Financing and Investment Patterns of Indian Firms

This paper analyses the financing and investment pattern of non-financial, non-government, public limited firms over the period 1971-72 to 1999-2000, at an aggregate and disaggregate level of major industry groups. On the sources side, the financing pattern of Indian firms is found to be debt based and different from that in developed countries and other emerging markets, but their share of internal sources increased markedly in the latter half of the 1990s. On the investment side, inventory investment has shown a secular decline, while investments in financial assets are on the rise. The relationship pattern between sources and uses of funds contrasts with the pattern observed for US firms, where market imperfections lead to fixed investments having a high positive association with cash flows and a high negative association with debt.
SEEMA SAGGAR

I Introduction
his paper is an attempt to indicate the general trends and specific shifts in financing and investment patterns of Indian manufacturing firms over the years, both at an aggregate and disaggregate level of major industry groups. The focus is on providing evidence on how Indian firms have financed their investments over the period 1970-71 to 1999-2000. On the sources side, we examine whether internal funds are significant source of finance. Are banks the dominant source of external finance? Do firms raise a substantial amount of finance from the stock market? On the uses side, we explore whether there has been improved inventory and cash management by Indian firms? Are firms deploying more of their funds for financial investments including equity and debt securities of other corporates? Is the share of real estate investments in the form of land and buildings increasing in firms total investments? We take a look at the relationship between sources of financing and the composition of investment to examine if firms issue debt and equity for meeting current expenditures rather than capital expenditures. Are capital expenditures financed primarily through internal finance? Does external finance play a limited role with regard to capital expenditure? Does the analysis of the sources and uses of funds support the financing hierarchy hypothesis? We explore these various dimensions by focusing on the mix between internal and external sources of finance and the mix between capital expenditure and other uses of funds. Sources and uses of funds for Indian firms at an aggregate, industry level and firm level are compiled using the company finance database of the RBI covering period 1970-71 to 1999-2000. Even though for the very recent period, alternative databases are available for the Indian corporate sector, the RBI database is considered to be the most reliable and extensive for the Indian private corporate sector for the long period that is studied in this paper. The RBI database provided an unbalanced sample of 4,834 large and medium non-financial public limited companies. These cover 84 industries, most of which have been grouped into 15 major

industry groups for which disaggregative analysis is done separately. Analysis is also done for a balanced panel of 218 common companies for which information is available in each of the last 30 years. The rest of the study scheme is as follows. Section II looks at the type of investments by Indian firms at an aggregate as well as industry level. Similarly, Section III studies the financing pattern of Indian firms at an aggregate and industry level. Section IV relates the financing pattern to composition of investment. Section V draws conclusions from the above.

II Investment Pattern of Indian Firms

The corporate sector is a deficit one that borrows funds from other sectors, mainly households, either directly or intermediated through banks or non-bank financial institutions. It then invests over and above internal funds, either in capital formation that takes the form of investments in physical assets, such as land, building, machinery or stocks, or in financial assets such as loans and advances, securities and sundry credit. It can also hold cash as a financial asset, bearing the opportunity cost to meet transaction needs. Over the period under consideration, viz, 1971-72 to 19992000, Indian firms invested about half (52.6 per cent) of their total uses of funds in gross fixed assets (GFA). The share of gross fixed capital formation in total uses of funds had averaged around the 50 per cent mark during 1971-72 to 1995-96, but distinctly increased thereafter to 65.2 per cent during 1996-97 to 19992000. Bulk of this gross fixed capital formation takes the form of investments in plant and machinery. In this latter period, investments in plant and machinery accounted for half of the total uses over three-quarters of the total investments in gross fixed assets (Tables 1 and 2). Such investments accounted for over a third of the total uses of funds during the earlier periods under consideration. Spending on land and building, which averaged only about 5 to 6 per cent of the total uses in the earlier periods, also increased to nearly 9 per cent. A predominant share of such investments are in the

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form of buildings, which accounted for an average of 10.6 per cent of investments in gross fixed assets during 1971-72 to 19992000. Land accounted for only 1.2 per cent of fixed assets during this period. Other forms of gross fixed assets investments furniture and fixtures, vehicles, capital work in progress, etc, accounted for the balance of the gross fixed capital formation in the sector. While these categories accounted for 6.1 per cent of the total uses in 1971-72 to 1975-76, its share crossed 10 per cent in the first half of 1990s mainly due to the spurt in construction work-in-progress. The level of inventories has been traditionally quite high for Indian firms. They accounted for 29.5 per cent of the total uses of funds during 1971-72 to 1975-76. However, over the years, the funds locked in inventories have declined sharply. Only 12.6 per cent of the total uses of funds during 1991-92 to 1995-96 financed inventories and a still lower 5.7 per cent of funds were used for the purpose during 1996-97 to 1999-00. This may partly reflect business conditions: sharp recovery in aggregate demand following the crunch in 1991-92 and, partly, better inventory management by Indian corporate sector, which may have been aided by better supply chain management aided, inter-alia, by infusion of new technology. It may be mentioned that aggregate demand had picked up during 1992-93 to 1995-96, but a credit crunch followed, which contributed to a decline in industrial growth, measured in terms of the index number of industrial production (general), with 1993-94=100, the index fell from 13.1 per cent in 1995-96, to 6.1 per cent and 6.6 per cent in the next two years and further to 4.1 per cent in 1998-99. Industrial growth measured 6.7 per cent in 1999-00. However, the share of inventories in overall expenditures was the lowest in this latter period. Share in expenditure on all categories of inventories, viz, raw materials and components, finished goods, work-in-progress, stores and spares and other inventories showed a decline in the 1990s. While the investment pattern for Indian firms differs from that of developed country firms, mainly in terms of higher allocation for inventories in comparison with financial investments, this new trend of the falling share of inventories has broadly put Indian firms in line with the pattern observed for developed countries. For instance, Samuels sample for US firms taken from the S and P Compustat database shows that during the 1972-92 period, US firms spent only 11.0 per cent of their total uses of funds on inventories, compared with 22.5 per cent for Indian firms during the 1971-72 to 1990-91 period. However, during 1991-92 to 1999-00, this percentage fell to 9.1 per cent for Indian firms. In contrast, Indian firms deployment of funds in financial assets has picked up distinctly since the latter half of the 1980s. During 1971-72 to 1975-76, their spending on financial assets was a mere 21.2 per cent, but during the 10-year period, 1986-87 to 1995-96, this rose to 34.4 per cent, though in the following four years it again declined somewhat to 29.1 per cent. For US firms, these financial investments accounted for about 40 per cent of the total uses of funds during the period 1972-92. The increasing share of other (financial) assets in the uses of Indian firms is accounted by a sharp rise in inter-corporate investments, especially in firms other than own subsidiaries. Financial investments in securities accounted for only 1.1 per cent of total uses in 1971-72 to 1975-76, but its share had jumped to average about 8.5 per cent during 1986-87 to 1999-00. Over the same periods, loans and advances by these firms increased

