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EFFICACY THROUGH WORKING CAPITAL MANAGEMENT -A STUDY OF VENKYS INDIA LIMITED

1 Mohd Mujahed Ali, Asst. Prof of Finance and Accounting in Alluri Institute ofManagement Sciences Warangal. He can be reached on 9849891687 and email:Mubarak_mujahed@yahoo.co.in

ABSTRACT

Working capital management deals with maintaining the levels of working capitalto optimum, because if a concern has inadequate opportunities and the working capitalis more than required, the concern will lose money in the form of interest on the blockfunds. Therefore, working capital management plays a very vital role in profitabilityof a company. Many companies still underestimate the importance of working capitalmanagement as a lever for freeing up cash from inventory, accounts receivable, andaccounts payable. By effectively managing these components, companies can sharplyreduce their dependence on outside funding and can use the released cash for furtherinvestments or acquisitions. This will not only lead to more financial flexibility, butalso create value and have a strong impact on a companys enterprise value by reducingcapital employed and thus increasing asset productivity. The present study is toinvestigate the empirical evidences of Accounts receivable, accounts Payable, Inventoryand Investments on Profitability by using Regression analysis and bi-variate correlationanalysis.

KEY WORDS:

Accounts Payables, Accounts Receivables, Inventory, Working CapitalManagement.

INTRODUCTION

A study of working capital is therefore of major importance for internal and externalanalysis because of its close relationship with the current day to day operations of business.Working capital signifies the funds required for day to day operations of the firm. Themanagement of current assets and current liabilities and the interrelationship that existsbetween them may be regarded as Working Capital Management. It is concerned with allaspects of managing current assets and current liabilities. Current assets are those assets,which in the ordinary course of business can be converted into cash within a period of oneyear without diminution in the value of assets and without disrupting the operations of thefirm. They include cash and bank balances, accounts receivables, stock of raw materials,work in progress and finished goods, short term investments, prepaid expenses and incomesoutstanding. Current liabilities are those liabilities, which in the ordinary course of business

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are expected to be paid within a period of one year. They include Accounts Payable, shortterm loans taken, outstanding expenses and incomes received in advance. In accountingterminology, working capital is the excess of current assets over the current liabilities. It isthe difference between the inflow and outflow of funds. The goal of the Working CapitalManagement is to manage the firms current assets and current liabilities at a satisfactorylevel. The term working capital is often referred to circulating capital which isfrequently used to denote those assets which are changed with relative speed fromcompany that are changed in the ordinary course of business from one form to anotheroneform to another i.e., starting from cash, changing to raw materials, converting into work-in-progress and finished products, sale of finished products and ending with realization of cashfrom debtors.

REVIEW OF LITERATURE

The study of working capital management has not been received sufficient attentionof the researchers though it deserves it. Very few studies have been conducted in the pastwhich are detailed below;

Smith1 1973 has identified eight major theoretical approaches taken towards themanagement of the working capital. He stresses the need for the development of a viablemodel with dual finance goals of profitability and liquidity and argues that only such modelswill assist the practicing managers in their day-to-day decision making.

Khorram et al 2 (1994) proposed a unique solution to resource allocation problemsby combining goal programming with a qualitative forecasting model (e.g. the Delphi method)and a quantitative forecasting technique (e.g. the Poisson gravity model). In their model, theDelphi method is used initially to elicit the experts talents to derive the objectives to beconsidered in resource allocation, and subsequently a quantitative forecasting technique isused to predict the future values for these objectives. This information is then was used toconstruct a goal programming model.

According to Moyer, Macguigan and Kretlow, 3 1995 each of the working capitalitems (i.e. cash, receivables and inventories) helps in the management of firms in its ownparticular way and is used to keep the firm liquid so that it is able to pay its obligations whenthey are due for payment and therefore it protects the firm from bankruptcy.

As Cote and Latham4 1999, argue that the management of receivables, inventoryand accounts payable have tremendous impact on cash flows, which in turn affect theprofitability of firms.

Ghosh and Maji 5 attempted to examine the efficiency of working capital managementof Indian cement companies during 1992 - 93 to 2001 - 2002. They calculated three indexvalues - performance index, utilization index, and overall efficiency index to measure the

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efficiency of working capital management, instead of using some common working capitalmanagement ratios. By using regression analysis and industry norms as a target efficiencylevel of individual firms, Ghosh and Maji [8] tested the speed of achieving that target level ofefficiency by individual firms during the period of study and found that some of the samplefirms successfully improved efficiency during these years.

Chakraborty and Bandopadhyay 6 (2007) studied strategic working capitalmanagement, and its role in corporate strategy development, ultimately ensuring the survivalof the firm. They also highlighted how strategic current asset decisions and strategic currentliabilities decisions had multi-dimensional impact on the performance of a company.

Singh7 (2008) found that the size of inventory directly affects working capital and itsmanagement. He suggested that inventory was the major component of working capital,and needed to be carefully controlled.

Thus, it is found that a few studies have been undertaken on working capitalmanagement of the firms. It is pertinent to note that so far no studies have been undertakenon working capital management of poultry industry. Hence, it made me to take up thepresent research work and I have selected Venkys India Limited a poultry company for mystudy which emerging as a leader in the poultry industry.

OBJECTIVES OF THE STUDY

1. to know the size of working capital to total assets in Venkys India Limited.(VIL)

2. to estimate the working capital requirements of VIL

3. to study the relationship and impact of working capital components on profitability.

4. to offer suggestions based upon the study made on VIL

SCOPE AND LIMITATIONS

This study is carried on the basis of the data available of Venkys India Limited,during the period 2001-2012. The study is confined to understanding the relationship betweenworking capital and profitability of the case using Profit before Tax (PBT) as a measure ofprofitability and the most common measures of working capital. Results of the tests cannotbe generalized to the firms in Poultry industry nor on the company as the study is pertainingto a single unit and also based on the information for 12 years

RESEARCH METHODOLOGY

The data used in the study is obtained from the published results of the companyduring 2001-2012. The conceptual framework of working capital and statistical methods aregathered from reference books, publications of reputed journals and industry websites. Thestudy has been conducted through simple statistical methods such as correlation, regression

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and Chi-square test. PBT as a measure of profitability has been compared with variousmeasures of working capital to understand the association between the variables. Anestimation of the working capital requirements of the company on the basis of linear regressionmodel has been made. The linear regression model is Y=a+bX. Where Y=working capital.X=Sales. a=the intercept of line on the Y-axis. I.e., the Amount of working capital requiredwhen sales are Nil. b = the rate of growth in working capital. The difference betweenworking capital during different years has been found and the variation has been tested withthe help of the most popular chi-square test at 5% level of significance.

VENKYS (INDIA) LIMITED (Company Profile)

The VH group was established in 1971, when motivated by his wife Late Smt.Uttaradevi Rao, the founder Chairman Late Padmashree Dr. B.V.Rao, fondly referredto as The Father of the Indian Poultry Industry , established VenkateshwaraHatcheries Pvt. Ltd. in Pune (India). Today the group is popularly known the world overas Venkys. With a unique combination of expertise and experience and supported bystrategic collaborations, the company diversified its activities to include SPF eggs, chickenand eggs processing, broiler and layer breeding, genetic research and Poultry diseasesdiagnostic, Poultry vaccines and feed supplements, vaccine production, bio-security products,Poultry feed & equipments, nutritional health products, soya bean extract and many more.Today the group is the largest fully integrated poultry group in Asia. The VH group todayplays proud parent to a number of reputed organizations under its wide umbrella andsuccessfully caters to poultry and its allied sectors. The pioneering efforts of the VH Grouphave been well rewarded with several national and international awards. By keeping Qualityand Technology as their guiding stars, VENKYS has consistently fulfilled its commitmentto QUALITY THROUGH TECHNOLOGY by ensuring that it not only manufacturesproducts using high-end technology but also delivers actual value to its customers through itsproducts and services.

Over the years, Venkys (India) Limited embarked upon new ventures in regularsuccession, adding tremendous value to the company, giving it an edge in technology andhigh returns on investment. The company has steadily grown to over 30 units spread acrossIndia.Today, Venkys impressive portfolio includes animal health products, pellet feeds,processed, and further processed chicken products, solvent oil extraction, and SPF Eggs.The companys Specific Pathogen Free Egg unit (in technical collaboration with SPAFASInc. USA) is among four such units in the world and the only one of its kind in the developingworld.Diversifying from mainstream poultry products, Venkys (India) Limited has added toits credit, manufacturing facilities for nutritional health products for humans, and pet foodand health care products. The company has steadily grown to over 30 units spread acrossIndia.The Forbes business magazine of USA ranked Venkys (India) Limited as 67th amongthe 100 best global small companies in the year 1999-2000.

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VENKEYS INDIA LIMITED WORKING CAPITAL ANALYSIS

In analyzing working capital the components of working capital, sources of workingcapital, estimation of working capital, net working capital and the relationship of variouscomponents of working capital with profitability play a pivotal role. It is essential to study theeffects of investing in current assets on liquidity and profitability. It is also needed to gaugethe usage of working capital, the study on efficiency of over all working capital and workingcapital elements, liquidity of working capital elements and structure of working capital isimperative. A modest attempt has been made to exhibit the same aspects through the belowanalysis.

