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Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
140
Chapter-V
EFFECT OF LIBERALIZATION ON COST OF CAPITAL
OF INDIAN COMPANIES IN SELECTED INDUSTRIES
Liberalization policies of Government of India have been structured to
revitalize Indian industry by infusing it with a greater degree of competition. As
opposed to earlier policies which directed investment in industry to what were
understood to be 'nationally desirous' in a protected environment, liberalization allows
a manufacturer greater liberty in selecting investment levels and output patterns
according to the dictates of the market. Liberalization policies in India have a modest
beginning in the late 1960s to remedy the foreign exchange and fiscal problems faced
by the economy. The first was the prolonged stagnation in the industrial sector. The
second was increasing inefficiency and low rates of return of the public sector as a
whole into which the Government has committed vast resources resulting in an
internal resource crunch. The third was the recurring balance of payments crisis. A
conscious policy of liberalization was advanced by policy-makers as an effective
measure to counter these problems. Liberalization by systematically deregulating
industry and cutting down restrictions on trade (especially imports) aimed at infusing
greater competition into the industrial sector and thereby led to increase in growth and
efficiency.
Liberalization in its broadest sense is a shift towards decreasing Government
intervention in economic activity. Two significant forms of intervention have been
direct state participation in economic activity and Government's regulatory role
through industrial and trade policies. Liberalization would thus denote deregulation
that indicates decrease in Government role in resource allocation, production and
distribution decisions in the economy and decrease in the Government's direct
participation in economic activity. The objective of liberalization is to induct
competitive forces into the economy in order to increase efficiency and productivity.
More specifically, liberalized policies are targeted to increase competition and to
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
141
obtain efficient outcomes in industry. At one end of the spectrum, liberalization
stands for minimum activity (Guha, 1990) and at the other end a liberalized market
where there are no quantitative restrictions either on buyers or sellers. Since all
restrictions are not quantitative, liberalization in a more general sense could be
defined as any policy action which reduces the restrictiveness of controls- either their
complete removal or the replacement of a more restrictive set of controls with less
restrictive ones. (Krueger,1986).
It is well known that from 1951 to 1991, Indian policy-makers stuck to a path
of centralized economic planning accompanied by extensive regulatory controls over
the economy. A visible policy was introduced during the eighties in order to introduce
structural changes in the industrial scene and raise efficiency and productivity levels.
Since the eighties, there has been a growing realization of the need for reforms both
in the public and private sectors. There have been some reforms with respect to
foreign technical collaboration for the upgradation of technology and for creation and
utilization of additional capacities through streamlining of the licensing policies. The
liberalization of the Indian economy from the mid seventies to the mid eighties
appeared to be promising in the areas of industry, technology upgradation, domestic
trade, taxation and finance. The policy packages introduced during this period mainly
aimed at improving industrial growth and domestic competition.
During the 1980s there was a worldwide trend towards financial liberalization
and globalization of the stock markets. Due to domestic and international
compulsions most of the developing countries liberalized their financial markets
during this period. Increased emphasis was put on the development of equity markets.
India also followed this path. Stock markets grew rapidly in India during the late
1980s and early 1990s. This growth was a direct consequence of the active role
played by Government of India to promote the Indian stock market. International
financial institutions were actively encouraging stock market growth also. Several
domestic and international factors also contributed to this rapid growth of the stock
markets. Prior to the financial liberalization, interest rates in India were administered
by Government. During this period, credit deployment by banks and financial
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
142
institutions was at low rate of interest. Low rate of interest made industries more
dependent upon the financial institutions for resource mobilization. As a consequence
of financial liberalization, interest rates shot up in India. In August 1991, the
Government of India allowed all term lending institutions to charge interest rates
according to the risk perception of the concerned project, subject to minimum prime
lending rate (PLR) prescribed by RBI. Along with this increase in the cost of bank
finance, the availability of credit to the private sector was also under severe strain.
Stock market scams and other official investigations into the lending by some Indian
banks made them reluctant to lend to the corporate sector. This period of high interest
rate coincided with increase in cost of debt (Kdat) during this period. This made equity
financing even more attractive. Due to large increase in share prices and price-
earnings ratios the relative cost of equity capital (Ke) fell significantly. Growth during
the 1980s was also propelled by fiscal expansion financed by borrowing abroad and at
home. But this was unsustainable and led to the crisis of June 1991. The reforms in
the 1990s were more systematic and they gave rise to more stable and sustainable
growth from 1992 on.
Finally, Das (2000), as quoted by DeLong, gives the strongest impression of
all writers that reforms originated with the July 1991 package announced by
Manmohan Singh:
“…in July 1991… with the announcement of sweeping liberalization by the minority
Government of P.V. Narasimha Rao… opened the economy…dismantled import
controls, lowered customs duties and devalued the currency… virtually abolished
licensing controls on private investment, dropped tax rates, and broke public sector
monopolies…. We felt as though our second independence has arrived. We were
going to be free from a rapacious and domineering state…"
Since 1991, India has embarked on a large-scale economic liberalization and
structural adjustment programme, which includes modernization and
internationalization of the financial sector. On July 24, 1991 Government of India
announced its new industrial policy. The main aim of new industrial policy was to
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
143
unshackle the Indian Industrial economy from the cobwebs of unnecessary
bureaucratic control and to integrate the Indian economy with the world economy.
The reforms of industrial policy led the Government to take a series of initiatives in
respect of policies in the following areas:
Delicensing: A number of industries (apart from the small-scale sector) were
progressively delicensed under the New Licensing Industrial Policy (NILP) that was
introduced in 1991. New Licensing Industrial Policy (NILP) delicensed all industries
irrespective of size of investment or the ownership of the undertaking except 18
industries which still required licensing. The number of industries was later reduced
to 15.
Foreign Investment: In order to invite foreign investment in high priority industries
requiring large investment and advanced technology, Government permitted foreign
direct investment (FDI) up to 51 percent in form of foreign equity in such industries.
The Government also encouraged the foreign trading companies to assist Indian
exporters in export activities for the promotion of exports of Indian products in the
world market.
Foreign Technology: In order to achieve the highest growth and productivity, the
Government provided automatic approval for technology agreements related to high
priority industries within specified parameters.
Opening up the Economy: Areas that were earlier under the exclusive purview of the
public sector were gradually opened up for the private sector.
Minimum Economic Scale: Minimum capacities of operations were prescribed in
selected industries in order to exploit economies of scale. This was with a view to
increase efficiency in units that could not exploit economies of scale because of the
stringent licensing laws.
Thus the decade of 1990s which forms a part of our period of study, has
witnessed radical changes in public policy in India. These changes have an effect on
the macroeconomic environment within which firms always operate. As result of
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
144
liberalization there has been reduction in the involvement of state in economic
activities-both as direct participant in the production process and through its indirect
control over the process of production and resource allocation in the economy. These
changes were manifested in dismantling of the industrial licensing system, a dilution
of the anti-monopoly laws, withdrawal of directed credit programs and opening of
several economic activities for private sector participation. The financial sector also
experienced deregulatory initiatives to encourage the growth of financial markets-for
both debt and equity instruments. All these changes have effect on the operating
environment and financing patterns of companies operating in India which in turn
affects cost of capital and value of firm.
5.1 Liberalization and Cost of Capital
The financial development in India can be divided into three phases. First two
decades of 1950s and 1960s represent foundation phase, a decade and a half after
1969 marked by rapid expansion and the period since 1980s characterized by
consolidation, diversification and liberalization both in financial and banking sector.
The Indian financial system has undergone transformation over the last four decades
and now comprises of an impressive network of financial institutions, financial
markets and a wide range of financial instruments. Developing countries have
progressively adopted market friendly reforms during 1980s and 1990s. One of the
most important objectives of these reforms was to make economies more resilient and
less vulnerable to external shocks. More than 18 years have passed, since the Indian
Government has started the process of liberalization and now almost all sectors are
reaping the harvest of economic and financial sector reforms. Financial sector
liberalization can be viewed as a set of operational reforms and policy measures
designed to deregulate and transform the financial system and its structure with a
view to achieve a liberalized market oriented system with an appropriate regulatory
framework. The liberalization process undertaken in the country has resulted in a
wide range of changes and adoption of market policies that spanned the whole
economy. Changes have taken place in almost all important sectors of economy
including capital markets, banking sector and industrial sector. The primary motive
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
145
behind liberalization was to impart greater depth, liquidity and stability of financial
Institutions and markets. The countries that have adopted the process of liberalization
and deregulation have effectively reduced operational cost of financial intermediation
and of loans and services. The financial sector also experienced deregulatory
initiatives in form of unfreezing of interest rate controls and public policy initiatives
to encourage the growth of financial markets for both debt and equity. Along with
banking sector reforms and economic reforms in 1991, the Govt. of India also
launched reform programmes for capital market. The reforms in capital market
enabled firms to raise funds cheaply and contributed to diversification of corporate
finance. Various efforts in this regard have been made to improve the informational,
legal and judicial infrastructure needed for sound capital market. In 1992, CCI was
abolished and thereafter, Securities and Exchange Board of India (SEBI) became a
regulatory body with an explicit mandate of protecting investors and developing the
capital market. In the same year, SEBI issued guidelines on capital issues to permit
Indian companies to freely price their capital issues in accordance with company
fundamentals and market sentiments which were earlier subject to CCI formula. The
lending and borrowing behavior of Indian companies as well as financing patterns
have undergone change as result of economic and financial liberalization in 1991. The
pattern of capital structure i.e. choice of different proportions of financing mix affects
the efficiency of business enterprise. Mainly capital structure of a company has to be
viewed with respect to risk, return and cost being attached to each source of financing
mix. Cost of capital for a firm is the average rate of return that the investors in a firm
would expect for supplying funds to firm or in other words, it is the cost of obtaining
funds. It is the cut-off rate for allocation of capital to investment of projects that will
leave unchanged the market price of stock (Van Horne, 2002). The excessive use of
debt may endanger the survival of firm while its conservative use may deprive the
equity shareholders from magnifying their return by using debt as cheaper source of
finance. Thus, the importance of an appropriate and sound capital structure with low
cost of capital is obvious from the perspective of corporate enterprises, its owners and
other stakeholders. Both debt and equity markets have undergone a stage of
development as result of economic and financial liberalization in 1991 and 1992
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
146
respectively. Some of important studies that have examined the impact of
liberalization upon cost of capital consist of Eun and Janaki (1986), Barber and
Lyon (1987), Foerster and Karolyi (2000), Chari and Henry (2004), Danial and
Makina (2005), etc. Eun and Janaki (1986) in their study found out that integration
of capital markets reduced cost of capital as the risk of firm is internationally
diversified. Barber and Lyon (1997) in their study investigated the impact of
liberalization upon returns by using firm level data. They found out that liberalization
had affected returns of firms positively. They observed that 52.4 percent of firms in
had higher returns after liberalization as compared to pre-liberalization period.
Foerster and Karolyi (2000) examined the impact of cross listing upon cost of
capital and found out that this impact was larger if the gain from diversification was
larger. Chari and Henry (2004) investigated the impact of liberalization upon stock
price revaluation and found out that firm-specific revaluations were directly
proportional to firm specific changes in systematic risk and consequently had impact
upon cost of capital. Danial and Makina (2005) in their study analyzed the impact of
stock market liberalization upon cost of capital for a single emerging market South
Africa which liberalized its stock exchange in the 1990s. Their main findings are
three-fold. First, consistent with other empirical findings, the majority of firms in
their sample showed decline in the cost of capital following liberalization. Secondly,
they found out that the impact of liberalization to be transmitted across all sectors and
thus independent of the sector to which a firm belongs. Thirdly, they found out that a
sizeable number of firms that exhibited an increase in the cost of capital following
liberalization were due to an informational effect that negatively re-rated firms by
repricing their risk and raising their cost of capital.
5.2 Methodology
The present chapter deals with the objective to study the affect of
liberalization on cost of capital of Indian companies in selected industries. A sample
of 100 companies representing eight industries i.e. (power, metal, cement, textiles,
paper, general engineering, sugar and tea) has been taken for the purpose of study.
The data have been collected for a period of 27 years i.e. from 1979-80 to 2005-06.
The various sources of data were the Bombay Stock Exchange Official Directory,
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
147
Prowess Database maintained by Centre for Monitoring Indian Economy (CMIE) and
annual reports of selected companies. To study the impact of liberalization, the study
period has been divided into two parts i.e. pre-liberalization period (1979-80 to 1989-
90) and post-liberalization period (1990-91 to 2005-06). The overall cost of capital
(Ko1 and Ko2) has been computed by taking into account cost of debt after tax (Kdat),
cost of preference share capital (Kp) and cost of equity capital (Ke1 and Ke2)
multiplied by their respective weights in the total financing mix of company. Various
statistical techniques such as index numbers, compound growth rates, t-values and
averages have been used for analysis of data both company-wise and industry-wise in
present chapter. For calculating the index numbers, the year 1979-80 was considered
as base year for the pre-liberalization period and 1990-91 was considered as base year
for the post-liberalization period.
5.3 Company-wise Trend Analysis
Tables 5.1 to 5.6 present company-wise analysis of cost of each specific source
i.e. cost of debt (Kdat), cost of preference share capital (Kp), cost of equity capital (Ke1 and
Ke2) and overall cost of capital (Ko1 and Ko2) of 100 companies representing 8 industries
i.e. (power, metal, cement, textiles, paper, general engineering, sugar and tea) for the
study period. The entire study period has been segregated into two parts i.e. pre-
liberalization period (1979-80 to 1989-90) and post-liberalization period (1990-91 to
2005-06). The trends have been studied using data techniques such as compound
growth rates, t-values and averages.
5.3.1 Company-wise Trend Analysis on the Basis of Compound Growth Rates
for Pre-liberalization Period (1979-80 to 1989-90)
Table 5.1 shows company-wise analysis of cost of each specific source of long-
term finance and overall cost of capital (Ko1 and Ko2) of 100 companies representing 8
industries on the basis of compound growth rates for pre-liberalization period (1979-
80 to 1989-90). The Indian capital market has experienced rapid growth during the
late 1980s and early 1990s. The financial liberalization and active government
support for the development and fostering of the stock markets in the late 1980s and
early 1990s led to a vibrant stock market in India. As a result , share prices increased
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
148
rapidly in the initial phase. As a first step to reform the capital market, the Securities
and Exchange Board of India (SEBI), which was earlier set up in April 1988 as a
nonstatutory body under an administrative arrangement, was given statutory powers
in January 1992 through an enactment of the SEBI Act, 1992 for regulating the
securities markets. Twin objectives mandated in the SEBI Act were investor
protection and orderly development of the capital market. Before 1992, Indian firms
were required to obtain approval from the office of Controller of Capital Issues (CCI)
for raising capital. New companies were allowed to issue shares only at par values.
Only existing companies with substantial reserves were allowed to issue shares at a
premium. This premium was decided on an estimated fair value. This act was
repealed in May 1992. All these developments have influenced a lot cost of each
specific source of long-term finance and overall cost of capital (Ko1 and Ko2) during
this period.
In the pre-liberalization period i.e. 1979-80 to 1989-90, participation of retail
investors in the Indian stock market grew. The Indian securities market before 1992
has been subject to fragmented regulation and multiplicity of administration. There
was poor disclosure in prospectus. Prospectus and balance sheet were not made
available to investors. Investors faced problems of delays in refund and transfer, etc.
Stock exchanges were regulated through the Securities Contracts (Regulations) 1956
Act. No inspection of stock exchanges was undertaken. The following trends have
been observed in selected companies in selected industries on the basis of compound
growth rates and respective t-values.
The Table 5.1 shows that 2 out of 5 i.e. 40 percent companies in power
industry have exhibited significant increase in cost of debt (Kdat) during this period.
The companies such as CESC Ltd. and Torrent Power SEC Ltd. have been observed
with significant decline in cost of preference share capital (Kp) over the selected study
period. There has been significant increase in cost of preference share capital (Kp),
cost of equity capital (Ke1) and overall cost of capital (Ko1) in case of Reliance Energy
Ltd. during this period. A significant decline in overall cost of capital (Ko2) has been
observed in case of Torrent Power AEC Ltd. during the study period.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
149
As shown by Table 5.1, it has been observed that in metal industry, Bharat
Forge Ltd. has exhibited significant decline in cost of debt (Kdat) during the selected
study period. There has been significant increase in cost of debt (Kdat) in case of
Goetze (India) Ltd. during this period. 3 out of 8 i.e. 38 percent companies have been
observed with increase in cost of equity capital (Ke2) and overall cost of capital (Ko2)
over the selected study period. The companies such as GKW Ltd. and Tata Iron and
Steel Company Ltd. have exhibited significant increase in overall cost of capital (K o1)
during this period. There has been significant increase in overall cost of capital (K o1)
in 2 out of 8 i.e. 25 percent companies during this period. There has been significant
decline in overall cost of capital (Ko2) in case of Electrosteel Castings Ltd. during this
period.
The Table 5.1 shows that 2 out of 7 i.e. 29 percent companies have exhibited
significant decline in cost of debt (Kdat) in cement industry during the selected study
period. The companies such as Chettinad Cement Corpn. Ltd., Mangalam Cement
Ltd. and Shree Digvijay Cement Co. Ltd. have been observed with significant
increase in cost of debt (Kdat) during this period. 2 out of 7 i.e. 29 percent companies
have revealed significant increase in cost of preference share capital (Kp) during the
selected study period. There has been significant decline in cost of preference share
capital (Kp) in case of India Cement Ltd. during this period. The companies such as
Associated Cement Cos. Ltd. and Dalmia Cement Bharat Ltd. have been observed
with significant decline in cost of equity capital (Ke1) during this period. 4 out of 7
i.e. 57 percent have exhibited significant decline in cost of equity capital (Ke2) and
overall cost of capital (Ko2) over the selected study period. There has been significant
increase in cost of equity capital (Ke2) in case of Shree Digvijay Cement Co. Ltd.
during this period. 3 out of 7 i.e. 43 percent companies have revealed significant
decline in overall cost of capital (Ko1) during this period. There has been significant
increase in cost of equity capital (Ke1) and overall cost of capital (Ko1) in case of
Mangalam Cement Ltd. during the selected study period. There has been significant
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
150
Table 5.1
Analysis of Compound Growth Rates of Cost of Each Specific Source and Overall
Cost of Capital during Pre-liberalization Period (1979-80 to 1989-90)
Sr.
No. Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
A. Power Industry
1 C E S C Ltd. .719
(.086)
-.017
(-2.71)**
7.87
(.802)
4.27
(.324)
1.91
(.719)
-1.59
(-.252)
2 Reliance Energy Ltd. 1.48
(.214)
22.20
(2.91)***
2.46
(2.21)**
-15.46
(-1.10)
3.52
(3.19)***
-12.25
(-.978)
3 Tata Power Co. Ltd. 11.85
(1.79)
-8.45
(-1.28)
.889
(.182)
4.44
(.764)
3.32
(.662)
3.92
(.719)
4 Torrent Power A E C Ltd.
10.00
(1.52)
3.51
(.296)
6.61
(.933)
-9.04
(-1.27)
5.14
(1.36)
-18.14
(-2.01)**
5 Torrent Power S E C Ltd.
.405
(.263)
-1.34
(-1.73)**
7.68
(1.26)
11.71
(.736)
5.54
(1.25)
5.26
(.509)
B. Metal Industry
6 Bharat Forge Ltd. -4.62
(-2.50)** N.A.
.998
(.189)
40.82
(5.08)***
-1.94
(-.804)
-.646
(-.077)
7 Electrosteel Castings Ltd.
-.021
(-.008) N.A.
5.36
(.993)
5.71
(.531)
2.78
(.793)
-25.14
(-2.03)**
8 Ferro Alloys Corpn. Ltd.
-1.31
(-.559)
-2.94
(-.27)
5.37
(1.33)
8.34
(.553)
.596
(.088)
6.18
(2.45)**
9 G K W Ltd. -.131
(-.045) N.A.
-15.71
(-.858)
22.58
(.567)
11.41
(2.84)***
18.87
(.983)
10 Goetze (India) Ltd. 3.89
(1.39)* N.A.
2.21
(.162)
20.98
(.948)
4.11
(1.09)
2.37
(.369)
11 Graham Firth Steel Products (India) Ltd.
4.13
(.942) N.A.
8.51
(.846)
23.23
(1.33)
2.45
( .638)
18.12
(2.94)**
12 K E C Infrastructures Ltd.
96.26
(.985)
-4.31
(.793)
.957
(.127)
42.24
(2.98)***
-1.94
(-.666)
18.74
(2.37)**
13 Tata Iron and Steel Company Ltd.
-3.86
(-1.23) N.A.
4.58
(.63)
54.18
(1.81)**
9.67
(1.78)**
5.80
(2.43)**
C. Cement Industry
14 Associated Cement Cos. Ltd.
-15.97
(-2.18)** N.A.
-5.97
(-1.61)*
-39.79
(-3.73)***
-10.54
(-1.76)**
-42.91
(-3.22)***
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
151
Sr.
No. Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
15 Chettinad Cement Corpn. Ltd.
5.41
(1.39)*
3.61
(1.73)**
2.28
(.345)
-26.97
(-3.92)***
2.75
(.476)
-18.44
(-2.28)**
16 Dalmia Cement (Bharat) Ltd.
-10.35
(-3.07)***
3.43
(.318)
-8.62
(-2.01)**
-31.18
(-6.07)***
-7.38
(-1.93)**
-29.35
(-5.59)***
17 India Cements Ltd. 3.66
(.691)
-11.11
(-3.81)***
-7.56
(-.772)
-32.96
(-2.10)**
-2.17
(-.319)
-9.10
(-3.46)***
18 Madras Cements Ltd. -1.26
(-.112)
-3.11
(-.985)
-.274
(-.043)
-2.28
(-.211)
-1.77
(-.565)
1.98
(.291)
19 Mangalam Cement Ltd.
13.77
(3.64)***
-5.61
(-1.08)
12.32
(1.92)**
-10.67
(-.913)
7.91
(1.73)**
-8.97
(-1.23)
20 Shree Digvijay Cement Co. Ltd.
8.69
(1.94)**
9.00
(1.45)*
-28.23
(-.664)
6.29
(2.04)**
-16.15
(-1.47)*
2.29
(1.51)*
D. Textiles Industry
21 Arvind Mills Ltd. 2.25
(.512)
14.02
(10.99)***
10.27
(1.25)
-5.78
(-.341)
1.74
(.464)
-3.60
(-.309)
22 Baroda Rayon Corpn. Ltd.
10.74
(2.68)**
26.63
(2.61)**
7.89
(1.01)
-22.31
(-1.59)*
12.18
(2.55)**
-7.10
(-1.17)
23 Bharat Commerce & Inds. Ltd.
1.90
(.394)
19.38
(1.73)**
12.08
(1.45)*
39.54
(3.00)***
5.29
(1.05)
15.67
(5.92)***
24 Birla Transasia Carpets Ltd.
-9.83
(-1.04) N.A.
-3.21
(-.293)
83.78
(2.08)**
-6.24
(-1.68)**
7.98
(1.62)**
25 Birla V X L Ltd. 1.58
(.409)
-6.30
(-3.94)***
-5.72
(-.605)
3.25
(.092)
-4.37
(-.788)
-1.99
(-.110)
26 Bombay Dyeing & Mfg. Co. Ltd.
-4.31
(-1.27) N.A.
-25.18
(-2.93)***
-40.13
(-1.54)*
-12.41
(-2.47)**
-14.13
(-.909)
27 Century Enka Ltd. 21.69
(4.99)***
.582
(1.38)*
18.43
(1.32)
17.37
(2.60)**
.221
(.058)
5.20
(1.12)
28 Century Textiles & Inds. Ltd.
-6.09
(-1.46)*
33.93
(1.86)**
-.945
(-.166)
36.13
(3.47)***
2.88
(1.01)
18.94
(2.97)***
29 Cheviot Co. Ltd. -1.22
(-.807)
32.38
(1.76)**
31.80
(4.44)***
29.42
(3.99)***
15.45
(3.52)***
-4.35
(-.509)
30 Futura Polyesters Ltd. -.126
(-.033)
-.865
(-1.73)**
14.61
(1.86)**
11.99
(1.60)*
4.75
(1.09)
8.08
(1.29)
31 Grasim Industries Ltd. 2.32
(.538)
-.864
(-.241)
-9.34
(-1.06)
-31.72
(-1.21)
.567
(.242)
-3.54
(-.444)
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
152
Sr.
No. Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
32 Hindoostan Spinning & Wvg. Mills Ltd.
-2.29
(-.593)
9.89
(3.24)***
-10.93
(-2.15)**
26.95
(1.93)**
2.57
(.720)
14.40
(2.37)**
33
Juggilal Kamlapat Cotton Spg. & Wvg. Mills Co. Ltd.
12.05
(4.88)***
12.37
(1.28)
-3.48
(-.483)
-14.66
(-.692)
-2.55
(-.259)
-9.55
(-.701)
34 Kesoram Industries Ltd.
5.03
(1.05)
11.64
(1.73)**
2.06
(.309)
1.14
(.087)
1.83
(.521)
1.05
(.105)
35 L D Textile Inds. Ltd. -8.45
(-1.48)*
-6.89
(-1.04)
2.11
(.168)
6.14
(.234)
5.26
(.816)
10.94
(1.66)**
36 Lakshmi Mills Co. Ltd. 2.54
(1.15) N.A.
-.323
(-.081)
17.68
(2.42)**
-2.58
(-1.27)
11.37
(2.39)**
37 Malwa Cotton Spg. Mills Ltd.
11.04
(4.47)*** N.A.
8.64
(2.27)**
-4.69
(-.389)
6.12
(1.72)**
-4.50
(-.364)
38 Modipon Ltd. -5.10
(-2.27)**
15.76
(3.96)***
.5.09
(.588)
-13.40
(-.509)
12.07
(4.01)***
-5.68
(-1.32)
39 Morarjee Realties Ltd. .475
(.189)
-9.07
(-1.73)**
-1.71
(-.361)
-5.97
(-.379)
-3.52
(-1.38)*
-.068
(-.011)
40 N R C Ltd. 1.40
(.389)
6.08
(.434)
-9.51
(-.992)
40.94
(2.30)**
-2.49
(-.72)
16.44
(1.25)
41 Rajasthan Spinning & Wvg. Mills Ltd.
.696
(.292)
-14.81
(-2.18)**
1.31
(.131)
-11.89
(-.48)
4.47
(1.10)
.356
(.037)
42 Raymond Ltd. -4.37
(-1.09)
6.87
(1.25)
-3.49
(-.154)
-3.93
(-1.29)
-2.25
(-.314)
9.89
(1.86)**
43 Reliance Industries Ltd.
14.51
(4.35)***
-5.30
(-.92)
-8.24
(-.937)
9.55
(4.25)***
.770
(.079)
-6.97
(-2.59)**
44 Ruby Mills Ltd. -2.29
(-1.42)* N.A.
25.71
(1.36)
-.602
(-.299)
5.63
(3.09)***
1.59
(.729)
45 S I V Industries Ltd. 4.43
(1.56)* N.A.
8.70
(.223)
8.70
(1.95)**
-14.93
(-.94)
.888
(.369)
46 Shree Rajasthan Syntex Ltd.
10.49
(5.26)*** N.A.
-37.81
(-2.00)
-.698
(-.252)
-10.66
(-1.45)*
1.53
(.467)
47 Simplex Realty Ltd. 6.48
(1.11) N.A.
67.40
(9.67)***
1.34
(.192)
45.13
(4.23)***
-2.91
(-.74)
48 Standard Industries Ltd.
7.96
(1.96)**
-.371
(-.045)
-8.97
(-.508)
-6.93
(-1.32)
-10.54
(-.784)
-6.53
(-1.95)**
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
153
Sr.
No. Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
49 Victoria Mills Ltd. 2.29
(.575) N.A.
9.95
(1.04)
-.664
(-.126)
9.39
(2.32)**
1.72
(0.70)
E. Paper Industry
50 Andhra Pradesh Paper Mills Ltd.
9.89
(1.86)** N.A.
9.91
(1.49)*
6.24
(.893)
10.14
(2.20)
3.11
(.609)
51 Aurangabad Paper Mills Ltd.
-6.97
(-2.59)** N.A.
2.81
(1.12)
-6.74
(-.436)
-2.31
(-4.16)***
-12.73
(-1.53)*
52 Balkrishna Industries Ltd.
1.59
(.729) N.A.
-3.44
(-.62)
-23.22
(-2.67)**
-4.75
(-.529)
-11.47
(-1.94)**
53 Ballarpur Industries Ltd.
.888
(.367)
3.70
(.894)
-.502
(-.070)
-16.15
(-1.96)**
-.902
(-.174)
-14.41
(-2.17)**
54 Jayant Paper Mills Ltd. 1.53
(.466) N.A.