at a more moderate pace, from 5.2 per cent to 7.7 per cent. Sundry (trade) credit, which forms the most important form of financial investments of Indian firms, formed a stable share of total uses of funds over the years accounting for 12.4 per cent on an average basis during 1971-72 to 1999-00. There is, however, no evidence of better cash management or reduced transaction requirements by Indian firms so far. Firms investments in current assets (comprising inventories, sundry credit and cash) as a ratio of their total uses, has shown a distinct falling trend over the years, due mainly to better inventory management. The investment pattern of common companies is not significantly different from that of the full sample. The shares of various categories of uses of funds in total uses are broadly comparable. The declining trend for inventories and current assets, as also the rising share of investments in securities, is somewhat sharper in case of common companies than for the full sample (Tables 3 and 4).
Table 1: Uses of Funds for Medium and Large Public Limited Companies
(As Percentage of Total Uses) Full Sample 1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 1720 49.2 5.6 36.2 4.5 2.9 23.7 8.6 4.5 5.9 4.4 0.3 72.9 27.1 14.5 5.3 7.3 3.2 100.0 41.4 1720 52.5 6.3 39.9 2.7 3.6 17.7 3.9 7.0 3.3 2.9 0.5 70.2 29.8 14.3 6.1 9.4 4.0 100.0 35.9 1917 48.5 5.4 34.6 5.7 2.8 19.2 6.3 5.2 4.5 2.7 0.5 67.6 32.4 13.3 8.1 10.9 1.7 100.0 34.2 1795 51.0 4.8 35.3 8.3 2.6 12.6 3.7 4.3 2.7 1.6 0.4 63.6 36.4 12.7 8.5 15.2 3.2 100.0 28.5 1885 65.2 8.9 50.6 2.2 3.5 5.7 0.0 3.4 0.8 1.0 0.5 70.9 29.1 9.2 6.4 13.6 1.1 100.0 16.0

No of COs 1650 Gross fixed assets 49.3 Land and building 6.5 Plant and machinery 36.7 Construction work-in-progress 2.4 Others 3.7 Inventories 29.5 Raw materials 8.6 Finished goods 8.2 Work-in progress 6.2 stores and spares 0.0 Others 6.6 Capital formation 78.8 Other assets 21.2 Sundry credit 10.3 Loans and advances 5.2 Others 5.7 O/w: cash 3.5 Total uses 100.0 Change in current assets 43.3 Note:

The data pertains to financial year April-March, so that 1998 relates to April 1998-March 1999 and so on. Where the balance sheet data does not relate to financial year, pro rata adjustment is done. Source: Authors compilation based on Company Finance data of the Reserve Bank of India.

Table 2: Components of Gross Fixed Assets and Inventories

1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 Share in total GFA Land 0.9 Building 12.3 Plant and machinery 74.6 Construction work in progress 4.9 Others 7.4 Total gross fixed assets 100.0 Share in total Inventories Raw materials 20.8 Finished goods 30.1 Work-in-progress 23.6 Stores and spares 0.0 Others 25.4 Total inventories 100.0 GFA as share of GCF 62.6 Inventories as share of GCF 37.4 1.0 10.4 73.8 9.0 5.8 100.0 36.1 -7.9 58.4 17.0 -3.6 100.0 67.5 32.5 0.9 10.9 75.7 5.6 6.8 100.0 14.0 45.0 13.9 24.7 2.4 100.0 74.8 25.2 0.9 10.3 72.0 11.1 5.8 100.0 31.8 27.7 23.7 14.5 2.3 100.0 71.6 28.4 1.3 8.1 69.8 15.6 5.2 100.0 36.6 25.1 22.5 11.7 4.1 100.0 80.3 19.8 2.0 11.6 77.7 3.2 5.6 100.0 -23.5 57.4 14.6 31.4 20.1 100.0 91.9 8.0

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Industrywise Investment Patterns of Indian Firms

Industrywise differences in investment patterns are summarised in Table 5. Some industries channelled a large proportion of their funds to gross fixed assets during almost the entire period. These included shipping (74.1 per cent), tea (72.7 per cent), cement (65.9 per cent), paper and paper products (64.0 per cent) and textiles (62.0 per cent); (figures in parenthesis give average investments in gross fixed assets to total uses during 1971-72 to 1999-2000). In contrast, trading (12.3 per cent), sugar (24.3 per cent), construction (34.2 per cent) and electrical machinery and apparatus (38.1 per cent) channelled not too large sections of their funds for fixed investments. Industries, which had a relatively large share of inventories in relation to the full sample, included sugar (54.5 per cent), construction (36.4 per cent), medicine and pharmaceuticals (23.8 per cent). Industries whose investment patterns were skewed in favour of other assets comprising sundry credit, loans and advances and others, which include investments in financial securities, were trading (81.9 per cent), electrical machinery and apparatus (40.4 per cent), machinery other than transport and electrical (37.3 per cent) and tea (36.1 per cent). To a large extent, the investment pattern would be influenced by the nature of activities for an industry. Firms operating in relatively capital-intensive industries would be channelling a larger share of funds towards financing fixed investments. This is true of firms operating in shipping and cement industries. The textiles and paper product industries have been investing more in plant and machinery. Of the firms that relatively invest less in fixed investments, trading companies had sharp year-to-year and period-to-period fluctuations in investment patterns, with swings in asset formation and inventory financing. During 1971-72 to 1975-76, trading firms devoted large sums to financing inventories and financial investments. Investments in gross fixed investments declined sharply during the period. A decade later this trend was reversed and inventories, especially finished good inventories, were depleted, but during this 1981-82 to 1985-86 period trading firms extended large amounts of sundry credit. The sugar industry had unduly large inventory investments during 1976-77 to 1980-81. This may to a large extent be due to excess sugar cane supply in 1976-77 and 1978-79 and speculative build-ups of stocks of finished goods in the following years. Sugar firms inventories again increased during 1996-97 to 1999-00 due mainly to excess supply emanating from high sugar cane production since 1994-95. Industries that witnessed clear shifts in investment pattern during the period under consideration include textiles, engineering (including its components electric machinery and machinery other than transport), chemicals, basic industrials, medicines and pharmaceuticals, cement, paper and paper products and construction. In all these cases, the shift in pattern was essentially supported by a decline in the share of inventory investment. The decline has been particularly sharp in the reform period starting 199192. For textile firms, the share of inventories in total investment declined from 24.0 per cent in 1986-87 to 1990-91, to 3.4 per cent in 1996-97 to 1999-2000. The decline in inventory share led to a significant increase in fixed asset formation from 47.3 per cent to 78.4 per cent over the same periods. For engineering companies, inventory share declined from 23.9 per cent to 3.0 per cent over these periods. For paper and paper products, the

