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Mohd Mujahed Ali, Asst. Prof of Finance and Accounting in Alluri Institute of Management Sciences Warangal. He can be reached on 9849891687 and email:

ABSTRACT Working capital management deals with maintaining the levels of working capital to optimum, because if a concern has inadequate opportunities and the working capital is more than required, the concern will lose money in the form of interest on the block funds. Therefore, working capital management plays a very vital role in profitability of a company. Many companies still underestimate the importance of working capital management as a lever for freeing up cash from inventory, accounts receivable, and accounts payable. By effectively managing these components, companies can sharply reduce their dependence on outside funding and can use the released cash for further investments or acquisitions. This will not only lead to more financial flexibility, but also create value and have a strong impact on a companys enterprise value by reducing capital employed and thus increasing asset productivity. The present study is to investigate the empirical evidences of Accounts receivable, accounts Payable, Inventory and Investments on Profitability by using Regression analysis and bi-variate correlation analysis. KEY WORDS: Accounts Payables, Accounts Receivables, Inventory, Working Capital Management. INTRODUCTION A study of working capital is therefore of major importance for internal and external analysis because of its close relationship with the current day to day operations of business. Working capital signifies the funds required for day to day operations of the firm. The management of current assets and current liabilities and the interrelationship that exists between them may be regarded as Working Capital Management. It is concerned with all aspects of managing current assets and current liabilities. Current assets are those assets, which in the ordinary course of business can be converted into cash within a period of one year without diminution in the value of assets and without disrupting the operations of the firm. They include cash and bank balances, accounts receivables, stock of raw materials, work in progress and finished goods, short term investments, prepaid expenses and incomes outstanding. Current liabilities are those liabilities, which in the ordinary course of business - 57 -

are expected to be paid within a period of one year. They include Accounts Payable, short term loans taken, outstanding expenses and incomes received in advance. In accounting terminology, working capital is the excess of current assets over the current liabilities. It is the difference between the inflow and outflow of funds. The goal of the Working Capital Management is to manage the firms current assets and current liabilities at a satisfactory level. The term working capital is often referred to circulating capital which is frequently used to denote those assets which are changed with relative speed from company that are changed in the ordinary course of business from one form to anotherone form to another i.e., starting from cash, changing to raw materials, converting into work-inprogress and finished products, sale of finished products and ending with realization of cash from debtors. REVIEW OF LITERATURE The study of working capital management has not been received sufficient attention of the researchers though it deserves it. Very few studies have been conducted in the past which are detailed below; Smith1 1973 has identified eight major theoretical approaches taken towards the management of the working capital. He stresses the need for the development of a viable model with dual finance goals of profitability and liquidity and argues that only such models will assist the practicing managers in their day-to-day decision making. Khorram et al 2 (1994) proposed a unique solution to resource allocation problems by combining goal programming with a qualitative forecasting model (e.g. the Delphi method) and a quantitative forecasting technique (e.g. the Poisson gravity model). In their model, the Delphi method is used initially to elicit the experts talents to derive the objectives to be considered in resource allocation, and subsequently a quantitative forecasting technique is used to predict the future values for these objectives. This information is then was used to construct a goal programming model. According to Moyer, Macguigan and Kretlow, 3 1995 each of the working capital items (i.e. cash, receivables and inventories) helps in the management of firms in its own particular way and is used to keep the firm liquid so that it is able to pay its obligations when they are due for payment and therefore it protects the firm from bankruptcy. As Cote and Latham4 1999, argue that the management of receivables, inventory and accounts payable have tremendous impact on cash flows, which in turn affect the profitability of firms. Ghosh and Maji 5 attempted to examine the efficiency of working capital management of Indian cement companies during 1992 - 93 to 2001 - 2002. They calculated three index values - performance index, utilization index, and overall efficiency index to measure the - 58 -

