924 to 1929 retained corporate income averaged only 33 percent. Between 1947 and 1956, on the other hand corporate retained on an average 54 percent of their profits. In all internally generated funds of corporate houses exceeds their externally raised funds that is new capital issues, bank loans, mortgage, trade debt and other liabilities by 42 percent in compared to the period between 1923 and 1929 which accounted for about 10 to 20 percent. Internally generated funds helps in reducing the dependence of business firms an externally raised capital as it hedged effectively against ordinary fluctuations in the credit market. The real investment decisions are independent of financial decisions. Capital structure of the firms or sources of financing has no bearing on their financial decisions. Contrary to the neo-classical models developed since 1950s, there are theoretical and empirical studies that stressed on the relationship between finance and investment (Minsky 1975; Fazarri and Variato 1994). Myres (1984) and Myres and Majluf (1984) opened up the way to the so- called pecking order theorem. Pecking order theorem predicts a negative relationship between profitability (as a measure of internal funds) and debt financing. . Debt and equity are not merely alternative modes of finance, but are also alternative modes of governance (Williamson 2002). Corporate governance is meant to create some rules and regulations which would ensure that external investors and creditors in a firm can get their money back and would not simply be expropriated by those who are managing the

11

firm (Shleifer and Vishny 1997). Berle and Means (1932) argued that the separation of ownership and control may lead managers to pursue their own objectives at the expense of owners. However, it is also argued that the diffuse equity ownership can also make managers run the firm to their own benefits at the expense of investors (Bolton and Schartstein 1998, p.100). Cornelli, Portes, and Schaffer (1998) observed that the price of outstanding shares usually drops when a firm announces a new equity issue. An increase in debt has also a similar but less strong effect on share price. This could be the reason why managers prefer internal financing, turn to debt if the former option is not available and use equity issue only as a last resort. The rationale for the relevance of the internal finance could be defended from two theoretical perspectives: The first approach i.e. the managerial approach emphasises agency costs arising out of the separation of ownership from control and the role of internal finance in facilitating managerial discretion. The second approach i.e. the information-theoretic approach emphasises asymmetries of information between insiders (managers) and outsiders (suppliers of capital) leading to credit shortage faced by firms.

Srivastava (1979) [1] states," provision is a charge against profit where as reserve is an appropriation of profit which is used for expansion purposes. The process of creating savings in the form of reserve and surpluses for its utilization in the business is technically called as plough back of profits. The main sources of internal finance of a corporation are retained earnings, depreciation, reserves, sale of assets and development

12

reserves/investment allowances." Thus we conclude that the components of equity fund are the most important sources of long-term fund.

Parekh (1980) [2] states that," it, is not possible for industries to develop without the availability of adequate finance in time and at reasonable terms. Moreover, requirements of additional finance go on increasing with the tempo of development. However, besides being necessary for development, finance is also generated by development itself. Thus, the finance is the oxygen of the industry." The availability of adequate finance in time and at reasonable terms are essential requirement for survival, sustain and growth of the corporate sector.

Braja Kishore (1980) [3] in his paper entitled Corporate Internal Finance: A study of overall trends and retentions analyzed corporate finance for a 20 years period with hypothesis that a synchronization trend could be noticed in the Indian corporate sector and also identified variables that are responsible for explaining the corporate saving behaviour. He has taken the period from 1951-1952 to 1973-1974. He uses a number of ratios and behaviour regresional models to test the above. The Linter model is an adequate explanation of dividend behaviour and dividend decisions are largely autonomous of investment and external financing decisions shows that retained earnings are residual in character. The demand of external finance is determined by internal saving and investment expenditure fixed and/or inventory. He also concluded that dividends influence investment and external financing but the affect is only one way and also indirect, i.e.

13

through retained earnings. The impact of retained earnings on the flow of external finance is negative and significant in all industries.

A Study of RBI (1980-87) [4] regarding the financing pattern of various public limited companies shows the proportion of internal sources to total sources is between 31 to 45 per cent during the seven-year study period from 1980-81 to 1986-87. The proportions of external sources to the total sources were ranged between 54 and 69 per cent during the same period.