decline was from 16.8 to 1.6 per cent. Construction firms witnessed a sharper decline in inventory share in total uses from 38.7 per cent in 1986-87 to 1990-91, to 5.8 per cent in 1996-97 to 1999-2000. Decline in inventories began earlier and was more phased during the entire period of 1971-72 to 1999-2000 in case of chemical firms, basic industrial chemical firms, medicines and pharmaceuticals. In almost all these cases, the decline in inventory share was accompanied by a rising share of fixed investments, with other investments displaying a more stable share over the three decades. The industrywise analysis of investment pattern, on the whole, indicates that financial sector reforms initiated in mid-1991 have not led to any undue rise in the share of other (mainly financial) investments. In fact, the gains if any have been mainly on the front of fixed asset formation, which may have contributed to the increased productive capacity of the economy. Increased fixed investments may be aided by increased financial intermediation as well as better inventory management by the firms aided, inter alia, by technological innovations.
Table 3: Uses of Funds for Medium and Large Common Public Limited Companies
(As Percentage of Total Uses) 1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 No of Common COs 218 Gross fixed assets (GFA) 48.8 Land and building 7.4 Plant and machinery 35.2 Construction work-in-progress 2.6 Others 3.7 Inventories 31.8 Raw materials 9.9 Finished goods 9.6 Work-in-progress 5.2 Stores and spares 0.0 Others 7.2 Capital formation (GCF) 80.7 Other assets 19.3 Sundry credit 10.6 Loans and advances 3.9 Others 4.9 O/w: cash 2.4 Total uses 100.0 Change in current assets 44.8 Note: as in Table 1. 218 51.5 5.5 37.0 6.0 3.0 23.8 10.1 3.2 5.8 4.4 0.3 75.3 24.7 12.0 5.4 7.3 4.2 100.0 40.0 218 56.1 7.0 41.8 4.9 2.5 15.0 3.1 5.5 3.5 2.7 0.3 71.1 28.9 13.6 4.7 10.6 3.3 100.0 31.9 218 51.4 5.8 36.8 5.5 3.4 17.6 7.0 4.6 3.1 2.6 0.3 69.1 30.9 11.2 6.3 13.4 1.5 100.0 30.3 218 49.8 4.1 39.3 3.8 2.6 10.6 4.0 2.7 1.7 1.7 0.5 60.3 39.7 13.9 8.6 17.1 1.6 100.0 26.1 218 66.5 9.7 54.6 -2.2 4.3 4.2 -1.1 4.2 0.5 0.5 0.1 70.6 29.4 2.9 6.7 19.9 0.6 100.0 7.5

Table 4: Components of Gross Fixed Assets and Inventories

1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 Share in total GFA Land 0.9 Building 14.4 Plant and machinery 72.3 Construction work-in-progress 5.1 Others 7.3 Total gross fixed assets (GFA) 100.0 Share in total inventories Raw materials 28.5 Finished goods 31.2 Work-in-progress 17.1 Stores and spares 0.0 Others 23.3 Total inventories 100.0 GFA as share of GCF 60.5 Inventories as share of GCF 39.5 0.4 10.3 71.6 11.9 5.8 100.0 46.4 6.9 33.3 17.3 -4.0 100.0 68.4 31.5 0.8 11.4 73.4 10.0 4.4 100.0 -414.8 119.6 108.6 288.0 -1.2 100.0 78.9 21.1 0.8 10.3 72.8 9.5 6.4 100.0 37.8 27.1 18.6 15.5 1.0 100.0 74.5 25.5 0.9 7.4 77.9 8.4 5.4 100.0 9.9 91.6 -5.5 13.1 -9.1 100.0 82.6 17.5 1.9 12.5 82.1 -3.0 6.5 100.0 14.5 65.1 17.9 6.2 -3.7 100.0 94.1 5.9

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III What Do We Know from Sources of Funds?

Ever since the celebrated Modigliani-Miller (1958) theorem, corporate finance literature has trained its inquiry on the link between firms financing and investment decisions. In perfect market conditions, the value of the firm is independent of its debt-equity mix and depends only on the cash flows it generates. However, financial markets are characterised by frictions and imperfections. Information flows are not symmetric. Principalagent problems affect corporate governance and corporate decision-making. The states of nature, the stage of the development of markets and of the macroeconomy, the interaction of institutions, markets and market practices, all have a influence on the real decisions on the firm and therefore, on the overall capital formation in the corporate sector. Typically, firms in developed countries tend to rely more on internal sources of finance, while firms in emerging markets see stock markets as the prime source to promote growth [Singh 1995]. Firms in developed countries tend to follow what is known as, following Myers and Majluf (1984), the pecking order pattern of finance. This refers to firms in advanced economies usually relying on internal finance as far as possible. If their investment needs cannot be internally financed, they first go to banks or issue long-term debt and only as a last resort tap equity markets. This pecking order is not found to be observed by firms in developing countries, whose financing hierarchy is different

from that of firms in developed countries. Firms in developing countries are known to lean more on equity finance and relatively little on debt, and their relevance on internal funds is far lower than that in developed countries. The financing pattern of the Indian corporate sector was neither similar to developed countries nor to emerging markets till at least 1992. Firms in India also relied less on internal finance, but for external finance they relied mainly on long-term debt, and less on equity. The reliance on debt by Indian firms has been noticed by Singh (1995) and Samuel (1996). Singh explains it as an outlier. He argues that, in general, developing country firms reliance on equity can be explained by the proactive role played by governments in these countries in developing and expanding stockmarkets. This has helped in raising share prices and price-earning (P/E) ratios, thereby reducing cost of equity capital in relation to debt.1 Samuel, however, attempts to explain the atypical financing pattern of Indian corporates by looking at the information and agency problems firms in India and elsewhere face. This line of reasoning has its justification, as firms in developed countries prefer internal financing to debt or equity because external finance subjects managers to discipline. Stock financing accentuates the principal-agent problem. Managers set their own agenda. This could be maximising output or sales, subject to maintaining a stock price that is high enough to prevent hostile takeovers. They can also seek to maximise returns to both stockholders and bondholders and so the value of the levered firm. At the same time, discretionary managerial behaviour gets constrained as