-5.61
(-.637)
-2.61
(-.121)
3.09
(.347)
-3.30
(-.247)
55 Orient Paper & Inds. Ltd.
-2.91
(-.743)
-4.33
(-1.07)
-11.47
(-1.89)**
-38.46
(-1.77)**
-5.99
(-1.96)**
-24.09
(-1.46)*
56 Rohit Pulp & Paper Mills Ltd.
-6.53
(-1.94)** N.A.
-4.76
(-.823)
-6.91
(-.542)
-3.95
(-.802)
-7.30
(-.675)
57 Rollatainers Ltd. 1.72
(.702)
6.17
(3.82)***
-2.89
(-.573)
-4.98
(-2.69)**
-.614
(-.129)
-6.01
(-1.39)*
58 Seshasayee Paper & Boards Ltd.
-2.25
(-1.35) N.A.
.322
(.083)
4.49
(.370)
-5.18
(-1.00)
2.48
(.525)
59 Shree Vindhya Paper Mills Ltd.
-2.94
(1.06) N.A.
-8.23
(1.08)
-47.95
(-3.03)***
-3.48
(-1.07)
-19.96
(-2.67)**
60 Sirpur Paper Mills Ltd. 8.42
(4.45)***
2.55
(.788)
-7.31
(-1.55)*
-6.41
(-.565)
-.034
(-.018)
-.501
(-.072)
61 Star Paper Mills Ltd. 1.20
(.560)
.758
(.662)
15.06
(1.63)**
46.66
(3.22)***
5.91
(1.63)*
20.61
(3.70)***
62 West Coast Paper Mills Ltd.
-2.59
(-1.21)
-10.57
(-.92)
2.07
(.371)
-11.79
(-1.16)
.287
(.092)
-7.19
(-2.40)**
F. General Engineering Industry
63 Bajaj Auto Ltd. 7.73
(1.59)* N.A.
--6.52
(-.953)
-35.38
(-2.97)***
-3.68
(-.790)
-27.81
(-2.93)***
64 Bharat Gears Ltd. -.089
(-.044)
5.02
(1.73)**
-12.41
(-3.11)***
-5.84
(-.608)
-6.05
(-1.89)**
9.06
(1.87)**
65 Bimetal Bearings Ltd. 4.51
(1.27) N.A.
7.27
(-1.36)
30.76
(2.87)***
-5.61
(-1.36)
20.20
(3.37)***
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
154
Sr.
No. Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
66 Elecon Engineering Co. Ltd.
-8.98
(-4.31)*** N.A.
-5.69
(-.696)
-23.09
(-3.77)***
-8.46
(-2.73)***
-16.23
(-3.02)***
67 Escorts Ltd. 13.79
(6.32)***
-14.63
(-1.14)
-6.95
(-1.21)
-22.98
(-2.51)**
.816
(.233)
-10.91
(-2.42)**
68 Force Motors Ltd. 7.31
(1.85)** N.A.
-9.87
(-1.96)**
-24.22
(-1.50)
-4.29
(-1.16)
-12.19
(-1.39)*
69 Gabriel India Ltd. 2.15
(.502) N.A.
8.73
(2.64)**
30.81
(1.54)*
4.19
(1.58)*
4.94
(.428)
70 Hindustan Motors Ltd. 3.58
(.806)
-.751
(-1.73)**
-28.24
(-5.29)***
-49.43
(-5.84)***
-11.95
(-6.63)***
-25.97
(-3.81)***
71 Kirloskar Brothers Ltd. -.512
(-.241)
-4.01
(-.580)
4.45
(.558)
19.83
(1.36)
.595
(.332)
7.99
(.951)
72 L M L Ltd. 10.39
(.433)
.639
(.264)
-5.25
(-.556)
9.19
(.309)
-2.62
(-.381)
7.92
(.661)
73 Lakshmi Machine Works Ltd.
3.89
(1.48)* N.A.
-3.93
(-1.01)
3.16
(.404)
-3.51
(-.998)
.279
(.049)
74 Larsen & Toubro Ltd. 8.53
(2.05)**
22.57
(1.30)
13.68
(-4.73)***
-24.58
(-3.26)***
-4.85
(-2.07)**
-10.91
(-1.54)*
75 Maharashtra Scooters Ltd.
15.09
(1.13) N.A.
2.11
(.226)
-22.93
(-1.68)*
8.83
(1.59)*
-22.99
(-1.69)*
76 Mahindra & Mahindra Ltd.
3.44
(1.99)**
-1.14
(-.680)
-4.89
(-1.69)*
2.39
(.505)
-1.76
(-1.04)
1.67
(.721)
77 Premier Ltd. 4.92
(1.32) N.A.
-2.79
(-.627)
-17.58
(-1.55)*
-1.84
(-.443)
-12.95
(-1.74)**
78 Punjab Tractors Ltd. 5.71
(1.29)
6.94
(2.05)**
.609
(.042)
47.09
(4.22)***
-.028
(-.008)
29.41
(4.98)***
79 Revathi Equipment Ltd.
-.022
(-.006)
-12.09
(-2.98)***
-8.66
(-1.31)
-29.16
(-2.06)**
-4.06
(-.969)
-22.39
(-2.67)**
80 Tata Motors Ltd. -2.63
(-1.59)*
7.45
(5.61)***
-9.90
(2.16)**
11.98
(.344)
-4.73
(-2.12)**
-.847
(-.259)
81 Tayo Rolls Ltd. -6.66
(-.761) N.A.
-17.38
(-2.49)**
-27.83
(-1.01)
-10.28
(-2.07)**
-14.69
(-1.28)
82 Texmaco Ltd. 11.49
(2.86)***
-6.26
(-1.73)**
-14.71
(-3.09)***
48.23
(.879)
1.50
(.402)
-29.59
(-1.21)
83 Voltas Ltd. 3.79
(1.07) N.A.
-1.16
(-.122)
32.01
(1.61)*
1.62
(.387)
4.08
(.644)
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
155
Sr. No.
Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
G. Sugar Industry
84 Andhra Sugars Ltd. -.914
(-.225) N.A.
-.182
(-.024)
32.43
(3.84)***
.974
(.183)
24.29
(2.63)**
85 Bajaj Hindusthan Ltd. .066
(.229) N.A.
-5.82
(-1.22)
-25.29
(-4.30)***
-4.27
(-1.48)*
-27.89
(-5.55)***
86 Balrampur Chini Mills Ltd.
-6.04
(-1.15)
-1.35
(-.391)
17.00
(1.25)
57.38
(1.33)
.351
(.082)
17.94
(.923)
87 Kothari Sugars & Chemicals Ltd.
-4.15
(-1.25) N.A.
11.70
(2.11)**
16.37
(1.38)*
3.89
(.728)
4.92
(.445)
88 Ravalgaon Sugar Farm Ltd.
-.651
(-.092)
-10.13
(-1.99)**
2.87
(.429)
19.36
(1.52)*
-1.11
(-.352)
1.73
(.147)
89 Sakthi Sugars Ltd. -.753
(-.172)
3.03
(1.49)*
3.14
(.939)
-6.51
(-.625)
.500
(.270)
-5.91
(-.919)
90 Sri Chamundeswari Sugars Ltd.
1.04
(.335)
-1.06
(-1.73)**
-16.09
(-3.76)***
17.32
(.976)
-5.67
(-2.57)**
23.31
(2.78)***
H. Tea Industry
91 Apeejay Tea Ltd. 49.84
(4.24)*** N.A.
17.09
(2.66)**
-34.45
(-4.41)***
21.04
(3.17)***
-35.55
(-4.45)***
92 Assambrook Ltd. .301
(.065)
.555
(2.32)**
7.41
(.770)
-22.92
(-.862)
7.63
(1.65)*
-11.29
(-.793)
93 D P I L Ltd. 25.45
(4.59)*** N.A.
45.13
(4.12)***
18.78
(1.76)**
25.66
(4.66)***
25.35
(2.73)***
94 Dhunseri Tea & Inds. Ltd.
-1.12
(-.199) N.A.
8.57
(.445)
33.15
(2.42)**
-1.25
(-.091)
28.08
(3.09)***
95 Hasimara Industries Ltd.
-2.14
(-.578) N.A.
-21.36
(-3.66)***
-19.04
(-.708)
-3.05
(-.914)
-11.10
(-1.50)*
96 Jay Shree Tea & Inds. Ltd.
-.647
(-.165) N.A.
-9.42
(-.712)
4.53
(.119)
-6.09
(-1.47)*
1.39
(.105)
97 Moran Tea Co. (India) Ltd.
1.49
(.256) N.A.
27.23
(2.01)**
7.56
(.365)
11.80
(1.05)
9.11
(.657)
98 Tata Tea Ltd. 8.58
(1.59)* N.A.
49.88
(1.88)**
24.81
(1.97)**
17.15
(2.05)**
21.88
(3.41)***
99 Warren Tea Ltd. 42.39
(2.45)** N.A.
22.81
(2.27)**
-12.19
(-1.17)
18.20
(2.25)**
-4.54
(-.408)
100 Williamson Tea Assam Ltd.
18.92
(5.37)*** N.A.
2.16
(.365)
-33.93
(-5.04)***
6.42
(1.42)*
-28.73
(-4.52)***
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Notes: 1. Figures in Parentheses represent t-values. 2. Significance at 10%, 5% and 1% is indicated by one, two and three asterisks respectively.
3. N.A. stands for not available.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
156
increase in overall cost of capital (Ko2) in case of Shree Digvijay Cement Co. Ltd.
during the selected study period.
As revealed by Table 5.1, it has been observed that 7 out of 29 i.e. 24 percent
companies have exhibited significant increase in cost of debt (Kdat) in textile industry
during this period. There has been significant decline in cost of debt (Kdat) in 3 out of
29 i.e. 10 percent companies over the selected study period. 9 out of 29 i.e. 31 percent
companies have revealed significant increase in cost of preference share capital (Kp)
during this period. 5 out of 29 i.e. 17 percent companies have been observed with
significant increase in cost of equity capital (Ke1) during this period. The companies
such as Bombay Dyeing & Mfg. Co. Ltd. and Hindoostan Spinning & Wvg. Mills
Ltd. have exhibited significant decline in cost of equity capital (Ke1) during the
selected study period. 10 out of 29 i.e. 34 percent companies have been observed with
significant increase in cost of equity capital (Ke2) during this period. The companies
such as Baroda Rayon Corpn. Ltd. and Bombay Dyeing & Mfg. Co. Ltd. have
exhibited significant decline in cost of equity capital (Ke2) over the selected study
period. 6 out of 29 i.e. 21 percent companies have been observed with significant
increase in overall cost of capital (Ko1 and Ko2) during the selected study period.
The Table 5.1 reveals that the companies such as Andhra Pradesh Paper Mills
Ltd. and Sirpur paper Mills Ltd. have exhibited significant increase in cost of debt
(Kdat) in paper industry during this period. There has been significant decline in cost
of debt (Kdat) in 2 out of 13 i.e. 15 percent companies during the selected study
period. There has been significant increase in cost of preference capital (Kp) in case of
Rollatainers Ltd. during this period. 2 out of 13 i.e. 15 percent companies have shown
significant increase in cost of equity capital (Ke1) during the selected study period.
The companies such as Orient Paper & Inds. Ltd. and Sirpur Paper Mills Ltd. have
revealed significant decline in cost of equity capital (Ke1) during this period. 5 out of
13 i.e. 38 percent companies have been observed with significant decline in cost of
equity capital (Ke2) during this period. There is significant increase in cost of equity
capital (Ke2) and overall cost of capital (Ko1 and Ko2) respectively in case of Star
Paper Mills Ltd. over the selected study period. There has been significant decline in
overall cost of capital (Ko1) in 2 out of 13 i.e. 15 percent companies during this
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
157
period. 7 out of 13 i.e. 54 percent companies have revealed significant decline in
overall cost of capital (Ko2) during the selected study period.
The Table 5.1 shows that 6 out of 21 i.e. 29 percent companies have exhibited
significant increase in cost of debt (Kdat) in general engineering industry during the
selected study period. There has been significant decline in cost of debt (Kdat) in case
of Elecon Engineering Co. Ltd. and Tata Motors Ltd. during this period. 3 out of 21
i.e. 14 percent companies have been observed with significant increase in cost of
preference capital (Kp), cost of equity capital (Ke2) and overall cost of capital (Ko2)
during the selected study period. There has been significant decline in cost of
preference capital (Kp) in 3 out of 21 i.e. 14 percent companies during this period. 7
out of 21 i.e. 33 percent companies have exhibited significant decline in cost of equity
capital (Ke1) over the study period. There has been significant increase in cost of
equity capital (Ke1) in case of Gabriel India Ltd. during this period. 8 out of 21 i.e. 38
percent companies have revealed significant decline in cost of equity capital (Ke2)
during the selected study period. 3 out of 21 i.e. 14 percent companies have shown
significant increase in cost of equity capital (Ke2) during this period. 6 out of 21 i.e.
29 percent companies have exhibited significant decline in overall cost of capital
(Ko1) during this period. There has been significant increase in overall cost of capital
(Ko1) in case of Maharashtra Scooters Ltd. over the selected study period. 9 out of 21
i.e. 43 percent companies have been observed with significant decline in overall cost
of capital (Ko2) during this period.
As shown by Table 5.1, it appears that 2 out of 7 i.e. 29 percent companies
have exhibited significant decline in cost of preference capital (Kp) over the study
period. There has been significant increase in cost of preference capital (Kp) in case of
Sakthi Sugars Ltd. during this period. The Kothari Sugars & Chemicals Ltd. has been
observed with significant increase in cost of equity capital (Ke1) during the selected
study period. There has been significant decline in cost of equity capital (K e1) in case
of Sri Chamundeswari Sugars Ltd. over the study period. 3 out of 7 i.e. 43 percent
companies have been observed with significant increase in cost of equity capital (K e2)
during this period. The companies such as Bajaj Hindusthan Ltd. and Sri
Chamundeswari Sugars Ltd. have exhibited significant decline in overall cost of
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
158
capital (Ko1) during the selected study period. 2 out of 7 i.e. 29 percent companies
have revealed significant increase in overall cost of capital (Ko2) during this period.
There has been significant decline in overall cost of capital (Ko2) in case of Bajaj
Hindusthan Ltd. over the study period.
It appears from the Table 5.1 that 5 out of 10 i.e. 50 percent companies have
revealed significant increase in cost of debt (Kdat), cost of equity capital (Ke1) and
overall cost of capital (Ko1) in tea industry during the selected study period. The
Assambrook Ltd. is the only company which has exhibited significant increase in cost
of preference capital (Kp) during this period. There has been significant increase in
cost of equity capital (Ke1) in case of Hasimara Industries Ltd. over the study period.
3 out of 10 i.e. 30 percent companies have been observed with significant increase in
cost of equity capital (Ke2) and overall cost of capital (Ko2) during the selected study
period. The companies such as Apeejay Tea Ltd. and Tata Tea Ltd. have been
observed with significant decline in cost of equity capital (Ke2) during this period.
There has been significant decline in overall cost of capital (Ko1) in case of Jay Shree
Tea & Inds. Ltd. over the selected study period. The companies such as Hasimara
Industries Ltd. and Williamson Tea Assam Ltd. have revealed significant decline in
overall cost of capital (Ko2) during this period.
5.3.2 Company-wise Trend Analysis on the Basis of Averages for Pre-
liberalization Period (1979-80 to 1989-90)
Table 5.2 presents company-wise trend analysis of cost of each specific source
of long-term finance and overall cost of capital (Ko1 and Ko2) of 100 companies
representing 8 industries i.e. (power, metal, cement, textiles, paper, general
engineering, sugar and tea) on the basis of averages for pre-liberalization period i.e.
1979-80 to 1989-90. Theoretically, cost of debt (Kdat) is said to be lower than cost of
preference share capital (Kp). The cost of preference share capital (Kp) is expected to
be lower than cost of equity capital (Ke). The overall cost of capital (Ko) is expected
to lie among cost of debt (Kdat), cost of preference share capital (Kp) and overall cost
of capital (Ko). The return expected by an investor from a particular security depends
upon risk associated with particular security. The return expected by an investor is
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
159
composition of risk free rate of return plus risk premium. Due to lower risk, return
expected by debt holders and preference share holders is less as compared to equity
investors. In power industry, the cost of debt (Kdat) being 10.89 percent has been
observed higher than cost of preference share capital (Kp) being 7.50 percent in case
of CESC Ltd during this period. This company has raised new debt at higher rate of
interest leading to increase in cost of debt (Kdat) during this period. The cost of equity
capital (Ke1 and Ke2) being 31.30 percent and 43.48 percent respectively have been
observed higher than cost of debt (Kdat) and cost of preference share capital (Kp)
during this period. The overall cost of capital (Ko1 and Ko2) being 16.57 percent and
19.64 percent respectively has been observed according to theoretical view. The
Reliance Energy Ltd has cost of debt (Kdat) being 16.34 percent higher than cost of
preference share capital (Kp) being 10.26 percent during this period. It has been
observed that the company has raised new debt at higher rate of interest leading to
increase in cost of debt (Kdat) during this period. The cost of equity capital (Ke1 and
Ke2) being 50.01 percent and 47.39 percent has been observed to be higher than cost
of debt (Kdat) and cost of preference share capital (Kp) over the study period. This
finding is in conformity with our theoretical view. The overall cost of capital (K o1 and
Ko2) has been observed 42.54 percent and 42.23 percent respectively during this
period. This company is having maximum cost of equity capital (Ke1 and Ke2) and
overall cost of capital (Ko1 and Ko2) out of 100 sampled companies during this period.
The overall cost of capital (Ko1 and Ko2) as computed by multiplying cost of each
specific cost with their respective weights in total financing mix of company has been
observed higher due to higher cost of debt (Kdat) and cost of equity capital (Ke1 and
Ke2) during the study period. The findings of remaining three companies have been in
conformity with our theoretical viewpoint. In metal industry, Bharat Forge Ltd has
cost of equity capital (Ke1 and Ke2) being 25.19 percent and 30.87 percent
respectively has been observed higher than cost of debt (Kdat) being 21.50 percent
during this period. This finding is in conformity with our theoretical proposition. The
overall cost of capital (Ko1 and Ko2) has been observed 22.98 percent and 23.70
percent respectively during this period. The Electrosteel Castings Ltd has cost of
equity capital (Ke1 and Ke2) being 27.40 percent and 35.22 percent respectively
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
160
Table 5.2
Analysis of Cost of Each Specific Source and Overall Cost of Capital on the Basis of
Averages during Pre-liberalization Period (1979-80 to 1989-90)
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
A. Power Industry
1 C E S C Ltd. 10.89 7.50 31.30 43.48 16.57 19.64
2 Reliance Energy Ltd. 16.34 10.26 50.01 47.39 42.54 42.23
3 Tata Power Co. Ltd. 7.98 17.01 25.40 44.57 20.23 21.05
4 Torrent Power A E C Ltd. 13.99 12.71 24.05 20.89 17.24 23.77
5 Torrent Power S E C Ltd. 13.37 9.90 33.22 25.80 24.85 19.88
B. Metal Industry
6 Bharat Forge Ltd. 21.50 N.A. 25.19 30.87 22.98 23.70
7 Electrosteel Castings Ltd. 17.54 N.A. 27.40 35.22 23.47 27.67
8 Ferro Alloys Corpn. Ltd. 14.22 7.39 27.39 30.25 19.35 23.59
9 G K W Ltd. 20.13 N.A. 9.16 2.35 13.54 9.74
10 Goetze (India) Ltd. 16.55 N.A. 22.05 31.33 21.39 30.85
11 Graham Firth Steel Products (India) Ltd. 31.83 N.A. 20.52 30.46 25.07 31.62
12 K E C Infrastructures Ltd. 27.92 8.47 26.04 20.43 26.44 25.93
13 Tata Iron and Steel Company Ltd. 18.62 1.23 16.50 19.63 14.98 17.23
C. Cement Industry
14 Associated Cement Cos. Ltd. 11.26 N.A. 15.84 29.21 12.92 18.98
15 Chettinad Cement Corpn. Ltd. 10.47 10.74 29.24 26.31 18.65 24.26
16 Dalmia Cement (Bharat) Ltd. 8.73 10.07 30.77 40.78 20.34 26.08
17 India Cements Ltd. 13.80 2.00 20.67 22.06 15.21 16.43
18 Madras Cements Ltd. 11.52 9.34 29.54 32.62 17.66 19.53
19 Mangalam Cement Ltd. 7.94 15.69 13.85 11.09 10.73 9.34
20 Shree Digvijay Cement Co. Ltd. 16.02 8.03 25.37 30.74 17.40 23.34
D. Textiles Industry
21 Arvind Mills Ltd. 12.22 4.62 21.60 15.08 17.20 14.25
22 Baroda Rayon Corpn. Ltd. 9.86 12.23 13.33 27.55 10.95 14.57
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
161
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
23 Bharat Commerce & Inds. Ltd. 24.10 9.52 9.84 11.30 17.75 19.43
24 Birla Transasia Carpets Ltd. 14.94 N.A. 11.16 10.41 14.25 21.53
25 Birla V X L Ltd. 12.31 13.15 16.97 18.15 15.01 16.84
26 Bombay Dyeing & Mfg. Co. Ltd. 9.89 N.A. 15.67 24.85 15.74 16.47
27 Century Enka Ltd. 9.95 12.39 21.62 24.70 19.37 18.35
28 Century Textiles & Inds. Ltd. 9.19 N.A. 14.24 7.93 12.36 8.73
29 Cheviot Co. Ltd. 16.14 11.09 15.95 22.10 14.64 16.34
30 Futura Polyesters Ltd. 7.93 9.30 8.30 20.53 8.35 15.13
31 Grasim Industries Ltd. 9.80 11.50 16.98 17.69 11.98 10.88
32 Hindoostan Spinning & Wvg. Mills Ltd. 16.12 12.71 19.34 12.72 17.71 11.30
33 Juggilal Kamlapat Cotton Spg. & Wvg.
Mills Co. Ltd. 11.10 9.20 28.91 23.55 19.49 16.16
34 Kesoram Industries Ltd. 8.67 10.82 16.05 10.34 14.53 10.42
35 L D Textile Inds. Ltd. 19.80 11.00 22.91 24.48 19.21 17.91
36 Lakshmi Mills Co. Ltd. 12.90 N.A. 16.60 37.45 14.58 27.19
37 Malwa Cotton Spg. Mills Ltd. 10.33 N.A. 16.10 40.05 13.48 37.33
38 Modipon Ltd. 12.23 12.82 20.23 44.97 17.53 38.76
39 Morarjee Realties Ltd. 17.28 6.03 14.19 21.45 16.78 18.99
40 N R C Ltd. 17.43 7.37 11.63 12.75 14.93 15.68
41 Rajasthan Spinning & Wvg. Mills Ltd. 12.31 12.36 15.79 18.10 13.87 14.41
42 Raymond Ltd. 11.00 10.36 16.55 24.20 13.06 16.12
43 Reliance Industries Ltd. 9.36 13.55 27.50 5.19 16.88 6.93
44 Ruby Mills Ltd. 15.17 N.A. 28.67 38.27 19.72 30.62
45 S I V Industries Ltd. 15.30 N.A. 24.91 27.20 21.53 23.29
46 Shree Rajasthan Syntex Ltd. 15.73 N.A. 11.13 19.77 14.31 20.02
47 Simplex Realty Ltd. 15.11 N.A. 21.05 26.16 17.22 16.88
48 Standard Industries Ltd. 14.79 6.22 14.86 23.70 15.68 20.33
49 Victoria Mills Ltd. 19.97 5.75 17.05 22.58 19.18 23.97
E. Paper Industry
50 Andhra Pradesh Paper Mills Ltd. 24.31 N.A. 22.22 29.75 21.53 28.60
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
162
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
51 Aurangabad Paper Mills Ltd. 11.18 N.A. 11.26 21.71 11.44 14.79
52 Balkrishna Industries Ltd. 7.98 N.A. 13.98 19.54 11.70 12.48
53 Ballarpur Industries Ltd. 11.97 13.56 18.40 18.30 16.21 16.79
54 Jayant Paper Mills Ltd. 15.53 N.A. 22.51 17.36 20.65 16.92
55 Orient Paper & Inds. Ltd. 15.65 8.56 7.21 21.15 10.51 19.93
56 Rohit Pulp & Paper Mills Ltd. 10.99 N.A. 27.44 38.38 19.24 24.11
57 Rollatainers Ltd. 11.82 12.79 24.12 38.28 19.74 22.53
58 Seshasayee Paper & Boards Ltd. 15.60 N.A. 13.38 12.24 16.26 14.17
59 Shree Vindhya Paper Mills Ltd. 7.01 N.A. 10.15 28.24 8.37 13.69
60 Sirpur Paper Mills Ltd. 13.94 9.23 12.06 17.95 13.16 16.71
61 Star Paper Mills Ltd. 16.16 9.71 14.30 18.72 14.32 16.40
62 West Coast Paper Mills Ltd. 17.20 7.93 15.97 14.39 16.32 14.79
F. General Engineering Industry
63 Bajaj Auto Ltd. 9.64 N.A. 19.05 30.49 15.83 22.87
64 Bharat Gears Ltd. 13.55 10.19 14.74 7.26 14.48 11.02
65 Bimetal Bearings Ltd. 8.67 N.A. 18.32 18.18 15.06 15.88
66 Elecon Engineering Co. Ltd. 16.35 9.79 13.78 12.80 14.93 12.51
67 Escorts Ltd. 11.71 12.82 16.32 14.66 14.16 14.95
68 Force Motors Ltd. 11.02 N.A. 13.74 11.64 13.49 13.01
69 Gabriel India Ltd. 22.16 N.A. 16.47 31.49 19.27 27.27
70 Hindustan Motors Ltd. 12.90 11.12 20.52 17.82 19.87 21.46
71 Kirloskar Brothers Ltd. 16.08 10.56 19.22 35.04 17.22 22.13
72 L M L Ltd. 17.78 10.00 21.17 18.17 18.07 13.58
73 Lakshmi Machine Works Ltd. 10.65 N.A. 24.83 26.30 18.72 18.75
74 Larsen & Toubro Ltd. 9.49 14.71 10.63 9.59 10.52 10.93
75 Maharashtra Scooters Ltd. 16.30 N.A. 16.92 39.20 21.22 37.50
76 Mahindra & Mahindra Ltd. 10.97 9.45 16.61 14.91 13.26 12.55
77 Premier Ltd. 19.59 N.A. 23.27 21.03 24.13 21.82
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
163
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
78 Punjab Tractors Ltd. 14.18 10.97 22.59 29.35 17.86 26.13
79 Revathi Equipment Ltd. 15.76 13.26 17.64 43.29 16.13 30.62
80 Tata Motors Ltd. 14.50 13.66 13.57 7.47 14.18 10.94
81 Tayo Rolls Ltd. 22.16 N.A. 15.55 23.13 16.53 18.51
82 Texmaco Ltd. 10.03 6.33 16.67 19.40 11.47 10.03
83 Voltas Ltd. 10.37 N.A. 18.31 13.68 13.08 12.96
G. Sugar Industry
84 Andhra Sugars Ltd. 9.26 9.50 24.05 35.77 17.29 23.75
85 Bajaj Hindusthan Ltd. 10.13 7.20 13.04 25.03 11.67 18.45
86 Balrampur Chini Mills Ltd. 12.26 14.93 17.08 16.21 13.41 25.49
87 Kothari Sugars & Chemicals Ltd. 31.15 N.A. 24.19 40.24 28.26 38.87
88 Ravalgaon Sugar Farm Ltd. 19.61 10.95 14.82 34.60 16.51 30.41
89 Sakthi Sugars Ltd. 13.40 11.95 16.64 24.29 14.29 16.88
90 Sri Chamundeswari Sugars Ltd. 8.15 10.38 22.03 36.40 10.82 17.49
H. Tea Industry
91 Apeejay Tea Ltd. 5.53 N.A. 8.95 32.41 8.45 31.85
92 Assambrook Ltd. 13.05 5.66 7.24 12.07 8.50 11.24
93 D P I L Ltd. 15.87 N.A. 11.13 11.00 25.47 31.39
94 Dhunseri Tea & Inds. Ltd. 11.19 N.A. 22.09 24.22 14.43 16.84
95 Hasimara Industries Ltd. 20.03 N.A. 16.18 11.23 16.75 17.44
96 Jay Shree Tea & Inds. Ltd. 10.66 N.A. 9.58 7.06 9.93 8.57
97 Moran Tea Co. (India) Ltd. 22.42 N.A. 16.21 12.07 20.87 12.96
98 Tata Tea Ltd. 10.37 N.A. 17.14 21.98 16.87 17.76
99 Warren Tea Ltd. 13.55 N.A. 14.67 33.29 13.34 27.86
100 Williamson Tea Assam Ltd. 8.56 N.A. 7.98 25.57 7.71 24.10
Max 31.83 17.01 50.01 47.39 42.54 42.23
Min 5.53 2.00 7.21 2.35 7.71 6.93
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note : N.A. stands for not available.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
164
higher than cost of debt (Kdat) being 17.54 during the selected study period. This
finding is in conformity with our theoretical viewpoint. The overall cost of capital
(Ko1 and Ko2) has been observed 23.47 percent and 27.67 percent respectively during
this period. The findings of companies other 4 companies out of 8 companies selected
for this sector are based upon theory. The companies such as GKW Ltd, Graham Firth
Steel Products (India) Ltd and K E C Infrastructures Ltd have cost of debt (Kdat)
higher than cost of equity capital (Ke1 and Ke2) during this period. These companies
have experienced consecutive decline in earnings per share during this period. The
Tata Iron and Steel Company Ltd. has cost of debt (Kdat) higher than cost of equity
capital (Ke1) during this period. This company has raised new debt at higher rate of
interest leading to increase in cost of debt (Kdat) during this period. The companies
such as Bharat Forge Ltd., Electrosteel Castings Ltd GKW Ltd, Goetze (India) Ltd
and Graham Firth Steel Products (India) Ltd. do not have preference capital during
this period. In cement industry, Associated Cement Cos. Ltd has cost of equity capital
(Ke1 and Ke2) being 15.84 percent and 29.21 percent respectively higher than cost of
debt (Kdat) being 11.26 percent during the selected study period. This finding is in
conformity with our theoretical proposition. The overall cost of capital (Ko1 and Ko2)
has been observed 12.92 percent and 18.98 percent respectively during this period.