Weston and Brigham in (1981) [5] found in their study dilution of control is not a big issue for large firms and they may choose equity to debt where they have suggested that "Management of large firms may choose to use equity financing since sale of additional stock has little influence on the control of the large firm." Gupta (1990), [6] "The investment made in an enterprise comprises the investment in shares by shareholders, specified financial institutions, commercial banks, creditors and others. If such an investment does not generate wealth i.e. add value, it may be termed as misuse of public funds. The concept of value added is broader than the concept of profit. Profit is a test for shareholders to measure the performance of an enterprise while the value added is a measure available for all these constitutes like workers, government, financers as well as owners who contribute in the process of generating wealth or value added in the enterprises. "

14

Panda Jagannath & Lall Gouri Sankar (1990) [7] in their study "Internal Financing in the Corporate Sector- An Indian Experience analyze the behaviour of internal financing in the corporate sector of Eastern India for the period 1976 to 1987. They conclude companies in industrially backward regions generally depend more on the internal funds for mobilizing additional funds. Bulk internal sources of funds came from depreciation and amortization. Age, size and nature of a company significantly influenced the ability to generate internal funds. Fixed assets formation of company largely depends upon the availability of internal funds and the availability of internal funds generally does not influence the incremental investment in shares, securities and miscellaneous assets. Panigrahy J, Pand J & Sahu P K (1991) [8] in an analytical study named "Management of Internal Financing in the Corporate Sector analyse the behaviour of internal financing in the corporate sector of Orissa for the period 1970 to 1981. They explain the factors influencing the need for generation of different components of internal funds and also the impact of each variable on the overall trend in internal funds and its components. The study by Mayer (1990) observed that two-thirds on the average of investment financing in developed countries like the US, UK, Japan, Germany, France, Italy, Canada and Finland are mobilised through internal financing. In contrast to the experience of the developed countries, Singh and Hamid (1992) observed very different trends in certain developing countries. The contribution of external sources to the financing of net fixed capital formation in the 1980s was around 50 per cent with a significant share coming from the stock market. The corporate house depend on
15

equity rather than debt financing for regulations of the Government that directly discourage the use of debt. The study by Nagaraj (1996), Samuel (1996) and Singh (1998) showed similar trends in the case of Indian corporate sector. Mathew, Rupa et.al (1999) observed a declining trend in the internal financing among the large and medium-sized Indian firms between the periods 1972-80 to 1988-96 which supports the findings of other studies. Similar findings were observed by Rajakumar (2001), Sarkar and Sarkar (2004), Joshi (2005) and Bhole (2005). Various studies such as Singh and Hamid (1992), Nagaraj (1996), Singh (1995 & 1997), and Samuel (1996) argued that the capital market boom in developing countries is not associated with improved corporate profitability and therefore, may not help in achieving quicker

industrialisation and faster long-term economic growth.

Acharya (2001) [9] states that, "the goals of finance can be reasonably associated with the overall goals of business. A successful business enterprise often uses a goal oriented financial structure. The financial manager performs certain tasks that help to achieve the goals of the corporate sector." The economic times conducted a study on giant and mini-giant companies in public and private sector and gave awards annually on their performance in the management of funds over the years. Also RBI to ascertain the financial performance of firms in private corporate sector, it has conducted mini sample studies periodically. There are many writings and research works on the long-term finance in the corporate sector. It 'will not be possible to record as all of them reiterate the same views

16

opined by the various authors. A recent study by RBI (200506) has observed that the Indian corporate sector has mobilised a large share of resources from internal sources which accounts for 60.7 per cent during 2000-01 to 2004-05. Capital market has been considered as a last resort which contributed merely 9.9 per cent. The debt-equity ratio has also declined over the years as the corporate sector has been able to mobilise resources internally. However, the study does not reveal the contribution of depreciation on large scale as a source of internal finance which is also an important aspect to be explored. M.Sriram and N.Shankar (2006) [10] in a short empirical study asserted Indian Corporates' preferred dependence on internal resources and their fixed assets structure and earning potential to have Impact on capital structure decisions. They put their finding as the company was relying more on funds internally generated and had only a small portion of debt in the capital structure and that the composition of fixed assets and the earning potential of the organization are the major factors which were Influencing the capital structure decisions." There are few empirical studies specifically on the investment pattern of the Indian corporate sector. Bhole (2005) argued that the gross or net savings rates of the private corporate sector remained low during 1966-67 to 2000-01. Moreover, this sector has not kept pace with its capital formation. However, there is an increasing trend of capital formation in the private corporate sector since 2002-03. According to Mazumdar (2008), the annual rate of growth of gross fixed capital formation at constant prices was quite high during 1990-91 to 1996-97 which accounts for 19.5 per cent. And

17

the growth in capital formation during the 1990s was relatively higher than the growth registered in the 1980s ( Nair 2005) and (Nagaraj 2002). The latest study (Robertson, 2010) also observed that Indias investment rate has increased from 25 per cent to 35 per cent of GDP in the present decade and argues that it may not get fully utilised productively in the long run.