COMPONENTS OF WORKING CAPITAL

Table 1 shows the component wise analysis of working capital of Venkateshwarahatcheries Groups VENKYS (INDIA) LIMITED. (VIL) from 2000-01 to 2011-12. It isto be noted that inventory (INV) was the major constituent of the working capital of VIL itwas 49 per cent in the year 2000-01 and it has moved to 44 per cent in the year 2011- 12 Thesecond major constituent was sundry debtors (SDB) which was 32 per cent in the year2000-01 and it has moved to 14 per cent in the year 2011-12 which reveals the efficiency ofreceivables management and effective credit policy of the VIL. The third major constituentof working capital is deposits/investments. It was 5 per cent in the year 2000-01 and went to34 per cent in the year 2009-10 and 10 per cent in the 2011-12. The cash balances, advancesand others were recorded as 6 per cent , 4 percent and 4 per cent respectively in the year2000-01. And moved to 28 per cent, 3 per cent and 1 per cent respectively in the year 2011-12 and the average was 7 per cent, 3 percent and 2 per cent respectively.

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TAB

LE 1

(Com

pone

nts

of G

ross

Wor

king

Cap

ital o

f VH

IL)

Rup

ees

in l

akhs

Sour

ce: P

ublis

hed

Ann

ual R

epor

ts o

f the

com

pany

Not

e: A

bbre

viat

ions

Inv

ento

ry

IN

V, S

undr

y D

ebto

rs

SD

B, C

ash

& B

ank

Bala

nce

C

BL,

Adv

ance

s

AD

V,D

epos

its

DEP

, oth

ers

O

TH, G

ross

Wor

king

Cap

ital

GW

C, T

otal

Ass

ets

TA

.

- 63 -

TAB

LE 2

(Sou

rces

of

Wor

king

Cap

ital o

f V

HIL

)

Rup

ees

in L

akhs

Sour

ce: P

ublis

hed

Ann

ual R

epor

ts o

f the

com

pany

Tabl

e 2

reve

als t

he so

urce

s of w

orki

ng c

apita

l of V

IL. H

ere

it an

atte

mpt

to k

now

the

long

term

and

sho

rt te

rm fi

nanc

ing

ofth

e w

orki

ng c

apita

l of V

IL. I

t is t

rans

pare

nt 3

9 pe

r cen

t of t

he w

orki

ng c

apita

l was

fina

nce

thro

ugh

shor

t ter

m fi

nanc

e in

the

year

200

0-01

and

mov

ed to

55

per c

ent i

n th

e ye

ar 2

011-

12Th

us th

ere

was

an

incr

easi

ng tr

end

in th

e ut

ilizi

ng o

f lon

g te

rmca

pita

l as a

sour

ce o

f fin

ance

whi

ch in

dica

tes t

he c

ompa

nys

polic

y of

inve

stin

g in

cur

rent

ass

ets a

nd o

n th

e oth

er h

and

it ca

nal

so b

e un

ders

tand

of i

nabi

lity

of fi

ndin

g sh

ort t

erm

sou

rces

of f

inan

ces.

- 64 -

ESTIMATION OF WORKING CAPITALAn attempt has been made to estimate the requirements of Working capital needs of

VIL with the help of regression analysis and the required working capital has been projectedin the table -3 and chi-square test was conducted for the actual working capital and estimatedworking capital of VIL. The chi-square table is 19.68 which is very far below the calculatedchi-square value of 5114. Thus there is a large fluctuation in the working capital of VIL.

TABLE 3

(Estimation of Working Capital)

Rupees in Lakhs

5114E(X)

39091021726704164872011-12

219322607228002010-11

23-657--------18419177622009-10

44-804--------14628138242008-09

58----------88113316141972007-08

605---------248310194126772006-07

137----------11259267103922005-06

45-607--------823176242004-05

19-374--------726668922003-04

199-1174---------694257682002-03

54-568---------598154132001-02

19-306---------483945332000-01

(O-E)2/E(X)

Shortage of Working Capital

Excess of Working Capital

Estimated Working

Capital (E)

Actual Working

Capital (O)Years

5114E(X)

39091021726704164872011-12

219322607228002010-11

23-657--------18419177622009-10

44-804--------14628138242008-09

58----------88113316141972007-08

605---------248310194126772006-07

137----------11259267103922005-06

45-607--------823176242004-05

19-374--------726668922003-04

199-1174---------694257682002-03

54-568---------598154132001-02

19-306---------483945332000-01

(O-E)2/E(X)

Shortage of Working Capital

Excess of Working Capital

Estimated Working

Capital (E)

Actual Working

Capital (O)Years

Source: Annual Reports of the company

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AN

ALY

SIS

OF

EFF

ICIE

NC

Y O

F W

OR

KIN

G C

API

TAL

EL

EM

EN

TS

An

atte

mpt

is m

ade t

o an

alys

e the

liqu

idity

pos

ition

, act

ivity

pos

ition

and

prof

itabi

lity

posit

ion

of th

e org

anis

atio

n w

ithth

e he

lp o

f fol

low

ing

ratio

s whi

ch a

re s

how

n in

the

follo

win

g ta

ble

-4.

Tabl

e-4

- 66 -

DESCRIPTIVE ANALYSIS

The descriptive analysis is shown in the following table-5

2.822266.794212.523.10PTR

.167051.93832.211.64CATR

.799894.41086.113.29WCTR

.41652.80001.42.27CAR

.495271.74332.441.02QR

.642963.00834.021.81CUR

1.122535.19507.123.19CTR

2.8777411.474218.849.11DTR

.620754.58755.963.91ITR

Std. DeviationMeanMaximumMinimumParticulars

2.822266.794212.523.10PTR

.167051.93832.211.64CATR

.799894.41086.113.29WCTR

.41652.80001.42.27CAR

.495271.74332.441.02QR

.642963.00834.021.81CUR

1.122535.19507.123.19CTR

2.8777411.474218.849.11DTR

.620754.58755.963.91ITR

Std. DeviationMeanMaximumMinimumParticulars

BI VARIATE COEFFICIENT OF CORRELATION ANALYSIS

To analyse the impact of Working capital efficiency on Profitability, correlation testhas been conducted between Profitability and various components. In the analysis it is vividthat there is a positive correlation existing between Inventory turnover ratio, Debtor turnoverratio, Creditor turnover, current ratio, quick ratio and cash ratio to Profitability. which stronglyrecommends that efficient utislisation of inventory, better management of debts and payables,and proper liquidity of the organisation leads for profitability.

Another important finding is that excess investment in Working capital and CurrentAssets lead to negative role in profitability because the relationship between Working capitalratio and current asset ratio is negative.

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TABLE 6(COEFFICIENT OF CORRELATION ANALYSIS)

1PTR

-.2041CATR

-.304.5481WCTR

.641-.350-.6761CAR

.93-.316-.874.9181AR

.607-.291-.897.843.9761CUR

.644.144-.671.743.879.9021CTR

.400.105.402.374.001-.105-.0181DTR

.375.382-.237.618.592.474.697.2891ITR

PTRCATRWCTRCARARCURCTRDTRITR

1PTR

-.2041CATR

-.304.5481WCTR

.641-.350-.6761CAR

.93-.316-.874.9181AR

.607-.291-.897.843.9761CUR

.644.144-.671.743.879.9021CTR

.400.105.402.374.001-.105-.0181DTR

.375.382-.237.618.592.474.697.2891ITR

PTRCATRWCTRCARARCURCTRDTRITR

Source: Annual Reports of the compantyCONCLUSIONS

The components of working capital, sources of working capital, estimation of workingcapital, net working capital and the relationship of various components of working capitalwith profitability play a pivotal role. It is being analysed that 50 per cent of the long termfunds are used in financing working capital, and efficiency of the components of workingcapital has positive relationship with profitability. Thus effective and efficient managementof current assets is the need of the hour.

REFERENCES

1. Anand, M., & Gupta, C. P. (2001). Working capital performance of corporate India:an emprirical survey for the year 2000-2001. Management and Accounting Research,4(4), 35-65.

2. Auerbach, C. F., & Silverstein, L. B. (2003). Qualitative data an introduction to codingand analysis. New York, NY: New York University Press. Bacani, C. (2007). The bigsqueeze. Retrieved August 2, 2008 from http://www.cfoasia.com/archives/200709-09.htm

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3. Eljelly A, 2004. Liquidity-profitability tradeoff: an empirical investigation in an emergingmarket. International Journal of Commerce and Management, 14: 48-61.

4. Falope OI, Ajilore OT, 2009. Working capital management and corporate profitability:evidence from panel data analysis of selected quoted companies in Nigeria. ResearchJournal of Business Management, 3: 73-84.

5. Ghosh SK, Maji SG, 2003. Working capital management efficiency: a study on theIndian cement industry. The Institute of Cost and Works Accountants of India. [http://www.icwai.org/icwai/knowledgebank/fm47.pdf]

6. Mathuva D, 2009. The influence of working capital management components oncorporate profitability: a survey on Kenyan listed firms. Research Journal of BusinessManagement, 3: 1-11. Abdul Rahman, R., & Mohamed Ali, F. H. (2006). Board, auditcommittee, culture and earnings management: Malaysian evidence. Managerial AuditingJournal, 21(7), 783-804.