The cost of debt (Kdat) being 10.47 percent has been observed to be lower than cost of
preference share capital (Kp) being 10.74 percent in case of Chettinad Cement Corpn.
Ltd during this period. The cost of equity capital (Ke1 and Ke2) being 29.24 percent
and 26.31 percent respectively have been observed higher than cost of debt (Kdat) and
cost of preference share capital (Kp) over the study period. This finding is in
conformity with our theoretical view. The overall cost of capital (Ko1 and Ko2) has
been observed 18.65 percent and 24.26 percent respectively during this period. The
Mangalam Cement Ltd is only company that have cost of preference share capital
(Kp) higher than the cost of equity capital (Ke1 and Ke2) over the study period. This
company has paid preference dividend at higher rate leading to increase in cost of
preference capital (Kp) over the study period. The findings of remaining 4 companies
out of 7 companies have been in conformity with our theoretical proposition. In
textile industry, Arvind Mills Ltd has cost of debt (Kdat) being 12.22 percent higher
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
165
than cost of preference capital (Kp) being 4.62 percent during this period. This finding
is contrary to our theoretical proposition. The trend of increase in debt has been
observed during this period. Interest payments has shown upward trend. It appears
that companies have raised new debt at higher rate of interest leading to increase in
cost of debt (Kdat) during this period. The cost of equity capital (Ke1 and Ke2) being
21.60 percent and 15.08 percent respectively have been observed higher than cost of
debt (Kdat) and cost of preference capital (Kp) over the selected study period. This
finding is in conformity with our theoretical view. The overall cost of capital (Ko1 and
Ko2) has been observed 17.20 percent and 14.25 percent respectively during this
period. The cost of debt (Kdat) being 9.86 percent has been observed lower than cost
of preference share capital (Kp) being 12.23 percent in case of Baroda Rayon Corpn.
Ltd. during this period. This company is paying preference dividend at higher rate
leading to increase in cost of preference share capital (Kp). The cost of equity capital
(Ke1 and Ke2) being 13.33 percent and 27.55 percent respectively have been observed
higher than cost of debt (Kdat) and cost of preference capital (Kp) during the selected
study period. This finding is in conformity with our theoretical proposition. The
overall cost of capital (Ko1 and Ko2) has been observed 10.95 percent and 24.26
percent respectively during this period. The findings of other 18 companies out of 29
companies selected for this sector are based upon theory. The companies such as
Bharat Commerce & Inds. Ltd, Birla Transasia Carpets Ltd and N R C Ltd have cost
of debt (Kdat) higher than cost of equity capital (Ke1 and Ke2) over the study period.
The cost of debt (Kdat) has been observed to be higher than cost of equity capital (Ke1)
in case of Cheviot Co. Ltd, Morarjee Realties Ltd, Shree Rajasthan Syntex Ltd and
Victoria Mills Ltd over the selected study period. The same has been observed to be
higher than cost of equity capital (Ke2) in case of Century Textiles & Industries Ltd
and Hindoostan Spinning and Wvg. Mills Ltd during the study period. The reason
attributed to higher cost of debt (Kdat) is raising of new debt at higher rate of interest.
The cost of preference share capital (Kp) has been observed to be higher than cost of
equity capital (Ke2) in case of Reliance Industries Ltd over the selected study period
of 27 years. In Paper Industry, Andhra Pradesh Paper Mills Ltd has cost of debt (Kdat)
being 24.31 percent has been observed higher than cost of equity capital (K e1) being
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
166
22.22 percent over the selected study period. The cost of equity capital (Ke2) being
29.75 percent has been observed higher than cost of debt (Kdat) during this period.
The overall cost of capital (Ko1 and Ko2) has been observed 21.53 percent and 28.60
percent respectively during this period. The company has raised fresh debt at higher
rate of interest leading to increase in cost of debt (Kdat) during this period. The
Aurangabad Paper Mills Ltd has cost of equity capital (Ke1 and Ke2) being 11.26
percent and 21.71 percent respectively higher than cost of debt (Kdat) being 11.18
percent over the study period. The overall cost of capital (Ko1 and Ko2) has been
observed 11.44 percent and 14.79 percent respectively during the study period These
two companies do not have preference capital over the study period. The findings of
other 6 out of 13 companies are in conformity with our theoretical viewpoint. The
cost of debt (Kdat) has been observed to be higher than cost of equity capital (Ke1) in
case of Sirpur Paper Mills Ltd and Star Paper Mills Ltd during the study period. The
Seshasayee Paper & Boards Ltd and West Coast Paper Mills Ltd have cost of debt
(Kdat) higher than the cost of equity capital (Ke1 and Ke2) over the study period. The
company has raised new debt at higher rate of interest leading to increase in cost of
debt (Kdat) during this period. These companies have experienced decline in earnings
per share during this period. These factors led to increase in cost of debt (Kdat) as
compared to cost of equity capital (Ke1 and Ke2) during this period. In general
engineering industry, Bajaj Auto Ltd has cost of equity capital (Ke1 and Ke2) being
19.05 percent and 30.49 percent respectively higher than cost of debt (Kdat) being 9.64
percent during this period. This finding is in conformity with our theoretical view.
The overall cost of capital (Ko1 and Ko2) has been observed 15.83 and 22.87
respectively during this period. The findings of 15 other companies out of 21
companies selected for this sector are based upon theory over the study period. The
Bharat Gears Ltd has cost of debt (Kdat) being 13.55 percent higher than cost of
preference capital (Kp) and cost of equity capital (Ke2) being 10.19 percent and 7.26
percent respectively during this period. This finding is contrary to theoretical view.
The overall cost of capital (Ko1 and Ko2) has been observed as 14.48 percent 11.02
percent over the study period. The Elecon Engineering Co. Ltd and Tata Motors Ltd
have cost of debt (Kdat) higher than the cost of equity capital (Ke1 and Ke2) over the
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
167
study period. The cost of debt (Kdat) has been observed to be higher than cost of
equity capital (Ke1) in case of Force Motors Ltd and Tayo Rolls Ltd during the study
period. The trend of increase in interest payments have been observed for these
companies. It appears that companies have raised fresh debt at higher rate of interest.
These companies have experienced decline in earnings per share during this period.
All these factors led to higher cost of debt (Kdat) and lower cost of equity capital (Ke1
and Ke2) during this period. The cost of preference share capital (Kp) has been
observed to be higher than cost of equity capital (Ke2) in case of Tata Motors Ltd
during the selected study period. The company has paid preference dividend at higher
rate leading to increased cost of preference share capital (Kp) during this period. In
sugar industry, Andhra Sugars Ltd has cost of debt (Kdat) being 9.26 percent lower
than cost of preference share capital (Kp) being 9.50 percent during this period. The
cost of equity capital (Ke1 and Ke2) being 24.05 percent and 35.77 percent
respectively have been observed to be higher than cost of debt (Kdat) and cost of
preference share capital (Kp) during this period. This finding is in conformity with
theoretical viewpoint. The overall cost of capital (Ko1 and Ko2) has been observed
17.29 percent and 23.75 percent respectively during this period. The findings of other
3 companies out of 7 companies selected for this sector are based upon theory. The
cost of debt (Kdat) being 10.13 percent has been observed higher than cost of
preference share capital (Kp) being 7.20 percent in case of Bajaj Hindusthan Ltd over
the study period. This company has cost of debt (Kdat) higher than cost of preference
share capital (Kp) that is contrary to our theoretical viewpoint. It has been observed
that this company has raised fresh debt at higher rate of interest leading to increase in
cost of debt (Kdat) during this period. The cost of equity capital (Ke1 and Ke2) being
13.04 percent and 25.03 percent respectively has been observed higher than cost of
debt (Kdat) and cost of preference share capital (Kp) during this period. The overall
cost of capital (Ko1 and Ko2) has been observed to be 11.67 percent and 18.45 percent
respectively over the study period. The companies i.e. Kothari Sugars and Chemicals
Ltd and Ravalgaon Sugar Farm Ltd have cost of debt (Kdat) higher than cost of equity
capital (Ke1) during the study period. These companies have been observed with lower
earnings per share. In tea industry, Apeejay Tea Ltd has cost of equity capital (Ke1
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
168
and Ke2) being 8.95 percent and 32.41 percent respectively higher than cost of debt
(Kdat) being 5.53 percent during this period. This finding is in conformity with
theoretical view. The overall cost of capital (Ko1 and Ko2) has been observed 8.45
percent and 31.85 percent respectively over the study period. The cost of debt (Kdat)
being 13.05 percent has been observed higher than cost of preference share capital
(Kp) and the cost of equity capital (Ke1 and Ke2) being 5.66 percent, 7.24 percent and
12.07 percent respectively in case of Assambrook Ltd during this period. The overall
cost of capital (Ko1 and Ko2) has been observed 8.50 percent and 11.24 percent
respectively during this period. This company has cost of debt (Kdat) higher than cost
of preference share capital (Kp) and cost of equity capital (Ke1 and Ke2) that is
contrary to our theoretical view. This company has raised fresh debt at higher rate of
interest leading to increased cost of debt (Kdat) during this period. The findings of
companies such as Apeejay Tea Ltd, Dhunseri Tea & Industries Ltd, Tata Tea Ltd and
Warren Tea Ltd are in conformity with our theoretical proposition. The cost of debt
(Kdat) has been observed to be higher than the cost of equity capital (Ke1 and Ke2) in
case of D P I L Ltd, Hasimara Industries Ltd, Jay Shree Tea & Industries Ltd and
Moran Tea Co. (India) Ltd during the selected study period of 27 years. In case of
Williamson Tea Assam Ltd the cost of debt (Kdat) has been observed to be higher than
the cost of equity capital (Ke1) over the study period. There is more fluctuation in
market price of these companies. The trend of increase in interest payments have been
observed for these companies. It appears that companies have raised fresh debt at
higher rate of interest. It leads to increase in cost of debt (Kdat) during this period.
The Assambrook Ltd is only company that has preference capital over the study
period. Overall theoretical viewpoint that cost of debt (Kdat) is lower than cost of
preference share capital (Kp) and cost of preference capital (Kp) is lower than cost of
equity capital (Ke1 and Ke2) has been supported by 68 percent out of 100 selected
companies during pre-liberalization period. The cost of debt (Kdat) has been observed
higher than cost of preference capital (Kp) in 36 out of total selected during the study
period. The cost of debt (Kdat) has been observed higher than the cost of equity capital
(Ke1) in 19 out of total selected companies over the study period. The cost of debt
(Kdat) has been observed to be higher than the cost of equity capital (Ke2) in 10 out of
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
169
total 100 selected companies during the selected study period. The cost of preference
capital (Kp) has been observed higher than the cost of equity capital (Ke1 and Ke2) in 5
out of total selected companies during the study period.
Table 5.3 depicts frequency cost of each source of finance and overall cost of
capital (Ko1 and Ko2) for pre-liberalization period i.e. 1979-80 to 1990-91. It appears
that approximately 69 percent companies have cost of debt (Kdat) in the range of 10-20
percent followed by 20 percent in the range of 0-10 percent, 9 percent in the range of
20-30 percent and 2 percent in the range of 30-40 percent. Approximately 69 percent of
selected companies have cost of preference share capital (Kp) in the range of 0-10
percent followed by 31 percent in the range of 10-20 percent. Majority i.e. 55 percent of
selected companies have cost of equity capital (Ke1) in the range of 10-20 percent.
Approximately 33 percent companies have cost of equity capital (Ke2) in the range of
10-20 percent followed by 32 percent in the range of 20-30 percent, 20 percent in the
range of 30-40 percent, 8 percent in the range of 40-50 percent and 7 percent in the
range of 0-10 percent. Majority i.e. 77 percent of selected companies have overall cost
of capital (Ko1) in the range of 10-20 percent followed by 16 percent in the range of 20-
Table 5.3
Frequency Table of Cost of Capital of Selected Companies for Pre-liberalization
Period (1979-80 to 1989-90)
Variable/
Range
0-10 10-20 20-30 30-40 40-50 Total
Kdat (%) 20 69 9 2 - 100
Kp (%) 69 31 - - - 100
Ke1 (%) 8 55 34 3 - 100
Ke2 (%) 7 33 32 20 8 100
Ko1 (%) 7 77 16 - - 100
Ko2 (%) 5 55 28 11 1 100
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
170
30 percent and 7 percent in the range of 0-10 percent. Approximately 55 percent of
selected companies have overall cost of capital (Ko2) in the range of 10-20 percent
followed by 28 percent in the range of 20-30 percent, 11 percent in the range of 30-40
percent, 5 percent in the range of 0-10 percent and 1 percent in the range of 40-50 percent.
5.2.3 Company-wise Trend Analysis on the Basis of Compound Growth Rates
for Post-liberalization Period (1990-91 to 2005-06)
Table 5.4 presents company-wise trend analysis of cost of each specific source
of long-term finance and overall cost of capital (Ko1 and Ko2) of 100 companies
representing 8 industries i.e. (power, metal, cement, textiles, paper, general
engineering, sugar and tea) on the basis of compound growth rates for post-
liberalization period i.e. 1990-91 to 2005-06. The post-liberalization period has been
characterized by the domestic changes such as new industrial policy, introduction of
online trading, emergence of a new market regulator called the Securities & Exchange
Board of India (SEBI), the integration of the Indian stock market with global
exchanges, arrival of Foreign Institutional Investors (FIIs), permitting foreign brokers
to trade on Indian stock markets and a primary market boom and bust. The post-
liberalization period is subject to various scams by individual traders, such as Harshad
Mehta, Hiten Dalal, Bhupen Dalal, and others. There was a large bubble in Indian
stock market prices in early 1990s, which was followed by a market collapse in April
1992, causing huge losses for thousands of investors. The post-liberalization period
may also be described as the decade of radical changes in the Indian trading
mechanism. For the first time in its history of over 115 years, BSE faced competition.
The financial liberalization and active government support for the development and
fostering of the stock markets in the late 1980s and early 1990s led to a vibrant stock
market in India. As a result share prices, increased rapidly in the initial phase. Before
1992, Indian firms were required to obtain approval from the office of Controller of
Capital Issues (CCI) for raising capital. New companies were allowed to issue shares
only at par values. Only existing companies with substantial reserves were allowed to
issue shares at a premium. This premium was decided on an estimated fair value. This
act was repealed in May 1992. This allowed firms to price their issues without any
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
171
intervention from authorities. This resulted in a sharp increase of capital mobilized
through equity related instruments in the post 1992 phase. The BSE Sensex rose from
a level of 123.6 in 1980 to cross 4000 in 1994. Money raised through new capital
Issues by non-government public limited companies grew at an annual average rate of
more than 43 percent during 1991-92 to 1994-95 phase. However, after 1994, there
has been a decline in the PE ratio. External finance is more important as a source of
finance for Indian firms. The Importance of the capital market has declined as a
source of finance after 1995. However, the capital market still contributes
significantly in the financing of Indian firms. The contribution of external equity has
declined after 1995. Equity related finance got a spurt in the early 1990s. The
importance of equity as a source of finance peaked around 1994. After that there has
been a shift away from equity related financing towards external debt. The
contribution of capital markets peaked during 1993-95. The contribution of the capital
market was highest in 1993 for textile industry but for others it peaked in 1994-95.
The contribution of the capital market has declined after 1995. After reaching a peak
in 1994-95, there has been a decline in the contribution of equity market in almost all
the industries. There has been a steep decline in proportion of funds raised through
equity related instruments in the post 1994-95 phase. These changes have impact
upon financing patterns and cost of each specific source of finance and overall cost of
capital (Ko1 and Ko2) of selected companies in selected industries for present study.
The Table 5.4 shows that 3 out of 5 i.e. 60 percent companies in power
industry have exhibited significant decline in cost of debt (Kdat) during this period.
There has been significant increase in cost of debt (Kdat) in case of CESC Ltd. over
the selected study period. A significant increase has been observed in cost of equity
capital (Ke1 and Ke2) and overall cost of capital (Ko1) respectively in 3 out of 5 i.e. 60
percent companies during this period. There has been significant decline in cost of
equity capital (Ke2) in case of Reliance Energy Ltd. during the selected study period.
The Tata Power Ltd. is the only company which has exhibited significant increase in
overall cost of capital (Ko2) during this period.
It appears from the Table 5.4 that 3 out of 8 i.e. 38 percent companies have
revealed significant decline in cost of debt (Kdat) in metal industry during this period.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
172
Table 5.4
Analysis of Compound Growth Rates of Cost of Each Specific Source and Overall
Cost of Capital during Post-liberalization Period (1990-91 to 2005-06)
Sr.
No.
Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
A. Power Industry
1 C E S C Ltd. 11.40
(3.62)***
9.57
(.743)
-1.91
(-.567)
-3.88
(-.925)
2.28
(1.67)**
1.75
(1.13)
2 Reliance Energy Ltd. 5.17
(1.03)
12.88
(1.03)
6.83
(1.39)*
-9.56
(-2.13)**
9.03
(1.99)**
-5.98
(-1.26)
3 Tata Power Co. Ltd. -2.14
(-1.85)**
N.A. 5.24
(.827)
11.95
(2.16)**
2.49
(.636)
7.33
(2.57)**
4 Torrent Power A E C
Ltd.
-10.48
(-4.04)***
N.A. 14.00
(1.98)**
17.25
(3.76)***
-13.68
(-.432)
3.42
(1.35)
5 Torrent Power S E C
Ltd.
-14.29
(-6.28)***
N.A. 27.12
(3.86)***
21.88
(3.01)***
3.98
(1.58)*
2.54
(1.20)
B. Metal Industry
6 Bharat Forge Ltd. -1.79
(-1.38)*
2.79
(.515)
1.46
(.340)
8.64
(3.26)***
.330
(.125)
5.29
(3.29)***
7 Electrosteel Castings
Ltd.
-3.56
(-2.32)**
N.A. -5.85
(-2.75)***
-2.00
(-.657)
-4.01
(-2.51)**
-.902
(-.306)
8 Ferro Alloys Corpn.
Ltd.
-1.34
(-.864)
N.A. .177
(.067)
-10.56
(-1.47)*
1.03
(.745)
-1.31
(-.357)
9 G K W Ltd. -1.36
(-.915)
-15.81
(-.878)
4.50
(.993)
16.35
(4.19)***
-.036
(-.016)
10.22
(3.40)***
10 Goetze (India) Ltd. 20.17
(.545)
N.A. .856
(.192)
9.34
(2.61)**
-1.57
(-.540)
1.83
(.802)
11 Graham Firth Steel
Products (India) Ltd.
-.975
(-1.06)
N.A. 16.69
(3.48)***
12.14
(1.92)**
5.01
(4.99)***
4.73
(3.42)***
12 K E C Infrastructures
Ltd.
-1.91
(-1.46)*
13.21
(.655)
4.32
(.714)
-3.91
(-.538)
-1.81
(-.778)
-5.73
(-1.79)**
13 Tata Iron and Steel
Company Ltd.
5.02
(.142)
58.58
(1.13)
16.01
(2.92)***
11.99
(1.62)*
3.50
(1.18)
2.67
(.917)
C. Cement Industry
14 Associated Cement
Cos. Ltd.
-3.44
(-2.63)**
N.A. -7.50
(-1.34)
-18.23
(-4.35)***
-3.76
(-1.27)
-12.14
(-5.50)***
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
173
Sr.
No.
Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
15 Chettinad Cement
Corpn. Ltd.
-7.70
(-4.88)***
-17.98
(-.670)
-.102
(-.039)
-6.17
(-2.49)**
-2.88
(-1.80)
-7.22
(-4.62)***
16 Dalmia Cement
(Bharat) Ltd.
-3.61
(-1.87)**
N.A. -4.48
(-1.29)
.047
(.027)
-6.24
(-2.43)**
-2.75
(-1.52)*
17 India Cements Ltd. -3.21
(-2.21)
N.A. -4.38
(-.952)
-13.54
(-2.82)***
-3.85
(-2.25)**
-7.53
(-3.29)***
18 Madras Cements Ltd. -9.73
(-7.92)***
26.12
(1.50)*
-6.36
(-1.49)*
-11.89
(-3.32)***
-7.70
(-2.71)***
-11.52
(-4.77)***
19 Mangalam Cement
Ltd.
18.02
(3.07)***
62.20
(17.72)***
18.11
(5.35)***
3.13
(1.00)
16.00
(3.78)***
5.63
(2.21)**
20 Shree Digvijay
Cement Co. Ltd.
-10.61
(-3.33)***
2.73
(.105)
3.14
(1.07)
.290
(.111)
-2.84
(-1.49)*
-4.13
(-2.57)**
D. Textiles Industry
21 Arvind Mills Ltd. -4.01
(-1.87)**
31.48
(1.25)
-11.69
(-5.06)***
-10.95
(-4.12)***
-7.55
(-4.38)***
-6.80
(-2.86)***
22 Baroda Rayon Corpn.
Ltd.
-3.63
(-1.73)**
-10.87
(-.759)
-6.93
(-1.90)**
-8.43
(-2.21)**
-6.01
(-2.29)**
-5.23
(-2.86)***
23 Bharat Commerce &
Inds. Ltd.
-4.13
(-1.36)*
N.A. -1.35
(-.262)
-4.22
(-.773)
-4.53
(-1.32)
-6.68
(-2.89)***
24 Birla Transasia
Carpets Ltd.
-12.09
(-5.15)***
N.A. -.298
(-.075)
-6.93
(-1.34)
-2.91
(-1.38)*
-7.79
(-2.52)**
25 Birla V X L Ltd. -6.69
(-1.89)**
-17.84
(-1.00)
1.06
(.200)
-7.15
(-1.53)*
-2.97
(-.861)
-4.01
(-.961)
26 Bombay Dyeing &
Mfg. Co. Ltd.
-8.71
(-3.47)***
N.A. -1.16
(-.271)
-5.39
(-1.32)
-3.91
(-.669)
-9.68
(-3.44)***
27 Century Enka Ltd. -7.6
(-2.54)**
-1.89
(-1.16)
-5.61
(-1.07)
-12.29
(-2.32)**
-6.99
(-1.63)*
-.481
(-.188)
28 Century Textiles &
Inds. Ltd.
-1.01
(-.405)
53.86
(1.73)**
6.17
(3.18)***
-6.97
(-3.01)***
7.92
(4.75)***
3.77
(1.68)*
29 Cheviot Co. Ltd. -10.12
(-4.47)***
N.A. 9.11
(1.56)*
8.71
(1.46)*
.796
(.263)
.967
(.454)
30 Futura Polyesters Ltd. 1.02
(1.24)
N.A. -1.59
(-.425)
-2.56
(-.814)
.056
(.021)
1.33
(.347)
31 Grasim Industries Ltd. -1.58
(-.730)
N.A. 4.78
(.697)
6.18
(.987)
-6.67
(-4.35)***
-5.56
(-3.62)***
32 Hindoostan Spinning
& Wvg. Mills Ltd.
3.72
(1.64)*
-4.04
(-.719)
-8.13
(-4.18)***
5.59
(-3.46)***
2.80
(.806)
3.70
(1.04)
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
174
Sr. No.
Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
33 Juggilal Kamlapat Cotton Spg. & Wvg. Mills Co. Ltd.
-6.26
(-1.46)*
N.A. 7.32
(1.70)*
12.94
(2.22)**
-3.62
(-1.10)
-5.63
(-2.62)**
34 Kesoram Industries Ltd.
-4.94
(-1.83)**
8.33
(2.01)
.498
(.175)
-9.73
(-2.76)***
-1.37
(-.565)
.130
(.061)
35 L D Textile Inds. Ltd. -1.28
(-1.16)
N.A. 6.51
(1.07)
1.51
(.234)
2.16
(.591)
1.77
(.200)
36 Lakshmi Mills Co. Ltd.
.708
(.440)
N.A. -1.47
(-.297)
-.748
(-.067)
-.421
(-.161)
-4.01
(-1.27)
37 Malwa Cotton Spg. Mills Ltd.
2.11
(1.83)**
N.A. 2.33
(.480)
1.99
(.294)
-8.99
(-2.35)**
-7.11
(-1.89)**
38 Modipon Ltd. -.405
(-.173)
-.238
(-.094)
.729
(.159)
4.89
(1.34)
-3.35
(-1.53)*
-3.86
(-1.93)**
39 Morarjee Realties Ltd. -1.61
(-1.58)*
-39.40
(-1.64)*
3.70
(.423)
3.07
(.388)
.797
(.737)
-2.06
(.908)
40 N R C Ltd. -4.38
(-2.74)***
-1.12
(-.249)
8.44
(2.42)**
11.99
(2.92)***
-1.53
(-.408)
1.43
(.650)
41 Rajasthan Spinning & Wvg. Mills Ltd.
-5.86
(-2.71)***
24.18
(1.73)**
-1.18
(-.199)
1.76
(.546)
-.778
(-.283)
-4.62
(-1.93)**
42 Raymond Ltd. -6.24
(-3.04)***
-7.04
(-1.87)**
-.088
(-.023)
-5.64
(-1.76)**
-13.31
(-1.75)**
-2.55
(-1.09)
43 Reliance Industries Ltd.
-5.03
(-1.71)**
43.21
(1.76)**
-3.63
(-.532)
3.12
(.500)
1.99
(.987)
.993
(.143)
44 Ruby Mills Ltd. -5.96
(-2.87)***
N.A. 4.08
(1.23)
3.93
(.368)
-7.35
(-2.70)*
-7.57
(-3.38)***
45 S I V Industries Ltd. 3.60
(3.04)***
N.A. -1.43
(-.395)
-5.12
(-1.56)*
-8.62
(-3.16)***
-12.52
(-4.69)***
46 Shree Rajasthan Syntex Ltd.
-9.26
(-3.86)***
2.95
(.614)
-5.57
(-1.04)
-16.47
(-3.00)***
1.55
(.542)
5.86
(1.57)*
47 Simplex Realty Ltd. -10.51
(-3.55)***
N.A. 4.04
(.630)
15.17
(2.15)**
-.200
(-.189)
.166
(.072)
48 Standard Industries Ltd.
2.56
(.856)
N.A. 3.02
(.727)
4.18
(.825)
-6.63
(-3.09)***
-6.38
(-2.52)**
49 Victoria Mills Ltd. -8.36
(-4.91)***
N.A. -9.31
(-2.55)**
.744
(.246)
-7.04
(-3.75)***
-15.21
(-2.55)**
E. Paper Industry
50 Andhra Pradesh Paper Mills Ltd.
-9.64
(-7.37)***
-57.89
(-31.06)***
8.22
(2.03)**
9.32
(1.85)
3.83
(1.28)
3.33
(1.25)
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
175
Sr.
No.
Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
51 Aurangabad Paper
Mills Ltd.
-5.06
(-1.06)
N.A. 8.84
(1.02)
10.91
(1.38)
-3.35
(-1.01)
-2.59
(-.734)
52 Balkrishna Industries
Ltd.
-8.06
(-3.58)***
N.A. 4.38
(1.01)
15.22
(5.65)***
-1.97
(-.751)
5.49
(2.99)***
53 Ballarpur Industries
Ltd.
-3.17
(-2.11)**
1.47
(.525)
18.14
(4.40)***
-.339
(-.080)
5.47
(2.68)**
-1.69
(-1.01)
54 Jayant Paper Mills
Ltd.