1.6

PERCEPTIBLE GAP
The present survey of related literature indicates that, even a good

number of studies have been conducted to analyze the internal finance of the corporate sector in India. There is also a perceptible gap, which needs for further study. As the changes taking place in the corporate sector are very fast, innovative and dynamic, a rapid change of world economic order takes place in this era of globalization, liberalization and privatization. The technology also changes at the same pace. This results in a drastic change in the internal financing pattern of the corporate sector. A number of innovative methods of financing are also available for internal financing in the corporate sector. Hence there is a lot of scope for empirical study on internal finance in the corporate sector of India.

1.7

OBJECTIVE OF THE STUDY

The present endeavor basically is an attempt to study the role of internal source of finance in the corporate sector in the country and the manner in which these funds have been utilized. The trend of internal finance and its individual component is the focus of the study. Thus, the present study aims at analyzing the internal financing pattern of the sample

18

companies as well as corporate sector of India by formulating the package of parameters for evaluating the owned fund financing pattern and more specifically internal sources part. It also considers the factors affecting mobilization of internal finance as well as external finance in the corporate sector. The study also aims at making an industry-wise, size-wise, regionwise and age-wise analysis of internal financing pattern in the corporate sector of India. The study also tries to suggest the steps needed for improving the attractiveness of these funds. Finally, an attempt will be made to compare the internal finance in general with that of external finance of the corporate sector in India.

1.8

PLAN OF STUDY

For a lucid presentation of the study, it has been put in two broad parts. In the first part of the study, its wide perspective is spread out to serve as a backdrop for the context, concept and sources of finance. The second part is an empirical analytical endeavor to reach at the relevant imperative conclusions to put in focus the deficiencies and deviations and the desired constituent elements of internal sources of finance in the total sources of finance decision making process of Indian Corporate Sector. So, our study has been fastened in seven chapters. The chapters have been organized to ensure a smooth flow with continuity and consistency in the discussion. Chapter One depicts the fundamentals of our study through the discussion of importance and objectives of the study, survey of related literature and the much needed methodology of the study like its scope, sources of data, selection and classification of sample companies, techniques and tools used for analysis, hypotheses of the study etc. along
19

with the limitations of the study. The second chapter provides a clear picture of the evolution and growth of Indian corporate sector, so far, through age, stage, size, pattern, ownership pattern, sector and region etc. while the third chapter deals with a broad conceptual frame work that provides the sources of various internal and external funds as well. The fourth chapter makes an empirical analysis of total sample companies under study and variable-wise: region, age, size and industry wise analysis follow in the fifth chapter. At this stage, in chapter six, we have attempted to test the hypotheses of study vis-a-vis the findings and interpretation in the preceding fourth and fifth chapters. In the concluding chapter i.e. in

chapter seven, we have summarized the whole gamut of discussions in the preceding chapters, in brief, to give the reader a thematic view for an easy and quick grasp.

1.9

METHODOLOGY

For an investigative insight into the subject it is essential to follow a research methodology which is a way to systematically solve the research problem. It may be understood as a science of studying how research is done systematically. This methodology section deals with procedure followed in the selection of sample, collection of data, classification of sample, and nature of the data required, plans of the study and tools and techniques used for the study. The scope of the study, sources of data, procedure followed for selection of the sample, the population size, classification of the sample and various concepts are elaborated in the following paragraphs. The chapter also deals with procedure for calculating coefficient of
20

correlation and different financial ratios. The hypothesis set for the study and various limitations found in the study have also been dealt in this section.

1.9.1 SCOPE OF THE STUDY The present study aims at analyzing long-term finance more specifically internal finance in the corporate sector in India. As compared to public sector enterprises, the private sector enterprises face difficulties in encountering the internal finance problems. The study is aimed at finding out the extent of mobilization of internal finance by the corporate sector in which these finances have been utilized. The trend of the internal finance and its individual components are the focus of the study. It deals with the factors affecting the mobilization of internal funds in the corporate sector. The requirement of internal funds and the appropriate mix between internal funds, equity and debt needs are analyzed for different companies, duly grouping them on the basis of their region, size, age and industry. The study also tries to suggest the steps needed to augment the flow of internal funds and equity funds to the capital market and tries measures required to improve the attractiveness of the internal funds. 1.9.2 NATURE OF DATA The natures of the data required for the selection of sample are as follows: Information relating to the number, size and age of manufacturing public limited Companies working in India. Information relating to growth of corporate sector in India during Pre

21

and Post Independence plan periods. Information relating to growth of public limited companies in private sector. Information relating to growth of joint stock companies in India distributed in different regions. Information relating to distribution of companies in India by industrial activities. Annually published financial statements (Profit and Loss account and Balance Sheet) of sample companies from 2001 to 2008 for 8 years.