7. Reason, T. (2008). Preparing your company for recession. Retrieved August 2, 2008fromht tp :/ / ezproxy. l incoln. ac.nz/ login?ur l=http :/ /proques t .umi. com/pqdweb?did=1423329 071&Fmt=7&clientId=18963&RQT=309&VName=PQD

8. Reyman, G. (2005). How Johnsondiversey implemented s&op in Europe. Journal ofBusiness Forecasting Methods and Systems, 24(3), 20-28.

9. Richards, V. D., & Laughlin, E. J. (1980). A cash conversion cycle approach toliquidity analysis. Financial Management, 9(1), 32-38.

10. Sartoris, W. L., Hill, N. C., & Kallberg, J. G. (1983). A Generalized Cash FlowApproach to Short-Term Financial Decisions/Discussion. The Journal of Finance,38(2), 349-360.

11. Shin HH, Soenen L, 1998. Efficiency of working capital management and corporateprofitability. Financial Practice and Education,8: 37-45

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DYNAMISMS OF DIVIDEND POLICY1 Mr.Shaik Masood, Asst Professor of Finance, Dept of Business Management, Alluri

Institute of Management Sciences, Warangal, A.P. he can be reached atmasoodfru@gmail.com.

2 Navaneeth, Student of MBA IV semester, Alluri Institute of Management Sciences,Warangal, A.P.

3 Anitha, Student of MBA IV semester, Alluri Institute of Management Sciences, Warangal,A.P.

ABSTRACT

The objective of the corporate management is to maximise the market value ofthe organisation. Generally investors expect returns out of their investments anddividend policy of the organisation motivates the investors to invest in their companies.Thus the dividend policy should be as inclined as to satisfy the interest of share holdersas well as to attract the potential investors and the positive reception in the marketprice of share. The present paper is to study the determinants and impact of dividendpolicy on market price of the share with reference to select FMCG companies.

KEY WORDS

Dividend, Market price, Payout ratio.

CONCEPT OF DIVIDEND POLICY

In corporate finance one of the major issues for the managers that are can influencethe market value of the business, financing structure of the firm, market prices of equityprices and shareholders value maximaisation.

As companies are artificial human being, the decision regarding utilisation of profitsrests with a group of people, namely the board of directors. As in any other types oforganization, the disposal of net earnings of a company involves either their retention in thebusiness or their distribution to the owners (i.e. shareholders) in the form of dividend, orboth. Yet the decision regarding distribution of disposal earnings to the shareholders is veryconsiderable one. Besides affecting the mood of the present shareholders, dividend mayalso influence the mood, behaviour responses of prospective investors, stock exchanges andfinancial institutions because the relationship of dividend is strongly linked with fundamentalperformance of a company that can also show its impact on the market value of the shares.The decisions regarding dividend is taken by their Board of directors and is meeting of thecompany. Disposal of profits in the form of dividends can become a controversial-issuebecause of conflicting interests if various parties like the directors, employees, shareholders,

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debenture holders, lending institutions, etc. even among the shareholders there may be conflictsas they may belong to different income groups. While some may be interested in regularincome, others may be interested in capital appreciation and capital gains. Hence, formulationof dividend policy is a complex decision. It needs careful consideration of various factors,one thing, however, standout. Instead of an ad hoc approach, it is more desirable to followsa reasonably long term policy regarding dividends.

REVIEW OF LITERATURE

Dr. T. Satyanarayana Chary and Mohammed Mujahed Ali (2009) dividend as a returnto the factor of production is considered to be an image maker for a commercial enterprise,irrespective of the arguments in favour and against the dividend proposition and confidenceabout the performance and profitability of such enterprise.

I.M. Panday and Ramesh Bhatt in their article Dividend Behaviour of IndianCompanies under Monetary Policy Restrictions, focused on the corporate dividendbehavior as a key research area in finance. They opine on the lines of Black (1976) thatdividend behavior of companies and the dividend puzzle still remains unsolved. Under theassumption that capital markets are perfect, the finance researchers have shown that dividendsare irrelevant, and that they have no influence on the share price (Miller and Modigliani,1961). When capital markets are imperfect, some researchers have argued that dividendsdo matter and firms pursue an appropriate dividend policy. Several empirical surveys indicatethat both managers and investors favour payment of dividends.

Fama et al. (1969) have conducted the seminal study on semi-strong form of marketefficiency with a view to determine the effect of stock splits on share prices. The study hasa special importance in the area of finance because it was the first to develop a researchmethodology for testing market efficiency which is still widely used by the researchers.

Narsimhan and Asha (1977) discussed the impact of dividend tax on dividendpolicy of companies. They observe that the uniform tax rate of 10 % on dividend as proposedby the union budget 1997-98, altered the demand of investors in favour of high payoutsrather than low payouts because of 20% tax on capital gains in the said period.

According to Mohanty (1999), the theory of finance considers a bonus issue as afinancial illusion because it does not add value to the company under the symmetric informationassumption. This is because bonus issue is just an accounting adjustment. The accountantjust makes a book entry by debiting some free reserves account and crediting the sharecapital account. It does not directly affect any cash flow or outflow and, therefore, it isassumed that it does not add value to the company. If a company distributes a known fractionof its earnings each year as dividend, then the bonus issue will bring down the dividend inproportion to the bonus ratio and hence the theoretical ex-bonus share price will go down in

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proportion to the bonus ratio. However, the number of shares the company holds increasesin the same proportion and hence the shareholders wealth remains unchanged. If, however,management has better information about the future prospects of a company than theshareholders, then a bonus issue may convey some valuable information to the shareholders.The shareholders, for example, may think that the management is more confident of thefuture and hence the cash flows due to dividend will increase after the bonus issue. In thiscase, the bonus issue will be welcomed by the shareholders.

NEED FOR THE STUDY

The dividend is an amount of return expected by the shareholders of the joint stockcompany, this is a motivate factor for the investors behaviour in the securities market, itinfluence the market prices of the security, hence it felt to analyse the practices dividendpolicy in FMCG industry with reference to select companies.

OBJECTIVE OF THE STUDY

1. To analyse the dividend practices of FMCG industry and their market value in Indiawith specific reference to select sample companies,

2. To find out the factors influencing the determinants of dividend payout,

3. To compare the market price of share of selected companies to share value attainedthrough Modigliani - Miller model to the actual market price.

LIMITATION OF THE STUDY

The study is very comprehensive in nature, but subject to study of select companiesFMCG industry, limited data of five years from 2007-08 to 2011-12 only, the values areapproximation and on basis of annual reports and market prices taken from the stock exchangedirectories, lastly the analysis made from the past financial statements and thus there are noindicators of future.

RESEARCH METHODOLOGY

The research uses secondary data as collected the annual reports from respectivecompanies, market prices information, other related information collected through stockexchanges, RBI, published journal and articles.

Data thus collected was processed and analysed through financial tools such as MPS,EPS, P/E, Ke, r dividend theory proposed by Modigliani - Millers as well as yield toinvestor. Hence the calculation of cost of equity (Ke) and comparison to the rate of return(r) is made in the study. The MPS was calculated by using Modigliani Miller and comparewith actual MPS.

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MODIGLIANI AND MILLERS

Modigliani - Millers thoughts for irrelevance of dividends are most comprehensiveand logical. According to them, dividend policy does not affect value of a firm and is therefore,of no consequence. They are of the view that the sum of the discounted value per shareafter dividend payments is equal to the market value per share before dividend is paid. It isearning potentially and investment policy of a firm rather than its pattern of distribution ofremainings that affects value of the firm.

The basic assumptions of M-M approach are:

1) There exists perfect capital market where all investors are rational-information isavailable to all at no cost, there are no transaction costs and floatation costs, there isno such investor as could alone influence market value of shares.

2) There does not exist taxes. Alternatively, there is no tax differential between incomeon dividend and capital gains

3) Firms investment policy is well planned and is fixed for all the time to come.

4) There is no uncertainty as to future investments and profits of the firm. Thus, investorsare able to predict future prices and dividends with certainty. This assumption wasdropped by M-M later.

This model, which opines that dividends policy of firm effects its value, is based onthe following assumptions

M-M formula for determining the market price per share is as follows.

P 1 = {Po * (1+Ke)} - D1

Where

P1 = Market price of the share at the end of the year,

Po = last year MPS, D1= Dividend Per Share, Ke = cost of Equity

DATA ANALYSIS AND INTERPRETATION

The table 1 revels that the calculated market price and actual market price waschanged due to change in D/P ratio, as cost of equity increases market price also increase,it can be conclude that as investors expectation were influence the market price rather thanactual value of the market price. The interest rate shows the negative relation with d/P ratio,inflation to d/p shows positive, it may conclude that as inflation factor influence on marketprices.