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owners of firms exert pressure on managers (as their agents) to maximise yield on equity rather than pursue their own agenda. Samuel also notes that asymmetry of information could be so severe that equity may be mispriced by the market, as outside suppliers of the firm are less informed than insiders about the value of the firms assets. He believes that this information asymmetry is severe for US firms, but not for Indian firms. Apart from the reasons already cited by Samuel it is also possible, and in fact likely, that agents (managers) in India saw internal financing as less of a threat to their private agenda than what their counterpart agents faced from the principal (shareholders) in developed countries. Government owned financial institutions hold a large proportion of the debt of firms in India. Their monitoring and information base is poorer than what is the norm in the private sector financial institutions. With stockholders of public sector institutions being the government or its institutions, managers were not accountable to a set of stakeholders who had personal stakes. The objectives of the government itself can be very different from those of private shareholder investors. This ownership pattern reduced the agency problems for managers, who may have otherwise been compelled to prefer alternative sources of financing. Debt financing did subject them to some scrutiny, but financial institutions never pressurised management to alter their strategies, far less force a change in management itself. India was primarily a bank-financed economy for the larger part of the period under consideration. We extend the Singh-Samuel analysis by looking at the sources of funds for the Indian corporate sector based on time-series data on non-government, non-financial public limited companies since 1971-72. As the database covers a sample of 4,834 companies, the coverage is much more representative of financing patterns than in Singh (1995), which looks only at the top 100 companies. The sample compares more closely with Samuel (1996), but is made available for a larger time span and more break-ups for financing sources. The financing pattern of medium and large Indian firms is presented in Tables 6 and 7. The financing pattern of common companies out of this sample is given in Tables 8 and 9. From the full sample, one finds that Indian firms were almost evenly dependent on internal and external sources of finance during 1971-72 to 1975-76, with 55.2 per cent of their funds sourced from internal sources and the remaining from external sources. The share of internal sources was large in this period, due mainly to large provisioning, that accounted for over a third of the total sources of funds. The bulk of provisioning was on account of depreciation, however, tax provisions were also large during this period. Retentions were also higher in this period compared to the 1980s, with accretion to reserves and surpluses accounting for 14.0 per cent of total sources. As far as external sources are concerned, they mainly came from borrowings in the form of loans and advances and trade dues. Most of the loans and advances came from banks. Equity as an external source accounted for only 2.2 per cent of the total sources for firms. Over the years, this financing pattern changed in the favour of external finance. Internal provisioning for depreciation was lower. Accretion to reserves and surpluses accounted for only about 7 per cent of total sources in the 1980s. Borrowings increased with firms tapping non-bank financial institutions for credit and a greater recourse to flotation of debentures. Firms started depending more on external equity beginning late 1980s. The atypical pattern, in relation to other developing countries,

of Indian firms relying more on debt and less on equity was brought to fore by the Singh-Samuel analysis. The financing pattern was drastically altered in 1992-93 with firms suddenly increasing their reliance on stock markets. Only 2.4 per cent of funds came from primary equity issues, other than capitalisation of reserves, during the period 1971-72 to 1985-86. The average improved to 8.3 per cent during the 1986-87 to 1990-91 period, then suddenly jumped to 21.7 per cent in 1992-93, and averaged 20.0 per cent in the period 1991-92 to 1995-96. During 1996-97 to 1999-2000 the reliance on external equity came down and averaged 12.8 per cent of the total sources of funds.
Table 5: Industrywise Investment Pattern for Indian Firms, 1971-72 to 1999-2000
Industry Gross Fixed Inventories/ Gross Fixed Inventories/ Assets/ GCF Assets/ Total Uses GCF Total Uses -20.5 31.5 20.8 29.5 36.4 28.8 24.8 35.2 19.8 14.6 20.2 17.3 51.7 7.0 23.1 25.2 23.5 72.7 24.3 62.0 48.3 38.1 43.4 53.5 41.6 59.0 65.9 54.2 64.0 34.2 12.3 74.1 52.6 54.0 -8.8 54.5 15.6 20.0 21.5 19.3 17.9 23.8 14.8 11.3 14.0 13.0 36.4 5.8 -0.8 18.8 17.2

Tea 120.5 Sugar 68.5 Textiles 79.2 Engineering, of which 70.5 electrical machinery and apparatus, etc 63.7 Machinery other than transport and, elect 71.2 Chemicals, of which 75.2 Medicine and pharmaceuticals 64.8 Basic industrial chemicals 80.2 Cement 85.4 Rubber and rubber products 79.8 Paper and paper products 82.7 Construction 48.3 Trading 3.0 Shipping 76.7 All firms 74.8 Common firms. 76.5

Note: Firms are classified in industry groups on the basis of their classification in the latest reporting year in the database.