1.9.3 SOURCES OF DATA Usually, there are two broad sources of data The primary data source implying direct collection of information from the persons or agencies concerned and the secondary data source requiring collection of already recorded, published or unpublished information of the units concerned. Looking into the nature and magnitude of our study it was proposed to tap mainly the secondary sources of data. Accordingly, the data for the purpose of our study has been sourced from the RBI monthly bulletins, Government reports, company news and notes and annual reports of Department of company affairs and other publications, periodicals and journals and information on websites of different related agencies like SEBI, ICAI, ICSI, and ICWAI etc. But the main bulk of our data was collected from the financial statements of the public limited manufacturing companies in the private sector as published in the Stock Exchange official Directory, Mumbai

22

Classification of the sample: With sober assumptions that the companies differ in their construction, composition, considerations and constraints relating to their capital structure according to their differences in age, size, region and industry they belong to. We have classified the sample companies on the basis of the above variables to have the scope for an in-depth variable-wise analysis to drive home the truth in our assumptions. Region wise classification: Consideration of the geographical confines of industries for their capital structure considerations though appears funny but it truly shows up in their financial statements. The simple reason is that with industrial growth there is growth in cluster of financial institutions source and instrument alternatives and above all the perception and ideas of persons and parties around that creates a broad framework of operation. All these impact the long-term financing mix of the business and influence the capital structure decision making of business managers. Hence, keeping this in view we have classified the companies into four regions taking their geographical location into consideration. Eastern Region: The companies registered in the states/ union territories of Bihar, Assam, Meghalaya, Orissa, West Bengal, Tripura, Manipur, Mizoram, Nagaland, Arunchal Pradesh and Andaman and Nicobar. Western Region: It includes companies registered in the states/ union territories of Gujrat, Goa, Daman and Diu, Maharastra, Madhya Pradesh and Dadar and Nagar Haveli.

23

In the Southern Region We have included the companies registered in the states/ union territories of Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Pondichery. The Northern Region covers the companies registered in the states/union territories of Haryana, Punjab, Rajsthan, Uttar Pradesh, Chandigarh, Delhi, Himachal Pradesh, Jammu and Kashmir. The western companies constitute 35.54% of sample while the number of companies in northern region constitute 23.97% of our sample. The eastern and southern region constitute 26.44% and 14.05% respectively of the total sample companies.

Table:1.2 REGION-WISE CLASSIFICATION OF SAMPLE COMPANIES Region No. of % to the Total Sample 35.54 23.97 26.44 14.05 100 group Companies Western 43 Northern 29 Eastern 32 Southern 17 Total 121 Source: Compiled from collected data

II. Age: It is just a gathered wisdom that a company being an organism as good as other living organism it grows from strength to strength as it grows in age. It may gather sloth or may move dynamically, and it may have rigidity or flexibility but it grows in age. In this view we have classified the companies on the basis of date of their registration. Accordingly, they are put into groups like:

OLD

Registered prior to 1946

24

MODERATELY OLD NEW

: :

Registered between 1946 and 1970 Registered after 1970

The old companies constitute 16.53% of the total sample whereas the moderately old

companies constitute 23.97% only. The rest 59.50% comprise the new companies in the total sample companies taken for our study. Table: 1.3 AGE-WISE CLASSIFICATION OF SAMPLE COMPANIES

Age Group Old Moderately Old New Total

Registered Prior to 1946 Between 19461970 After 1970 --

No. of Companies 20 29 72 121

% to total sample 16.53 23.97 59.50 100.00

Source: Compiled from collected data

shaping of its capital structure. So we feel it imperative to classify the sample companies on the basis of their size to create space for a sizewise variations analysis of their capital structure. The classification is based on the paid-up capital of the companies. Accordingly, the total sample companies are put into three groups like:

Small

With paid up capital less than 5 crores.

25

Medium

With paid up capital more than 5 crores but less than 25

crores. Large : With paid up capital more than 25 crores.

