EFFECT OF LIBERALIZATION ON COST OF CAPITAL OF …shodhganga.inflibnet.ac.in/bitstream/10603/10460/12/12_chapter 5.pdfSince 1991, India has embarked on a large-scale economic liberalization

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


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


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


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


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


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


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,


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


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.


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


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…


151

Sr.


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…


152

Sr.


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…


153

Sr.


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…


154

Sr.


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…


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.


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


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


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


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


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


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…


161

Sr.

No.


(%)

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…


162

Sr.

No.


(%)

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


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…


163

Sr.

No.


(%)

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



Note : N.A. stands for not available.


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


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


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


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


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


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


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




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)




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


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.


revealed significant decline in cost of debt (Kdat) in metal industry during this period.


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.


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…


173

Sr.

No.


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)**


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…


174

Sr. No.


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…


175

Sr.

No.


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)


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…


176

Sr.

No.


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…


177

Sr.

No.


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)



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.


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.


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.


180


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.


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-





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


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


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


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.


(%)

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


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…


184

Sr.

No.


(%)

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…


185

Sr.

No.


(%)

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


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...


186

Sr.

No.


(%)

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.


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


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


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


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


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


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


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


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.


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


194

Table 5.7

Cost of Capital of Power Industry during Pre-liberalization Period


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


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.


finance and overall cost of capital (Ko1 and Ko2) in case of power industry for post-


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


196

Table 5.8

Cost of Capital of Power Industry during Post-liberalization Period



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


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 (%)


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


finance and overall cost of capital (Ko1 and Ko2) in case of metal industry during pre-


1981-82 to 26.35 percent in the year 1987-88. It exhibits an increase in 6 out of 11


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


199

Table 5.9

Cost of Capital of Metal Industry during Pre-liberalization Period





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


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.


finance and overall cost of capital (Ko1 and Ko2) in case of metal industry for post-


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



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


201

Table 5.10

Cost of Capital of Metal Industry during Post-liberalization Period



Note: * = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share 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


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

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 Metal Industry during Post-liberalization Period

(1990-91 to 2005-06)

Kdat (%)

Kp (%)

Ke1 (%)

Ke2 (%)

Ko1 (%)

Ko2 (%)


203

affected cost of capital of this industry favorably during post-liberalization period as

compared to pre-liberalization period.

5.4.3 Cement Industry


finance and overall cost of capital (Ko1 and Ko2) in case of cement industry for pre-


1979-80 to 15.60 percent in the year 1981-82. It exhibits an increase in 10 out of 11


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


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


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


as compared to first year of the study period. The overall cost of capital (Ko2) has


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




onwards.

Figure 5.5

0

10

20

30

40

50

60

70

19

79

-80

19

80

-81

19

81

-82

19

82

-83

19

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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 Cement Industry during Pre-liberalization Period

(1979-80 to 1989-90)Kdat (%)

Kp (%)

Ke1 (%)

Ke2 (%)

Ko1 (%)

Ko2 (%)


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


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.


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


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


206

Table 5.12

Cost of Capital of Cement Industry during Post-liberalization Period


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






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


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 Cement Industry during Post-liberalization

Period (1990-91 to 2005-06)

Kdat (%)

Kp (%)

Ke1 (%)

Ke2 (%)

Ko1 (%)

Ko2 (%)


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


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



209

Table 5.13

Cost of Capital of Textiles Industry during Pre-liberalization Period


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





onwards.

Figure 5.7

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 Textile Industry during Pre-liberalization Period

(1979-80 to 1989-90)

Kdat (%)

Kp (%)

Ke1 (%)

Ke2 (%)

Ko1 (%)

Ko2 (%)


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)


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.


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


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 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


211

Table 5.14

Cost of Capital of Textiles Industry during Post-liberalization Period






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


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



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.


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

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 Textile Industry during Post-liberalization

Period (1990-91 to 2005-06)

Kdat (%)

Kp (%)

Ke1 (%)

Ke2 (%)

Ko1 (%)

Ko2 (%)


213

liberalization period. This it can be concluded that liberalization have affected

performance of this industry favorably.

5.4.5 Paper Industry


finance and overall cost of capital (Ko1 and Ko2) in case of paper industry during pre-


1980-81 to 15.53 percent in the year 1982-83. It exhibits a decline in 6 out of 11


observed in cost of debt (Kdat) during this period. Overall it shows a decline of 5



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


cost of equity capital (Ke1) during this period. Overall a decline of 25 percent 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


exhibits an increase in 3 out of 6 years as compared to first year of the study period.


214

Table 5.15

Cost of Capital of Paper Industry during Pre-liberalization Period





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


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.


finance and overall cost of capital (Ko1 and Ko2) in case of paper industry for post-


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)


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


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


216

Table 5.16

Cost of Capital of Paper Industry during Post-liberalization Period



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






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


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 (%)


218

Table 5.17

Cost of Capital of General Engineering Industry during Pre-liberalization Period





onwards.

Figure 5.11

0

5

10

15

20

25

30

Co

sts

(%)

Cost of Capital of General Engineering Industry during Pre-


Kdat (%)

Kp (%)

Ke1 (%)

Ke2 (%)

Ko1 (%)

Ko2 (%)


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


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


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)


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


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



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.


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


220

Table 5.18

Cost of Capital of General Engineering Industry during Post-liberalization Period


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






221

Figure 5.12


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


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


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-


Kdat (%)

Kp (%)

Ke1 (%)

Ke2 (%)

Ko1 (%)

Ko2 (%)


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.



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


finance and overall cost of capital (Ko1 and Ko2) in case of sugar industry for pre-



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


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


223

Table 5.19

Cost of Capital of Sugar Industry during Pre-liberalization Period



Note: * = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on


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 (%)


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


224


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


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


observed in overall cost of capital (Ko1) during this period. Overall it exhibits a



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.


finance and overall cost of capital (Ko1 and Ko2) in case of sugar industry for post-


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


225

Table 5.20

Cost of Capital of Sugar Industry during Post-liberalization Period







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


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


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 (%)


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


finance and overall cost of capital (Ko1 and Ko2) in case of tea industry for pre-



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


228

Table 5.21

Cost of Capital of Tea Industry during Pre-liberalization Period


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





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 (%)


229


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


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-




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



230

Table 5.22

Cost of Capital of Tea Industry during Post-liberalization Period







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


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 (%)


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


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


233

Table 5.23

Analysis of Compound Growth Rates of Selected Industries



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)**


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


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


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-


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


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-


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


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-


level of significance during post-liberalization period. The compound growth rate of


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


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


238

turns negative to the extent of 2.39 percent during post-liberalization period. Such a


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


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


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


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



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


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


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


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


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


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


On an average, the cost of debt (Kdat) of sugar industry reduces to 10.80


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


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


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


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


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.

Documents

EFFECT OF LIBERALIZATION ON COST OF CAPITAL OF …shodhganga.inflibnet.ac.in/bitstream/10603/10460/12/12_chapter 5.pdfSince 1991, India has embarked on a large-scale economic liberalization