Table 6: Sources of Funds for Medium and Large Public Limited Companies
(As Percentage of Total Sources) Full Sample 1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 1706 42.3 5.6 9.4 27.5 57.7 2.2 0.5 26.6 1.2 20.5 12.7 5.0 7.8 28.6 99.8 1842 34.2 1.9 8.7 23.5 65.8 2.8 0.8 37.5 9.2 22.4 12.2 7.8 8.3 25.3 99.8 1983 32.0 2.3 5.8 23.9 68.0 8.3 5.1 37.2 9.9 25.3 13.0 9.4 5.0 22.3 99.8 1795 29.9 1.3 13.5 15.0 70.1 20.0 15.6 32.4 6.7 24.8 9.6 10.7 5.4 17.6 99.9 1885 38.6 0.9 12.5 25.3 61.4 12.8 8.0 35.6 7.3 26.7 10.4 10.8 7.1 12.2 99.2

Average no of COs 1650 Internal sources 55.2 Paid-up capital 4.3 Reserves and surplus 14.0 Provisions 37.0 External sources 44.8 Paid-up capital 2.2 O/w: share premium 0.4 Borrowings 18.0 Debentures 0.8 Loans and advances 11.2 from banks 10.3 from other financial corp -0.2 from others 7.1 Trade dues and others 24.6 Total sources 100.0

Table 7: Components of Borrowings

(As Percentage of Borrowings) Borrowings from: 1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 4.3 48.3 20.6 -2.5 8.5 0.7 -0.7 19.0 1.7 100.0 24.7 32.8 19.1 1.5 0.6 1.1 3.3 12.4 4.4 100.0 26.2 34.8 24.0 1.5 2.8 2.7 0.7 4.6 2.5 100.0 20.2 28.5 27.0 6.6 2.6 2.1 0.2 2.9 9.9 100.0 21.1 32.3 21.5 6.2 2.3 4.9 0.6 3.7 7.6 100.0

Debentures 24.4 Banks -89.1 Indian financial institutions 33.8 Foreign financial institutions 58.8 Government/semigovernment bodies 15.0 Companies -23.1 Deferred payments 47.5 Public deposits 127.6 Others 22.8 Total borrowings 100.0

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This sudden increase in reliance on equity finance was of a magnitude that cannot be simply explained by information asymmetry. It is not just as if suppliers of information do not know about the value of the firms assets. Where a colossal amount of money is involved, probable investors would make necessary investments to obtain a reasonable estimate for the true value of the firm. It was just that, prior to reforms, markets were not allowed to fairly price equity. A significant reform in the capital market was the abolition of the Controller of Capital Issues (CCI) in May 1992 and setting up of the Securities Exchange Board of India (SEBI) as an autonomous body with wide powers and responsibilities to regulate capital markets. Among the steps taken by SEBI was the decision in June 1992 to allow firms to chose the price at which they want to issue their stocks. Earlier the premium charged on issuing equity was strictly regulated by the CCI. The CCI did not allow new firms to charge any premium over the face value, while premium by existing firms, inter alia, was linked to the book value of the equity in a graded scale that seldom allowed firms to charge large premiums. This resulted in severe under-pricing, enabling new investors to capture more value than the NPV of the new project. The firms, given their low internal resource generation and large expansion plans, were left with an option either to reject projects even with positive NPVs or resort to debt financing. Debt financing lowered the loss to existing shareholders as it also afforded the benefit of a debt tax shield. Also, as Samuel himself points out, debt financing was easily available given the well-established bankoriented system in the country. The financial repression in India was much less severe than in many other developing countries. Apparently, the cost of debt financing could not have been a major factor inducing firms to leverage. The corporate tax rate in India, at 45 per cent for widely held firms and 50 per cent for closely held firms, can be considered high, but it was equally high in Korea, Mexico, Turkey, Malaysia and Zimbabwe in Singhs sample and only Pakistan had low corporate tax rates. So the hypothesis that firms in developing countries leverage more because of the tax shield benefits associated with debt does not apply any more to India than it does to other developing countries. The SEBI move to deregulate determination of premium assigned capital markets its due role in determining stock prices. Amounts raised through premiums leap-frogged in 1992-93 to Rs 4,379 crore from only Rs 1,071 crore in the previous year. Premium accounted for only 62.7 per cent of the primary equity capital raised in 1991-92, but in 1992-93 the percentage rose to 73.5 per cent. In the following two years the premium amount raised was placed at Rs 7,292 crore (80.4 per cent of equity capital raised) and Rs 10,760 crore (84.4 per cent of equity capital raised), respectively. It is also important to recognise that once freed, Indian firms often charged hefty premiums which bore little relation to the true value of the firm. Premiums more than 10 times the face value were not very uncommon in post deregulation years. Herd behaviour and stock market mania during the period of equity price boom helped firms charge irrational premiums. Apparently, the markets lacked adequate information and regulators failed to bring order to inefficient markets by enforcing appropriately tight disclosure norms. In principle, SEBI did set-up guidelines for disclosure and investor protection norms as well as norms for lead mangers and merchant bankers soon after its inception. However, given the state of the market, asymmetry of information and somewhat poor monitoring by SEBI in its initial years, new

issues seldom devolved on underwriters. This allowed existing shareholders to tap more than the NPV of a new project, simply by issuing new equity at a premium. Apart from the equity premium deregulation, liberalisation of the capital account of balance of payments, which permitted funds to be raised by large corporations through the euro issues in the form of global depository receipts (GDRs) and foreign currency convertible bonds (FCCBs), also effected a change in the financing pattern. These euro issues not only helped lower the issuance costs to firms, but at least initially, helped them to float these at a premium over domestic stock prices. The amounts raised by Indian corporates by GDRs alone exceeded $1.5 billion in 1993-94 and 1994-95. However, following insipid performance of the stock markets during 1996-97 to 1999-2000, the dependence on external equity as a source of financing once again dropped to 12.8 per cent. The atypical financing pattern for Indian firms, therefore, can be said to have changed only moderately. Firms are responding by reducing their leverage as market imperfections allow them to tap equity funds at a low cost. However, overall institutional design of the stock market, especially its organisational and liquidity problems and incidences of price rigging and less than satisfactory regulation, has slowed down this process. The financing pattern for Indian firms remains atypical, and the key factors in explaining this are: (i) low internal resource generation by corporates, (ii) delayed reforms not allowing capital markets to determine fair prices for firms, and (iii) bank-oriented system leading to easy if not cheap debt financing.