On this basis the small, medium and large companies constitute Size Wise Group Registered No. of Companies % to total sample Small Below Rs. 5 Crore 16 13.22 Medium Between Rs.5- 25 41 33.88 Crore Large Rs. 25 Crore and 52.90 above 64 Total -121 100.00 13.22% 33.88% and 52.90% of the total sample companies respectively as can be seen in Table 1.3.

Table: 1.4 SIZE-WISE CLASSIFICATIONS OF SAMPLE COMPANIES Source: Compiled from collected data Table: 1.5 CLASSIFICATIONS OF SAMPLE COMPANIES BY INDUSTRY-GROUP SI. NO 01. 02. 03. 04. 05. 06. 07. 08. 09. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Industrial Group Automobile Cement Ceramic Chemicals Cosmetics Cotton and blended Diary foods Diversified industries Drugs and Pharmacy EE equipments Electricity Ferro Motor Vehicle Paper Readymade garments Refractory Sugar Synthetics Tea Tyre and Tubes No. of Companies 08 09 06 05 07 04 04 06 09 07 04 12 05 04 05 04 04 05 08 05 % to total sample 6.61 7.44 4.96 4.13 5.79 3.31 3.31 4.96 7.44 5.79 3.31 9.92 4.13 3.31 4.13 3.31 3.31 4.13 6.61 4.13

26

TOTAL 121 Source: Compiled from collected data

100

Technique of Analysis: Any empirical study is a relative and comparative study very often based on time perspective to the considerations of various elements. Keeping this in view, two broad set of tools like financial or accounting tools and statistical tools are usually employed for analysis. The following are few important of the techniques used for financial statement analysis under the two sets. Flow Analysis: The balance sheet is in the nature of a snapshot showing the position of a concern at a particular point of time. The business process is very dynamic with transactions occurring regularly, each of which affects in some way, the immediately preceding financial position. A Balance sheet therefore, merely provides the picture of a fleeting condition at a point of time and If balance sheets drawn at different times are compared, any difference found between the closing and the opening figures would be the result of the various transactions taking place during the interim period. The business process involves a continuous inflow and outflow of funds. This
concept of flow of funds constitutes the core of the business process

and forms the

foundation of the analysis of financial statements. This is what is referred to as a historical funds flow technique analysis. This funds-flow-analysis helps to explain source wise detail of the funds acquired by the company and to appraise the impact of the management's decision on various sources of long term funds and their uses in the business during a given period of time. Increase in various long term liabilities constitutes the long term sources of

27

funds. Ratio Analysis: Ratio analysis is one of the most popular financial analysis tools. It is the principal technique used in judging the condition portrayed by the financial statements. By its use, we can Judge the financial growth, development and the present condition of a business enterprise. A ratio is a quotient -simply one number expressed in terms of another. It is found by dividing one number, the base into the other. 'Ratios are simply a means of highlighting in arithmetical term the relationship between figures drawn from financial statements." So, accounting or financial ratios describe the significant relationship which exists between the figures shown in the balance sheet, profit and loss account, in financial budgets etc. Through this technique, an analyst can diagnose the financial resources of a concern and can know the strength and weakness of the financial condition. Ratio analysis involves four steps: (a) Determine which ratio to be used, (b) compute the ratio, (c) compare it with the standards and (d) interpret in the context of study. Still a ratio is simply a means and an indicator. It takes a lot of thought and analytical approach to get a deep insight into the problem under study. Ratio analysis usually makes a cluster approach as a single ratio fails to depict a clear picture of any aspect. In a crude classification Ratios may be (a) Balance Sheet Ratios, (b) Profit and Loss Account Ratios, and (c)
Combined Ratios. But this compartmentalized ascertainment of relationship is meaningless because relationship of financial figures is composite and complex. Each figure may have a cascading effect impacting all other figures in the

28

statement.

TREND ANALYSIS: Trend analysis, as a statistical tool, makes it easy to understand the changes in an item or a group of items over a period of time and to draw conclusions regarding the changes in data. For this purpose a base year is chosen and the amount of that data item relating to the base year is taken equal to one hundred and index numbers are calculated for other years based on the amounts of that item in those years. It is a dynamic method of analysis showing the changes over a period of time. For proper trend analysis, it is studied over a period of more than eight years. This technique indicates the direction of financial movement of the concern and upon this basis future forecast can be made of the items concerned. COEFFICIENT OF VARIATIONS: The availability of a particular source of finance determines to a considerable extent the choice of a particular source of financing. This is, particularly, of overriding importance in the Indian financial system. In order to ascertain the relative stability and uniformity of different sources of funds, coefficient of variations of each source has to be computed. The lowest the coefficient of variation of a source the most stable and reliable it is for the management to avail of at the time of fund requirement. CORRELATION ANALYSIS: Correlation analysis, as a statistical tool, establishes the relationship between two variables. The two variables may show positive or negative variations in relationships or they may be relationship neutral. To study the relationship of I.S.F and E.S.F and their impact on long-lived assets composition of the enterprise this technique has