9.29
(2.04)**
N.A. 1.02
(.178)
.017
(.003)
-4.42
(-1.31)
-3.01
(-.904)
55 Orient Paper & Inds.
Ltd.
5.73
(.991)
21.03
(2.33)**
-.018
(-.003)
-10.19
(-2.06)**
-2.16
(-.685)
-7.17
(-2.89)***
56 Rohit Pulp & Paper
Mills Ltd.
-5.61
(-.982)
6.98
(.904)
1.40
(.270)
12.05
(2.10)**
5.44
(1.00)
11.61
(3.66)***
57 Rollatainers Ltd. 1.39
(.709)
-13.89
(-4.07)***
3.06
(.773)
-2.30
(-.873)
-.541
(-.207)
-1.38
(-.567)
58 Seshasayee Paper &
Boards Ltd.
-7.13
(-3.77)***
N.A. .785
(.187)
.828
(.196)
-3.41
(-.761)
-5.35
(-1.86)**
59 Shree Vindhya Paper
Mills Ltd.
-4.54
(-2.31)**
22.99
(.306)
2.71
(.723)
-.715
(-.239)
3.63
(1.67)*
1.29
(.781)
60 Sirpur Paper Mills
Ltd.
-13.89
(-4.52)***
-6.86
(-1.73)**
3.59
(.718)
18.59
(3.08)***
-2.70
(-.863)
6.97
(1.59)*
61 Star Paper Mills Ltd. -57.89
(-
31.06)***
-13.12
(-.970)
-.504
(-.128)
5.62
(1.68)*
-2.37
(-1.01)
2.44
(1.09)
62 West Coast Paper
Mills Ltd.
1.47
(0.53)
N.A. 11.24
(2.23)**
15.55
(3.66)***
.356
(.127)
3.52
(1.07)
F. General Engineering Industry
63 Bajaj Auto Ltd. -32.57
(-11.73)***
N.A. 10.03
(3.83)***
3.80
(.779)
5.88
(2.93)***
.606
(.142)
64 Bharat Gears Ltd. -1.19
(-.704)
-83.09
(30.69)***
4.05
(.963)
10.41
(1.54)*
-.683
(-.424)
1.79
(.525)
65 Bimetal Bearings Ltd. 2.19
(1.29)
N.A. 11.45
(5.38)***
-.144
(-.085)
11.16
(5.78)***
1.09
(.718)
66 Elecon Engineering
Co. Ltd.
-2.81
(-.869)
N.A. 8.92
(1.25)
17.18
(2.34)**
.999
(.191)
3.89
(1.24)
67 Escorts Ltd. -.973
(-.721)
N.A. -2.36
(-.316)
-4.06
(-.655)
-2.33
(-1.14)
-2.79
(-.770)
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
176
Sr.
No.
Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
68 Force Motors Ltd. -9.52
(-2.23)**
N.A. 6.42
(1.12)
-13.00
(-2.50)**
4.22
(1.55)*
-10.20
(-2.48)**
69 Gabriel India Ltd. -6.74
(-3.15)***
N.A. 7.92
(2.15)**
2.80
(.789)
2.32
(1.00)
2.08
(.981)
70 Hindustan Motors
Ltd.
-1.53
(-.992)
N.A. 7.09
(1.28)
20.48
(2.89)***
.537
(.460)
6.26
(2.14)**
71 Kirloskar Brothers
Ltd.
.343
(.186)
N.A. -7.90
(2.43)**
4.43
(1.15)
4.39
(2.35)**
-1.23
(-.437)
72 L M L Ltd. -5.35
(-3.19)***
N.A. -4.21
(-.641)
13.25
(2.31)**
-5.22
(-1.92)**
2.34
(.735)
73 Lakshmi Machine
Works Ltd.
5.76
(2.11)**
N.A. 2.70
(.342)
.299
(.042)
5.38
(1.17)
7.06
(1.99)**
74 Larsen & Toubro Ltd. -4.20
(-1.96)**
N.A. 12.65
(2.11)**
30.39
(5.36)***
3.74
(1.00)
-6.30
(-1.24)
75 Maharashtra Scooters
Ltd.
-19.35
(-2.22)**
N.A. .264
(.052)
-3.65
(-.710)
-1.14
(-.234)
1.35
(.484)
76 Mahindra & Mahindra
Ltd.
-8.12
(-3.67)***
N.A. 1.39
(.389)
1.74
(.422)
1.63
(.401)
-.045
(-.008)
77 Premier Ltd. -3.54
(-1.23)
N.A. -7.81
(-1.73)**
3.30
(.502)
-7.63
(-1.94)**
-9.38
(-2.22)**
78 Punjab Tractors Ltd. .100
(.031)
N.A. 1.32
(.325)
-9.88
(-2.04)**
.135
(.039)
4.11
(1.04)
79 Revathi Equipment
Ltd.
-1.93
(-.369)
N.A. 12.15
(3.77)***
4.88
(1.12)
7.39
(3.12)***
-2.03
(-.616)
80 Tata Motors Ltd. -4.51
(-1.78)**
N.A. 7.45
(1.52)*
5.95
(.848)
2.50
(1.16)
5.58
(1.92)**
81 Tayo Rolls Ltd. -3.80
(-2.01)**
N.A. 11.19
(2.42)**
11.04
(2.63)**
6.26
(2.02)**
5.31
(.734)
82 Texmaco Ltd. -4.09
(-.827)
N.A. 13.02
(2.22)**
18.56
(1.56)*
-.310
(-.137)
-2.35
(-2.35)**
83 Voltas Ltd. -6.25
(-4.06)***
N.A. 5.74
(1.22)
3.73
(1.17)
-.341
(-.197)
-3.14
(-1.52)*
G. Sugar Industry
84 Andhra Sugars Ltd. -9.26
(-3.47)***
N.A. -12.63
(-3.18)***
-11.68
(-3.40)***
-8.61
(-3.01)***
-7.14
(-3.61)***
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
177
Sr.
No.
Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
85 Bajaj Hindusthan Ltd. -8.00
(-4.42)***
N.A. 8.46
(.963)
4.90
(.853)
-3.16
(-1.29)
-2.56
(-1.04)
86 Balrampur Chini Mills
Ltd.
-18.13
(-2.31)**
-55.27
(-1.27)
-.406
(-.124)
1.24
(.295)
-2.88
(-1.09)
-.758
(-.267)
87 Kothari Sugars &
Chemicals Ltd.
-1.82
(-.523)
1.69
(1.32)
8.33
(2.38)**
.789
(.194)
2.76
(1.67)*
.382
(.105)
88 Ravalgaon Sugar
Farm Ltd.
.327
(.258)
N.A. -9.74
(-1.04)
-21.15
(-1.74)*
-2.06
(-.929)
-1.92
(-.702)
89 Sakthi Sugars Ltd. -6.26
(-2.01)**
4.02
(2.99)***
-1.71
(-.322)
-8.29
(-2.68)**
-1.25
(-.473)
-3.11
(-2.35)**
90 Sri Chamundeswari
Sugars Ltd.
-4.03
(-1.86)**
N.A. 14.89
(3.10)***
6.57
(1.47)*
.921
(.207)
-3.05
(-1.64)*
H. Tea Industry
91 Apeejay Tea Ltd. 2.85
(.619)
N.A. 2.86
(.418)
-5.71
(-.681)
-2.69
(-1.06)
-3.82
(-1.71)**
92 Assambrook Ltd. -2.33
(-1.92)**
N.A. -2.74
(-.268)
-18.93
(-2.60)**
-12.28
(-2.67)**
-14.44
(-4.54)***
93 D P I L Ltd. -9.37
(-.972)
N.A. -18.13
(-1.64)*
-11.32
(-2.34)**
-1.04
(-.348)
-8.09
(-2.92)***
94 Dhunseri Tea & Inds.
Ltd.
-7.42
(-.690)
N.A. -2.39
(-.489)
-22.55
(-.570)
-3.03
(-1.50)*
-3.61
(-1.78)**
95 Hasimara Industries
Ltd.
-1.74
(-.886)
N.A. 1.90
(.504)
-11.82
(-2.51)**
-6.62
(-1.10)
-7.63
(-2.41)**
96 Jay Shree Tea & Inds.
Ltd.
-1.12
(-1.11)
N.A. -8.23
(-2.22)**
-8.05
(-3.52)***
-3.62
(-3.16)***
-7.67
(-4.08)***
97 Moran Tea Co. (India)
Ltd.
2.13
(.318)
N.A. -2.97
(-1.67)*
-3.56
(-.470)
3.52
(1.15)
.918
(-.099)
98 Tata Tea Ltd. -2.74
(-1.91)**
N.A. 2.19
(-.494)
-4.13
(-.840)
-2.51
(-.602)
-4.99
(-.993)
99 Warren Tea Ltd. -14.38
(-3.34)***
N.A. .130
(.026)
-6.03
(-1.16)
.956
(.309)
-4.90
(-1.14)
100 Williamson Tea
Assam Ltd.
2.16
(.879)
N.A. 2.86
(.396)
.723
(.207)
.882
(.183)
.563
(.882)
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Notes: 1. Figures in Parentheses represent t-values. 2. Significance at 10%, 5% and 1% is indicated by one, two and three asterisks respectively.
3. N.A. stands for not available.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
178
The companies such as Graham Firth Steel Products (India) Ltd. and Tata Iron and
Steel Company Ltd. have shown significant decline in cost of equity capital (Ke1)
during the selected study period. There has been significant decline in cost of equity
capital (Ke1) and overall cost of capital (Ko1) in case of Electrosteel castings Ltd.
during this period. 5 out of 8 i.e. 63 percent companies have been observed with
significant increase in cost of equity capital (Ke1) over the selected study period.
There has been significant decline in cost of equity capital (Ke2) in case of Ferro
Alloys Corpn. Ltd. during this period. The Graham Firth Steel Products (India) Ltd.
has exhibited significant increase in overall cost of capital (Ko1) during the selected
study period. 3 out of 8 i.e. 38 percent companies have been observed with significant
increase in overall cost of capital (Ko2) during this period. The KEC Infrastructures
Ltd. is the only company which has exhibited significant increase in overall cost of
capital (Ko2) during this period.
The Table 5.4 reveals that 5 out of 7 i.e. 71 percent companies have been
observed with significant decline in cost of debt (Kdat) during this period. There has
been significant increase in cost of debt (Kdat) cost of equity capital (Ke1) and overall
cost of capital (Ko1 and Ko2) respectively in case of Mangalam Cement Ltd. over the
selected study period. The companies such as Madras Cement Ltd. and Mangalam
Cement Ltd. have been observed with significant increase in cost of preference share
capital (Kp) during the selected study period. There has been significant decline in
cost of equity capital (Ke1) in case of Madras Cement Ltd. during this period. 4 out of
7 i.e. 57 percent companies have revealed significant decline in cost of equity capital
(Ke2) and overall cost of capital (Ko1) during this period. There has been significant
decline in overall cost of capital (Ko2) in 6 out of 7 i.e. 86 percent companies over the
study period.
As revealed by Table 5.4, it has been observed that 19 out of 29 i.e. 66
percent companies have been observed with significant decline in cost of debt (K dat)
in textile industry during the selected study period. There has been significant
increase in cost of debt (Kdat), cost of preference share capital (Kp) and cost of equity
capital (Ke1) respectively in 3 out of 29 i.e. 10 percent companies during this period.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
179
The companies such as Morarjee Realities Ltd. and Raymond Ltd. have exhibited
significant decline in cost of preference share capital (Kp) over the study period. 8
out of 29 i.e. 28 percent companies have shown significant decline in cost of equity
capital (Ke1) during this period. There has been significant increase in cost of equity
capital (Ke2) in 4 out of 29 i.e. 14 percent companies during the selected study
period. 10 out of 29 i.e. 34 percent companies have revealed significant decline in
cost of equity capital (Ke2) during this period. 12 out of 29 i.e. 41 percent companies
have exhibited significant decline in overall cost of capital (Ko1) over the selected
study period. There has been significant increase in overall cost of capital (K o1) in
case of Century Textiles & Inds. Ltd. during this period. 14 out of 29 i.e. 48 percent
companies have exhibited significant decline in overall cost of capital (Ko2) over the
study period. The companies such as Century Textiles & Inds. Ltd. and Shree
Rajasthan Syntex Ltd. have been observed with significant increase in overall cost of
capital (Ko2) during this period.
The Table 5.4 reveals that 6 out of 13 i.e. 46 percent companies have revealed
significant decline in cost of debt (Kdat) in paper industry during the selected study
period. There has been significant increase in cost of debt (Kdat) in case of Jayant
Paper Mills Ltd. during this period. 3 out of 13 i.e. 23 percent companies have shown
significant decline in cost of preference share capital (Kp) over the study period. The
Orient Paper & Inds. Ltd. is the only company which has exhibited significant
increase in cost of preference share capital (Kp) over the selected study period. There
has been significant increase in cost of equity capital (Ke1) and overall cost of capital
(Ko2) in 3 out of 13 i.e. 23 percent companies during the study period. 5 out of 13 i.e.
38 percent companies have revealed significant increase in cost of equity capital
(Ke2) during this period. The companies such as Ballarpur Industries Ltd. and Shree
Vindhya Paper Mills Ltd. have exhibited significant increase in overall cost of
capital (Ko1) during the selected study period. There has been significant decline in
overall cost of capital (Ko2) in 2 out of 13 i.e. 15 percent companies over the study
period.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
180
It appears from the Table 5.4 that 10 out of 21 i.e. 48 percent companies have
shown significant decline in cost of debt (Kdat) during the selected study period.
There has been significant increase in cost of debt (Kdat) in case of Lakshmi Machine
Works Ltd. during the study period. The Bharat Gears Ltd. has been observed with
significant increase in cost of preference share capital (Kp) during this period. 9 out
of 21 i.e. 43 percent companies have revealed significant increase in cost of equity
capital (Ke1) over the study period. There has been significant decline in cost of
equity capital (Ke1) in case of Premier Ltd. during the study period. 7 out of 21 i.e.
33 percent companies have been observed with significant decline in cost of equity
capital (Ke1) over the selected study period. The companies such as Force Motors
Ltd. and Punjab Tractors Ltd. have been observed with significant decline in cost of
equity capital (Ke2) during this period. 6 out of 21 i.e. 29 percent companies have
exhibited significant decline in overall cost of capital (Ko1) during the study period.
The companies such as LML Ltd. and Premier Ltd. have revealed significant decline
in overall cost of capital (Ko1) during this period. 4 out of 21 i.e. 19 percent
companies have exhibited significant decline in overall cost of capital (Ko2) during
the study period. There has been significant increase in cost of capital (Ko2) in 3 out
of 21 i.e. 14 percent companies during this period.
The Table 5.4 reveals that 5 out of 7 i.e. 71 percent companies have exhibited
significant decline in cost of debt (Kdat) in sugar industry during the study period.
There has been significant increase in cost of preference share capital (Kp) in case of
Sakthi Sugars Ltd. during this period. 2 out of 7 i.e. 29 percent companies have
revealed significant increase in cost of equity capital (Ke1) over the study period. The
Andhra Sugars Ltd. has been observed with significant decline in cost of equity
capital (Ke1) and overall cost of capital (Ko1) during this period. 3 out of 7 i.e. 43
percent companies have revealed significant decline in cost of equity capital (K e2)
and overall cost of capital (Ko2) during the study period. There has been significant
increase in cost of equity capital (Ke2) in case of Sri Chamundeswari Sugars Ltd.
during this period. The Kothari Sugars & Chemicals Ltd. has been observed with
significant increase in overall cost of capital (Ko1) during this period.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
181
As shown by Table 5.4 it appears that 3 out of 10 i.e. 30 percent companies have
exhibited significant decline in cost of debt (Kdat), cost of equity capital (Ke1) and overall
cost of capital (Ko1) in tea industry during the selected study period. 4 out of 10 i.e. 40
percent companies have been observed with significant decline in cost of equity capital
(Ke2) during this period. 6 out of 10 i.e. 60 percent companies have revealed significant
increase in overall cost of capital (Ko2) during the study period.
5.3.4 Company-wise Trend Analysis on the Basis of Averages for Post-
liberalization Period (1990-91 to 2005-06)
Table 5.5 presents company-wise trend analysis of cost of each specific source
of long-term finance and overall cost of capital (Ko1 and Ko2) of 100 companies
representing 8 industries i.e. (power, metal, cement, textiles, paper, general
engineering, sugar and tea) on the basis of averages for post-liberalization period i.e.
1990-91 to 2005-06. It appears from Table 5.5 that in power industry, CESC Ltd has
cost of debt (Kdat) being 10.33 percent higher than cost of preference capital (Kp) being
8.34 percent during post-liberalization period. This finding is contrary to theoretical
view. The company has raised new debt at higher rate of interest leading to increase in
cost of debt (Kdat) during this period. The cost of equity capital (Ke1 and Ke2) being
20.87 percent and 17.05 percent respectively have been observed higher than cost of
debt (Kdat) and cost of preference capital (Kp) over the study period. The overall cost of
capital (Ko1 and Ko2) has been observed 12.3 percent and 12.15 percent respectively
during this period. The cost of debt (Kdat) being 5.26 percent has been observed lower
than cost of preference capital (Kp) being 11.04 percent in case of Reliance Energy Ltd
during this period. The cost of equity capital (Ke1 and Ke2) being 26.18 percent and 19
percent respectively have been observed higher than cost of debt (Kdat) and cost of
preference capital (Kp) over the selected study period. This finding is according to
theoretical proposition. The overall cost of capital (Ko1 and Ko2) has been observed
18.09 percent and 13.63 percent respectively during this period. The findings of
remaining three companies in this sector are based upon theory. In metal industry,
Bharat Forge Ltd has cost of debt (Kdat) being 11.58 percent higher than cost of
preference capital (Kp) being 10.64 percent over the study period. This finding is
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
182
contrary to theoretical view. It appears that company has raised fresh debt at higher rate
of interest leading to increase in cost of debt (Kdat) during this period. The cost of
equity capital (Ke1 and Ke2) being 17.61 percent and 40.06 percent respectively have
been observed higher than cost of debt (Kdat) and cost of preference capital (Kp) over
the study period. The overall cost of capital (Ko1 and Ko2) has been observed 14.14
percent and 23.46 percent respectively during this period. The Electrosteel Castings Ltd
has cost of equity capital (Ke1 and Ke2) being 26.61 percent and 31.46 percent
respectively higher than cost of debt (Kdat) being 13.14 percent over the study period.
This finding is in conformity with theoretical proposition. The overall cost of capital
(Ko1 and Ko2) has been observed 19.69 percent and 24.93 percent respectively during
this period. This company doesn’t have preference share capital during this period. The
findings of these two companies are based upon theory and similar results have been
derived for other 5 companies out of 8 companies selected for this sector. The G K W
Ltd is only company that have cost of preference share capital (Kp) higher than cost of
equity capital (Ke1 and Ke2) over the study period. This finding is contrary to theoretical
viewpoint. In cement industry, Associated Cement Cos. Ltd has cost of equity capital
(Ke1 and Ke2) being 22.38 percent and 25.01 percent respectively higher than cost of
debt (Kdat) being 8.62 percent during this period. This finding is in conformity with
theoretical view. The overall cost of capital (Ko1 and Ko2) has been observed 15.18
percent and 16.22 percent respectively during this period. The Chettinad Cement
Corpn. Ltd has cost of debt (Kdat) being 11.37 percent lower than cost of preference
capital (Kp) being 25.09 percent over the study period. The cost of preference capital
(Kp) has been observed higher than cost of equity capital (Ke1 and Ke2) being 17.09
percent and 16.66 percent respectively during this period. This company has paid
preference dividend at higher rate leading to increase in cost of preference capital (K p)
during this period. The overall cost of capital (Ko1 and Ko2) has been observed 13.12
percent and 13.18 percent respectively during the study period. The finding of this
company is contrary to our theoretical view. The finding of Associated Cement Cos.
Ltd along with remaining five companies in this sector has been in conformity with our
theoretical viewpoint. In textile industry, Arvind Mills Ltd has cost of debt (Kdat) being
7.41 percent lower than cost of preference share capital (Kp) being 7.52 percent during
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
183
Table 5.5
Analysis of Cost of Each Specific Source and Overall Cost of Capital on the Basis of
Averages during Post-liberalization Period (1990-91 to 2005-06)
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
A. Power Industry
1 C E S C Ltd. 10.33 8.34 20.87 17.05 12.53 12.15
2 Reliance Energy Ltd. 5.26 11.04 26.18 19.00 18.09 13.63
3 Tata Power Co. Ltd. 6.77 8.16 20.30 18.11 16.56 13.56
4 Torrent Power A E C Ltd. 12.30 24.93 21.41 12.70 20.34 13.93
5 Torrent Power S E C Ltd. 12.93 11.52 22.99 24.53 17.20 17.86
B. Metal Industry
6 Bharat Forge Ltd. 11.58 10.64 17.61 40.06 14.14 23.46
7 Electrosteel Castings Ltd. 13.14 N.A. 26.61 31.46 19.69 24.93
8 Ferro Alloys Corpn. Ltd. 13.43 16.79 25.62 29.10 16.99 20.03
9 G K W Ltd. 21.77 28.64 28.10 24.68 24.67 21.42
10 Goetze (India) Ltd. 18.65 2.70 25.22 29.93 22.97 22.87
11 Graham Firth Steel Products (India) Ltd. 16.37 N.A. 23.96 38.28 19.86 23.80
12 K E C Infrastructures Ltd. 15.10 10.95 15.55 19.24 14.36 20.36
13 Tinplate Co. Of India Ltd. 15.66 10.50 20.18 17.99 12.98 12.20
C. Cement Industry
14 Associated Cement Cos. Ltd. 8.62 N.A. 22.38 25.01 15.18 16.22
15 Chettinad Cement Corpn. Ltd. 11.37 25.09 17.09 16.66 13.12 13.18
16 Dalmia Cement (Bharat) Ltd. 8.26 N.A. 26.89 44.90 17.96 26.05
17 India Cements Ltd. 11.06 11.18 12.64 22.03 11.57 15.73
18 Madras Cements Ltd. 10.74 14.08 33.05 40.67 23.75 25.43
19 Mangalam Cement Ltd. 14.30 17.26 18.98 19.79 14.40 15.00
20 Shree Digvijay Cement Co. Ltd. 17.81 16.91 28.69 29.27 23.51 23.64
D. Textiles Industry
21 Arvind Mills Ltd. 7.41 7.52 15.45 16.76 10.63 10.92
22 Baroda Rayon Corpn. Ltd. 13.94 6.04 15.03 14.04 14.32 14.04
23 Bharat Commerce & Inds. Ltd. 21.19 N.A. 13.43 14.12 21.50 20.56
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
184
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
24 Birla Transasia Carpets Ltd. 8.85 N.A. 16.93 19.66 11.51 12.57
25 Birla V X L Ltd. 12.50 10.72 11.24 13.81 13.22 14.24
26 Bombay Dyeing & Mfg. Co. Ltd. 8.02 N.A. 14.17 12.75 11.48 10.30
27 Century Enka Ltd. 7.62 15.46 18.39 33.59 18.86 28.42
28 Century Textiles & Inds. Ltd. 8.72 9.17 21.18 25.08 20.56 22.69
29 Cheviot Co. Ltd. 8.04 N.A. 28.62 43.24 23.86 35.14
30 Futura Polyesters Ltd. 15.60 N.A. 14.14 14.03 17.95 15.38
31 Grasim Industries Ltd. 7.48 N.A. 20.01 28.54 14.13 18.47
32 Hindoostan Spinning & Wvg. Mills
Ltd. 15.58 6.55 16.89 14.12 18.26 13.67
33 Juggilal Kamlapat Cotton Spg. &
Wvg. Mills Co. Ltd. 25.51 13.13 11.29 9.40 15.57 14.48
34 Kesoram Industries Ltd. 11.40 13.55 12.69 14.25 16.53 15.96
35 L D Textile Inds. Ltd. 23.51 13.00 21.34 24.95 22.60 31.68
36 Lakshmi Mills Co. Ltd. 16.91 N.A. 14.58 17.80 17.95 17.16
37 Malwa Cotton Spg. Mills Ltd. 12.46 6.37 19.66 21.72 13.83 19.13
38 Modipon Ltd. 13.06 13.32 13.39 20.47 12.76 18.27
39 Morarjee Realties Ltd. 15.81 5.88 16.06 11.36 14.25 12.36
40 N R C Ltd. 15.27 14.41 21.78 13.08 17.48 13.78
41 Rajasthan Spinning & Wvg. Mills
Ltd. 10.81 8.48 16.75 19.91 12.92 14.36
42 Raymond Ltd. 8.79 17.20 19.96 19.42 17.67 15.09
43 Reliance Industries Ltd. 7.95 12.93 31.43 28.01 23.74 19.75
44 Ruby Mills Ltd. 10.65 N.A. 12.35 9.76 12.06 9.64
45 S I V Industries Ltd. 11.80 7.55 22.51 20.85 15.32 15.30
46 Shree Rajasthan Syntex Ltd. 12.50 12.67 20.02 23.58 18.25 17.02
47 Simplex Realty Ltd. 15.43 N.A. 9.87 12.40 13.92 17.87
48 Standard Industries Ltd. 16.00 N.A. 14.21 9.15 16.08 14.71
49 Victoria Mills Ltd. 21.35 N.A. 18.89 22.78 23.40 23.99
Contd…
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
185
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
E. Paper Industry
50 Andhra Pradesh Paper Mills Ltd. 11.48 34.60 27.21 23.50 20.30 18.14
51 Aurangabad Paper Mills Ltd. 5.81 N.A. 13.82 10.13 7.17 6.18
52 Balkrishna Industries Ltd. 9.40 N.A. 15.95 22.35 12.52 15.97
53 Ballarpur Industries Ltd. 12.95 14.70 19.33 19.38 16.01 14.52
54 Jayant Paper Mills Ltd. 12.65 N.A. 18.27 15.60 15.24 13.53
55 Orient Paper & Inds. Ltd. 13.33 8.65 17.91 21.63 15.72 20.08
56 Rohit Pulp & Paper Mills Ltd. 15.40 4.88 15.49 18.57 17.39 16.58
57 Rollatainers Ltd. 16.73 8.26 15.65 17.54 14.07 15.05
58 Seshasayee Paper & Boards Ltd. 11.02 N.A. 22.52 23.67 15.61 17.78
59 Shree Vindhya Paper Mills Ltd. 9.93 9.67 16.87 12.80 12.75 10.64
60 Sirpur Paper Mills Ltd. 12.49 8.00 17.45 21.52 15.42 20.85
61 Star Paper Mills Ltd. 13.81 10.62 19.17 22.34 15.94 17.96
62 West Coast Paper Mills Ltd. 13.01 N.A. 16.23 23.59 13.22 16.70
F. General Engineering Industry
63 Bajaj Auto Ltd. 3.51 N.A. 10.16 15.43 8.86 13.81
64 Bharat Gears Ltd. 12.60 21.02 18.19 16.27 15.12 20.89
65 Bimetal Bearings Ltd. 9.30 N.A. 13.43 18.86 13.45 17.41
66 Elecon Engineering Co. Ltd. 10.76 N.A. 17.91 16.96 14.65 17.28
67 Escorts Ltd. 12.49 N.A. 12.30 22.70 12.50 22.11
68 Force Motors Ltd. 14.84 N.A. 7.21 15.52 8.16 14.39
69 Gabriel India Ltd. 11.36 N.A. 23.59 29.94 16.48 22.91
70 Hindustan Motors Ltd. 15.43 N.A. 21.66 20.56 16.78 17.08
71 Kirloskar Brothers Ltd. 14.00 N.A. 17.18 33.87 15.46 23.35
72 L M L Ltd. 17.08 N.A. 13.56 15.60 16.72 18.16
73 Lakshmi Machine Works Ltd. 10.42 N.A. 13.00 23.41 12.28 17.57
74 Larsen & Toubro Ltd. 8.99 N.A. 8.47 7.57 9.20 9.15
75 Maharashtra Scooters Ltd. 10.33 N.A. 13.76 13.84 13.55 15.44
76 Mahindra & Mahindra Ltd. 8.41 N.A. 19.88 28.07 15.74 21.10
77 Premier Ltd. 24.62 N.A. 11.47 19.05 15.00 21.29
Contd...
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
186
Sr.
No.