Industrywise Differences in Financing Pattern

Apart from the shift in financing patterns of Indian corporates, especially after reforms were initiated in 1991, important industry differences are observed in the financing pattern. These are available at a glance in Table 10. During the entire period from 1971-72 to 1999-2000 some industries had a high dependence on internal funds. These include rubber and rubber products (54.4 per cent), chemicals (49.1 per cent), medicine and pharmaceuticals (45.8 per cent) and sugar (45.4 per cent). In comparison, firms operating in textiles (18.6 per cent) and construction (21.8 per cent) had a clear low dependence on internal funds. Industries, which had a high dependence on external equity in relation to the full sample includes rubber and rubber products (15.7 per cent), paper and paper products (11.8 per cent) and trading (10.7 per cent). In contrast, sugar (3.2 per cent) and tea (4.2 per cent) had a meagre dependence on external
Table 8: Sources of Funds for Medium and Large Public Limited Companies
(As Percentage of Total Sources) Common Companies 1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 218 49.3 7.3 14.5 27.5 50.7 1.7 0.5 20.7 0.9 14.3 7.7 5.5 6.7 28.1 99.9 218 40.8 2.0 15.2 23.6 59.2 1.8 0.7 37.3 12.1 20.1 9.8 7.2 8.3 20.1 99.9 218 42.4 2.5 14.4 25.5 57.6 7.5 5.3 32.0 11.5 19.0 6.7 9.3 4.5 18.0 99.9 218 36.8 1.2 18.4 17.2 63.2 19.3 17.1 28.3 6.8 21.1 8.8 9.3 3.4 15.5 99.9 218 62.3 0.7 30.1 31.5 37.7 7.8 5.2 16.4 8.5 6.6 2.9 3.6 1.4 13.2 99.7

No of COs 218 Internal sources 59.7 Paid-up capital 3.9 Reserves and surplus 17.7 Provisions 38.1 External sources 40.3 Paid-up capital 2.1 O/w: share premium 0.6 Borrowings 15.3 Debentures 2.6 Loans and advances 6.0 from banks 8.6 from other financial corp -1.7 from others 5.9 Trade dues and others 22.9 Total sources 100.0

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equity. Firms with high dependence on bank finance include construction (149.4 per cent), trading (149.4 per cent) sugar (86.2 per cent) and basic industrial chemicals (75.9 per cent). In contrast, the share of bank finance to shipping industry dropped (-85.0 per cent). Firms that relied more on other long-term borrowing include cement (92.7 per cent), shipping (73.9 per cent), electrical machinery and apparatus (66.7 per cent) and machinery other than transport and electricals (61.6 per cent). Several industries witnessed a sharp change in financing patterns during the period under consideration. The two major elements in this shift were reduced reliance on internal financing that began in 1980s and increased recourse to external finance, in the form of borrowed funds as well as external equity. Second, there was a clear spurt in equity financing in the period 1991-92 to 1995-96, though the dependence on such funds again somewhat reduced thereafter. The shift in financing pattern from internal finance to external equity and borrowed sources of finance was marked in case of firms operating in engineering, chemicals, basic industrial chemicals, medicines and pharmaceuticals, cement and paper and paper industry. For engineering firms, internal equity accounted for about 46.7 per cent of total funds during 1971-72 to 1980-81,
Table 9: Components of Borrowings
(As Percentage of Borrowings) Borrowings from Debentures Banks Indian financial institutions Foreign financial institutions Government/semigovernment bodies Companies Deferred payments Public deposits Others Total borrowings 1971-75 1976-80 1981-85 1986-90 1991-95 1996-99 26.3 33.3 18.8 -42.0 -1.4 -10.7 10.8 54.3 10.4 100.0 4.4 37.3 24.3 0.9 3.0 -1.5 -0.8 29.9 2.5 100.0 32.0 26.7 14.0 4.2 1.9 1.0 2.6 10.9 6.5 100.0 35.8 20.0 23.6 6.1 3.7 4.6 1.3 3.7 1.1 100.0 24.9 30.0 25.3 7.4 5.5 2.1 -1.3 2.7 3.4 100.0 47.3 17.4 50.7 -4.3 -26.7 -1.4 0.2 3.4 13.5 100.0

Table 10: Industrywise Financing Pattern for Indian Firms, 1971-72 to 1999-2000
Industry Internal Equity Total Funds Borrowing Long-term Bank Borr as Borr as Percentage of Percentage Total of Total Borrowing Borrowing 10.1 11.1 40.4 53.5 66.7 61.6 33.2 -10.4 7.3 92.7 44.5 43.6 -43.9 -5.4 73.9 79.2 67.2 54.8 86.2 51.9 32.3 35.5 34.3 53.9 38.6 75.9 -28.3 44.3 47.6 149.4 134.0 -85.0 14.6 27.5

but this ratio dropped to 31.4 per cent during 1981-82 to 19992000. Correspondingly, the dependence on external sources increased from 53.4 per cent to 68.6 per cent over the same periods. The share of external equity increased from 3.0 per cent to 10.4 per cent over these periods, while that of debt improved from 21.5 per cent to 33.4 per cent. The shift was sharp in case of chemical firms, as also paper and paper products and perhaps the sharpest in case of basic industrial chemicals. The dependence on internal finance for basic industrial chemical firms dropped from nearly 79 per cent to 38 per cent, while that on external funds increased from 21 per cent to 62 per cent. The shift in favour of external finance was caused by increased reliance on borrowings that averaged only 6.9 per cent of total sources during 1971-72 to 1980-81, but 38.4 per cent in the remaining periods. Borrowing in the form of debentures as well as loans and advances shot up since the 1980s. In case of the cement industry, there was a spurt in raising funds through external equity in the post-reform period starting 1991-92. Firms in this industry had only 2.3 per cent of their total funds coming from this source during 1970-71 to 1990-91, but the average jumped to 17.7 per cent during 1991-92 to 1995-96 and further to 21.8 per cent in 1996-97 to 1999-2000. Machinery other than transport and electricals, rubber and rubber products firms and trading companies also witnessed a similar trend. Firms that witnessed a spurt in dependence on external equity during 1991-92 to 1995-96, but a reversal thereafter include sugar, chemical, basic industrial chemicals, medicines and pharmaceuticals, paper and paper products, construction and shipping. The reversal was quite muted in case of engineering and electrical apparatus firms, where external equity can be considered to have retained its higher share. On the borrowing side, construction firms raised about half of their resources from loans and advances, especially from non-bank financial corporations during 1996-97 to 1999-2000, which accounted for a third of total sources. This partly reflected the public-policy thrust to infrastructure financing in this period. Borrowings also shot up for sugar as also paper and paper product firms in this period, though loans in this case were not from non-bank financial companies.