- 73 -

Table 1

Analysis of ITC

0.56-0.010.78Corr D/P

9.138224.98226.90Ke>r1.9823.5723.99228.280.548.282012

8.876.5327.84182.10Ke>r2.4424.2224.25224.450.518.652011

12.114.75185.74263.05Ker2.0017.0920.49153.700.576.452009

8.327182.84206.25Ke>r1.7021.8521.95203.500.447.882008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

0.56-0.010.78Corr D/P

9.138224.98226.90Ke>r1.9823.5723.99228.280.548.282012

8.876.5327.84182.10Ke>r2.4424.2224.25224.450.518.652011

12.114.75185.74263.05Ker2.0017.0920.49153.700.576.452009

8.327182.84206.25Ke>r1.7021.8521.95203.500.447.882008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

(Source: Annual reports of the company)

MPS*- calculated MPS, MPS- Current MPS, i interest rate, I inflation rate, G-growth rate of earnings, Ke - cost of equity, EPS- Earning Per Share, r- Return on investment,DPS- Dividend Per Share,

The table 2 revels that the calculated market price and actual market price was aschange in D/P ratio, as cost of equity is higher than to return on investment increases marketprice also increase, it can be conclude that as investors expectation were influence themarket price rather than actual value of the market price. The interest rate shows thepositive relation with d/P ratio, inflation to d/p shows as equivalent to zero so here it mayconclude both ware independent, it may conclude that as inflation factor influence on marketprices.

Table 2

Analysis of Dabur India ltd

0.010.49-0.04CorrD/P

9.138123.91106.60Ke>r1.31%27.3327.68263.700.383.702012

8.876.5207.9896.10Ke>r1.35%29.2929.39281.300.393.302011

12.114.75142.17158.80Ker1.81%32.1932.39301.800.404.502009

8.327139.18110.80Ke>r1.35%45.3845.65441.500.383.902008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

0.010.49-0.04CorrD/P

9.138123.91106.60Ke>r1.31%27.3327.68263.700.383.702012

8.876.5207.9896.10Ke>r1.35%29.2929.39281.300.393.302011

12.114.75142.17158.80Ker1.81%32.1932.39301.800.404.502009

8.327139.18110.80Ke>r1.35%45.3845.65441.500.383.902008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

(Source: Annual reports of the company)

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The table 3, it can analysed that D/P ratio initial period of the study was 23 percentand gradually constant in subsequent period, market price to calculated price was low it canalso analysed from the cost of equity is higher than to return on investment increases marketprice also increase, it can be conclude that as investors expectation were influence themarket price rather than actual value of the market price. The interest rate shows thenegative relation with d/p ratio means as inflation increases the investors expecting morereturn as inflation high, market prices was also moved in same direction, inflation to d/pshows high it may conclude that as interest rate increases market price falling down.

Analysis of Table 3

BRITANNIA INDUSTRIES LIMITED

0.64-0.730.70CorrD/P

9.138460.36593.00Ke>r1.4324.0724.392315.630.5415.632012

8.876.51824.62372.50Ke>r1.7413.8914.43126.500.5312.162011

12.114.751557.271573.90Ker1.4324.0724.392315.630.5415.632012

8.876.51824.62372.50Ke>r1.7413.8914.43126.500.5312.162011

12.114.751557.271573.90Ke

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Table 4

Analysis of MARICO

-0.260.690.62CorrD/P

9.138176.92175.30Ke>r0.4023.9224.01245.470.135.472012

8.876.5141.47139.45Ke>r0.4726.8826.91260.660.135.132011

12.114.7580.59109.05Ke=r0.6130.6430.64300.660.173.862010

10.834.587.4460.30Ke=r1.0924.6424.64240.660.282.332009

8.32778.8367.80Ke=r0.9726.9926.99260.660.282.352008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

-0.260.690.62CorrD/P

9.138176.92175.30Ke>r0.4023.9224.01245.470.135.472012

8.876.5141.47139.45Ke>r0.4726.8826.91260.660.135.132011

12.114.7580.59109.05Ke=r0.6130.6430.64300.660.173.862010

10.834.587.4460.30Ke=r1.0924.6424.64240.660.282.332009

8.32778.8367.80Ke=r0.9726.9926.99260.660.282.352008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

Source: Annual reports of the company

From the table 5, it is observed from the analysis actual market price is higher thanmarket price at the same time cost of equity is equal to return on investment except startingand ending of the period, the dividend policy follows a stable rupee dividend, it may concludethat investors happy in stability in dividend payments as per their expectation, the interestrate shows the positive relation with d/p ratio, it means as interest rate increases marketprices also increases it may corporate follow the policy to keep the shareholders happy bypaying stable and high dividends, inflation increases the investors expecting more return asinflation high, market prices was also moved in opposite direction.

Table 5

Analysis of P&G

-0.150.59-0.58CorrD/P

9.1382188.152197.65Ke>r1.0211.7211.831135.850.6335.852012

8.876.52321.841968.05Ke=r1.1415.5215.521422.500.4846.482011

12.114.751136.342008.20Ke=r1.1227.6827.682722.500.4155.382010

10.834.51008.76896.15Ke=r2.5131.3531.352922.500.4155.102009

8.3271023.10763.95Ke>r2.6228.7029.032620.000.4940.482008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

-0.150.59-0.58CorrD/P

9.1382188.152197.65Ke>r1.0211.7211.831135.850.6335.852012

8.876.52321.841968.05Ke=r1.1415.5215.521422.500.4846.482011

12.114.751136.342008.20Ke=r1.1227.6827.682722.500.4155.382010

10.834.51008.76896.15Ke=r2.5131.3531.352922.500.4155.102009

8.3271023.10763.95Ke>r2.6228.7029.032620.000.4940.482008

IiMPS*MPSKe vs rYield rKeGDPSD/PEPSYear

Source: Annual reports of the company

- 76 -

CONCLUSION

It is found from the analysis of dividend policy issues on market price of securities inspecial references from the FMCG companies, the some sample companies follows stablerupee dividend and few companies follows stable payout ratios, these two issues of thepolicy follows the corporate to protect the interest of shareholders, that we provide theevidence from actual (calculated) market price to market price variation is low in all samplecompanies, another issue keep fighting with the changes in the macro factors marketinterest rate, inflation, earnings and investors expectation about future behaviour of theeconomy also taking into consideration, and one of the important observation of study theperformance of the FMCG companies purely relay on inflation rate in the economy forpractitioners it is a challenging issue to face with interest and high inflation rate to formulatethe dividend policy.

REFERENCES

1. Bhat R and Pandey I.M. (1994), Dividend Decision: A Study of managersperceptions, Decision.

2. Dr. T. Satyanarayana Chary and Mohammed Mujahed Ali (2009),Dividend Practicesand Market Value of Pharma and Paper Industries- An Analytical Study, Pragyaan: JOM Volume 7 : Issue 2, Dec 2009

3. Fama E.F. and French K R (2001) Disappearing Dividends: Changing firmCharacteristics or lower Propensity to pay ?, Journal of Applied Corporate Finance.

4. Gupta L C (1981) Rates of Return on equities the Indian Experience, Oxford UniversityPress.

5. Kevin S (1992), Dividend Policy: An Analysis of some Determinants, Finance India.

6. Mohanty P (1999), Dividend and Bonus Polices of Indain Companies VikalpaNarasimhan M S and Asha C (1997), Implications of Dividend Tax on CorporateFinancial Policies, The Icfai Journal of Applied Finance.

7. Reddy S Y (2002), Dividend Policy of Indian Corporate Firms: An Analysis oftrends and determinants, NSE Research Initiative

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TRENDS IN LIFE INSURANCE SECTOR A STUDY1 Dr. T. Gopi, Assistant Professor, UPGC, Kakatiya University , Khammam2 K.Hanumantha Rao, Lecturer in Commerce and Business Management, Trinity PG

College, Khammam, He can be reached at email: hanumakondamudi@gmail.com

ABSTRACT

The capital markets channel the wealth of savers to those who can put it to longterm productive use, such as companies or governments making long term investments.When a company wants to raise money for long term investment, one of its first decisionsis whether to do so by issuing bonds or shares. When a government wants to raiselong term finance it will often sell bonds to the capital markets. One indicator offuture is that the IRDA is expected to change the investment norms it prescribes forinsurance companies. Under the current regulations, a firm can invest up to 50% ofits fund in government securities, 15% in infrastructure bonds, and 35% in corporatepaper and equities. Indias life insurance market has grown at more than 40% annually(measured in terms of new business premium) in the past six years. But the ratio ofinsurance premium to GDP is around 4%. Penetration is very low, practically zero inthe unbanked segment. For the industry, premium income is likely to go up sharply. Awell developed and evolved insurance sector is a boon for economic development ofa country. It provides long-term funds for infrastructure development and concurrentlystrengthens the risk-taking ability of the country. There are certain factors that needto be considered by the Indian insurance industry to ensure a seamless growth inbusiness like distribution channels, focus on financial inclusion. The Government isshowing interest to introduce the bill of raising FDI in insurance from 26% to 49%.

KEY WORDS:

Capital Market, IRDA, Life Insurance.

INTRODUCTION

Corporate finance is the area of finance dealing with monetary decisions that businessenterprises make and the tools and analysis used to make these decisions. The primary goalof corporate finance is to maximize shareholder value. The discipline can be divided intolong-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investmentwith equity or debt, and when or whether to pay dividends to shareholders. On the otherhand, short term decisions deal with the short-term balance of current assets and currentliabilities.