Name of Company Kdat
(%)
Kp
(%)
Ke1
(%)
Ke2
(%)
Ko1
(%)
Ko2
(%)
78 Punjab Tractors Ltd. 13.89 N.A. 12.28 25.50 12.64 24.46
79 Revathi Equipment Ltd. 13.38 11.76 17.84 25.06 14.57 23.69
80 Tata Motors Ltd. 10.62 24.17 10.18 12.32 10.85 13.06
81 Tayo Rolls Ltd. 9.14 N.A. 21.25 20.16 17.67 16.47
82 Texmaco Ltd. 12.60 7.00 15.71 32.41 15.27 23.55
83 Voltas Ltd. 13.51 14.09 10.92 7.35 13.19 11.29
G. Sugar Industry
84 Andhra Sugars Ltd. 8.09 N.A. 13.69 11.76 11.08 9.78
85 Bajaj Hindusthan Ltd. 10.66 N.A. 12.53 19.34 10.94 13.54
86 Balrampur Chini Mills Ltd. 8.88 9.00 19.43 18.85 13.48 15.53
87 Kothari Sugars & Chemicals Ltd. 10.11 14.31 24.44 24.54 13.75 15.09
88 Ravalgaon Sugar Farm Ltd. 12.28 5.00 10.64 7.71 11.54 10.69
89 Sakthi Sugars Ltd. 13.23 15.93 13.97 23.95 16.03 15.73
90 Sri Chamundeswari Sugars Ltd. 12.65 11.93 13.66 20.16 12.78 13.97
H. Tea Industry
91 Apeejay Tea Ltd. 12.45 N.A. 12.37 13.74 11.39 12.64
92 Assambrook Ltd. 14.82 N.A. 18.29 23.56 15.80 17.90
93 D P I L Ltd. 12.93 N.A. 9.63 7.68 10.06 8.41
94 Dhunseri Tea & Inds. Ltd. 9.84 N.A. 14.65 16.36 12.83 13.48
95 Hasimara Industries Ltd. 18.11 N.A. 7.41 9.78 15.02 15.42
96 Jay Shree Tea & Inds. Ltd. 9.10 N.A. 11.42 18.32 12.84 15.27
97 Moran Tea Co. (India) Ltd. 16.53 N.A. 10.63 15.25 11.28 14.63
98 Tata Tea Ltd. 9.45 N.A. 27.83 29.11 26.51 23.23
99 Warren Tea Ltd. 18.88 N.A. 11.56 16.06 11.21 15.60
100 Williamson Tea Assam Ltd. 15.96 N.A. 12.04 18.37 11.94 16.44
Max 25.51 34.60 33.05 44.90 26.51 35.14
Min 3.51 2.70 7.21 7.35 7.17 6.18
Source: Compiled and Analyzed from the Basic Data Obtained from The Stock Exchange Official
Directory (Mumbai), Prowess Database (CMIE) and Annual Reports of Companies.
Note: N.A. stands for not available.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
187
this period. The cost of equity capital (Ke1 and Ke2) being 15.45 percent and 16.76
percent respectively have been observed higher than cost of debt (Kdat) and cost of
preference share capital (Kp) over the study period. The overall cost of capital (Ko1 and
Ko2) being 10.63 percent and 10.92 percent respectively have been in conformity with our
theoretical viewpoint. The finding of this company along with 13 companies out of 29
companies selected in this sector has been in conformity with our theoretical proposition.
The Baroda Rayon Corpn. Ltd has cost of debt (Kdat) being 13.94 percent higher than cost
of preference capital (Kp) being 6.04 percent during this period. The cost of equity capital
(Ke1 and Ke2) being 15.03 percent and 14.04 percent have been observed higher than cost
of debt (Kdat) and cost of preference capital (Kp) during the selected study period. The
overall cost of capital (Ko1 and Ko2) has been observed 14.32 percent and 14.04 percent
respectively during the study period. This company has cost of debt (Kdat) higher than
cost of preference capital (Kp) that is contrary to our theoretical view. The cost of debt
(Kdat) has been observed to be higher than cost of equity capital (Ke1 and Ke2) in case of
Bharat Commerce & Inds. Ltd, Futura Polyesters Ltd, Juggilal Kamlapat Cotton Spg. &
Wvg. Mills Co. Ltd, Simplex Realty Ltd and Standard Industries Ltd over the study
period. The cost of debt (Kdat) has been observed to be higher than cost of equity capital
(Ke1) in case of Birla VXL Ltd, L D Textile Industries Ltd and Lakshmi Mills Co. Ltd
during the selected study period. The cost of debt (Kdat) has been observed to be higher
than cost of equity capital (Ke2) in case of Hindoostan Spinning & Wvg. Mills Ltd,
Morarjee Realties Ltd, N R C Ltd and Ruby Mills Ltd over the study period. The
companies with higher cost of debt (Kdat) have been observed with increase in debt
during this period. It appears that these companies have raised fresh debt at higher rate of
interest leading to increase in cost of debt (Kdat) during this period. The cost of preference
share capital (Kp) has been observed to be higher than cost of equity capital (Ke1) in case
of Kesoram Industries Ltd during this period. The same has been observed to be higher
than cost of equity capital (Ke2) in case of N R C Ltd during the study period. These
companies have paid preference dividend at higher rate leading to increase in cost of
preference capital (Kp) during this period. In paper industry, Andhra Pradesh Paper Mills
Ltd has cost of debt (Kdat) being 11.48 percent lower than cost of preference share capital
(Kp) being 34.60 percent during this period. The cost of preference share capital (Kp) has
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
188
been observed higher than cost of equity capital (Ke1 and Ke2) being 27.21 percent and
23.50 percent respectively during the selected study period. The overall cost of capital
(Ko1 and Ko2) has been observed 20.30 percent and 18.14 percent respectively during the
study period. This company has cost of preference share capital (Kp) higher than cost of
debt (Kdat) and cost of equity capital (Ke1 and Ke2) that is contrary to our theoretical
proposition. This company has highest cost of preference share capital (Kp) out of sample
of 100 companies during this period. This company has paid preference dividend at
higher rate leading to increase in cost of preference capital (Kp) during this period. The
Aurangabad Paper Mills Ltd has cost of debt (Kdat) being 5.81 percent lower than cost of
equity capital (Ke1 and Ke2) being 13.82 percent and 10.13 percent respectively during
this period. The overall cost of capital (Ko1 and Ko2) has been observed 7.17 percent and
6.18 percent respectively during the study period. This company doesn’t have preference
capital during this period. This company is having lower overall cost of capital (Ko1 and
Ko2) out of sample of 100 companies during the study period. The findings of these two
companies are in conformity with our theoretical viewpoint and similar results have been
derived for other 12 companies out of 13 companies selected in this sector. The
Rollatainers Ltd is only company that have cost of debt (Kdat) higher than cost of equity
capital (Ke1 and Ke2) over the study period. In general engineering industry, Bajaj Auto
Ltd has cost of equity capital (Ke1 and Ke2) being 10.16 percent and 15.43 percent
respectively higher than cost of debt (Kdat) being 3.51 percent during this period. The
overall cost of capital (Ko1 and Ko2) being 8.86 percent and 13.81 percent respectively
have been in conformity with our theoretical view. This company doesn’t have
preference capital during the study period. The findings of 11 companies out of 21
selected companies in this sector are in conformity with our theoretical viewpoint. The
Bhrarat Gears Ltd has cost of debt (Kdat) being 12.60 percent lower than cost of
preference capital (Kp) being 21.02 percent during this period. The cost of equity capital
(Ke1 and Ke2) being 18.19 percent and 16.27 percent respectively have been observed
lower than cost of preference capital (Kp) during the study period. The overall cost of
capital (Ko1 and Ko2) has been observed 15.12 percent and 20.89 percent respectively
during this period. This company has cost of preference capital (Kp) higher than cost of
equity capital (Ke1 and Ke2) that is contrary to our theoretical viewpoint. This company
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
189
has paid preference dividend at higher rate leading to increase in cost of preference
capital (Kp) during this period. The cost of debt (Kdat) has been observed to be higher than
cost of equity capital (Ke1) in case of Escorts Ltd, Force Motors Ltd and Punjab Tractors
Ltd during the study period. The cost of debt (Kdat) has been observed to be higher than
cost of equity capital (Ke1 and Ke2) in case of L M L Ltd, Larsen and Toubro Ltd, Premier
Ltd and Voltas Ltd over the study period. The companies with higher cost of debt (Kdat)
have been observed with increase in debt during this period. It appears that these
companies have raised fresh debt at higher rate of interest leading to increase in cost of
debt (Kdat) during this period. The cost of preference share capital (Kp) has been observed
to be higher than cost of equity capital (Ke1 and Ke2) in case of Bharat Gears Ltd, Tata
Motors Ltd and Voltas Ltd during the study period. These companies have paid
preference dividend at higher rate leading to increase in cost of preference capital (Kp)
during this period. In sugar industry, cost of debt (Kdat) being 8.09 percent has been
observed lower than cost of equity capital (Ke1 and Ke2) being 13.69 percent and 11.76
percent respectively in case of Andhra Sugars Ltd during this period. The overall cost of
capital (Ko1 and Ko2) has been observed 11.08 percent and 9.78 percent respectively
during this period. The Bajaj Hindusthan Ltd has cost of equity capital (Ke1 and Ke2)
being 12.53 percent and 19.34 percent respectively higher than cost of debt (Kdat) being
10.66 percent during the study period. The overall cost of capital (Ko1 and Ko2) being
10.94 percent and 13.54 percent have been in conformity with our theoretical view. This
company doesn’t have preference capital over the study period. The findings of these two
companies are in conformity with our theoretical viewpoint and similar results have been
derived for other 4 companies out of 7 companies selected in this sector. The Ravalgaon
Sugar Farm Ltd is only company in this industry that have cost of debt (Kdat) higher than
cost of equity capital (Ke1 and Ke2) during the selected study period. This company has
raised fresh debt at higher rate of interest leading to increase in cost of debt (Kdat) during
this period. In tea industry, Apeejay Tea Ltd has cost of debt (Kdat) being 12.45 percent
higher than cost of equity capital (Ke1) being 12.37 percent during this period. The cost of
equity capital (Ke2) being 13.74 percent has been observed higher than cost of debt (Kdat)
during the study period. The overall cost of capital (Ko1 and Ko2) has been observed 11.39
percent and 12.64 percent respectively during the study period. This company has cost of
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
190
debt (Kdat) higher than cost of equity capital (Ke1) that is contrary to our theoretical
viewpoint. This company has raised fresh debt at higher rate of interest leading to
increase in cost of debt (Kdat) during this period. The Assambrook Ltd has cost of debt
(Kdat) being 14.82 percent lower than cost of equity capital (Ke1 and Ke2) being 18.29
percent and 23.56 percent respectively during this period. The overall cost of capital (Ko1
and Ko2) has been observed 15.80 percent and 17.90 percent respectively during this
period. The findings of this company along with other 3 companies out of 10 companies
selected for this sector are based upon theory. The cost of debt (Kdat) has been observed
higher than cost of equity capital (Ke1) in case of Apeejay Tea Ltd and Williamson Tea
Assam Ltd during the selected study period. The cost of debt (Kdat) has been observed to
be higher than cost of equity capital (Ke1 and Ke2) in case of D P I L Ltd, Hasimara
Industries Ltd, Moran Tea Co. (India) Ltd and Warren Tea Ltd over the study period. The
companies with higher cost of debt (Kdat) have been observed with increase in debt
during this period. It appears that these companies have raised fresh debt at higher rate of
interest leading to increase in cost of debt (Kdat) during this period. Overall theoretical
viewpoint that cost of debt (Kdat) is lower than cost of preference capital (Kp) and cost of
preference capital (Kp) is lower than cost of equity capital (Ke1 and Ke2) has been
observed to be supported by 60 out of 100 selected companies during post-liberalization
period. The cost of debt (Kdat) has been observed higher than cost of preference capital
(Kp) in 38 out of total selected during the study period. The cost of debt (Kdat) has been
observed higher than the cost of equity capital (Ke1) in 21 out of total selected companies
over the study period. The cost of debt (Kdat) has been observed to be higher than the cost
of equity capital (Ke2) in 14 out of total 100 selected companies during the selected study
period. The cost of preference capital (Kp) has been observed higher than the cost of
equity capital (Ke1 and Ke2) in 6 out of total selected companies during post-liberalization
period.
Table 5.6 depicts frequency cost of each specific source of long-term finance
and overall cost of capital (Ko1 and Ko2) for post-liberalization period i.e. 1990-91 to
2005-06. It appears that approximately 68 percent companies have cost of debt (Kdat)
in the range of 10-20 percent followed by 26 percent in the range of 0-10 percent and
6 percent in the range of 20-30 percent. Approximately 66 percent companies have
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
191
Table 5.6
Frequency Table of Cost of Capital of Selected Companies for Post-liberalization
Period (1990-91 to 2005-06)
Source: Compiled and Analyzed from the Basic Data Obtained from The Stock Exchange Official
Directory (Mumbai), Prowess Database CMIE) and Annual Reports of Companies.
cost of preference share capital (Kp) in the range of 0-10 percent followed by 27
percent in the range of 10-20 percent, 6 percent in the range of 20-30 percent and 1
percent in the range of 30-40 percent. Majority i.e. 65 percent of selected companies
have cost of equity capital (Ke1) in the range of 10-20 percent followed by 28 percent
in the range of 20-30 percent, 5 percent in the range of 30-40 percent and 2 percent in
the range of 30-40 percent. Approximately 47 percent of selected companies have
cost of equity capital (Ke2) in the range of 10-20 percent followed by 36 percent in the
range of 20-30 percent, 8 percent in the range of 0-10 percent, 5 percent in the range
of 30-40 percent and 4 percent in the range of 0-10 percent. Majority i.e. 83 percent
of selected companies have overall cost of capital (Ko2) in the range of 10-20 percent
followed by 13 percent in the range of 20-30 percent and 4 percent in the range of 0-
10 percent. Approximately 55 percent of selected companies have overall cost of
capital (Ko2) in the range of 10-20 percent followed by 28 percent in the range of 20-
30 percent, 11 percent in the range of 30-40 percent, 5 percent in the range of 0-10
percent and 1 percent in the range of 40-50 percent.
It appears that the cost of debt (Kdat) ranges between 5.53 percent in case of
Apeejay Tea Ltd (Tea Industry) 19.61 percent in case of Graham Firth Steel Prod.(I)
Variable/
Range
0-10 10-20 20-30 30-40 40-50 Total
Kdat (%) 26 68 6 - - 100
Kp (%) 66 27 6 1 - 100
Ke1 (%) 5 65 28 2 - 100
Ke2 (%) 8 47 36 5 4 100
Ko1 (%) 4 83 13 - - 100
Ko2 (%) 5 55 28 11 1 100
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
192
Ltd. (Metal Industry) during pre-liberalization period and from 3.51 percent in case of
Bajaj Auto Ltd. (General Engineering Industry) to 25.51 percent in case of Juggilal
Kamlapat Cotton Spg. & Wvg. Mills Co. Ltd. (Textiles Industry) during post-
liberalization period.
The cost of preference share capital (Kp) ranges between 11.12 percent in case
of Hindustan Motors Ltd. (General Engineering Industry) 17.01 percent in case of
Tata Power Co. Ltd. (Power Industry) during pre-liberalization period and from 2.70
percent in case of Goetze (India) Ltd. (Metal Industry) to 34.60 percent in case of
Andhra Pradesh Paper Mills Ltd. (Paper Industry) during post-liberalization period.
The cost of equity capital (Ke1) ranges between 7.21 percent in case of Orient
Paper & Inds. Ltd. (Paper Industry) to 50.01 percent in case of Reliance Energy Ltd.
(Power Industry) during pre-liberalization period and from 7.21 percent in case of
Force Motors Ltd. (General Engineering Industry) to 33.05 percent in case of
Reliance Industries Ltd. (Textile Industry) during post-liberalization period.
The cost of equity capital (Ke2) ranges between 2.35 percent in case of G K W
Ltd. (Metal Industry) to maximum of 47.39 percent in case of Reliance Energy Ltd.
(Power Industry) during pre-liberalization period and from 7.35 percent in case of
Voltas Ltd. (General Engineering Industry) to 44.90 percent in case of Dalmia
Cement (Bharat) Ltd. (Cement Industry) during post-liberalization period.
The overall cost of capital (Ko1) ranges between 7.71 percent in case of
Williamson Tea Assam Ltd. (Tea Industry) to 42.54 percent in case of Reliance
Energy Ltd. (Power Industry) during pre-liberalization period and from 7.17 percent
in case of Aurangabad Paper Mills Ltd. (Paper Industry) to 26.51 percent in case of
Tata Tea Ltd. (Tea Industry) during post-liberalization period.
The overall cost of capital (Ko2) ranges between 6.93 percent in case of
Reliance Industries Ltd. (Textiles Industry) to 42.23 percent in case of Reliance
Energy Ltd. (Power Industry) during pre-liberalization period and from 6.18 percent
in case of Aurangabad Paper Mills Ltd. to 35.14 percent in case of Bharat Commerce
& Inds. Ltd. (Textiles Industry) during post-liberalization period.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
193
5.4 Industry-wise Trend Analysis
Tables 5.7 to 5.22 and Figures 5.1 to 5.16 represent industry-wise trend
analysis of 100 companies consisting of 8 industries (power, metal, cement, textile,
paper, general engineering, sugar and tea) over the study period of 27 years i.e. 1979-
80 to 2005-06. The entire study period has been segregated into two parts i.e. pre-
liberalization period (1979-80 to 1989-90) and post-liberalization period (1990-91 to
2005-06).
5.4.1 Power Industry
Table 5.7 and Figure 5.1 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of power industry for pre-
liberalization period. The cost of debt (Kdat) ranges between 8.57 percent in the year
1979-80 to 17.41 percent in the year 1987-88. There has been increase in 10 out of 11
years as compared to first year of the study period. An increasing trend has been
observed in cost of debt (Kdat) during this period. Overall it exhibits an increase of 55
percent as revealed by Table 5.7 during this period. The cost of preference share
capital (Kp) ranges between 8.38 percent in the year 1988-89 to 10.73 percent in the
year 1986-87. It exhibits increase in 8 out of 11 years as compared to first year of the
study period. An increasing trend has been observed in cost of preference share
capital (Kp) during this period. Overall a decline of 11 percent has been observed
during this period. The cost of equity capital (Ke1) ranges between 22.53 percent in
the year 1981-82 to 45.28 percent in the year 1985-86. There has been a decline in 7
out of 11 years as compared to first year of the study period. A declining trend has
been observed in cost of equity capital (Ke1) during this period. Overall it exhibits an
increase of 23 percent during this period. The cost of equity capital (K e2) ranges
between 26.23 percent in the year 1989-90 to 47.37 percent in the year 1986-87. It
exhibits a decline in 4 out of 6 years as compared to first year of the study period. The
cost of equity capital (Ke2) has exhibited declining trend during this period. Overall a
decline of 42 percent has been observed during this period. The overall cost of capital
(Ko1) ranges between 16.59 percent in the year 1981-82 to 31.32 percent in the year
1986-87. There has been increase in 6 out of 11 years as compared to first year of the
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
194
Table 5.7
Cost of Capital of Power Industry during Pre-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.1
0
10
20
30
40
50
19
79
-80
19
80
-81
19
81
-82
19
82
-83
19
83
-84
19
84
-85
19
85
-86
19
86
-87
19
87
-88
19
88
-89
19
89
-90
Co
sts
(%)
Cost of Capital of Power Industry during Pre-liberalization Period
(1979-80 to 1989-90)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Year Kdat (%) Index Kp (%) Index Ke1 (%) Index Ke2*(%) Index Ko1 (%) Index Ko2 (%) Index
1979-80 8.57 100 9.38 100 33.93 100 22.6 100
1980-81 9.89 115 9.6 102 28.27 83 19.13 85
1981-82 10.79 126 9.6 102 22.53 66 16.59 73
1982-83 12.27 143 9.6 102 24.01 71 18.09 80
1983-84 13.41 156 9.6 102 27.78 82 29.25 129
1984-85 13.95 163 9.98 106 29.99 88 45.22 100 23.91 106 27.9 100
1985-86 12.85 150 9.98 106 45.28 133 37 82 27.41 121 22.63 81
1986-87 13.36 156 10.73 114 32.13 95 47.37 105 31.32 139 27.72 99
1987-88 17.41 203 10.32 110 41.23 122 43.59 96 30.49 135 31.49 113
1988-89 13.42 157 8.38 89 33.78 100 38.55 85 22.89 101 25 90
1989-90 13.27 155 8.39 89 41.81 123 26.23 58 25.47 113 17.14 61
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
195
study period. An increasing trend has been observed in overall cost of capital
(Ko1) during this period. Overall an increase of 13 percent has been observed
during this period. The overall cost of capital (Ko2) ranges between 17.14 percent in
the year 1989-90 to 31.49 percent in the year 1987-88. There has been a decline in 4
out of 6 years as compared to first year of the study period. A declining trend has
been observed in overall cost of capital (Ko2) during this period. Overall it exhibits a
decline of 39 percent as revealed by Table 5.7 during this period.
Table 5.8 and Figure 5.2 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of power industry for post-
liberalization period. The cost of debt (Kdat) ranges between 5.41 percent in the year
2004-05 to 13.24 percent in the year 1994-95. There has been a decline in 12 out of
16 years as compared to first year of the study period. The cost of debt (Kdat) has
exhibited increasing trend during this period. Overall it exhibits a decline of 50
percent as shown by Table 5.8 during this period. The cost of preference share capital
(Kp) ranges between 5.02 percent in the year 2001-02 to 24.06 percent in the year
1996-97. It exhibits a decline in 4 out of 16 years as compared to first year of the
study period. A declining trend has been observed in cost of preference share capital
(Kp) during this period. As revealed by Table 5.8, overall a decline of 52 percent has
been observed during this period. The cost of equity capital (Ke1) ranges between
10.16 percent in the year 2005-06 to 49.78 percent in the year 1995-96. There has
been increase in 11 out of 16 years as compared to first year of the study period. The
cost of equity capital (Ke2) has exhibited an increasing trend during this period.
Overall it exhibits an increase of 95 percent during this period. The cost of equity
capital (Ke2) ranges between 7.77 percent in the year 1993-94 to 26.51 percent in the
year 2002-03. It exhibits a decline in 11 out of 16 years as compared to first year of
the study period. The cost of equity capital (Ke2) has exhibited declining trend during
this period. Overall a decline of 8 percent has been observed during this period. The
overall cost of capital (Ko1) ranges between 10.55 percent in the year 1992-93 to
31.04 percent in the year 1995-96. There has been an increase in 10 out of 16 years as
compared to first year of the study period. An increasing trend has been observed
in overall cost of capital (Ko1) during this period. Overall it exhibits an increase of
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
196
Table 5.8
Cost of Capital of Power Industry during Post-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database CMIE) and Annual Reports of Companies.
Note: *= g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*
(%) Index Ko1(%) Index Ko2(%) Index
1990-91 10.97 100 10.49 100 14.29 100 22.14 100 13.57 100 17.42 100
1991-92 10.84 99 12.17 116 11.16 78 15.46 70 10.96 81 12.94 74
1992-93 12.67 116 6.77 65 10.16 71 10.83 49 10.55 78 12.47 72
1993-94 12.67 116 0.00 0 11.13 78 7.77 35 8.83 65 8.13 47
1994-95 13.24 121 0.00 0 20.79 145 10.88 49 14.34 106 9.2 53
1995-96 10.41 95 9.78 93 49.78 348 15.74 71 31.04 229 10 57
1996-97 9.78 89 24.06 229 16.37 115 10.01 45 13.31 98 9.69 56
1997-98 8.48 77 8.57 82 27.89 195 18.41 83 18.9 139 12.74 73
1998-99 9.42 86 18.32 175 27.62 193 25.92 117 15.06 111 18.29 105
1999-00 10.64 97 0.00 0 23.12 162 24.52 111 19.6 144 18.49 106
2000-01 9.55 87 0.00 0 14.1 99 21.37 97 11.05 81 16.93 97
2001-02 8.52 78 5.02 48 27.77 194 25.06 113 20.89 154 19.96 115
2002-03 8.99 82 0.00 0 22.27 156 26.51 120 17.93 132 20.34 117
2003-04 6.25 57 0.00 0 39.99 280 20.17 91 27.15 200 13.4 77
2004-05 5.41 49 0.00 0 30.21 211 15.87 72 19.42 143 12.01 69
2005-06 5.51 50 0.00 0 27.9 195 20.41 92 18.47 136 15.58 89
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
197
Figure 5.2
10 percent during this period. The overall cost of capital (Ko2) ranges between 8.13
percent in the year 1993-94 to 20.34 percent in the year 2002-03. It exhibits a decline
in 11 out of 16 years as compared to first year of the study period. The overall cost of
capital (Ko2) has exhibited declining trend during this period. Overall a decline of 11
percent has been observed as shown by Table 5.8 during this period. External finance
is more important as a source of finance for Indian firms. The Importance of the
capital market has declined as a source of finance after 1995. However, the capital
market still contributes significantly in the financing of Indian firms. The contribution
of external equity has declined after 1995. External debt has remained an important
source of finance for Indian firms. The importance of external debt has increased over
the years. The equity related finance got a spurt in the early 1990s. The importance of
equity as a source of finance peaked around 1994. After that there has been a shift
away from equity related financing towards external debt.
Tables 5.7 and 5.8 reveal that the cost of debt (Kdat) has exhibited declining
trend during post-liberalization period. The cost of preference share capital (Kp)
shows a decline in both pre-liberalization and post-liberalization periods. The cost of
equity capital (Ke1) exhibits increase in both pre-liberalization and post-liberalization
periods. The cost of equity capital (Ke2) exhibits decline in both pre-liberalization and
0
10
20
30
40
50
60
19
90
-91
19
91
-92
19
92
-93
19
93
-94
19
94
-95
19
95
-96
19
96
-97
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
Co
sts
(%)
Cost of Capital of Power Industry during Post-liberalization
Period (1990-91 to 2005-06)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
198
post-liberalization periods. It declines at fast pace during pre-liberalization period.
The overall cost of capital (Ko1) shows an increase in both pre-liberalization and post-
liberalization periods. It increases rapidly during post-liberalization period. The
overall cost of capital (Ko2) exhibits an increase in both pre-liberalization and post-
liberalization periods. It declines at rapid pace during pre-liberalization period. It can
be concluded that overall performance of power industry in terms of minimization of
cost of capital is better in pre-liberalization period as compared to post-liberalization
period.
5.4.2 Metal Industry
Table 5.9 and Figure 5.3 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of metal industry during pre-
liberalization period. The cost of debt (Kdat) ranges between 17.01 percent in the year
1981-82 to 26.35 percent in the year 1987-88. It exhibits an increase in 6 out of 11
years as compared to first year of the study period. An increasing trend has been
observed in cost of debt (K d a t) during this period. As shown by Table 5.9,
overall a decline of 2 percent has been observed during this period. The cost of
preference share capital (Kp) ranges between 7.92 percent in the year 1981-82 to
17.16 percent in the year 1982-83. It exhibits an increase in 5 out of 11 years
as compared to first year of the study period. The cost of preference share capital (Kp)
has exhibited increasing trend during this period. It has been observed to be nil in 3
out of 11 years of the study period. Overall it exhibits a decline of 5 percent during
this period. The cost of equity capital (Ke1) ranges between 13.51 percent in the year
1982-83 to 32.50 percent in the year 1987-88. It exhibits a decline in 6 out of 11 years
as compared to first year of the study period. The cost of equity capital (Ke1) has
exhibited increasing trend during this period. Overall it exhibits an increase of 27
percent during this period. The cost of equity capital (Ke2) ranges between 14.09
percent in the year 1985-86 to 54.75 percent in the year 1989-90. It exhibits an
increase in 4 out of 6 years as compared to first year of the study period. An
increasing trend has been observed in cost of equity capital (Ke2) during this period.
Overall it exhibits an increase of 212 percent during this period. The overall cost of
capital (Ko1) ranges between 15.16 percent in the year 1982-83 to 27.70 percent in the
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
199
Table 5.9
Cost of Capital of Metal Industry during Pre-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.3
0
10
20
30
40
50
60
19
79
-80
19
80
-81
19
81
-82
19
82
-83
19
83
-84
19
84
-85
19
85
-86
19
86
-87
19
87
-88
19
88
-89
19
89
-90
Co
sts
(%)
Cost of Capital of Metal Industry during Pre-liberalization Period
(1979-80 to 1989-90)Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Year Kdat(%) Index Kp (%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1979-80 18.11 100 9.02 100 22.22 100 20.02 100
1980-81 20.31 112 10.21 113 21.89 99 22.35 112
1981-82 17.01 94 7.92 88 16.36 74 15.94 80
1982-83 18.06 100 17.16 190 13.51 61 15.16 76
1983-84 18.43 102 8.70 96 13.88 62 15.64 78
1984-85 19.49 108 15.49 172 17.72 80 17.57 100 16.99 85 26.67 100
1985-86 20.36 112 10.00 111 19.95 90 14.09 80 19.71 98 23.05 86
1986-87 22.45 124 9.47 105 30.5 137 27.06 154 25.41 127 25.9 97
1987-88 26.35 146 0.00 0 32.5 146 24.52 140 27.7 138 23.09 87
1988-89 17.34 96 0.00 0 28.57 129 38.41 219 22.08 110 24.8 93
1989-90 17.71 98 0.00 0 28.19 127 54.75 312 21.69 108 27.07 101
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
200
year 1987-88. It exhibits a decline in 5 out of 11 years as compared to first year of the
study period. A declining trend has been observed in overall cost of capital (Ko1)
during this period. Overall it exhibits an increase of 8 percent during this period. The
overall cost of capital (Ko2) ranges between 23.05 percent in the year 1985-86 to
27.07 percent in the year 1989-90. There has been a decline in 4 out of 6 years as
compared to first year of the study period. The overall cost of capital (Ko2) has
exhibited declining trend during this period. Overall it exhibits an increase of 1
percent as shown by Table 5.9 during this period.