efficiency of working capital management, instead of using some common working capital management ratios. By using regression analysis and industry norms as a target efficiency level of individual firms, Ghosh and Maji [8] tested the speed of achieving that target level of efficiency by individual firms during the period of study and found that some of the sample firms successfully improved efficiency during these years. Chakraborty and Bandopadhyay 6 (2007) studied strategic working capital management, and its role in corporate strategy development, ultimately ensuring the survival of the firm. They also highlighted how strategic current asset decisions and strategic current liabilities decisions had multi-dimensional impact on the performance of a company. Singh7 (2008) found that the size of inventory directly affects working capital and its management. He suggested that inventory was the major component of working capital, and needed to be carefully controlled. Thus, it is found that a few studies have been undertaken on working capital management of the firms. It is pertinent to note that so far no studies have been undertaken on working capital management of poultry industry. Hence, it made me to take up the present research work and I have selected Venkys India Limited a poultry company for my study which emerging as a leader in the poultry industry. OBJECTIVES OF THE STUDY 1. 2. 3. 4. to know the size of working capital to total assets in Venkys India Limited.(VIL) to estimate the working capital requirements of VIL to study the relationship and impact of working capital components on profitability. to offer suggestions based upon the study made on VIL

SCOPE AND LIMITATIONS This study is carried on the basis of the data available of Venkys India Limited, during the period 2001-2012. The study is confined to understanding the relationship between working capital and profitability of the case using Profit before Tax (PBT) as a measure of profitability and the most common measures of working capital. Results of the tests cannot be generalized to the firms in Poultry industry nor on the company as the study is pertaining to a single unit and also based on the information for 12 years RESEARCH METHODOLOGY The data used in the study is obtained from the published results of the company during 2001-2012. The conceptual framework of working capital and statistical methods are gathered from reference books, publications of reputed journals and industry websites. The study has been conducted through simple statistical methods such as correlation, regression - 59 -

and Chi-square test. PBT as a measure of profitability has been compared with various measures of working capital to understand the association between the variables. An estimation of the working capital requirements of the company on the basis of linear regression model has been made. The linear regression model is Y=a+bX. Where Y=working capital. X=Sales. a=the intercept of line on the Y-axis. I.e., the Amount of working capital required when sales are Nil. b = the rate of growth in working capital. The difference between working capital during different years has been found and the variation has been tested with the help of the most popular chi-square test at 5% level of significance. VENKYS (INDIA) LIMITED (Company Profile) The VH group was established in 1971, when motivated by his wife Late Smt. Uttaradevi Rao, the founder Chairman Late Padmashree Dr. B.V.Rao, fondly referred to as The Father of the Indian Poultry Industry , established Venkateshwara Hatcheries Pvt. Ltd. in Pune (India). Today the group is popularly known the world over as Venkys. With a unique combination of expertise and experience and supported by strategic collaborations, the company diversified its activities to include SPF eggs, chicken and eggs processing, broiler and layer breeding, genetic research and Poultry diseases diagnostic, Poultry vaccines and feed supplements, vaccine production, bio-security products, Poultry feed & equipments, nutritional health products, soya bean extract and many more. Today the group is the largest fully integrated poultry group in Asia. The VH group today plays proud parent to a number of reputed organizations under its wide umbrella and successfully caters to poultry and its allied sectors. The pioneering efforts of the VH Group have been well rewarded with several national and international awards. By keeping Quality and Technology as their guiding stars, VENKYS has consistently fulfilled its commitment to QUALITY THROUGH TECHNOLOGY by ensuring that it not only manufactures products using high-end technology but also delivers actual value to its customers through its products and services. Over the years, Venkys (India) Limited embarked upon new ventures in regular succession, adding tremendous value to the company, giving it an edge in technology and high returns on investment. The company has steadily grown to over 30 units spread across India.Today, Venkys impressive portfolio includes animal health products, pellet feeds, processed, and further processed chicken products, solvent oil extraction, and SPF Eggs. The companys Specific Pathogen Free Egg unit (in technical collaboration with SPAFAS Inc. USA) is among four such units in the world and the only one of its kind in the developing world.Diversifying from mainstream poultry products, Venkys (India) Limited has added to its credit, manufacturing facilities for nutritional health products for humans, and pet food and health care products. The company has steadily grown to over 30 units spread across India.The Forbes business magazine of USA ranked Venkys (India) Limited as 67th among the 100 best global small companies in the year 1999-2000. - 60 -