Tea Sugar Textiles Engineering, of which electrical machinery and apparatus, etc Machinery other than transport and elect Chemicals, of which Medicine and pharmaceuticals Basic industrial chemicals Cement Rubber and rubber products Paper and paper products Construction Trading Shipping All Common cos

51.1 45.4 18.6 36.5 35.3 37.8 49.1 45.8 51.6 40.3 54.4 31.0 21.8 32.6 34.1 38.7 48.5

4.2 3.2 7.0 7.9 8.1 7.8 6.8 8.5 6.4 8.1 15.7 11.8 7.4 10.7 8.1 8.0 6.7

44.6 51.3 74.2 55.5 56.6 54.3 44.0 45.4 42.0 51.5 29.8 57.0 70.8 56.5 57.9 53.0 44.6

IV Sources of Financing and Composition of Investment

Financing and investment patterns, when considered in isolation do not reflect the important link between the two. In a real world, firms are subjected to investment opportunities that cannot entirely be financed by internal sources. These firms acquire external funds and therefore, grow at a higher rate than could be realised using internal financing alone. Agency costs and other market imperfections make external finance costlier than internal finance. In accordance with the pecking order, debt is cheaper than equity as adverse selection and the market for lemons problems are more severe in equity markets. In any case, while these financing patterns have been well established in the literature, not many attempts have been made to examine the association of different types of financing patterns with that of investments. Following Fazzari, Hubbard and Petersen (1988), a positive relationship between long-term investments and internal financing is seen as strong evidence for financing constraints. Kaplan and Zingales (1997), however, argue that investment-cash flow sensitivities may not provide a correct assessment of financing

Notes: (i) Long-term borrowings comprise of debentures, borrowings from Indian and foreign financial institutions, government and semigovernment bodies, deferred payments and public deposit and exclude mortgages. (ii) Firms are classified in industry groups on the basis of their classification in the latest reporting year in the RBI database.

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constraints. In this context, Demirigu-Kunt and Maksimovic (1996) argue that one needs to explore the association between various financial patterns and types of investments. They hypothesise that firms use internal funds to finance long-term investments in plants and equipment, while use of external financing, including long-term and short-term debt, is negatively correlated with long-term investments. This link between sources of financing and composition of investment is explained on the basis of lower contracting and monitoring costs that may prompt lenders to finance short-term assets. Since monitoring costs for long-term investments could be high, information asymmetry would prompt external finance to be channelled more to finance acquisition of liquid assets. This enables firms to set apart more of internal finance for financing long-term investments. On the same lines, the association between sources of financing and composition of investment for Indian firms is examined in this section. For the purpose, out of the total 4,834 firms in the database, we consider only those for which financial results are available for at least seven years in succession. There were 2,096 firms in the sample that were considered for analysis on this basis and they provided a total of 25,043 observations in total. The balance sheet of the firm sets the link between financing and investment patterns. A firms investment can be funded either internally, through an increase in the retentions out of its own earnings (instead of paying it out as dividend), or by obtaining funds by increasing its short-term trade dues liabilities or by increasing long-term liabilities, say by debentures or bank borrowings. In our analysis of financing patterns of Indian firms, we observed that bank borrowings constituted an important part of external financing for Indian firms. Finally the firm may also issue new equity either directly or indirectly through the conversion of convertible debt. On the other hand, the firms uses could be broadly organised under three types of assets. Firstly, firms undertake investment in fixed assets (IFA) that creates fixed capital formation and is measured as the change in the firms gross fixed assets. In Section II, we observed that such investments, especially those in plant and machinery, comprised the largest share of total uses of funds for Indian firms. Secondly, firms undertake short-term investments in the form of inventories, loans and advances of less than a year, cash and bank balances and quoted securities or securities with a residual maturity of less than a year. In other words, changes in the firms current assets (CA) would provide such a measure. Finally, a firm uses the funds to finance some other investments and assets such as inter-corporate holdings or trademarks and patents acquired by a firm, etc, that may be categorised in the residual assets (RA) category. The following accounting
Table 11: Correlations between Financing and Investment Components
External Equity Full sample Long-term investments Current assets Common companies Long-term investments Current assets Note: 0.09 -0.10 -0.05 -0.08 Debt Short-Term Long-Term -0.58 0.40 -0.83 0.82 0.38 -0.22 0.75 -0.75 Internal Flows 0.47 -0.35 0.74 -0.72

The full sample data pertains to a sample of 1,602 companies for which financial results are available for seven or more years in succession, during 1971-72 to 1999-00. Common companies data pertains to 218 such companies. Source: Authors compilation based on Company Finance data of the Reserve Bank of India.

identity derived from the balance sheet holds for each firm: IFA + CA +RA = EQUITY +CL + LL + IA where EQUITY is the change in the equity, CL is the change in current liabilities, LL is the change in long-term liabilities, and IA is internal accruals defined as the sum of earnings after taxes, less dividends plus depreciation. In other words, it is retained earnings, which is apportioned into reserves and surplus and various provisions. The analysis focuses on the relationship between changes in fixed investments and current assets (IFA and CA) and changes in firm financing (CL, LL, EQUITY and IA).2 In general, every term of the above identity is endogenous and varies from year to year. Thus, it is impossible in general to assign a source for particular investment expenditure by a firm. Instead, we investigate whether changes in the financing mix are correlated with changes in investment in current or fixed assets in our sample of Indian manufacturing companies. For the purpose, correlations are worked out for the above six variables for each company for each year,3 each of which is scaled by respective firms total sources/uses. Table 11 provides the results for a large sample, as also for a smaller sample of common companies. It may be observed from Table 11 that there is a positive association between long-term debt and long-term investments, with a correlation coefficient of 0.38. Long-term investments are also highly positively correlated with internal flows at 0.47, but have a high negative correlation coefficient of -0.58 with shortterm debt. In contrast, there is a high positive correlation of 0.40 between short-term investments in current assets and short-term debt and a negative correlation of -0.22 between short-term investments in current assets and long-term debt. The association of financing current assets with external equity and internal flows is highly negative. The pattern of association between investment and financing for Indian firms is different from the one hypothesised by Demirigu-Kunt and Maksimovic (1996) in some important ways. Consideration of the presence of the information asymmetries suggests that liquid assets whose values are easy to ascertain, and which can be easily repossessed, may be easier to fund than specialised plant or equipment. The hypothesis that external finance shies away from long-term investments because of this information asymmetry and high monitoring cost does not find support in the Indian case. There is positive and high correlation between long-term debt with fixed capital formation. This is consistent with our earlier observation that the financing pattern of Indian firms is different as they depended on bank financing more than their counterparts in other emerging markets or developed countries. In addition, over the years, long-term debt from non-bank financial institutions also increased significantly. It is clear from the analysis here that such long-term debt is associated with fixed capital formation and not inventories and other current assets. Trade dues and other current liabilities in turn finance current assets. This is consistent with trends observed for other countries wherein current assets, in addition to shortterm debt, are also financed by long-term debt. Stricter monitoring norms by which bank finance for inventories were restricted, as prescribed by the Tandon and Chore Committee, may have been to some extent responsible for this pattern. Non-bank financial institutions, which were dominated by large financial intermediaries in the public sector were, in any case, given a mandate for term lending and they did not operate at the short end in any significant way.