29

to be resorted to. Also, for the purpose of correlating fixed assets with I.S.F correlation coefficient between the variables is to be calculated. To further confirm the relationship drawn by coefficient of correlation of different variables, significant tests have to be undertaken. 1.9.8. HYPOTHESES OF THE STUDY: The present study "The internal sources of finance of Indian corporate sector" is an attempt of microanalysis of firm's behaviour. So, the study broadly aims at examining the following hypotheses with the available data and techniques." 1. Companies generally depend upon internal sources of finance to meet their financial needs. 2. Irrespective of size and age, internal source of finance constitutes an important source of finance for Indian corporate sector. 3. The fixed asset formation in sample companies highly depends upon availability of internal sources of finance. 4. 4. Bulk of internal source of finance comes from reserve and surplus. The region, size and age of a company significantly influence the ability to

generate internal source of finance. 5.

Internal sources of finance and external sources of finance ratio of a firm are

constant over the years.

6.Companies in industrially developed regions generally depend more on internal

source of finance for mobilizing additional capital.

1.10 LIMITATIONS OF THE STUDY

30

The study is based on mostly the financial statements and other financial information of the companies collected from secondary sources like the stock exchange official directory Mumbai and other various reports, journals and periodicals of related institutions and agencies. Moreover, a lot many open ended conventions and conveniences are practiced by companies in presenting their financial information. So, the limitations of the secondary data and of the company's practice of their presentation might have a major impact on the usefulness of the findings. The sample companies constitute a very small part compared to the nature and number of companies working in India. So, the smallness of the sample has its own inherent limitations and poses a hurdle to the findings of uniform application to the case of other companies. The historical nature of data and the tools and techniques used for their analysis may also limit the use of the findings for future prospects. Hence, one needs to take the findings much carefully and judiciously while making use of them for his purpose.

REFERENCES 1. Srivastva. R.M., Fundamentals of Corporate Finance, Wisdom

publications, Allahbad, 1973, p. 225 2. Parekh, H.T., Finance for Industry, Perspective in the 1980. Introductory observation, Silver Jublee Symposium, ICICI, 1980. 3. Braja Kishore, Corporate Internal Finance, A study of overall Trends and Retentions, Vikalap, Vol-5, No-3,July 1980 4. A study of RBI in 1980-87, RBI Bulletin-1986-87.

31

5. Brigham, E.F. and others. Fundamentals of Financial Management. Dryden Press, 1981 6. Gupta,R.K, Profitability, Financial structure and liquidity, Rupa printers Jaipur, p-63(1990) 7. Panda Jagannath and Lall Gouri Sankar (1990) Internal Financing in the corporate sector-An Indian Experience, Kanishka Publishers &

Distributors, New Delhi. 8. Panigrahi J. Panda, J and Sahu P.K (1991) Management of internal financing in the corporate sector, Discovery Publishing House, New Delhi. 9. Acharya,B.L, Financial Analysis Mohit Publications, New Delhi, 2001 10. 11.
Rajeshwar Rao, K. and others, "Some Aspects of Capital Financing in Public

Enterprises" Lok Udyog 15(12) March 1982, pp. 17-32.

12. Brigham, E.F. and others. Fundamentals of Financial Management.

Dryden Press, 1998 13. New 8th Edition 2003. 18. Chndra, prasanna. Financial Management - Theory and Practice. Tata McGraw Hill publishing Company Ltd. ND, 6th edition -2004. 19. Chandra, prasanna. Financial Management- Theory and Practice. Tata Mc-Graw Hill publishing Company Ltd. ND, 6th edition-2004. 20.IGNOU, School of Management, "Capital Investment and Financing Decision MS-42, Part-1,2 and 4, 1997. Pandey, I.M. "Financial Management" Vlkash Publishing House. Delhi.

32

21.

Khan, M.Y. and Jain, P.K. "Financial Management-Text and Problems." Tata Mc-Graw Hill publishing Co. Ltd. N0, 2nd edition 1998.

22.

Bhalla,

V.K.,

"Financial

Managernnt

and

Policy.

"Anmoll

Publications Pvt. ltd.. ND, 2nd edition 1998.

33