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OBJECTIVES

1. To study the tools required to make investment decisions

2. To study about financial services by different markets.

3. To study the role of insurance in capital provision

4. to analyse the trends of the insurance sector

5. to make conclusions and suggestions

Capital investment decisions

Capital investment decisions are long-term corporate finance decisions relating tofixed assets and capital structure. Decisions are based on several inter-related criteria. (1)Corporate management seeks to maximize the value of the firm by investing in projectswhich yield a positive net present value when valued using an appropriate discount rate inconsideration of risk. (2) These projects must also be financed appropriately. (3) If no suchopportunities exist, maximizing shareholder value dictates that management must returnexcess cash to shareholders (i.e., distribution via dividends). Capital investment decisionsthus comprise an investment decision, a financing decision, and a dividend decision.

Tools required to make investment decisions

Net Present Value: According to this method that project which has highestNPV will be selected at invested. Along with this time value of money is considered

Internal Rate of Return: The rate at which the present values of investment andpresent value of cash inflows equals. Project with highest IRR is selected.

Finance is the study of how investors allocate their assets over time under conditionsof certainty and uncertainty. A key point in finance, which affects decisions, is the timevalue of money, which states that a unit of currency today is worth more than the same unitof currency tomorrow. Finance aims to price assets based on their risk level, and expectedrate of return. Finance can be broken into three different sub categories: public finance,corporate finance and personal finance.

Managerial or corporate finance is the task of providing the funds for a corporationsactivities. Corporate finance generally involves balancing risk and profitability, while attemptingto maximize an entitys wealth and the value of its stock, and generically entails threeinterrelated decisions. In the first, the investment decision, management must decide whichprojects (if any) to undertake. The discipline of capital budgeting is devoted to this question,and may employ standard business valuation techniques or even extend to real optionsvaluation. The second, the financing decision relates to how these investments are to befunded - capital here is provided by shareholders, in the form of equity or debt financing

- 79 -

which includes bank loans and bond sales. The owners of both bonds and stock, may beinstitutional investors - financial institutions such as investment banks and pension funds orprivate individuals, called private investors or retail investors. Short-term funding or workingcapital is mostly provided by banks extending a line of credit. The balance between theseelements forms the companys capital structure. The third, the dividend decision, requiresmanagement to determine whether any unappropriated profit is to be retained for futureinvestment / operational requirements, or instead to be distributed to shareholders, and if soin what form Another business decision concerning finance is investment, or fundmanagement. An investment is an acquisition of an asset in the hope that it will maintain orincrease its value one has to decide what, how much and when to invest. To do this, acompany must:

Identify relevant objectives and constraints

Identify the appropriate strategy

Measure the portfolio performance

Financial risk management, an element of corporate finance, is the practice of creatingand protecting economic value in a firm by using financial instruments to manage exposureto risk, particularly credit risk and market risk.

FINANCIAL SERVICES

Financial System includes all those activities dealing in finance, organized into a system.Financial system plays a crucial role in the functioning of the economy because, it allowstransfer of resources from savers to investors. It comprises four major components

1. financial institutions

2. financial markets

3. financial instruments and

4. financial services.

Financial market is a place or mechanism where funds or savings are transferredfrom surplus units to deficit units, and can classified into money markets and capital markets.Money market deals with shot-term claims or financial assets. The capital market plays avital role in mobilizing the savings and making them available to the enterprising investors.The primary capital market helps government and industrial concerns in raising funds byissuing various funds of securities. The secondary market provides liquidity to the outstanding/existing securities. Financial services include the services offered by both types of companies-Asset Management Companies and Liability Management Companies. Financial institutionsprovide service as intermediaries of financial markets. They are responsible for transferring

- 80 -

funds from investors to companies in need of those funds and facilitate the flow of moneythrough the economy. Financial Institutions in India mainly comprises of the Central Bankwhich is better known as the Reserve Bank of India, the commercial banks, the credit ratingagencies, the securities and exchange board of India, insurance companies and mutual funds.The financial services helps to decide the financing finds and to ensure their efficientdeployment, help to decide the financing mix and extend their services upto the stage ofservicing of lenders. A financial instrument is a real or virtual document representing a legalagreement involving some sort of monetary value. Financial instruments can be classifiedgenerally as equity based, representing ownership of the asset, or debt based, representinga loan made by an investor to the owner of the asset.

INDIA INSURANCE

India insurance is a flourishing industry, with several national and international playerscompeting and growing at rapid rates. With reforms and the easing of policy regulations, theIndian insurance sector been allowed to flourish, and as Indians become more familiar withdifferent insurance products, this growth can only increase, with the period from 2010 -2015 projected to be the Golden Age for the Indian insurance industry. The history of theIndian insurance sector dates back to 1818, when the Oriental Life Insurance Companywas formed in Kolkata. A new era began in the India insurance sector, with the passing ofthe Life Insurance Act of 1912. The Indian Insurance Companies Act was passed in 1928.This act empowered the government of India to gather necessary information about theinsurance organizations operating in the Indian financial markets. The formation of theMalhotra Committee in 1993 initiated reforms in the Indian insurance sector. Therecommendations of the committee put stress on offering operational autonomy to theinsurance service providers and also suggested forming an independent regulatory body.

The Insurance Regulatory and Development Authority Act of 1999 brought aboutseveral crucial policy changes in the insurance sector of India. It led to the formation of theInsurance Regulatory and Development Authority (IRDA) in 2000 by ending of governmentmonopoly lifting all entry restrictions for private players and allowing foreign players toenter the market with some limits on direct foreign ownership. As per rules, the upper limitof foreign direct investment permitted in this sector is 49 percent. However, this has to bedone through the automatic route and the investor needs a license from Insurance Regulatoryand Development Authority (IRDA). The IRDA has recently taken away the tariffs of theinterest rates and this has provided insurers greater independence when it comes to decidingthe price of their insurance policies. The insurance industry has also become more competitiveas a result. Yet another important factor affecting this sector has been the recent financialmeltdown.

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INDIA INSURANCE INDUSTRY CONTRIBUTION TO GDP

Around the world the insurance industry contributes around 4.5% to national GDPs.The Chairman of IRDA, Hari Narayan has ruled out any such possibility asking if IndiasGDP growth will be that much in the next few years ahead. If the insurance sector is to dowell in terms of contribution to GDP then more people should be convinced about its capabilityto provide good ROI (return on investment). With an annual growth rate of 15-20% and thelargest number of life insurance policies in force, the potential of the Indian insurance industryis huge. Total value of the Indian insurance market (2004-05) is estimated at Rs. 450 billion(US$10 billion). According to government sources, the insurance and banking servicescontribution to the countrys gross domestic product (GDP) is 7% out of which the grosspremium collection forms a significant part. The funds available with the state-owned LifeInsurance Corporation (LIC) for investments are 8% of GDP. Since opening up of theinsurance sector in 1999, foreign investments of Rs. 8.7 billion have poured into the Indianmarket and 21 private companies have been granted licenses. Capital markets have a longhistory of over 100 years in India. Bombay Stock Exchange came into existence more thana hundred years ago to remove direct government control. Indian companies are now allowedto raise capital from abroad and Foreign Institutional Investors are allowed to enter themarket due to an important policy initiative in 1993. For a stronger and resilient financialsystem, India needs to move beyond peripheral issues and act maturely by increasingprofitability and efficiency, providing better solutions to the customers.

TRENDS IN INSURANCE SECTOR

1. INDIAN ECONOMY (GROWTH RATE IN GDP)

Table No: 1

6.58.58.06.79.09.6rate

2011-122010-112009-102008-092007-082006-07year

6.58.58.06.79.09.6rate

2011-122010-112009-102008-092007-082006-07year

Source: irda annual reports

ANALYSIS

A slowdown can be observed in the economy in the year 2008-09 to 6.7 and a robustgrowth (surge) in consecutive two years 2009-10 and 2010-11. A dismal growth of 6.5percent in 2011-12 was registered, the lowest growth rate in the last decade.

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2. PAID UP CAPITAL

Table No: 2

5.3712.5715.1548.4551.35increase in % total

4.9712.5715.1548.4751.38increase in % private

sector

24931.9223661.8521019.9918254.7712296.428124.41total

24831.9223656.8521014.9918249.7712291.428119.41private sector

10055555lic

31-3-201231-3-201131-3-201031-3-200931-3-200831-3-2007

Year amount crore rs.Insurer

5.3712.5715.1548.4551.35increase in % total

4.9712.5715.1548.4751.38increase in % private

sector

24931.9223661.8521019.9918254.7712296.428124.41total

24831.9223656.8521014.9918249.7712291.428119.41private sector

10055555lic

31-3-201231-3-201131-3-201031-3-200931-3-200831-3-2007

Year amount crore rs.Insurer

Source: irda annual reports

ANALYSIS

There was an increase in the capital provided by insurance sector.,Capital providedby lic was stagnant upto 2011 but added Rs.95 crores in 2011-12. Though there was anincrease in private sector capital, the percentage decreased year to year.

3. MARKET SHARE

Table No: 3

100100100100100100total

29.3230.2229.929.0825.6116.1private sector

70.6869.7870.170.9274.3981.9lic

2011-122010-112009-102008-092007-082006-07

Year percentageInsurer

100100100100100100total

29.3230.2229.929.0825.6116.1private sector

70.6869.7870.170.9274.3981.9lic

2011-122010-112009-102008-092007-082006-07

Year percentageInsurer

Source: irda annual reports

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ANALYSIS

Market of lic decreased year to year from 2006-07 to 2010-11 but there was anincrease of less than one percent in 2011-12. In case of private sector there was an increaseupto 2010-11 but a marginal increase in 2011-12.