Table 5.10 and Figure 5.4 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of metal industry for post-
liberalization period. The cost of debt (Kdat) ranges between 10.88 percent in the year
2005-06 to 19.91 percent in the year 1998-99. There has been a decline in10 out of 16
years as compared to first year of the study period. A declining trend has been
observed in cost of debt (Kdat) during this period. Overall it exhibits a decline of 36
percent as revealed by Table 5.10 during this period. The cost of preference share
capital (Kp) ranges between 4.20 percent in the year 1994-95 to 19.96 percent in the
year 1996-97. It exhibits an increase in 10 out of 16 years as compared to first year of
the study period. An increasing trend has been observed in cost of preference share
capital (Kp) during this period. The cost of preference share capital (Kp) has been
observed to be nil in 5 out of 16 years of the study period. Overall it exhibits an
increase of 185 percent during this period. The cost of equity capital (K e1) ranges
between 16.37 percent in the year 1992-93 to 29.01 percent in the year 1996-97.
There has been an increase in13 out of 16 years as compared to first year of the study
period. The cost of equity capital (Ke1) has exhibited increasing trend during the study
period. Overall an increase of 7 percent has been observed during this period. The
cost of equity capital (Ke2) ranges between 12.60 percent in the year 1992-93 to 44.61
percent in the year 2001-02. It exhibits an increase in 9 out of 16 years as compared
to first year of the study period. An increasing trend has been observed in cost of
equity capital (Ke2) over the study period. Overall a decline of 17 percent has been
observed during this period. The overall cost of capital (Ko1) ranges between 15.95
percent in the year 2003-04 to 23.90 percent in the year 1991-92. There has been
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
201
Table 5.10
Cost of Capital of Metal Industry during Post-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database CMIE) and Annual Reports of Companies.
Note: * = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1990-91 17.08 100 0.00 0 19.21 100 30.73 100 17 100 20.11 100
1991-92 17.68 104 0.00 0 27.44 143 20.06 65 23.9 141 16.69 83
1992-93 19.89 116 0.00 0 16.37 85 12.6 41 16.89 99 15.18 75
1993-94 14.65 86 0.00 0 17.31 90 18.07 59 15.99 94 14.68 73
1994-95 17.23 101 4.20 100 19.34 101 15.62 51 18.67 110 14.87 74
1995-96 13.33 78 11.28 269 19.31 101 28.41 92 17.23 101 20.92 104
1996-97 14.95 88 19.96 475 29.01 151 49.6 161 20.13 118 27.71 138
1997-98 14.33 84 0.00 0 22.44 117 41.66 136 16.33 96 23.31 116
1998-99 19.91 117 0.00 0 24.63 128 36.58 119 18.47 109 28.03 139
1999-00 14.17 83 9.58 228 28.73 150 38.38 125 18.9 111 23.41 116
2000-01 15.74 92 8.62 205 22.17 115 35.31 115 17.69 104 21.42 107
2001-02 18.33 107 5.80 138 22.24 116 44.61 145 16.46 97 34.22 170
2002-03 13.12 77 6.45 154 24.87 129 35.93 117 17.85 105 33.76 168
2003-04 13.73 80 9.77 233 22.68 118 40.41 132 15.95 94 23.93 119
2004-05 13.6 80 17.53 417 34.6 180 38.49 125 21.46 126 21.79 108
2005-06 10.88 64 11.95 285 20.57 107 25.36 83 17.41 102 16.9 84
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
202
Figure 5.4
an increase in10 out of 16 years as compared to first year of the study period. The
overall cost of capital (Ko1) has exhibited increasing trend during the study period.
Overall it exhibits an increase of 2 percent as shown by Table 5.13 during this period.
The overall cost of capital (Ko2) ranges between 14.68 percent in the year 1993-94 to
34.22 percent in the year 2001-02. There has been an increase in10 out of 16 years as
compared to first year of the study period. An increasing trend has been observed in
overall cost of capital (Ko2) over the study period. Overall it exhibits a decline of 16
percent as revealed by Table 5.10 during this period.
Tables 5.9 and 5.10 reveal that the cost of debt (Kdat) has exhibited a decline in
both pre-liberalization and post-liberalization periods. The rate of decline was fast in
post-liberalization period as compared to pre-liberalization period. The cost of
preference (Kp) has increased during post-liberalization period. The cost of equity
capital (Ke1) shows an increase in both pre-liberalization and post- liberalization
period. The cost of equity capital (Ke2) has declined during post-liberalization period.
There has been an increase in the overall cost of capital (Ko1) in both pre-
liberalization and post-liberalization periods. The overall cost of capital (Ko2) has
declined during post-liberalization period. It can be concluded that liberalization has
0
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30
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Co
sts
(%)
Cost of Capital of Metal Industry during Post-liberalization Period
(1990-91 to 2005-06)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
203
affected cost of capital of this industry favorably during post-liberalization period as
compared to pre-liberalization period.
5.4.3 Cement Industry
Table 5.11 and Figure 5.5 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of cement industry for pre-
liberalization period. The cost of debt (Kdat) ranges between 9.07 percent in the year
1979-80 to 15.60 percent in the year 1981-82. It exhibits an increase in 10 out of 11
years as compared to first year of the study period. An increasing trend has been
observed in cost of debt (Kdat) during period. Overall it shows an increase of 32
percent as shown by Table 5.11 during this period. The cost of preference share
capital (Kp) ranges between 8.44 percent in the year 1983-84 to 35.43 percent in the
year 1981-82. There has been decline in 9 out of 11 years as compared to first year of
the study period. The cost of preference share capital (Kp) has exhibited declining
trend during this period. Overall it exhibits a decline of 68 percent during this period.
The cost of equity capital (Ke1) ranges between 16.62 percent in the year 1980-81 to
37.30 percent in the year 1984-85. It exhibits an increase in 6 out of 11 years as
compared to first year of the study period. The cost of equity capital (Ke2) has
exhibited increasing trend during this period. Overall it exhibits a decline of 5
percent during this period. The cost of equity capital (Ke2) ranges between 15 percent
in the year 1988-89 to 62.06 percent in the year 1984-85. There has been a decline in
5 out of 6 years as compared to first year of the study period. A declining trend has
been observed in cost of equity capital (Ke2) during this period. Overall it exhibits a
decline of 73 percent during this period. The overall cost of capital (Ko1) ranges
between 11.85 percent in the year 1979-80 to 33.62 percent in the year 1984-85.
There has been an increase in 10 out of 11 years as compared to first year of the study
period. An increasing trend has been observed in overall cost of capital (Ko1) during
this period. The overall cost of capital (Ko2) ranges between 12.23 percent in the year
1988-89 to 40.99 percent in the year 1984-85. It exhibits a decline in 5 out of 11 years
as compared to first year of the study period. The overall cost of capital (Ko2) has
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
204
Table 5.11
Cost of Capital of Cement Industry during Pre-liberalization Period
Source: Compiled and Analyzed from the Basic data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.5
0
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70
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Co
sts(
%)
Cost of Capital of Cement Industry during Pre-liberalization Period
(1979-80 to 1989-90)Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1979-80 9.07 100 31.30 100 21.48 100 11.85 100
1980-81 12.01 132 9.64 31 16.62 77 12.86 109
1981-82 15.6 172 35.43 113 28.95 135 23.06 195
1982-83 9.92 109 18.71 60 25.25 118 17.88 151
1983-84 9.22 101 8.44 27 27.03 126 16.41 138
1984-85 9.63 106 11.08 35 37.3 174 62.06 100 33.62 284 40.99 100
1985-86 9.36 103 11.31 36 29.38 137 57.81 93 18.95 160 31.59 77
1986-87 14.8 163 13.71 44 20.79 97 32.96 53 15.85 134 19.79 48
1987-88 12.99 143 15.86 51 26.58 124 32.49 52 15.57 131 18.19 44
1988-89 10.7 118 15.00 48 17.67 82 15 24 13.13 111 12.23 30
1989-90 11.94 132 10.00 32 20.48 95 16.71 27 14.02 118 13.55 33
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
205
exhibited declining trend during this period. Overall a decline of 67 percent as
revealed by Table 5.11 has been observed during this period.
Table 5.12 and Figure 5.6 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) for post-liberalization period in
case of cement industry. The cost of debt (Kdat) ranges between 5.15 percent in the
year 2005-06 to 14.80 percent in the year 1994-95. There has been an increase in10
out of 16 years as compared to first year of the study period. An increasing trend
has been observed in cost of debt (Kdat) during this period. Overall it exhibits a
decline of 55 percent as shown by Table 5.12 during this period. The cost of
preference share capital (Kp) ranges between 8.28 percent in the year 1999-00 to
33.78 percent in the year 1991-92. It exhibits an increase in 6 out of 16 years as
compared to first year of the study period. The cost of preference share capital (Kp)
has exhibited increasing trend during this period. It has been observed to be nil in
8 out of 16 years as compared to first year of the study period. Overall it exhibits a
decline of 63 percent as revealed by Table 5.12 during this period. The cost of
equity capital (Ke1) ranges between 14.66 percent in the year 1995-96 to 33.97
percent in the year 1994-95. There has been a decline in 8 out of 16 years as
compared to first year of the study period. A declining trend has been observed in
cost of equity capital (Ke1) during this period. Overall it exhibits an increase of 25
percent as compared to first year of the study period. The cost of equity capital (K e2)
ranges between 12.12 percent in the year 2005-06 to 52.12 percent in the year 1993-
94. There has been a decline in 9 out of 16 years as compared to first year of the
study period. The cost of equity capital (Ke2) has exhibited declining trend during
this period. Overall it exhibits a decline of 56 percent during this period. The overall
cost of capital (Ko1) ranges between 10.08 percent in the year 2004-05 to 23.34
percent in the year 1993-94. It exhibits an increase in 10 out of 16 years as
compared to first year of the study period. An increasing trend has been observed in
overall cost of capital (Ko1) during this period. Overall it exhibits an increase of 8
percent during this period. The overall cost of capital (Ko2) ranges between 7.75
percent in the year 2005-06 to 29.67 percent in the year 1993-94. There has been
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
206
Table 5.12
Cost of Capital of Cement Industry during Post-liberalization Period
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1990-91 11.55 100 8.64 100 25.63 100 29.84 100 15.45 100 17.81 100
1991-92 12.34 107 33.78 391 22.77 89 30.28 101 20.68 134 24.05 135
1992-93 12.78 111 16.57 192 31.55 123 39.13 131 23.1 150 23.99 135
1993-94 12.95 112 14.91 173 33.97 133 52.12 175 23.34 151 29.67 167
1994-95 14.8 128 10.29 119 28.28 110 40.35 135 21.58 140 27.59 155
1995-96 13.54 117 11.43 132 14.66 57 33.99 114 14.28 92 24.51 138
1996-97 14.16 123 0.00 0 23.15 90 32.37 108 18.2 118 22.34 125
1997-98 13.49 117 0.00 0 20.05 78 27.77 93 16.3 106 19.19 108
1998-99 13.71 119 0.00 0 21.42 84 28.61 96 16.73 108 19.82 111
1999-00 12.56 109 8.28 96 26.01 101 26.79 90 16.98 110 17.34 97
2000-01 9.94 86 14.08 163 26.25 102 26.17 88 15.14 98 16.04 90
2001-02 11.48 99 0.00 0 18.98 74 28.24 95 13.87 90 16.69 94
2002-03 12.8 111 0.00 0 17 66 23.69 79 14.1 91 16.99 95
2003-04 10.86 94 0.00 0 25.69 100 21.55 72 16.58 107 14.69 82
2004-05 5.59 48 0.00 0 19.05 74 20.57 69 10.08 65 10.66 60
2005-06 5.15 45 0.00 0 32.15 125 12.12 41 16.71 108 7.75 44
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
207
Figure 5.6
an increase in 8 out of 16 years as compared to first year of the study period. The
overall cost of capital (Ko2) has exhibited increasing trend during this period. Overall
it exhibits a decline of 56 percent as revealed by Table 5.12 during this period. Along
with this increase in the cost of bank finance during this period, the availability of
credit to the private sector was also under severe strain. Stock market scams and other
official investigations into the lending by some Indian banks made them reluctant to
lend to the corporate sector. Bank loans as a proportion of total domestic finance to
the corporate sector declined from 60 percent in 1988-89 to 37 percent in 1993-98.
However, this scenario changed quickly after 1994-95. The stock market scam of
1992 was followed by another major decline in share prices during the end of 1994
and early 1995. During the end of 1994 some irregularities also surfaced in working
of the primary market. This had a negative impact on investor’s sen timent. The
cumulative effect of all these led to a prolonged decline in share prices and increase in
cost of equity capital (Ke) during post 1995 era.
Tables 5.11 and 5.12 reveal that the cost of debt (Kdat) has declined during
post-liberalization period as compared to pre-liberalization period. The cost of
0
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60
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20
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20
01
-02
20
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20
03
-04
20
04
-05
20
05
-06
Co
sts
(%)
Cost of Capital of Cement Industry during Post-liberalization
Period (1990-91 to 2005-06)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
208
preference share capital (Kp) exhibits decline in both pre-liberalization and post-
liberalization periods. The cost of equity capital (Ke1) has increased during post-
liberalization period as compared to pre-liberalization period. The cost of equity
capital (Ke2) exhibits decline in both pre-liberalization and post-liberalization periods.
It declines at rapid pace during pre-liberalization period as compared to post-
liberalization period. The overall cost of capital (Ko1) shows increasing trend during
post-liberalization period. The overall cost of capital (Ko2) exhibits a decline in both
pre-liberalization and post-liberalization periods. The performance of this industry in
terms of minimization of cost of capital has improved during post-liberalization
period as compared to pre-liberalization period.
5.4.5 Textile Industry
Table 5.13 and Figure 5.7 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of textile industry during
pre-liberalization period. The cost of debt (Kdat) ranges between 11.45 percent in the
year 1979-80 to 18.61 percent in the year 1981-82. There has been an increase in10
out of 11 years as compared to first year of the study period. An increasing trend has
been observed in cost of debt (Kdat) during this period. Overall it exhibits an increase
of 20 percent as revealed by Table 5.13 during this period. The cost of preference
share capital (Kp) ranges between 7.56 percent in the year 1979-80 to 19.87 percent
in the year 1989-90. It exhibits an increase in 10 out of 11 years as compared to first
year of the study period. The cost of preference share capital (Kp) has exhibited
increasing trend during this period. Overall an increase of 163 percent has been
observed during this period. The cost of equity capital (K e1) ranges between 14.13
percent in the year 1987-88 to 22.49 percent in the year 1989-90. There has been a
decline in 9 out of 11 years as compared to first year of the study period. A declining
trend has been observed in cost of equity capital (Ke1) during this period. As shown
by Table 5.13, overall an increase of 12 percent has been observed during this
period. The cost of equity capital (Ke2) ranges between 21.75 percent in the year
1987-88 to 33.33 percent in the year 1988-89. It exhibits a decline in 4 out of 6 years
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
209
Table 5.13
Cost of Capital of Textiles Industry during Pre-liberalization Period
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1979-80 11.45 100 7.56 100 20.06 100 16.83 100
1980-81 13.03 114 8.01 106 15.68 78 13.72 82
1981-82 18.61 163 8.00 106 16.32 81 15.92 95
1982-83 12.53 109 11.46 152 17.72 88 16.76 100
1983-84 13.03 114 10.36 137 15.58 78 14.35 85
1984-85 13.57 119 10.99 145 19.49 97 31.34 100 17.04 101 19.79 100
1985-86 14.16 124 11.60 153 15.19 76 21.91 70 22.69 135 16.96 86
1986-87 14.36 125 13.03 172 17.79 89 28.07 90 16.47 98 19.66 99
1987-88 13.89 121 15.04 199 14.13 70 21.75 69 14.69 87 17.82 90
1988-89 14.02 122 12.19 161 18.22 91 33.33 106 15.91 95 20.87 105
1989-90 13.71 120 19.87 263 22.49 112 24.61 85 17.52 104 47.23 239
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.7
0
10
20
30
40
50
19
79
-80
19
80
-81
19
81
-82
19
82
-83
19
83
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19
84
-85
19
85
-86
19
86
-87
19
87
-88
19
88
-89
19
89
-90
Co
sts
(%)
Cost of Capital of Textile Industry during Pre-liberalization Period
(1979-80 to 1989-90)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
210
as compared to first year of the study period. The cost of equity capital (Ke2) has
exhibited declining trend during this period. Overall a decline of 15 percent has been
observed during this period. The overall cost of capital (Ko1) ranges between 13.72
percent in the year 1980-81 to 22.69 percent in the year 1985-86. It exhibits decline in
7 out of 11 years as compared to first year of the study period. A declining trend has
been observed in overall cost of capital (Ko1) during this period. Overall an increase
of 4 percent has been observed during this period. The overall cost of capital (K o2)
ranges between 17.82 percent in the year 1987-88 to 47.23 percent in the year 1989-
90. There has been decline in 3 out of 6 years as compared to first year of study
period. The overall cost of capital (Ko2) has exhibited declining trend during this
period. Overall it exhibits an increase of 139 percent as revealed by Table 5.13 during
this period.
Table 5.14 and Figure 5.8 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of textile industry during
post-liberalization period. The cost of debt (Kdat) ranges between 7.20 percent in the
year 2005-06 to 19.21 percent in the year 1995-96. There has been an increase in 11
out of 16 years as compared to first year of the study period. An increasing trend has
been observed in cost of debt (Kdat) during this period. Overall it exhibits a decline of
43 percent as shown by Table 5.14 during this period. The cost of preference share
capital (Kp) ranges between 6.77 percent in the year 2005-06 to 16.35 percent in the
year 1991-92. It exhibits a decline in 9 out of 16 years as compared to first year of
the study period. The cost of preference share capital (Kp) has exhibited declining
trend during this period. As shown by Table 5.14, overall a decline of 44 percent has
been observed during this period. The cost of equity capital (Ke1) ranges between
13.22 percent in the year 1998-99 to 20.78 percent in the year 2002-03. There has
been a decline in14 out of 16 years as compared to first year of the study period. A
declining trend has been observed in cost of equity capital (Ke1) during this period.
Overall it exhibits a decline of 19 percent during this period. The cost of equity
capital (Ke2) ranges between 16.25 percent in the year 2005-06 to 54.60 percent in
the year 1999-00. It exhibits a decline in 14 out of 16 years as compared to first
year of the study period. The cost of equity capital (Ke2) has exhibited declining
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
211
Table 5.14
Cost of Capital of Textiles Industry during Post-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1990-91 12.64 100 12.00 100 20.63 100 44.97 100 18.8 100 26.03 100
1991-92 13.66 108 16.35 136 17.52 85 23.11 51 50.01 266 16.88 65
1992-93 15.92 126 13.76 115 15.56 75 21.25 47 21.79 116 18.19 70
1993-94 13.93 110 14.81 123 17.88 87 24.18 54 19.44 103 18.56 71
1994-95 13.05 103 11.74 98 17.66 86 25.91 58 15.64 83 19.52 75
1995-96 19.21 152 9.47 79 17.37 84 25.86 58 21.98 117 23.39 90
1996-97 15.81 125 13.22 110 10.76 52 21.35 47 16.64 89 19.79 76
1997-98 15.02 119 8.74 73 16.64 81 20.58 46 31.55 168 17.98 69
1998-99 15.55 123 11.46 96 13.22 64 16.46 37 16.19 86 15.83 61
1999-00 15.89 126 9.08 76 19.75 96 54.6 121 17.97 96 56.35 216
2000-01 14.7 116 10.58 88 18.44 89 16.78 37 16.91 90 15.79 61
2001-02 13.99 111 12.88 107 16.86 82 41.27 92 16.49 88 44.34 170
2002-03 11.57 92 9.63 80 20.78 101 30.86 69 15.51 83 19.02 73
2003-04 9.78 77 13.97 116 19.94 97 19.25 43 17.85 95 15.79 61
2004-05 8.99 71 6.83 57 16.9 82 17 38 14.26 76 13.78 53
2005-06 7.2 57 6.77 56 16.81 81 16.25 36 12.41 66 11.89 46
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
212
Figure 5.8
trend during this period. Overall a decline of 64 percent has been observed during this
period. The overall cost of capital (Ko1) ranges between 12.41 percent in the year
2005-06 to 50.01 percent in the year 1991-92. There has been a decline in 10 out of
16 years as compared to first year of the study period. A declining trend has been
observed in overall cost of capital (Ko1) during this period. Overall it exhibits a
decline of 34 percent during this period. The overall cost of capital (Ko2) ranges
between 11.89 percent in the year 2005-06 to 56.35 percent in the year 1999-00. It
exhibits a decline in 13 out of 16 years as compared to first year of the study period.
The overall cost of capital (Ko2) has revealed declining trend during this period. As
revealed by Table 5.21, overall a decline of 54 percent has been observed during this
period.
Tables 5.13 and 5.14 reveal that the cost of debt (Kdat) has declined during
post-liberalization period. The cost of preference share capital (Kp) has declined
during post–liberalization period. The cost of equity capital (Ke1 and Ke2) exhibits
declining trend during post-liberalization period. The overall cost of capital (Ko1 and
Ko2) shows decline in post-liberalization period. The cost of each specific source of
finance and overall cost of capital (Ko1 and Ko2) exhibits declining trend during post-
0
10
20
30
40
50
60
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90
-91
19
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19
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-94
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19
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-97
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20
01
-02
20
02
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20
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-04
20
04
-05
20
05
-06
Co
sts
(%)
Cost of Capital of Textile Industry during Post-liberalization
Period (1990-91 to 2005-06)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
213
liberalization period. This it can be concluded that liberalization have affected
performance of this industry favorably.
5.4.5 Paper Industry
Table 5.15 and Figure 5.9 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of paper industry during pre-
liberalization period. The cost of debt (Kdat) ranges between 11.53 percent in the year
1980-81 to 15.53 percent in the year 1982-83. It exhibits a decline in 6 out of 11
years as compared to first year of the study period. A declining trend has been
observed in cost of debt (Kdat) during this period. Overall it shows a decline of 5
percent as revealed by Table 5.15 during this period. The cost of preference share
capital (Kp) ranges between 7.64 percent in the year 1988-89 to 14.19 percent in the
year 1982-83. There has been a decline in 6 out of 11 years as compared to first year
of the study period. The cost of preference share capital (Kp) has exhibited declining
trend during this period. Overall it exhibits a decline of 1 percent during this period.
The cost of equity capital (Ke1) ranges between 13.25 percent in the year 1981-82 to
19.68 percent in the year 1987-88. It exhibits a decline in 9 out of 11 years as
compared to first year of the study period. A declining trend has been observed in
cost of equity capital (Ke1) during this period. Overall a decline of 25 percent has
been observed during this period. The cost of equity capital (Ke2) ranges between
16.53 percent in the year 1988-89 to 29.64 percent in the year 1986-87. There has
been a decline in 3 out of 6 years as compared to first year of the study period. The
cost of equity capital (Ke2) has exhibited declining trend during this period. Overall a
decline of 30 percent has been observed during this period. The overall cost of
capital (Ko1) ranges between 13.51 percent in the year 1988-89 to 27.32 percent in
the year 1983-84. It exhibits a decline in 7 out of 11 years as compared to first year
of the study period. A declining trend has been observed in overall cost of capital
(Ko1) during this period. As shown by Table 5.15, overall an increase of 22 percent
has been observed during this period. The overall cost of capital (Ko2) ranges
between 14.77 percent in the year 1989-90 to 23.10 percent in the year 1986-87. It
exhibits an increase in 3 out of 6 years as compared to first year of the study period.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
214
Table 5.15
Cost of Capital of Paper Industry during Pre-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.9
0
5
10
15
20
25
30
35
19
79
-80
19
80
-81
19
81
-82
19
82
-83
19
83
-84
19
84
-85
19
85
-86
19
86
-87
19
87
-88
19
88
-89
19
89
-90
Co
sts
(%)
Cost of Capital of Paper Industry during Pre-liberalization Period
(1979-80 to 1989-90)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Indwex Ko2(%) Index
1979-80 14.18 100 10.75 100 19.52 100 17.97 100
1980-81 11.53 81 10.12 94 16.17 83 14.26 79
1981-82 13.04 92 8.80 82 13.25 68 17.88 100
1982-83 15.53 110 14.19 132 15.8 81 14.41 80
1983-84 14.68 104 9.13 85 14.04 72 27.32 152
1984-85 13.49 95 10.01 93 17.57 90 24.76 100 19.18 107 17.75 100
1985-86 14.95 105 11.14 104 19.41 99 23.38 94 17.21 96 19 107
1986-87 15.02 106 12.26 114 15.26 78 29.64 120 14.81 82 23.1 130
1987-88 13.97 99 12.45 116 19.68 101 24.95 101 16.04 89 18.46 104
1988-89 11.82 83 7.64 71 14.77 76 16.53 67 13.51 75 13.96 79
1989-90 13.51 95 10.62 99 14.77 76 17.35 70 21.9 122 14.77 83
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
215
The overall cost of capital (Ko2) has exhibited an increasing trend during this period.
Overall a decline of 17 percent has been observed during this period.
Table 5.16 and Figure 5.10 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of paper industry for post-
liberalization period. The cost of debt (Kdat) ranges between 8.38 percent in the year
2005-06 to 39.41 percent in the year 2004-05. It exhibits a decline in 10 out of 16
years as compared to first year of the study period. The cost of debt (Kdat) has
exhibited declining trend during this period. As revealed by Table 5.16, overall a
decline of 30 percent has been observed during this period. The cost of preference
share capital (Kp) ranges between 5.03 percent in the year 1995-96 to 39.80 percent
in the year 2004-05. There has been an increase in 10 out of 16 years as compared to
first year of the study period. An increasing trend has been observed in cost of
preference share capital (Kp) during this period. Overall it exhibits an increase of 119
percent as shown by Table 5.16 during this period. The cost of equity capital (Ke1)
ranges between 10.52 percent in the year 1991-92 to 29.68 percent in the year 2003-
04. It exhibits a decline in 12 out of 16 years as compared to first year of the study
period. A declining trend has been observed in cost of equity capital (K e1) during this
period. Overall it exhibits a decline of 24 percent during this period. The cost of
equity capital (Ke2) ranges between 11.83 percent in 1994-95 to 35.62 percent in
1999-00. There has been an increase in12 out of 16 years as compared to first year of
the study period. The cost of equity capital (Ke2) has exhibited increasing trend
during this period. Overall it exhibits an increase of 20 percent during this period.
The overall cost of capital (Ko1) ranges between 10.98 percent in the year 1995-96 to
51.87 percent in the year 1998-99. It exhibits a decline in 14 out of 16 years as
compared to first year of the study period. A declining trend has been observed in
overall cost of capital (Ko1) during this period. As shown by Table 5.25, overall a
decline of 31 percent has been observed during this period. The overall cost of
capital (Ko2) ranges between 12.10 percent in the year 1994-95 to 21.73 percent in
the year 2000-01. It exhibits an increase in 14 out of 16 years as compared to first
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
216
Table 5.16
Cost of Capital of Paper Industry during Post-liberalization Period
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*
(%) Index Ko1(%) Index Ko2(%) Index
1990-91 12.51 100 10.62 100 22.54 100 14.67 100 17.26 100 12.98 100
1991-92 11.83 95 9.32 88 10.52 47 14.03 96 12.09 70 12.71 98
1992-93 17.95 143 10.37 98 12.16 54 19.76 135 15.53 90 17.35 134
1993-94 16.64 133 12.87 121 13.46 60 18.56 127 14.19 82 17.09 132
1994-95 11.68 93 15.20 143 18.1 80 11.83 81 14.56 84 12.1 93
1995-96 11.99 96 5.03 47 10.81 48 12.57 86 10.98 64 12.35 95
1996-97 14.17 113 18.80 177 19.57 87 26.51 181 16.06 93 19.25 148
1997-98 36.15 289 20.00 188 13.89 62 25.16 172 12.63 73 18.06 139
1998-99 12.42 99 15.39 145 20.88 93 16.76 114 51.87 301 14.89 115
1999-00 10.94 87 8.38 79 15.42 68 35.62 243 13.38 78 15.82 122
2000-01 9.75 78 9.65 91 23.87 106 32 218 16.47 95 21.73 167
2001-02 9.92 79 18.45 174 21.01 93 25.14 171 15.7 91 16.66 128
2002-03 9.53 76 18.98 179 23.38 104 22.19 151 15.45 90 14.99 115
2003-04 8.55 68 12.05 113 29.68 132 36.71 250 16.23 94 19.66 151
2004-05 39.41 315 39.80 375 17.52 78 19.91 136 14.38 83 16.02 123
2005-06 8.38 67 23.25 219 17.06 76 17.57 120 11.92 69 12.47 96
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
217
Figure 5.10
year of the study period. The overall cost of capital (Ko2) has exhibited increasing
trend during this period. As revealed by Table 5.16, overall a decline of 4 percent has
been observed during this period.