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Both bank and non-bank financial institutions lending, at least till the early 1990s, was influenced largely by certain priorities and social objectives. The logic that liquid assets can be repossessed quickly and, as such, external finance is easily available for such assets rather than for plant and machinery, did not quite hold for India. Legal institutions in India do not quite still match those in developed countries, especially in respect of bankruptcy laws and loans defaults. Though the bulk of financial institution lending in India is collateralised, the legal system is painfully slow in redressing past dues, collateralised assets are not easy to attach, and are seldom sold to pay the creditor in any case. How far is it easy to repossess inventories, trade dues or cash holdings in comparison to land, building, plant or machinery is difficult to say in the Indian context, given the long averages for the process of arbitration. Lower monitoring costs for short-term investments, in themselves, remain inadequate reason for the pattern hypothesised by Demirigu-Kunt and Maksimovic to be effected. The association between internal finance in the form of internal flows with long-term investments is highly positive and that for investments in current assets is negative. This is in line with what was observed generally for firms in other countries. The pattern is explained on the grounds that insiders have an information advantage and, since external funds can be costlier, long-term investments are financed mostly by internal funds. However, Indian firms also depend on external equity for financing long-term investments. External equity is positively associated with fixed capital formation and negatively correlated with current assets. Equity financing for capital formation may again be supported by special institutional characteristics of Indian financial markets. Raising external equity is a time-consuming process that takes about three to six months, and sometimes more, making it a source that is not conducive for financing inventories. In contrast, trade credit is more easily available and, even if it is costlier, firms tap this source for their current investments. It may be added that bank financing for securities has been restricted by tight regulations. For most part of the period banks exposure to capital markets was kept at very low levels. As such, long-term debt has not financed corporate acquisition of other corporate securities. The pattern, as revealed for common companies is different from that observed for the large sample. At first sight, it may appear somewhat surprising in that aged companies should, in principle, have lower monitoring costs than firms that exist for shorter spans. However, it is likely that aged firms have stabilised cash flows that make it possible to internally finance long-term projects. They also have less dependence on external equity as they capitalise reserves internally, raising funds through bonus issues. In addition, long-term debt finances their fixed assets, while they do not prefer to use internal funds for financing current assets for reasons of financing hierarchy.

is consistent with the notion that the Indian financial system is essentially a bank-oriented one. External equity as a source of finance picked up immediately after the onset of reforms. However, the atypical pattern of debt financing has prevailed thereafter. On the uses side, the pattern is less atypical, though inventories constituted a large portion of investments. Inventories spending, however, has declined sharply over the years and in the 1990s came down to a level comparable with firms in advanced economies. Firms investments in current assets (comprising inventories, sundry credit and cash) as a ratio of their total uses of funds has shown a distinct falling trend over the years, due mainly to better inventory management. Considering the relationship between sources of finance and the type of investments by examining the correlations, Indian firms are found to rely more on long-term debt for financing fixed (long-term) investments and more on short-term debt for financing short-term investments in current assets. While their dependence on internal funds to finance fixed assets is significant, the role of equity in the same is limited. This pattern is consistent with our observation that borrowings from banks and other financial institutions have played an important role in financing corporate fixed investments. The pattern, however, contradicts the pecking order observed for other countries, where market imperfections lead to fixed investments having a high positive association with cash flows and a high negative association of debt, especially long term. -29 Address for correspondence: ssaggar@rbi.org.in

Notes
[The views are those of the author, and not necessarily of the institution to which she belongs. This paper is drawn from her doctoral dissertation and the author is grateful to L M Bhole, K Narayanan and Pami Dua for their comments on the same.] 1 Singh also considers the Taggart (1985) data which shows that, like the present day developing countries, firms in US also relied heavily on equity in their initial years, before reducing their dependence on it. 2 Residual investments constitute a small proportion of total investments for the Indian firms and are, therefore, ignored in our analysis of correlations. 3 For this purpose, a sources and uses of funds statement is worked out for each of the companies included.

References
Demirigu-Kunt, Asli and Vojislav Maksimovic (1996): Financial Constraints, Uses of Funds and Firm Growth, Policy Research Working Paper No 1671, World Bank, Washington DC. Fazzari, Steven, R Glenn Hubbard, Bruce C Peterson (1988): Financial Constraints and Corporate Investment, Brookings Papers on Economic Activity, 1, pp 141-95. Kaplan, S and L Zingales (1997): Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?, Quarterly Journal of Economics, 112, pp 169-216 Modigliani, F and M Miller (1958): The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, 48: pp 261-97. Myers, S C and N Majluf (1984): Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have, Journal of Financial Economics, 13, pp 187-221. Samuel, C (1996): The Stockmarket as a Source of Finance, Policy Research Working Paper, No 1592, World Bank, Washington, DC. Singh, Ajit (1995): Corporate Financing Patterns in Industrialising Economies: A Comparative International Study, International Finance Corporation Technical Paper, No 2, International Finance Corporation, Washington. Taggart, Jr R A (1985): Secular Patterns in the Financing of US Corporations in B M Friedman(ed), Corporate Capital Structure in the United States, University of Chicago Press, Chicago.

V Conclusions
In conclusion, one may state that the financing pattern of Indian firms, and the way they match alternative sources of financing with different types of investments, varies from the commonly observed pattern in other countries. An examination of the financing pattern of Indian firms using balance sheet data shows an atypical pattern of lower but significant dependence on internal funds and a larger dependence on borrowings. Borrowings from banks constitute the major component of total borrowings. This

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