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PEMIUM UNDERWRITTEN

Table No: 4

-1.579.8719.7310.1129.01change %

287072.11291638.64265450.37221705.48201351.41156075.85total

-4.5211.0823.0625.0982.50change %

84182.8388165.2479373.0664497.4451561.4228253.01private sector

-0.299.3518.305.0117.19change %

202889.28203473.40186077.31157288.04149789.99127822.84lic

2011-122010-112009-102008-092007-082006-07

year amount rs.CroresInsurer

-1.579.8719.7310.1129.01change %

287072.11291638.64265450.37221705.48201351.41156075.85total

-4.5211.0823.0625.0982.50change %

84182.8388165.2479373.0664497.4451561.4228253.01private sector

-0.299.3518.305.0117.19change %

202889.28203473.40186077.31157288.04149789.99127822.84lic

2011-122010-112009-102008-092007-082006-07

year amount rs.CroresInsurer

Source: irda annual reports

ANALYSIS

There were wide fluctuations in case of lic and private sector upto 2010-11. In theyear 2011-12 there was a slump in the business.

REAL GROWTH IN PREMIUM YEAR WISE IN PERCENT

Table No: 5

-2.73.2-2.8world

-8.54.210.1India (financial year)

0.54.21.8asia

-5.1134.2emerging

-2.31.8-2.8advanced

201120102009Regions/ countries

-2.73.2-2.8world

-8.54.210.1India (financial year)

0.54.21.8asia

-5.1134.2emerging

-2.31.8-2.8advanced

201120102009Regions/ countries

Source: Swiss RE, sigma (irda reports)

- 85 -

INSURANCE PENETRATION AND DENSITY IN INDIA

Table No: 6

3.44.44.6444.12.532.532.262.592.15Penetr

ation %

4956.747.741.240.430.318.315.712.911.79.1Density(usd)

20112010200920082007200620052004200320022001year

3.44.44.6444.12.532.532.262.592.15Penetr

ation %

4956.747.741.240.430.318.315.712.911.79.1Density(usd)

20112010200920082007200620052004200320022001year

Source: Swiss Re, various issues (irda reports)

1. Insurance density is measured as ratio of premium(in USD) to total population

2. insurance penetration is measured as ratio of premium (in USD) to GDP (in USD)

ANALYSIS

India has reported increase in insurance density for every subsequent year and forthe first time reported a fall in the year 2011. Insurance penetration surged till 2009 andslumped continuously in two years 2010 and 2011. Pebetration is very low.

TOTAL INVESTMENTS OF THE LIFE INSURANCE SECTOR

Table No: 7

*figures shown in brackets are percentage growth to previous year ** figures are share in total investments year wise

312188(10.80)19.49

281528(27.89)19.69

220127(88.51)18.27

116772(33.35)12.74

87567(94.68)*11.43**

Private sector

1289670(10.40)80.51

1148589(15.75)80.31

985028(23.19)81.73

799583(17.86)87.26

678402(21.32)*88.57**

Public sector

31-3-201231-3-201131-3-201031-3-200931-3-2008Year

*figures shown in brackets are percentage growth to previous year ** figures are share in total investments year wise

312188(10.80)19.49

281528(27.89)19.69

220127(88.51)18.27

116772(33.35)12.74

87567(94.68)*11.43**

Private sector

1289670(10.40)80.51

1148589(15.75)80.31

985028(23.19)81.73

799583(17.86)87.26

678402(21.32)*88.57**

Public sector

31-3-201231-3-201131-3-201031-3-200931-3-2008Year

source: irda annual reports

ANALYSIS

The same pattern was followed by both public and private sector. There were upsand downs in investments. A slump by 31-3-2009, 2011 and 2012, and surge in 31-3-2010.Investments of public sector to total investments year wise were above eighty percent andthat of private sector were less than twenty percent.

- 86 -

INSURANCE - MARKET EFFICIENCY

Its good news for the insurance industry. For a sector that feeds on capital, theproposed hike in the foreign direct investment limit in insurance joint ventures to 49 per centis a boon. Foreign players, whose stake is now capped at 24 per cent, can now bring in moremoney; most of them would love to own a larger stake if not the whole venture.

India: The Next Insurance Giant

In 2000, Indian insurance market size was $21.71 billion. Between 2000 and2007, it had an increase of 120% and reached $47.89 billion. Between 2000 and2007, total premiums maintained an average growth rate of 11.96% and the CAGRgrowth during this time frame has been 11.96%. Indian economy is the 12th largest in theworld, with a GDP of $1.25 trillion and 3rd largest in terms of purchasing power parity. Withfactors like a stable 8-9 per cent annual growth, rising foreign exchange reserves, a boomingcapital market and a rapidly expanding FDI inflows, it is on the fulcrum of an ever increasinggrowth curve.

CONCLUSIONS

Insurance is one major sector which has been on a continuous growth curve since therevival of Indian economy. Taking into account the huge population and growing per capitaincome besides several other driving factors, a huge opportunity is in store for the insurancecompanies in India. Nearly 80% of Indian population is without life insurance cover, and thispart of the population is also subjected to weak social security and pension systems withhardly any old age income security. Insurance in India is primarily used as a means toimprove personal finances and for income tax planning; Indians have a tendency to invest inproperties and gold followed by bank deposits. They selectively invest in shares also but thepercentage is very small 4-5%. This in itself is an indicator that growth potential for theinsurance sector is immense. Its a business growing at the rate of 15-20% per annum andpresently is of the order of $47.9 billion.

India is a vast market for life insurance that is directly proportional to the growth inpremiums and an increase in life density. With the entry of private sector players backed byforeign expertise, Indian insurance market has become more vibrant. Competition in thismarket is increasing with companys continuous effort to lure the customers with new productofferings. However, the market share of private insurance companies remains very low inthe 10-15% range. Even to this day, Life Insurance Corporation (LIC) of India dominatesIndian insurance sector. The heavy hand of government still dominates the market, withprice controls, limits on ownership, and other restraints. Increase in FDI in insurance sectorwould attract more business by more premi8um can be collected which can be transferredto capital market for robust economic development.

- 87 -

SUGGESTIONSHigher savings pave the way for higher GDP growth rate. Given a particular

incremental capital output ratio, the only way to achieve higher GDP growth is by havinghigher long-term savings, so that there is a stable growth in savings and also in GDP. Insuranceis one of the long-term saving vehicles. Higher insurance penetration will enable to collecthigher premium and these premiums are invested in debt and equity instruments. The insurancesector was a significant contributor to the capital market thereby lending support to thestability of capital markets. Infrastructure development is very crucial for us. Infrastructureprojects are long term in nature and to provide capital for such sectors, the money has tocome from insurance. Hence high insurance penetration will provide a decent capitalcontribution in providing infrastructure facilities. Insurance density should be improvedcomparatively to the Indias population so that more premium can be collected which istransferable to Indian industry and service sectors.1. India has to go for more foreign contribution from insurance sector, high sectoral

reforms are needed like increase in FDI and FII.2. Reach rural areas as the most of the Indians live in rural areas and most of the rural

people are not yet covered by insurance. With this more premium collections may bepossible which can be invested in corporate sector for speedy economic development,

3. See that the share of insurance in GDP increases so more capital can be provided forcompanies.

4. Insurers have to speed up their businesses, endeavour to write more policies as thepremiums collected are not immediately repayable, they can be used for economicdevelopment.

5. Insurers have to give more services to the policy holders to develop trust amongthem.

REFERENCES1. Avadhani.V.S., Security Analysis and Portfolio Management, Mumbai: Himalaya

Publishing House, 8th ed., 2006, pp 1-45.2. IRDA annual reports for various years and other sites on internet.3. Madhukar Palli, A study on assessing life insurance potential in India, Bimaquest,

Vol.6, Issue 2, July 2006.4. Pandey. I.M., Financial Management, New Delhi: Vikas Publishing House Pvt Ltd,

9th ed., 2004, pp 22-355. Selva Kumar.M and Vimal Priyan.J, A comparative study of public and private life

insurance companies in India, Indian Journal of Commerce, Vol.65, No.1, Jan-Mar2002, pp 81-87.

6. Various issues of Insurance Institute of India.

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CORPORATE RESTRUCTURING THEORIES TYPES AND MODES1 Mirza Juned Beg, LL.M 2011-14, NALSAR University of Law, Justice City, Shameerpet,

R.R. Dist. 500078, Hyderabad, A.P.2 Habib Zafar Khan, LL.M 2012-14, NALSAR University of Law, Justice City, Shameerpet,

R.R. Dist. 500078, Hyderabad, A.P.

ABSTRACT:

Corporate restructuring is the process of dismantling and reconstructing eithera whole organization or certain divisions of a corporation that need special attention.This may require considerable movement of the companys liabilities and assets.Corporate restructuring often involves redesigning and reorganising one or morefacets of the organization. This process is undertaken for a variety of reason, thechief being to improve efficiency and profitability in the organisation. Thus reasonsof corporate restructuring can be divided into two distinct heads; first corporaterestructuring is a product of changing business scenario of corporations, and second,changing regulatory scenario of the nation. This paper explains the concept of corporaterestructuring and presents and overview of Law, policy and procedure in Indiapertaining to corporate restructuring. In the final section of the paper, the theories,types and modes.