Tables 5.15 and 5.16 reveal that the cost of debt (Kdat) exhibits a decline in
both pre-liberalization and post liberalization periods. The decline in cost of debt
(Kdat) was at fast pace during post-liberalization period as compared to pre-
liberalization period. The cost of preference share capital (Kp) has increased during
post-liberalization period. The cost of equity capital (Ke1) exhibits decline in both pre-
liberalization and post-liberalization periods. The cost of equity capital (Ke2) has
increased during post-liberalization period. The overall cost of capital (Ko1) has
declined during post-liberalization period. The overall cost of capital (Ko2) exhibits
decline in both pre-liberalization and post-liberalization periods. It can be concluded
that cost of capital of paper industry has declined during post-liberalization period as
compared to pre-liberalization period.
5.4.6 General Engineering Industry
Table 5.17 and Figure 5.11 show the cost of each specific source of long-
term finance and overall cost of capital (Ko1 and Ko2) in case of general engineering
0
10
20
30
40
50
60
19
90
-91
19
91
-92
19
92
-93
19
93
-94
19
94
-95
19
95
-96
19
96
-97
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
Co
sts
(%)
Cost of Capital of Paper Industry during Post-liberalization
Period (1990-91 to 2005-06)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
218
Table 5.17
Cost of Capital of General Engineering Industry during Pre-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.11
0
5
10
15
20
25
30
Co
sts
(%)
Cost of Capital of General Engineering Industry during Pre-
liberalization Period (1979-80 to 1989-90)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1979-80 10.44 100 9.38 100 22.03 100 16.17 100
1980-81 11.47 110 12.73 136 20.81 94 16.97 105
1981-82 13.32 128 9.79 104 27.12 123 22.67 140
1982-83 15.71 151 10.43 111 18.42 84 15.53 96
1983-84 16.31 156 11.15 119 14.06 64 15.23 94
1984-85 16.08 154 15.10 161 19.1 87 24.26 100 18.25 113 20.98 100
1985-86 13.18 126 12.42 132 18.35 83 22.6 93 16.07 99 19.7 94
1986-87 16.02 154 12.68 135 12.79 58 24.38 100 15.1 93 21.56 103
1987-88 14.85 142 12.96 138 14.46 66 23.49 97 14.54 90 20.83 99
1988-89 14.28 137 9.23 98 15.61 71 21.72 90 14.9 92 17.58 84
1989-90 12 115 13.33 142 10.91 50 18.08 75 12.4 77 13.62 65
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
219
industry during pre-liberalization period. The cost of debt (Kdat) ranges between 10.44
percent in the year 1979-80 to 16.31 percent in the year 1983-84. There has been an
increase in 10 out of 11 years as compared to first year of the study period. An
increasing trend has been observed in cost of debt (K d a t) during this
period. Overall it exhibits an increase of 15 percent as shown by Table 5.17 during
this period. The cost of preference share capital (Kp) ranges between 9.23 percent in
the year 1988- 89 to 15.10 percent in the year 1984-85. It exhibits an increase in 9 out
of 11 years as compared to first year of the study period. The cost of preference share
capital (Kp) has exhibited an increasing trend during this period. Overall an increase
of 42 percent has been observed during this period. The cost of equity capital (Ke1)
ranges between 10.91 percent in the year 1989-90 to 27.12 percent in the year 1981-
82. There has been a decline in 9 out of 11 years as compared to first year of the study
period. A declining trend has been observed in cost of equity capital (Ke1) during this
period. Overall it exhibits a decline of 50 percent during this period. The cost of
equity capital (Ke2) ranges between 18.08 percent in the year 1989-90 to 24.38
percent in the year 1986-87. It exhibits a decline in 4 out of 6 years as compared to
first year of the study period. The cost of equity capital (Ke2) has exhibited declining
trend during this period. Overall a decline of 25 percent has been observed during this
period. The overall cost of capital (Ko1) ranges between 12.40 percent in the 1989-90
to 22.67 percent in the year 1981-82. There has been a decline in 7 out of 11 years as
compared to first year of the study period. A declining trend has been observed
in overall cost of capital (K o1) during this period. Overall it exhibits a decline of
23 percent during this period. The overall cost of capital (Ko2) ranges between 13.62
percent in the year 1989-90 to 21.56 percent in the year 1986-87. It exhibits a decline
in 4 out of 6 years as compared to first year of the study period. The overall cost of
capital (Ko2) has exhibited declining trend during this period. As revealed by Table
5.17, overall a decline of 35 percent has been observed during this period.
Table 5.18 and Figure 5.12 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of general engineering
industry for post-liberalization period. The cost of debt (Kdat) ranges between
6.98 percent in the year 2004-05 to 16.80 percent in the year 1993-94. It exhibits an
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
220
Table 5.18
Cost of Capital of General Engineering Industry during Post-liberalization Period
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1990-91 11.45 100 33.37 100 9.66 100 15.92 100 11.14 100 14.6 100
1991-92 12.29 107 11.76 35 9.21 95 20 126 10.63 95 17.38 119
1992-93 14.72 129 11.76 35 10.21 106 15.45 97 12.15 109 16.71 114
1993-94 16.8 147 0.00 0 9.65 100 16.53 104 12.12 109 10.11 69
1994-95 16.48 144 0.00 0 13.54 140 18.04 113 13.71 123 15.21 104
1995-96 12.61 110 0.00 0 14.64 152 18.74 118 13.86 124 17.64 121
1996-97 16.48 144 10.48 31 18.44 191 28.36 178 16 144 23.33 160
1997-98 11.52 101 6.67 20 17.37 180 34.89 219 14.03 126 24.65 169
1998-99 13.02 114 0.00 0 14.06 146 29.3 184 14.08 126 22.31 153
1999-00 11.98 105 8.20 25 13.96 145 22.12 139 13.62 122 19.5 134
2000-01 12.36 108 1.54 5 15.78 163 26.11 164 14.66 132 21.57 148
2001-02 11.72 102 0.00 0 14.57 151 28.56 179 12.1 109 16.3 112
2002-03 9.83 86 0.00 0 13.33 138 20.94 132 12.63 113 14.43 99
2003-04 8.89 78 0.00 0 18.66 193 34.84 219 15.52 139 23.59 162
2004-05 6.98 61 0.00 0 14.38 149 17.88 112 11.24 101 13.57 93
2005-06 10.63 93 0.00 0 28.21 292 27.09 170 22.02 198 26.27 180
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
221
Figure 5.12
increase in 11 out of 16 years as compared to first year of the study period. An
increasing trend has been observed in cost of debt (K d a t) during this
period. As shown by Table 5.18, overall a decline of 7 percent has been observed
during this period. The cost of preference share capital (Kp) ranges between 1.54
percent in the year 2000-01 to 33.37 percent in the year 1990-91. There has been a
decline in 6 out of 16 years as compared to first year of the study period. The cost of
preference share capital (Kp) has exhibited declining trend during this period. It has
been observed to be nil in 9 out of 16 years of the study period. Overall it exhibits a
decline of 95 percent during this period. The cost of equity capital (Ke1) ranges
between 9.21 percent in the year 1991-92 to 28.21 percent in the year 2005-06. It
exhibits an increase in 13 out of 16 years as compared to first year of the study
period. An increasing trend has been observed in cost of equity capital (Ke1)
during this period. Overall an increase of 192 percent has been observed during
this period. The cost of equity capital (Ke2) ranges between 15.45 percent in the year
1992-93 to 34.98 percent in the year 1997-98. There has been an increase in14 out of
16 years as compared to first year of the study period. The cost of equity capital (Ke2)
has exhibited an increasing trend during this period. Overall it exhibits an increase of
70 percent during this period. The overall cost of capital (Ko1) ranges between 10.63
0
5
10
15
20
25
30
35
40
19
90
-91
19
91
-92
19
92
-93
19
93
-94
19
94
-95
19
95
-96
19
96
-97
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
Co
sts
(%)
Cost of Capital of General Engineering Industry during Post-
liberalization Period (1990-91 to 2005-06)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
222
percent in the year 1991-92 to 22.02 percent in the year 2005-06. It exhibits an increase
in 14 out of 16 years as compared to first year of the study period. An increasing
trend has been observed in overall cost of capital (Ko1) during this period.
Overall an increase of 98 percent has been observed during this period. The overall cost
of capital (Ko2) ranges between 10.11 percent in the year 1993-94 to 26.27 percent in the
year 2005-06. There has been an increase in12 out of 16 years as compared to first year
of the study period. The overall cost of capital (Ko2) has exhibited an increasing trend
during this period. Overall it exhibits an increase of 80 percent as revealed by Table 5.29
during this period.
Tables 5.17 and 5.18 reveal that the cost of debt (Kdat) has declined during
post-liberalization period as compared to pre-liberalization period. The cost of
preference share capital (Kp) shows decline in both pre and post-liberalization
periods. The cost of equity capital (Ke1 and Ke2) has increased during post-
liberalization period. The overall cost of capital (Ko1 and Ko2) has increased during
post-liberalization period. Overall performance of this industry can be considered
better in pre-liberalization period as compared to post-liberalization period.
5.4.7 Sugar Industry
Table 5.19 and Figure 5.13 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of sugar industry for pre-
liberalization period. The cost of debt (Kdat) ranges between 8.24 percent in the year
1989-90 to 22.78 percent in the year 1984-85. It exhibits a decline in 6 out of 11 years
as compared to first year of the study period. A declining trend has been
observed in cost of debt (K d a t) during this period. As shown by Table 5.19,
overall a decline of 45 percent has been observed during this period. The cost of
preference share capital (Kp) ranges between 7.90 percent in the year 1987-88 to
26.17 percent in the year 1979-80. There has been a decline in 10 out of 11 years as
compared to first year of the study period. The cost of preference share capital (Kp)
has exhibited declining trend during this period. Overall a decline of 35 percent
has been observed during this period. The cost of equity capital (Ke1) ranges between
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
223
Table 5.19
Cost of Capital of Sugar Industry during Pre-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note: * = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.13
0
10
20
30
40
50
60
70
19
79
-80
19
80
-81
19
81
-82
19
82
-83
19
83
-84
19
84
-85
19
85
-86
19
86
-87
19
87
-88
19
88
-89
19
89
-90
Co
sts
(%)
Cost of Capital of Sugar Industry during Pre-liberalization Period
(1979-80 to 1989-90)Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1979-80 14.89 100 26.17 100 15.57 100 17.13 100
1980-81 9.82 66 13.43 51 28.53 183 14.96 87
1981-82 9.59 64 9.78 37 19.17 123 11.93 70
1982-83 16.72 112 17.38 66 14.54 93 17.57 103
1983-84 21.16 142 8.74 33 20.39 131 18.34 107
1984-85 22.78 153 8.74 33 18.55 119 27.56 100 18.38 107 22.18 100
1985-86 21.14 142 9.00 34 14.28 92 29.56 107 15.66 91 22.79 103
1986-87 12.96 87 8.91 34 16.21 104 26.32 96 16.33 95 20.43 92
1987-88 14.13 95 7.90 30 11.61 75 25.05 91 12.3 72 20.64 93
1988-89 11.95 80 12.50 48 23.09 148 58.99 214 18.98 111 33.71 152
1989-90 8.24 55 16.93 65 24.98 160 61.74 224 14.79 86 27.12 122
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
224
11.61 percent in the year 1987-88 to 28.53 percent in the year 1980-81. There has
been an increase in 7 out of 11 years as compared to first year of the study period. An
increasing trend has been observed in cost of equity capital (Ke1) during this
period. Overall it exhibits an increase of 60 percent during this period. The cost of
equity capital (Ke2) ranges between 25.05 percent in the year 1987-88 to 61.74
percent in the year 1989-90. It exhibits an increase in 3 out of 6 years as compared to
first year of the study period. The cost of equity capital (Ke2) exhibited an increasing
trend during this period. Overall a decline of 124 percent has been observed during
this period. The overall cost of capital (Ko1) ranges between 11.93 percent in the year
1981-82 to 18.98 percent in the year 1988-89. There has been a decline in 6 out of 11
years as compared to first year of the study period. A declining trend has been
observed in overall cost of capital (Ko1) during this period. Overall it exhibits a
decline of 14 percent during this period. The overall cost of capital (Ko2) ranges
between 20.43 percent in the year 1986-87 to 33.71 percent in the year 1988-89. It
exhibits an increase in 3 out of 6 years as compared to first year of the study period.
The overall cost of capital (Ko2) has exhibited an increasing trend during this period.
As revealed by Table 5.19, overall an increase of 22 percent has been observed during
this period.
Table 5.20 and Figure 5.14 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of sugar industry for post-
liberalization period. The cost of debt (Kdat) ranges between 3.80 percent in the year
2005-06 to 16.09 percent in the year 1997-98. There has been an increase in 12 out of
16 years as with first year of the study period. The cost of debt (Kdat) has exhibited an
increasing trend during this period. Overall it exhibits a decline of 59 percent as
shown by Table 5.20 during this period. The cost of preference share capital (Kp)
ranges between 5.59 percent in the year 1992-93 to 5.74 percent in the year 1995-96.
It exhibits a decline in 7 out of 16 years as compared to first year of the study period.
A declining trend has been observed in cost of preference share capital (Kp)
during this period. It has been observed to be nil in 7 years of 16 years of the study
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
225
Table 5.20
Cost of Capital of Sugar Industry during Post-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*
(%) Index Ko1(%) Index Ko2(%) Index
1990-91 9.19 100 5.63 100 20.06 100 34.2 100 14.03 100 16.68 100
1991-92 11.18 122 5.66 101 16.27 81 23.37 68 12.95 92 14.7 88
1992-93 13.01 142 5.59 99 14.61 73 18.81 55 12.62 90 15.11 91
1993-94 12.57 137 5.71 101 38.18 190 9.64 28 19.49 139 11.16 67
1994-95 9.21 100 0.00 0 12.05 60 9.37 27 11.63 83 9.01 54
1995-96 10.55 115 5.74 102 12.75 64 18.73 55 11.74 84 13.23 79
1996-97 12.66 138 0.00 0 13.84 69 20.82 61 13.45 96 15.43 93
1997-98 16.09 175 0.00 0 11.97 60 18.93 55 14.67 105 16.55 99
1998-99 15.8 172 0.00 0 14.2 71 14.47 42 14.71 105 14.73 88
1999-00 12.19 133 0.00 0 16.63 83 19.54 57 13.29 95 13.59 81
2000-01 12.6 137 0.00 0 16.54 82 15.34 45 13.31 95 13.21 79
2001-02 9.3 101 5.63 100 13.67 68 22.55 66 10.62 76 13.18 79
2002-03 12.35 134 5.66 101 14.17 71 34.42 101 12.41 88 21.1 127
2003-04 7.33 80 5.60 99 17.3 86 17.38 51 10.25 73 17.66 106
2004-05 4.93 54 5.71 101 10.18 51 12.03 35 6.39 46 6.78 41
2005-06 3.8 41 0.00 0 25.62 128 13.09 38 13.22 94 7.79 47
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
226
Figure 5.14
period. Overall an increase of 1 percent has been observed during this period. The
cost of equity capital (Ke1) ranges between 10.18 percent in the year 2004-05 to 38.18
percent in the year 1993-94. There has been a decline in 13 out of 16 years as
compared to first year of the study period. The cost of equity capital (Ke1) has
exhibited declining trend during this period. Overall it exhibits an increase of 28
percent during this period. The cost of equity capital (Ke2) ranges between 9.37
percent in the year 1994-95 to 34.42 percent in the year 2002-03. It exhibits a decline
in 14 out of 16 years as compared to first year of the study period. A declining trend
has been observed in cost of equity capital (Ke2) during this period. Overall a decline
of 62 percent has been observed during this period. The overall cost of capital (K o1)
ranges between 6.39 percent in the year 2004-05 to 19.49 percent in the year 1993-94.
There has been a decline in 12 out of 16 years as compared to first year of the study
period. The overall cost of capital (Ko1) has exhibited declining trend during this
period. Overall it exhibits a decline of 6 percent during this period. The overall cost
of capital (Ko2) ranges between 6.78 percent in the year 2004-05 to 17.66 percent in
the year 2003-04. It exhibits a decline in 13 out of 16 years as compared to first year
of the study period. A declining trend has been observed in overall cost of capital
0
5
10
15
20
25
30
35
40
45
19
90
-91
19
91
-92
19
92
-93
19
93
-94
19
94
-95
19
95
-96
19
96
-97
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
Co
sts
(%)
Cost of Capital of Sugar Industry during Post-liberalization Period
(1990-91 to 2005-06)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
227
(Ko2) during this period. Overall it shows a decline of 53 percent as revealed by Table
5.20 during this period. Thus it can be concluded that performance of this industry is
better during post-liberalization period as compared to pre-liberalization period.
Tables 5.19 and 5.20 reveal that the cost of debt (Kdat) has exhibited a decline
in both pre-liberalization and post-liberalization periods. The cost of preference
share capital (Kp) has declined at rapid pace during pre-liberalization period as
compared to post-liberalization period. The cost of equity capital (Ke1) shows an
increase in both pre-liberalization and post-liberalization periods. It increases at
higher rate in pre-liberalization period as compared to post-liberalization period. The
cost of equity capital (Ke2) has declined during post-liberalization period. The overall
cost of capital (Ko1) shows decline in both pre-liberalization and post-liberalization
periods. The overall cost of capital (Ko2) exhibits decline in post-liberalization
period. It can be concluded that performance of sugar industry in terms of
minimization of cost of each specific source of long-term finance and overall cost of
capital (Ko1 and Ko2) is better in post-liberalization period as compared to pre-
liberalization period.
5.4.8 Tea Industry
Table 5.21 and Figure 5.15 show the cost of each specific source of long-term
finance and overall cost of capital (Ko1 and Ko2) in case of tea industry for pre-
liberalization period. The cost of debt (Kdat) ranges between 7.46 percent in the year
1979-80 to 31.12 percent in the year 1987-88. There has been an increase in10 out of
11 years as compared to first year of the study period. An increasing trend has been
observed in cost of debt (Kdat) during this period. Overall it exhibits an increase of
207 percent as revealed by Table 5.21 during this period. The cost of preference
share capital (Kp) ranges between 5.60 percent in the year 1981-82 to 5.74 percent in
the year 1984-85. There has been an increase in 4 out of 11 years as compared to
first year of the study period. It has been observed to be nil in 6 years out of 11 years
of the study period. The cost of preference share capital (Kp) has exhibited an
increasing trend during this period. Overall it exhibits an increase of 102 percent
during this period. The cost of equity capital (Ke1) ranges between 5.41 percent in the
year 1979-80 to 63.44 percent in the year 1982-83. It exhibits an increase in 4 out of
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
228
Table 5.21
Cost of Capital of Tea Industry during Pre-liberalization Period
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*(%) Index Ko1(%) Index Ko2(%) Index
1979-80 7.46 100 5.63 100 5.41 100 4.93 100
1980-81 10.84 145 5.66 101 9.55 176 9.77 198
1981-82 11.22 150 5.60 99 15.7 290 13.95 283
1982-83 14.24 191 5.71 101 63.44 1172 27.85 565
1983-84 21.63 290 0.00 0 57.85 1068 47.44 963
1984-85 10.7 143 5.74 102 13.7 253 23.1 100 13.55 275 21.9 100
1985-86 11.19 150 0.00 0 5.61 104 24.4 106 8.63 175 21.46 98
1986-87 15.88 213 0.00 0 8.72 161 21.9 95 11.52 234 22.63 103
1987-88 31.12 417 0.00 0 54.89 1014 12.21 53 56.54 1148 17.55 80
1988-89 22.48 301 0.00 0 19.29 356 12.64 55 20.79 422 16.42 75
1989-90 22.9 307 0.00 0 14.66 271 20.1 87 17.26 350 20.05 92
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has been computed from 1984-85
onwards.
Figure 5.15
0
10
20
30
40
50
60
70
19
79
-80
19
80
-81
19
81
-82
19
82
-83
19
83
-84
19
84
-85
19
85
-86
19
86
-87
19
87
-88
19
88
-89
19
89
-90
Cost
s (%
)
Cost of Capital of Tea Industry during Pre-liberalization Period
(1979-80 to 1989-90)
Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
229
11 years as compared to first year of the study period. An increasing trend has been
observed in cost of equity capital (Ke1) during this period. Overall an increase of 171
percent has been observed during this period. The cost of equity capital (Ke2) ranges
between 12.21 percent in the year 1987-88 to 24.40 percent in the year 1985-86.
There has been a decline in 4 out of 6 years as compared to first year of the study
period. The cost of equity capital (Ke2) has exhibited declining trend during this
period. Overall it exhibits a decline of 13 percent during this period. The overall cost
of capital (Ko1) ranges between 4.93 percent in the year 1979-80 to 56.54 percent in
the year 1987-88. There has been an increase in 10 out of 11 years as compared to
first year of the study period. An increasing trend has been observed in overall cost
of capital (Ko1) during this period. Overall it exhibits an increase of 250 percent
during this period. The overall cost of capital (Ko2) ranges between 16.42 percent in
the year 1988-89 to 22.63 percent in the year 1986-87. It exhibits a decline in 4 out
of 6 years as compared to first year of the study period. A declining trend has been
observed in overall cost of capital (Ko2) during this period. As shown by Table 5.21,
overall decline of 8 percent has been observed during this period.
Table 5.22 and Figure 5.16 shows the cost of each specific source of long-
term finance and overall cost of capital (Ko1 and Ko2) in case of tea industry for post-
liberalization period. The cost of debt (Kdat) ranges between 8.10 percent in the year
2004-05 to 25.95 percent in the year 1994-95. There has been an increase in12 out of
16 years as compared to first year of the study period. An increasing trend has been
observed in cost of debt (Kdat) during this period. Overall it exhibits a decline of 4
percent as shown by Table 5.22 during this period. The cost of preference share
capital (Kp) has been observed to be nil during this period. It indicates that selected
companies in this industry do not have preference capital during post -liberalization
period. The cost of equity capital (Ke1) ranges between 5.18 percent in the year 2001-
02 to 22.29 percent in the year 1998-99. It exhibits a decline in 13 out of 16 years
as compared to first year of the study period. The cost of equity capital (Ke1)
has exhibited declining trend during this period. Overall a decline of 26 percent has
been observed during this period. The cost of equity capital (Ke2) ranges between
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
230
Table 5.22
Cost of Capital of Tea Industry during Post-liberalization Period
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on
Five-Year Basis (1985-86 to 1989-90) and so on.
Year Kdat(%) Index Kp(%) Index Ke1(%) Index Ke2*
(%) Index Ko1(%) Index Ko2(%) Index
1990-91 11.14 100 0 0 17.33 100 32.53 100 13.65 100 23.39 100
1991-92 16.62 149 0 0 12.85 74 29.94 92 12.8 94 23.01 98
1992-93 19.51 175 0 0 8.95 52 21.56 66 11.63 85 16.39 70
1993-94 13.71 123 0 0 15.5 89 14.51 45 14.25 104 14.7 63
1994-95 25.95 233 0 0 7.5 43 9.47 29 12.26 90 13.53 58
1995-96 25.11 225 0 0 22.1 128 7.75 24 19.55 143 10.7 46
1996-97 18.19 163 0 0 13.61 79 10.12 31 14.59 107 12.41 53
1997-98 15.74 141 0 0 12.32 71 18.46 57 21.24 156 18.55 79
1998-99 13.26 119 0 0 22.29 129 24.08 74 20.07 147 20.93 89
1999-00 15.41 138 0 0 15.1 87 31.35 96 14.76 108 25.17 108
2000-01 14.44 130 0 0 9.19 53 22.87 70 10.18 75 20.76 89
2001-02 15.46 139 0 0 5.18 30 7.51 23 7.63 56 9.39 40
2002-03 14.36 129 0 0 8.76 51 6.22 19 8.83 65 7.9 34
2003-04 10.69 96 0 0 15.17 88 11.27 35 13.46 99 9.97 43
2004-05 8.1 73 0 0 16.94 98 9 28 14.67 107 8.48 36
2005-06 10.69 96 0 0 12.78 74 10.18 31 11.22 82 9.34 40
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
231
Figure 5.16
6.22 percent in the year 2002-03 to 32.53 percent in the year 1990-91. There has been
a decline in 15 out of 16 years as compared to first year of the study period. A
declining trend has been observed in cost of equity capital (Ke2) during this period.
Overall it exhibits a decline of 69 percent as revealed by Table 5.22 during this
period. The overall cost of capital (Ko1) ranges between 7.63 percent in the year 2001-
02 to 21.24 percent in the year 1997-98. There has been a decline in 8 out of 16 years
as compared to first year of the study period. The overall cost of capital (Ko1) has
exhibited declining trend during this period. Overall it exhibits a decline of 18 percent
during this period. The overall cost of capital (Ko2) ranges between 7.90 percent in the
year 2002-03 to 25.17 percent in the year 1999-00. It exhibits a decline in 14 out of
16 years as compared to first year of the study period. A declining trend has been
observed in overall cost of capital (Ko2) during this period. As shown by Table 5.37,
overall a decline of 60 percent has been observed during this period.
Tables 5.21 and 5.22 reveal that the cost of debt (Kdat) has declined in post-
liberalization period as compared to pre-liberalization period. The cost of preference
share capital (Kp) has been observed to be nil during post-liberalization period. The
cost of equity capital (Ke1 and Ke2) exhibits declining trend during post-liberalization
period. This period of high interest rate coincided with a very favorable situation in
the stock market. High share prices and a booming secondary market induced
0
5
10
15
20
25
30
35
19
90
-91
19
91
-92
19
92
-93
19
93
-94
19
94
-95
19
95
-96
19
96
-97
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
Co
sts
(%)
Cost of Capital of Tea Industry during Post-liberalization Period
(1990-91 to 2005-06)Kdat (%)
Kp (%)
Ke1 (%)
Ke2 (%)
Ko1 (%)
Ko2 (%)
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
232
investors to mobilize funds through the stock market. During this period there has
been a shift in the financing pattern of the Indian corporate sector away from
borrowing and towards equity oriented funds. The overall cost of capital (Ko1 and
Ko2) has declined during post-liberalization period. The cost of each specific source of
long-term finance and overall cost of capital (Ko1 and Ko2) has exhibited declining
trend during post-liberalization period. Therefore it can be concluded that
performance of tea industry has improved during post-liberalization period as
compared to pre-liberalization period.
5.5 Compound Growth Rates
Table 5.23 represents compound growth rates for cost of debt (Kdat), cost of
preference share capital (Kp), cost of equity capital (Ke1 and Ke2) and overall cost of
capital (Ko1 and Ko2) for selected industries such as power, metal, cement, textiles,
paper, generals engineering, sugar and tea for pre-liberalization and post-
liberalization periods respectively. The compound growth rate of cost of debt (Kdat) in
case of power industry was 14.62 percent during pre-liberalization period. It turns
negative to the extent of 4.79 percent during post-liberalization period. These values
turn out to be significant at 1 percent level of significance during these periods. The
compound growth rate of cost of preference share capital (Kp) is -0.57 percent in pre-
liberalization period. It reduces to -22.53 percent in post-liberalization period. Such a
change has been observed to be significant at 1 percent level of significance during
post-liberalization period. The compound growth rate of cost of equity capital (Ke1)
has increased from 4.31 percent in pre-liberalization period to 6.22 percent in post-
liberalization period. These values have been observed to be significant at 5 percent
and 1 percent levels of significance respectively during these periods. The compound
growth rate of cost of equity capital (Ke2) has been observed to be -7.38 percent in
pre-liberalization period. It increases to 4.11 percent during post-liberalization period.