KEYWORDS:

Corporate Restructuring, Legal Provisions, Powers of Tribunal.

INTRODUCTION

The Companies Act, 1956 is a voluminous piece of legislation on the statute book with658 sections and 14 schedules. However, there are only seven sections here on corporaterestructuring including mergers, de mergers etc. Although corporate re-engineering physicallyoccupies a small portion of the Companies Act comprising barely seven sections from 390to 396A therein, yet its impact on industry and commerce has been far reaching. Theseprovisions have been borrowed from the English Companies Act and have withstood thetest of times. Chapter V of the Companies Act deals with schemes of compromises,arrangements and reconstructions covering Sections 390 to 396A.

Restructuringisthecorporatemanagementtermfortheactofreorganizingthelegal,ownership, operational, or other structures of a company for the purpose of making it moreprofitable, or better organized for its present needs. Other reasons for restructuring includea change of ownership or ownership structure, demerger, or a response to a crisis or majorchange in the business such as bankruptcy, repositioning, or buyout. Restructuring may alsobe described as corporate restructuring, debt restructuring and financial restructuring.

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Corporaterestructuringistheprocessofredesigningoneormoreaspectsofacompany.The process of reorganizing a company may be implemented due to a number of differentfactors, such as positioning the company to be more competitive, survive a currently adverseeconomic climate, or poise the corporation to move in an entirely new direction.

Restructuringacorporateentityisoftenanecessitywhenthecompanyhasgrowntothe point that the original structure can no longer efficiently manage the output and generalinterests of the company. For example, a corporate restructuring may call for spinning offsome departments into subsidiaries as a means of creating a more effective managementmodel as well as taking advantage of tax breaks that would allow the corporation to divertmore revenue to the production process. In this scenario, the restructuring is seen as apositive sign of growth of the company and is often welcome by those who wish to see thecorporation gain a larger market share.

Executives involved in restructuring often hire financial and legal advisors to assist inthe transaction details and negotiation. It may also be done by a new CEO hired specificallyto make the difficult and controversial decisions required to save or reposition the company.It generally involves financing debt, selling portions of the company to investors, andreorganizing or reducing operations.

The basic nature of restructuring is a zero sum game. Strategic restructuring reducesfinancial losses, simultaneously reducing tensions between debt and equity holders to facilitatea prompt resolution of a distressed situation.

Business firm engage in a broad range of activities including expanding, shrinking,and otherwise restructuring asset and ownership structures. In the words of Warren BuffetCorporate Restructuring is process, which prepares corporate entities to keep theircompetitiveness in the market.

Corporate restructuring is the process of dismantling and reconstructing either a wholeorganization or certain divisions of a corporation that need special attention. This may requireconsiderable movement of the companys liabilities and assets. Corporate restructuring ofteninvolves redesigning and reorganising one or more facets of the organization. This processis undertaken for a variety of reason, the chief being to improve efficiency and profitabilityin the organisation.

Thus reasons of corporate restructuring can be divided into two distinct heads; firstcorporate restructuring is a product of changing business scenario of corporations, andsecond, changing regulatory scenario of the nation.

THEORIES OF CORPORATE RESTRUCTURING

There are two theories regarding corporate restructuring, these are:

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Agency Theory: According to this theory, managers have incentives to expand anddiversify even when doing so does not increase the market value of the firm because theirpersonal wealth is linked more too firm size and risk of bankruptcy than to firm performance.Consequently, restructuring will occur only when the threat of acquisition or activism byshare-holders forces managers to reorganize.

According to agency theory, corporate restructuring during the 1980s was a correctionfor the past inefficient growth and diversification by managers (Jensen, 1989, 1991)

It argues that the managers, who are the agents of the shareholders, cannot berelied on to act in shareholders interests because their objectives are different. Whileshareholders wealth depends solely on the market value of a firm, managers pay dependsmore on its size and its bankruptcy risk, than its value.

Consequently, managers have incentives to invest in growth and risk-reducingdiversification, even when these investments do not increase shareholder wealth.

Thus under Agency theory, excess growth and diversification can be reversed by(a) restructuring a firms portfolio of business and (b) financially restructuring the firm.

ENVIRONMENT THEORY

It suggests that downsizing and refocusing became valuable during the 1980s but notbefore, due to changes in the regulatory and competitive environment. A number of importantchanges in the business environment took place during the 1980s. First, The Reaganadministration relaxed enforcement of the Cellar- Kefauver Act, making it easier for firmsto undertake horizontal mergers. Because horizontal expansions allows firms to exploit corecapabilities better than diversifying expansion, firms may have shed diversified businessesand focused corporate resources on horizontal expansion when the opportunity arose.

DIFFERENT MODES OF CORPORATE RESTRUCTURING

The Corporate restructuring is an umbrella term that includes mergers andconsolidations, divestitures and liquidations and various types of battles for corporate control.The essence of corporate restructuring lies in achieving the long run goal of wealthmaximisation.

The term corporate restructuring encompasses three distinct, but related, groups ofactivities;

Expansions including mergers and consolidations, tender offers, joint ventures,and acquisitions;

Contraction including sell offs, spin offs, equity carve outs, abandonment ofassets, and liquidation;

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An ownership and Corporate control including the market for corporate control,stock repurchases program, exchange offers and going private (whether byleveraged buyout or other means).

Mergers and acquisitions (M&A) and corporate restructuring are a big part of thecorporate finance world. One plus one makes three: this equation is the special alchemy ofa merger or an acquisition. The key principle behind buying a company is to create shareholdervalue over and above that of the sum of the two companies. Two companies together aremore valuable than two separate companies - at least, thats the reasoning behind M&A.

This rationale is particularly alluring to companies when times are tough. Strongcompanies will act to buy other companies to create a more competitive, cost-efficientcompany. The companies will come together hoping to gain a greater market share or toachieve greater efficiency. Because of these potential benefits, target companies will oftenagree to be purchased when they know they cannot survive alone.

TYPES OF CORPORATE RESTRUCTURING

Restructuring in its literal sense means changing the basic structure of a corporate.Corporate restructuring generally means acquisitions, amalgamations, mergers orreconstruction consequent to a compromise or arrangement (arrangement includesreorganization of the share capital of a company by the consolidation or division of sharesinto shares of different classes or both) and may according be through an organic or non-organic restructure. A compromise or arrangement may require the order of the NationalCompany Law Tribunal. Every company big or small has a basic capital structure as far asits share capital is concerned which is approved by its Memorandum of Association. Thisstructure of a company cannot be changed before the company has actually gone throughcertain procedures of law. Restructuring of a company is generally of two types:

1. Organic Restructuring

2. Non organic Restructuring

In modern context, corporate restructuring can be divided into three major categories,namely:

1. Organic Corporate Restructuring

2. Non Organic Corporate Restructuring

3. Portfolio Corporate Restructuring

TOOLS OR STRATEGIES OF C. RESTRUCTURING

Following are the some important tools of corporate restructuring: Amalgamation,Merger, and Demerger, Reverse Merger, Slump Sale, Takeover/Acquisition, Joint Venture/Strategic Alliance, and Disinvestment, etc.

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LEGAL PROVISIONS AFFECTING RESTRUCTURING

Following are the legal provision which affect the corporate restructuring:

1. Companies Act, 1956 Section 391 to 394, Section 100 and many other sections

2. Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003.

3. Unlisted Public Companies (Preferential Allotment) Rules, 2003,

4. Companies (Court) Rules, 1959.

5. SEBI Act, Rules and Regulations

i. Securities Exchange Board of India Act, 1992.

ii. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997.

iii. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

iv. SEBI (Prohibition of Insider Trading) Regulations, 1992.

v. SEBI (Buy- Back of Securities) Regulations, 1998.

vi. SEBI (Delisting of Securities) Guidelines, 2003.

vii. SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)Guidelines, 1999.

viii. SEBI (Informal Guidance) Scheme, 2003.

ix. SEBI (Issue of Sweat Equity) Regulations, 2002.

x. SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to SecuritiesMarket) Regulations, 2003.

6. Securities Contracts (Regulation) Act and rules.

7. Stock exchange Listing Regulations

i. Provisions of Listing Agreement-Clause 24(f); Clause 24 (g); Clause 40Aand 40B.

ii. Listing Guidelines

8. Income Tax Acti. Section 2(1B) Amalgamation, Section 2 (19A), 2 (19AA),2(42C)

ii. Section 47-Transactions not regarded as transfer

iii. Section 50, Section 50 B- Slump Sale, Section 50 C, Section 72A, and Section 79

9. Competition Act, 2002

i. Section 2(1b), Section 5, 6

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POWERS OF TRIBUNAL TO SANCTION COMPROMISE OR ARRANGEMENT

According to Section 391 (1) where a compromise or arrangement is proposedbetween a company on one hand and its creditors or a class of them or with its members ora class of them, the Tribunal may on an application of concerned member or creditor ordera meeting of the creditors or members or concerned class of them, as the case may be forconsideration of such proposals. Such proposals for compromise or arrangement underSection 391 of the Companies Act can also involve a scheme of reconstruction oramalgamation of companies by virtue of Section 394 of the said Act.