These values turn out to be significant at 10 percent and 5 percent levels of
significance respectively during these periods. The compound growth rate of overall
cost of capital (Ko1) has increased from 3.87 percent in pre-liberalization period to
4.09 percent in post-liberalization period. These values turn out to be significant at 5
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
233
Table 5.23
Analysis of Compound Growth Rates of Selected Industries
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Notes: 1. Figures in Parentheses represent t-values.
2. Significance at 10%, 5% and 1% is indicated by one, two and three asterisks respectively.
Industries Period Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
Power
Pre-lib 4.62
(3.87)***
-0.57
(-0.77)
4.31
(2.38)**
-7.38
(-1.78)*
3.87
(2.17)**
-5.58
(-1.16)
Post-lib -4.79
(-5.94)***
-22.53
(-2.85)***
6.22
(2.89)***
4.11
(2.19)**
4.09
(2.45)**
2.49
(1.64)*
Metal
Pre-lib 1.01
(0.79)
-1.42
(-0.17)
5.9
(2.31)**
27.83
(4.79)***
3.02
(1.68)*
0.514
(0.28)
Post-lib -2.01
(-2.67)***
9.03
(1.09)
1.87
(1.81)**
4.84
(2.50)**
-0.22
(-0.35)
2.83
(2.10)**
Cement
Pre-lib 1.08
(0.56)
-19.46
(-4.02)***
-0.50
(-0.13)
-26.17
(-6.12)***
-0.32
(-0.11)
-21.49
(-6.51)***
Post-lib -4.03
(-3.08)***
-25.61
(-2.85)***
-1.01
(-0.77)
-5.23
(-4.72)***
-2.8
(-3.02)***
-5.68
(-5.09)***
Textiles
Pre-lib 0.615
(0.52)
2.32
(1.34)
0.659
(0.48)
38.13
(1.74)*
0.889
(0.68)
14.94
(1.88)*
Post-lib -3.14
(-2.88)***
-15.98
(-6.72)***
0.311
(0.33)
-2.1
(-1.06)
-4.05
(-2.74)***
-1.31
(-0.59)
Paper
Pre-lib 0.0138
(-0.01)
-4.44
(-3.81)***
-0.286
(-0.21)
-8.19
(-1.97)**
0.035
(0.017)
-5.73
(-1.52)*
Post-lib -1.1
(-0.44)
-1.01
(-0.29)
3.28
(2.21)**
3.91
(2.26)**
0.202
(0.10)
1.02
(1.02)
General
Engineering
Pre-lib 1.58
(1.09)
-17.51
(-5.13)***
-6.17
(-3.99)***
-4.53
(-2.46)**
-2.85
(-2.46)**
-6.98
(-2.47)**
Post-lib -3.21
(-3.35)***
-38.95
(-3.56)**
4.7
(4.27)***
3.22
(2.46)**
1.92
(2.24)**
1.99
(1.45)*
Sugar
Pre-lib -1.37
(-0.40)
10.65
(-3.13)***
-0.114
(-0.04)
18.89
(2.45)**
0.002
(0.001)
6.45
(1.52)*
Post-lib -4.25
(-2.32)**
-1.9
(-0.41)
-0.963
(-0.54)
-1.13
(-0.54)
-2.39
(-2.14)**
-1.73
(-1.07)
Tea
Pre-lib 10.66
(3.65)***
41.3
(1.76)*
4.88
(0.54)
-8.87
(-1.36)
9.53
(1.37)
-4.19
(-1.57)*
Post-lib -2.7
(-0.56) -
-0.94
(-0.42)
-5.76
(-2.18)**
-1.53
(-1.01)
-4.98
(-2.89)**
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
234
percent level of significance during these periods. The compound growth rate of
overall cost of capital (Ko2) has been observed negative to the extent of 5.58 for pre-
liberalization period. It increases to 2.49 during post-liberalization period. Such a
change has been observed to be significant at 10 percent level of significance during
post-liberalization period.
The cost of debt (Kdat) in case of metal industry has positive compound growth
rate of 1.01 percent during pre-liberalization period. It turns negative to the extent of
2.01 percent during post-liberalization period and such a change has been observed to
be significant at 1 percent level of significance. The cost of preference share capital
(Kp) has negative compound growth rate of 1.42 percent. It increases to 9.03 during
post-liberalization period. The cost of equity capital (Ke1) has positive compound
growth rate of 5.90 percent during pre-liberalization period. It reduces to 1.87 percent
during post-liberalization period. These values turn out to be significant at 5 percent
level of significance during these periods. The cost of equity capital (Ke2) has
compound growth rate of 27.83 percent during pre-liberalization period and this value
turns out to be significant at 1 percent level of significance. It reduces to 4.84 percent
during post-liberalization period and this value turns out to be significant at 5 percent
level of significance. The overall cost of capital (Ko1) has positive compound growth
rate of 3.02 percent during pre-liberalization period and it turns out to be significant
at 10 percent level of significance. It turns negative to the extent of 0.22 percent
during post liberalization period. The overall cost of capital (Ko2) has positive
compound growth rate of 0.51 percent during pre-liberalization period. It increases to
2.83 percent during post-liberalization period. Such a change has been observed to be
significant at 5 percent level of significance during post-liberalization period.
The compound growth rate of cost of debt (Kdat) of cement industry has been
observed to be 1.08 percent in pre-liberalization period. It turns negative to the extent
of 4.03 percent during post-liberalization period. Such a change has been observed to
be significant at 1 percent level of significance during post-liberalization period. The
cost of preference share capital (Kp) has positive compound growth rate of 19.46
percent during pre-liberalization period and it turns out to be significant at 1 percent
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
235
level of significance. It increases to 25.61 percent during post-liberalization period
and this value turns out to be significant at 1 percent level of significance. The cost of
preference share capital (Kp) has exhibited declining trend during post-liberalization
period. The cost of equity capital (Ke1) has compound growth rate of 0.50 percent
during pre-liberalization period. It has been observed negative to the extent of 1.01
percent during post-liberalization period. This is a good sign as it indicates that
respective cost has reduced over a period of time. The compound growth rate of cost
of equity capital (Ke2) has increased from -26.17 percent in pre-liberalization period
to -5.23 percent during post-liberalization period. These values turn out to be
significant at 1 percent level of significance during these periods. The overall cost of
capital (Ko1) has negative compound growth rate of 0.32 percent during pre-
liberalization period. It reduces to 2.80 percent during post-liberalization period. Such
a change has been observed to be significant at 1 percent level of significance during
post-liberalization period. The overall cost of capital (Ko2) has increased to -5.68
percent during post-liberalization period as compared to -21.48 percent during pre-
liberalization period. These values turn out to be significant at 1 percent level of
significance during these periods.
The compound growth rate of cost of debt (Kdat) of textile industry has been
observed to be 0.62 percent during pre-liberalization period. It turns negative to the
extent of 3.14 percent during post-liberalization period. Such a change has been
observed to be significant at 1 percent level of significance during post-liberalization
period. The compound growth rate of cost of preference share capital (Kp) has been
observed to be 2.32 percent during pre-liberalization period. It reduces to -15.98
percent during post-liberalization period. Such a change has been observed to be
significant at 1 percent level of significance during post-liberalization period. The
compound growth rate of cost of equity capital (Ke1) has reduced from 0.66 percent in
pre-liberalization period to 0.3 percent during post-liberalization period. The
compound growth rate of cost of equity capital (Ke2) has been observed to be 38.13
percent during pre-liberalization period and it turns out to be significant at 10 percent
level of significance. It turns negative to the extent of 2.10 percent during post-
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
236
liberalization period. The compound growth rate of overall cost of capital (Ko1)
reduces from 0.89 percent in pre-liberalization period to -4.05 percent during post-
liberalization period. Such a change has been observed to be significant at 1 percent
level of significance during post-liberalization period. The compound growth rate of
overall cost of capital (Ko2) has been observed to be 14.94 percent during pre-
liberalization period. This value turns out to be significant at 1 percent level of
significance during this period. It turned negative to the extent of 1.31 percent during
post-liberalization period.
The cost of debt (Kdat) of paper industry has positive compound growth rate of
0.02 during pre-liberalization period. It turns negative to the extent of 1.10 percent
during post-liberalization period. The cost of preference share capital (Kp) shows an
increase from -4.44 percent in pre-liberalization period to -1.01 percent during post-
liberalization period. Such a change has been observed to be significant at 1 percent
level of significance during pre-liberalization period. The compound growth rate of
cost of equity capital (Ke1) has increased from -0.29 percent in pre-liberalization
period to 3.28 percent during post-liberalization period. Such a change has been
observed to be significant at 5 percent level of significance during post-liberalization
period. The compound growth rate of cost of equity capital (Ke2) has increased from -
8.19 percent in pre-liberalization period to 3.91 percent during post-liberalization
period. These values turn out to be significant at 5 percent level of significance during
these periods. The overall cost of capital (Ko1) shows positive compound growth rate
of 0.035 percent during pre-liberalization period. It increases to 0.20 percent during
post liberalization period. The compound growth rate of overall cost of capital (Ko2)
has increased from -5.73 percent in pre-liberalization period to 1.02 percent during
post-liberalization period. Such a change has been observed to be significant at 10
percent level of significance during pre-liberalization period.
The compound growth rate of cost of debt (Kdat) of general engineering has
reduced from 1.58 in pre-liberalization period to -3.20 percent during post-
liberalization period. Such a change has been observed to be significant at 1 percent
level of significance during post-liberalization period. The compound growth rate of
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
237
cost of preference share capital (Kp) has reduced from -17.51 percent in pre-
liberalization period to -38.95 during post-liberalization period. These values turn out
to be significant at 1 percent and 5 percent levels of significance respectively during
these periods. The compound growth rate of cost of equity capital (Ke1) has increased
from -6.17 percent in pre-liberalization period to 4.70 percent in pre-liberalization
period. These values turn out to be significant at 1 percent level of significance during
these periods. The compound growth rate of cost of equity capital (Ke2) has been
observed negative to the extent of 4.53 percent during pre-liberalization period. It
increases to 3.22 percent during post-liberalization period. These values turn out to be
significant at 5 percent level of significance during these periods. The compound
growth rate of overall cost of capital (Ko1) has been observed negative to the extent of
2.85 percent during pre-liberalization period. It increases to 1.92 percent during post-
liberalization period. These values turn out to be significant at 5 percent level of
significance during these periods. The compound growth rate of overall cost of capital
(Ko2) has increased from -6.98 percent in pre-liberalization period to 1.99 percent
during post-liberalization period. These values turn out to be significant at 5 percent
and 10 percent levels of significance respectively during these periods.
The compound growth rate of cost of debt (Kdat) of sugar industry has been
observed negative to the extent of 1.37 percent during pre-liberalization period. It
reduces to -4.25 percent during post-liberalization period. Such a change has been
observed to be significant at 5 percent level of significance during post-liberalization
period. The compound growth rate of cost of preference share capital (Kp) has been
observed to be 10.65 percent during pre-liberalization period and it turns out to be
significant at 1 percent level of significance. It turns negative to the extent of -1.90
percent during post-liberalization period. The compound growth rate of cost of equity
capital (Ke1) is -0.11 percent during pre-liberalization period. It reduces to -0.96
percent during post-liberalization period. The compound growth rate of cost of equity
capital (Ke2) is 18.89 percent during pre-liberalization period and it turns out to be
significant at 5 percent level of significance. It turns negative to the extent of 1.13
percent during post-liberalization period. The compound growth rate of overall cost of
capital (Ko1) has been observed to be 0.002 percent during pre-liberalization period. It
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
238
turns negative to the extent of 2.39 percent during post-liberalization period. Such a
change has been observed to be significant at 5 percent level of significance during
post-liberalization period. The compound growth rate of overall cost of capital (K o2)
is 6.45 percent during pre-liberalization period and it turns out to be significant at 10
percent level of significance. It turns negative to the extent of -1.73 percent during
post-liberalization period.
The compound growth rate of cost of debt (Kdat) of tea industry has been
observed to be 10.66 percent in pre-liberalization period. This value turns out to be
significant at 5 percent level of significance. It turns negative to the extent of 2.70
percent during post-liberalization period. The cost of preference share capital (Kp) has
compound growth rate of 41.30 percent during pre-liberalization period and it turns
out to be significant at 10 percent level of significance. It has been observed to be nil
during post-liberalization period which indicates that selected companies in industry
do not have preference capital during this period. The compound growth rate of cost
of equity capital (Ke1) has declined from 4.88 percent in pre-liberalization period to -
0.93 percent during post-liberalization period. The compound growth rate of cost of
equity capital (Ke2) has been observed negative to the extent of 8.87 percent during
pre-liberalization period. It increases to -5.76 percent during post-liberalization
period. Such a change has been observed to be significant at 5 percent level of
significance during post-liberalization period. The compound growth rate of overall
cost of capital (Ko1) has been observed to be 9.53 percent during pre-liberalization
period. It declines to -1.53 percent during post-liberalization period. The compound
growth rate of overall cost of capital (Ko2) has declined from -4.19 in pre-
liberalization period to -4.98 percent during post-liberalization period. These values
turn out to be significant at 10 percent and 5 percent levels of significance
respectively during these periods.
5.6 Averages
Table 5.24 represents averages for cost of debt (Kdat), cost of preference share
capital (Kp), cost of equity capital (Ke1 and Ke2) and overall cost of capital (Ko1 and
Ko2) for eight selected industries such as power, metal, cement, textile, paper, general
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
239
engineering, sugar and tea for pre-liberalization and post-liberalization periods
respectively.
On an average, cost of debt (Kdat) of power industry has declined from 12.65
in pre-liberalization period to 9.58 percent during post-liberalization period. The cost
of preference share capital (Kp) on an average reduces to 5.26 during post-
liberalization period as compared to 9.59 percent during pre-liberalization period. The
cost of equity capital (Ke1) on an average is 32.80 percent during pre-liberalization
period. It reduces to 23.41 percent during post-liberalization period. The cost of
equity capital (Ke2) on an average has been observed to be 39.65 percent during pre-
liberalization period. It declines to 18.19 percent during post- liberalization period.
The overall cost of capital (Ko1) on an average reduces to 16.94 during post-
liberalization period as compared to 24.29 percent during pre-liberalization period.
The overall cost of capital (Ko2) on an average is 25.31 percent during pre-
liberalization period. It reduces to 14.22 percent during post-liberalization period. The
cost of each specific source of long-term finance and overall cost of capital (Ko1 and
Ko2) on an average has exhibited declining trend during post-liberalization period. It
appears from company-wise analysis that 2, 3, 2, 2, 3 and 3 companies respectively
have respective costs lower than industry average out of 5 selected companies for
power industry during pre-liberalization period. The respective costs have been
observed to be higher than industry average in 3, 1, 5, 4, 4 and 4 companies
respectively out of total selected 5 companies for this sector during post-liberalization
period. Thus the performance of this industry can be considered better in post-
liberalization period as compared to pre-liberalization period.
On an average, the cost of debt (Kdat) of metal industry has been observed to
be 19.60 percent during pre-liberalization period. It reduces to 15.54 percent during
post-liberalization period. The cost of preference share capital (Kp) on an average
reduces to 1.99 percent during post-liberalization period as compared to 2.20 percent
during pre-liberalization period. The cost of equity capital (Ke1) on an average has
increased from 22.30 percent in pre-liberalization period to 23.18 percent during post-
liberalization period. The cost of equity capital (Ke2) on an average is 29.39 percent
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
240
Table 5.24
Analysis on the Basis of Average of Selected Industries
Industries Period Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)
Power
Pre-lib 12.65 9.98 32.8 39.65 24.29 25.31
Post-lib 9.58 11.90 23.41 18.19 16.94 14.22
Metal Pre-lib 19.6 11 22.3 29.39 20.24 25.09
Post-lib 15.54 10.51 23.18 31.99 18.15 22.31
Cement
Pre-lib 11.39 16.41 27.41 36.17 17.56 22.72
Post-lib 11.74 14.74 24.16 29.59 17.08 19.32
Textiles
Pre-lib 13.85 11.65 17.51 63.74 16.54 23.72
Post-lib 13.56 11.33 17.29 26.23 20.21 22.07
Paper
Pre-lib 13.79 10.65 16.39 22.76 17.68 17.84
Post-lib 15.11 15.51 18.12 21.81 16.79 15.88
General Engineering
Pre-lib 13.97 11.75 17.61 22.42 16.17 19.04
Post-lib 12.36 11.98 14.73 23.42 13.72 18.57
Sugar
Pre-lib 14.85 12.68 18.81 38.2 16.03 24.47
Post-lib 10.8 5.65 16.75 18.92 12.8 13.74
Tea
Pre-lib 16.33 5.68 24.43 19.06 21.11 20.01
Post-lib 33.89 N.A. 13.47 16.68 13.8 15.29
Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official
Directory, Prowess Database (CMIE) and Annual Reports of Companies.
Note : N.A. stands for not available.
during pre-liberalization period. It increases to 31.99 during post-liberalization
period. The overall cost of capital (Ko1) on an average reduces to 18.15 percent during
post-liberalization period as compared to 20.24 percent during pre-liberalization
period. The overall cost of capital (Ko2) on an average reduces from 25.09 percent in
pre-liberalization period to 22.31 percent during post-liberalization period. As per
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
241
company-wise analysis, it appears that 3, 1, 6, 5, 5 and 6 companies respectively have
respective costs higher than industry average out of 8 selected companies for metal
industry during pre-liberalization period. The respective costs have been observed to
be lower than industry average in 5, 6, 3, 3, 4 and 3 companies respectively out of
total selected 8 companies for this sector during post-liberalization period. Overall on
the basis of average performance of this industry can be considered better in post-
liberalization period as compared to pre-liberalization period.
On an average the cost of debt (Kdat) of cement industry has been observed to
be 11.39 percent during pre-liberalization period. It increases to 11.74 percent during
post-liberalization period. The cost of preference share capital (Kp) on an average has
declined from 16.41 percent in the pre-liberalization period to 14.74 percent during
post-liberalization period. The cost of equity capital (Ke1) on an average has been
observed to be 27.41 percent during pre-liberalization period. It declines to 24.16
percent during post-liberalization period. The cost of equity capital (Ke2) on an
average is 36.17 percent during pre-liberalization period. It reduces to 29.59 percent
during post-liberalization period. The overall cost of capital (Ko1) on an average has
been observed to be 17.56 percent during pre-liberalization period. It reduces to 17.08
percent during post-liberalization period. The overall cost of capital (Ko2) on an
average declines to 19.32 percent during post-liberalization period as compared to
22.72 percent during pre-liberalization period. On the basis of company-wise
analysis, it appears that 3, 4, 4, 4, 4 and 3 companies respectively have respective
costs higher than industry average out of 7 selected companies for this sector during
pre-liberalization period. The respective costs have been observed to be lower than
industry average in 5, 6, 4, 4, 4 and 4 companies respectively out of 7 selected
companies in this sector as compared to industry average during post-liberalization
period. Overall performance of this industry can be considered better during post -
liberalization period as cost of each specific source of long-term finance and overall
cost of capital (Ko1 and Ko2) has exhibited declining trend during this period.
On an average, the cost of debt (Kdat) of textile industry has been observed to
be 13.85 percent during pre-liberalization period. It reduces to 13.56 percent during
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
242
post-liberalization period. The cost of preference share capital (Kp) on an average is
4.33 percent during pre-liberalization period. It reduces to 2.55 percent during post-
liberalization period. The cost of equity capital (Ke1) on an average reduces to 17.29
percent in post-liberalization period as compared to 17.51 percent during pre-
liberalization period. The cost of equity capital (Ke1) on an average has been observed
to be 63.74 during pre-liberalization period. It reduces to 26.23 percent during post-
liberalization period. The overall cost of capital (Ko1) on an average has been
observed to be 16.54 percent in pre-liberalization period. It increases to 20.21 percent
during post-liberalization period. The overall cost of capital (Ko2) on an average has
been observed to be 23.72 percent during pre-liberalization period. It declines to
22.07 percent during post-liberalization period. It appears from company-wise
analysis that 18, 17, 21, 16, 23 and 20 companies respectively have respective costs
lower than industry average out of 29 selected companies for this sector during pre-
liberalization period. The respective costs have been observed to be lower than
industry average in 18, 20, 18, 15, 17 and 16 companies respectively out of 29
selected companies in this sector as compared to industry average during post-
liberalization period. Overall it can be concluded that liberalization has affected
performance of this industry favorably.
On an average, the cost of debt (Kdat) of paper industry increases to 15.11
percent during post-liberalization period as compared to 13.79 percent during pre-
liberalization period. On an average, the cost of preference share capital (Kp) has been
observed to be 3.79 percent during pre-liberalization period. It reduces to 2.12 percent
during post-liberalization period. The cost of equity capital (Ke1) on an average has
been observed to be 16.39 percent during pre-liberalization period. It increases to
18.12 percent during post-liberalization period. The cost of equity capital (Ke2) on an
average has been observed to be 22.76 percent during pre-liberalization period. It
reduces to 21.81 percent during post-liberalization period. The overall cost of capital
(Ko1) on an average reduces to 16.79 percent during post-liberalization period as
compared to 17.68 percent during pre-liberalization period. The overall cost of capital
(Ko2) on an average is 17.84 percent during pre-liberalization period. It declines to
15.88 percent during post-liberalization period. As per company-wise analysis, it has
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
243
been observed that 6, 11, 8, 9, 6 and 9 companies respectively have respective costs
lower than industry average out of 13 selected companies for this sector during pre-
liberalization period. The respective costs have been observed to be lower than
industry average in 9, 11, 7, 6, 5 and 6 companies out of 13 selected companies in this
sector as compared to industry average during post-liberalization period. Overall it
can be concluded that liberalization has affected performance of this industry
favorably.
On an average, the cost of debt (Kdat) of general engineering industry has been
observed to be 13.97 percent in pre-liberalization period. It reduces to 12.36 percent
during post-liberalization period. The cost of preference share capital (Kp) on an
average has been observed to be 4.32 percent during pre-liberalization period. It
reduced to 1.09 percent during post-liberalization period. The cost of equity capital
(Ke1) on an average declines to 14.73 percent during post-liberalization period as
compared to 17.61 percent during pre-liberalization period. The cost of equity capital
(Ke2) on an average increases from 22.42 percent in pre-liberalization period to 23.42
percent during post-liberalization period. The overall cost of capital (Ko1) on an
average reduces to 13.72 percent in post-liberalization period as compared to 16.72
percent during pre-liberalization period. The overall cost of capital (Ko2) on an
average has been observed to be 19.04 percent during pre-liberalization period. It
reduces to 18.57 percent during post-liberalization period. It has been observed from
company-wise analysis that 13, 16, 12, 13, 12 and 12 companies respectively have
respective costs lower than industry average out of 21 companies selected for this
sector during pre-liberalization period. The respective costs have been observed to be
lower than industry average in 6, 19, 12, 12, 9 and 12 companies respectively out of
21 companies selected for this sector during post-liberalization period. Overall
performance of this industry can be considered better in post-liberalization period as
compared to pre-liberalization period.
On an average, the cost of debt (Kdat) of sugar industry reduces to 10.80
percent during post-liberalization period as compared to 14.85 percent during pre-
liberalization period. The cost of preference share capital (Kp) on an average has been
observed to be 7.99 percent during pre-liberalization period. It reduces to 2.92 percent
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
244
during post-liberalization period. The cost of equity capital (Ke1) on an average
reduces from 18.81 percent in pre-liberalization period to 16.75 percent during post-
liberalization period. The cost of equity capital (Ke2) has been observed to be 38.20
percent during pre-liberalization period. It declines to 18.92 percent during post-
liberalization period. The overall cost of capital (Ko1) on an average declines to 12.80
percent during post-liberalization period as compared to 16.03 percent during pre-
liberalization period. The overall cost of capital (Ko2) on an average has been
observed to be 24.47 percent during pre-liberalization period. It reduces to 13.74
percent during post-liberalization period. It appears from company-wise analysis that
5, 4, 4, 3, 4 and 4 companies respectively have respective costs lower than industry
average out of 7 selected companies for this sector during pre-liberalization period.
The respective costs have been observed to be lower than industry average in 4, 4, 5,
2, 4 and 2 companies out of 7 selected companies in this sector as compared to
industry average during post-liberalization period. Overall on the basis of average,
performance of this industry can be considered better during post-liberalization period
as compared to pre-liberalization period.
On an average, the cost of debt (Kdat) of tea industry increases to 33.89 percent
during post-liberalization period as compared to 16.33 percent during pre-
liberalization period. The cost of preference share capital (Kp) on an average has been
observed to be 5.68 percent during pre-liberalization period. It has been observed to
be nil during post-liberalization period. It indicates that selected companies in this
industry do not have preference capital during post-liberalization period. The cost of
equity capital (Ke1) on an average has been observed to be 24.43 percent during pre-
liberalization period. It declines to 13.47 percent during post-liberalization period.
The overall cost of capital (Ko1) on an average has declined from 21.11 percent in pre-
liberalization period to 13.80 percent during post-liberalization period. The overall
cost of capital (Ko2) on an average has been observed to be 20.01 during pre-
liberalization period. It reduces to 15.29 percent during post-liberalization period. It
has been observed from company-wise analysis that 7, 9, 6, 5, 5 and 6 companies
respectively have respective costs lower than industry average out of 10 selected
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
245
companies for this sector during pre-liberalization period. Out of total selected
companies for this sector. The respective costs have been observed to be lower than
industry average in 5, 10, 7, 6, 7 and 7 companies respectively out of 10 selected
companies for this sector during post-liberalization period. On the basis of average it
can be concluded that performance of this industry is better in post-liberalization
period as compared to pre-liberalization period.
5.7 Conclusion
For the purpose of analysis the data in present chapter has been divided into
two parts i.e. pre-liberalization period (1979-80 to 1989-90) and post-liberalization
period (1990-91 to 2005-06). The economic reforms started in Indian economy during
the year 1991. The annual budget presented in 1992 introduced measures indented to
continue and expand the reforms. It called for simplification of tax structure,
liberalization of capital market and relaxation of stringent foreign exchange
regulation act (FERA). The new SEBI guidelines issued during July 1992 i.e. free
pricing policy, mandatory underwriting, liberalization of right issues and control on
debenture issues significantly affect the functioning of primary capital market.
However during the year 1992, with the Harshad Mehta’s scam capital market
(primary and secondary) shows downward trend. During the year 1993-94, a change
in the corporate financing patterns of the corporate sector from external to internal
sources has been witnessed. The major component with in internal resources was
reserves and surpluses which increased primarily due to sharp rise in share premium.
The change in financing patterns has impact on cost of capital and value of firm’s
shareholders.
On the basis of company-wise analysis, it has been observed that majority of
companies have cost of each specific source of long-term finance and overall cost of
capital (Ko1 and Ko2) in the range of 10-20 percent in both pre-liberalization and post-
liberalization periods. The cost of equity capital (Ke1 and Ke2) have been observed to
be higher than cost of debt (Kdat) in majority of companies during pre-liberalization
and post-liberalization periods. On the basis of industry-wise analysis it has been
observed that the cost of debt (Kdat) exhibits decline in almost all industries during
Effect of Liberalization on Cost of Capital of Indian Companies in Selected Industries
246
post-liberalization period. The cost of preference share capital (Kp) has been observed
with decline in almost all industries except metal industry during post-liberalization
period. The cost of equity capital (Ke1 and Ke2) exhibits increase in power, metal,
paper, and general engineering industries respectively. The overall cost of capital
(Ko1) has exhibited decline in metal, cement, textile, sugar and tea industries during
post-liberalization period. The overall cost of capital (Ko2) seems to be increased in
power, metal, paper and general engineering industries during post-liberalization
period. On the basis of industry average, it can be stated that the basic trend is decline
in average cost of each specific source of long-term finance and overall cost of capital
(Ko1 and Ko2) in almost all industries except metal, paper and general engineering
industries whereas average cost of equity capital (Ke1 and Ke2) seems to be increased
during post-liberalization period.
From the above analysis it is interesting to note that there has been wide
variations in cost of debt (Kdat), cost of preference share capital (Kp), cost of equity
capital (Ke1 and Ke2) and overall cost of capital (Ko1 and Ko2) over a period of time
but the basic trend has been decline in respective costs during post-liberalization
period. The cost of debt (Kdat) and cost of preference share capital (Kp) have been
observed to be less than cost of equity capital (Ke1 and Ke2) in maximum number of
years in all the selected industries. The fundamental reason that cost of debt (Kdat)
being less than cost of equity (Ke) due to lower risk premium and tax advantage of
debt has been accepted as per findings of present chapter. The findings of this chapter
supports the traditional viewpoint of capital structure theories that with the judicious
use of debt overall cost of capital (Ko) is reduced and cost of debt (Kd) is less than
cost of equity (Ke). Thus the Modigliani and Miller (M-M) approach i.e. cost of
capital is independent of capital structure changes does not seem to be applicable to
selected companies in selected industries for the present chapter.
Recommended