CONCLUSION

It may be concluded that a company that has been restructured effectively willtheoretically be leaner, more efficient, better organized, and better focused on its core businesswith a revised strategic and financial plan. If the restructured company was a leverageacquisition, the parent company will likely resell it at a profit if the restructuring has provensuccessful.

Corporaterestructuringmaytakeplaceasaresultoftheacquisitionofthecompanyby new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover,or a merger of some type that keeps the company intact as a subsidiary of the controllingcorporation. When the restructuring is due to a hostile takeover, corporate raiders oftenimplement a dismantling of the company, selling off properties and other assets in order tomake a profit from the buyout. What remains after this restructuring may be a smaller entitythat can continue to function, albeit not at the level possible before the takeover took place.

In general, the idea of corporate restructuring is to allow the company to continuefunctioning in some manner. Even when corporate raiders break up the company and leavebehind a shell of the original structure, there is still usually the hope that what remains canfunction well enough for a new buyer to purchase the diminished corporation and return ittoprofitability.

REFERENCES

1. Chartered Secretary, ICSI, New Delhi

2. Corporate Law Advisers, Post Bag No.3, Vasant Vihar, New Delhi.

3. Dr. J.C. Varma, Corporate Merger and Takeovers, Bharat Publishing House

4. Galpin Timothy J. Mark Headim, Complete Guide to Merger and Acquisition, JosseyBases Publisher

5. http://www.citeman.com/3884-portfolio-restructuring/

6. http//:www.shbathiya.com4

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7. J.M Thakur, Takeover of Companies, Snow White Publications Pvt, Ltd

8. Jenifer E. Bethel & Julia Libeskind, the Effects of Ownership Structure on CorporateRestructuring, Strategic Management Journal, Vol.14, Special Issue: CorporateRestructuring (Summer, 1993). P2

9. L.M Sharma, Acquisition, Amalgamation, Merger Takeovers, Company Law Journal,New Delhi

10. S. Ramanujam, Mergers ET. Al; Tata McGraw Hill Publishing Company Ltd, NewDelhi

11. V.K Kaushal, Corporate Takeovers in India, Sarup & Sons, New Delhi

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IDENTIFYING BUBBLES IN THE FINANCIAL MARKETS ANDPREDICTING THEIR CRASH USING THE HINDENURG OMEN

1 Ashutosh Pandit, Student, MBA (Finance), Department of Management Studies, SriSathya Sai Institute of Higher Learning, Email: panditashutosh99@gmail.com

2 Dr. Subhash Subramanian, Assistant Professor, Department of Management Studies,Sri Sathya Sai Institute of Higher Learning; email: subhash.subramanian@gmail.com

3 Prof. U.S. Rao, Professor, Department of Management Studies, Sri Sathya Sai Instituteof Higher Learning; usrao@sssihl.edu.in

ABSTRACT

Financial crisis have been an impediment all across the globe since a very longperiod of time. These crises have always complimented the falling of the financialmarkets. The fall was preceded by optimistic movement of prices in the markets; oftencalled as the formation of a bubble. Hence the fall in the markets is seen as a correctionof the market or a crash in the market. There have been attempts to find patterns andhave a model which can predict the bursting of a bubble. Various technical analysisindicators have been used for this purpose. One such indicator is the HindenburgOmen. The signal is triggered when a set of conditions are fulfilled at one point oftime. Here, in this study, an attempt is made to test the accuracy of the HindenburgOmen with regards to the NIFTY index. If crashes have occurred post a signal then Ifind the average time frame for the crash to occur and the average decline in theindex.

KEY WORDS

Financial Bubble, Hindenburg Omen, JEL Classification: G1, G17, NIFTY,Prediction of Crash, Size of Crash.

INTRODUCTION

In the times of today, it would be right if someone said that each and every person onthis planet is affected in some way or the other by the way economies around the worldfunction. One may be a simple householder doing a routine 9 to 5 job, but ones life may beaffected to the extent of one losing ones job or even losing ones house if one finds oneselfin the midst of something like a global financial crisis. Owing to the global financial crisis thatwas witnessed, there is growing concern among people, corporations and even governmentsas to how they can hedge themselves against the likes of such crisis and minimize their loss.Thus, what is required is identifying situations which suggest that a financial bubble existsand then, identifying measures that can be taken to monitor the bubble. That would be goodenough to reduce the damages of a bubble bursting to a great extent.

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Thus the problem statement for this study has been defined as Identifying bubbles inthe financial markets and predicting their crash using the Hindenburg Omen. The purposeof the study here will be to find out the probability of a crash and the size of a crash using theHindenburg Omen. The objective here is to test the efficacy of the Hindenburg Omen withregards to prediction of a crash in the context of the NIFTY index.

The Hindenburg Omen is a technical analysis pattern that is said to predict a stockmarket crash. It uses the McClellan Oscillator. The simplified formula for determining theoscillator is: Oscillator = (19 day EMA of Advances minus Declines) (39 day EMA ofAdvances minus Declines) It helps to judge the markets overall bullishness or bearishness.

LITERATURE REVIEW

BASIC NEED FOR PREDICTION AND HISTORY OF CRISES

Explaining the Hindenburg Omen, Robert D. McHugh (2007) says, The HindenburgOmen is a combination of technical factors that attempt to measure the health of the NYSE,and by extension, the stock market as a whole. The goal of the indicator is to signal increasedprobability of a stock market crash. The rationale is that under normal conditions either asubstantial number of stocks may set new annual highs or annual lows, but not both at thesame time. As a healthy market possesses a degree of uniformity, whether up or down, thesimultaneous presence of many new highs and lows may signal trouble. Prediction ofStock market movements has always fascinated a lot of stakeholders. However, scientificattempts to do so have most of the times been unsuccessful. But, what has happened ingreat detail is a post mortem analysis of the same. Sendhil Mullainathan, in his article inthe HBR, (2011) says that such postmortem analysis is useful to historians, but isnt helpfulin any way for preventing an incident like collapsing housing prices. An early warning systemwould be more valuable. The question asked here is, Could behavioral finance be used toidentify bubbles as they form? The answer seems to be a guarded yes. The goal is not tobe able to predict when a bubble will burst. That might never be possible. How can the callon a on a rising bubble be made? Behavioral finance gives us the resources and perspectiveto spot telltale signs. Giving a comprehensive view of financial crises that have occurred inthe past eight centuries all across the globe Carmen M. Reinhar and Kenneth S. Rogoffstate that, a serial default is a nearly universal phenomenon as countries struggle to transformthemselves from emerging markets to advanced economies. Major default episodes aretypically spaced some years (or decades) apart, creating an illusion that this time is differentamong policymakers and investors. We also confirm that crises frequently emanate fromthe financial centres with transmission through interest rate shocks and commodity pricecollapses. Thus, the recent US sub-prime financial crisis is hardly unique. They also identifyother issues that compliment a crisis; those of inflation, exchange rate crashes, bankingcrises and currency debasements.

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BUBBLE FORMATION

In another article, the authors, Franklin Allen and Douglas Gale (1997), discussthe various bubbles and the following crisis that we have been a witness to. They explainthat, In recent financial crises a bubble, in which asset prices rise, is followed by a collapseand widespread default. Bubbles are caused by agency relationships in the banking sector.Investors use money borrowed from banks to invest in risky assets, which are relativelyattractive because investors can avoid losses in low payoff states by defaulting on the loan.This risk shifting leads investors to bid up the asset prices. Risk can originate in both the realand financial sectors. Financial fragility occurs when positive credit expansion is insufficientto prevent a crisis. There is in depth study of the process of bubble formation in markets.They go into various factors that are responsible for the formation of the bubble and discussthem at length.

SCIENTIFIC STUDIES

To explain the phenomena of bubbles, various studies have been done. One suchstudy in experimental markets has been done by Smithet al. (1988). Charles Noussair andSteven Tucker (2006) explain that The existence of bubbles and crashes in experimentalmarkets with inexperienced participants is a well-documented result in experimentaleconomics. Smithet al. (1988) first observed the bubble and crash pattern. They studied themarkets with the following structure. The asset traded has a life of 15 periods. In eachperiod, each unit of the asset pays a per-unit dividend that is common knowledge and notbased on the identity of the agent who is holding the asset. The fundamental value can becalculated at any point of time because the intrinsic value in this case is based on 2 sources the finite time horizon and the dividends, whose distribution is common knowledge. Thefundamental value declines over time, decreasing in each period by the per-period expecteddividend. However, Smith et al. find that, when participants have little or no previousexperience in asset markets of the same type, fundamental value is not what is tracked.Instead there are bubbles and crashes. For most of the time horizon, market prices greatlyexceed fundamental values on high volume. Market crashes rapid drops in price tofundamental values often occur as the end of the life of the asset approaches. Thesetheories give us insights into what could be the possible if not absolute causes of bubbleformations and crashes in the real scenario.

PREDICTION

Chikashi Tsuji (2003) conducts a study to find out which among the two indicatorsof volatility and market liquidity is the best to predict a crash in the equity market. Theauthors conclude that the modified calculated market liquidity measure has a strongerforecasting power than volatility in relation to market crashes. Using the liquidity factor, theauthors also construct a forecast model using time series analysis. Economic interpretations

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are also derived based on various financial theories. Thus the authors clarify that the bestpredictor of equity market crashes is not volatilit