VENKEYS INDIA LIMITED WORKING CAPITAL ANALYSIS In analyzing working capital the components of working capital, sources of working capital, estimation of working capital, net working capital and the relationship of various components of working capital with profitability play a pivotal role. It is essential to study the effects of investing in current assets on liquidity and profitability. It is also needed to gauge the usage of working capital, the study on efficiency of over all working capital and working capital elements, liquidity of working capital elements and structure of working capital is imperative. A modest attempt has been made to exhibit the same aspects through the below analysis. COMPONENTS OF WORKING CAPITAL Table 1 shows the component wise analysis of working capital of Venkateshwara hatcheries Groups VENKYS (INDIA) LIMITED. (VIL) from 2000-01 to 2011-12. It is to be noted that inventory (INV) was the major constituent of the working capital of VIL it was 49 per cent in the year 2000-01 and it has moved to 44 per cent in the year 2011- 12 The second major constituent was sundry debtors (SDB) which was 32 per cent in the year 2000-01 and it has moved to 14 per cent in the year 2011-12 which reveals the efficiency of receivables management and effective credit policy of the VIL. The third major constituent of working capital is deposits/investments. It was 5 per cent in the year 2000-01 and went to 34 per cent in the year 2009-10 and 10 per cent in the 2011-12. The cash balances, advances and others were recorded as 6 per cent , 4 percent and 4 per cent respectively in the year 2000-01. And moved to 28 per cent, 3 per cent and 1 per cent respectively in the year 201112 and the average was 7 per cent, 3 percent and 2 per cent respectively.

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TABLE 1 (Components of Gross Working Capital of VHIL) Rupees in lakhs

- 62 Source: Published Annual Reports of the company

Note: Abbreviations Inventory INV, Sundry Debtors SDB, Cash & Bank Balance CBL, Advances ADV, Deposits DEP, others OTH, Gross Working Capital GWC, Total Assets TA.

TABLE 2 (Sources of Working Capital of VHIL) Rupees in Lakhs

- 63 Source: Published Annual Reports of the company

Table 2 reveals the sources of working capital of VIL. Here it an attempt to know the long term and short term financing of the working capital of VIL. It is transparent 39 per cent of the working capital was finance through short term finance in the year 2000-01 and moved to 55 per cent in the year 2011-12Thus there was an increasing trend in the utilizing of long term capital as a source of finance which indicates the companys policy of investing in current assets and on the other hand it can also be understand of inability of finding short term sources of finances.


An attempt has been made to estimate the requirements of Working capital needs of VIL with the help of regression analysis and the required working capital has been projected in the table -3 and chi-square test was conducted for the actual working capital and estimated working capital of VIL. The chi-square table is 19.68 which is very far below the calculated chi-square value of 5114. Thus there is a large fluctuation in the working capital of VIL. TABLE 3 (Estimation of Working Capital) Rupees in Lakhs
Actual Working Capital (O) 4533 5413 5768 6892 7624 10392 12677 14197 13824 17762 22800 16487 Estimated Working Capital (E) 4839 5981 6942 7266 8231 9267 10194 13316 14628 18419 22607 26704 Excess of Working Capital --------------------------------------1125 2483 881 --------------193 10217 E(X) Shortage of Working Capital -306 -568 -1174 -374 -607 ---------------------------804 -657 (O-E)2/E (X) 19 54 199 19 45 137 605 58 44 23 2 3909 5114

Years 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Source: Annual Reports of the company

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An attempt is made to analyse the liquidity position, activity position and profitability position of the organisation with the help of following ratios which are shown in the following table -4. Table-4

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DESCRIPTIVE ANALYSIS The descriptive analysis is shown in the following table-5


Minimum 3.91 9.11 3.19 1.81 1.02 .27 3.29 1.64 3.10

Maximum 5.96 18.84 7.12 4.02 2.44 1.42 6.11 2.21 12.52

Mean 4.5875 11.4742 5.1950 3.0083 1.7433 .8000 4.4108 1.9383 6.7942

Std. Deviation .62075 2.87774 1.12253 .64296 .49527 .41652 .79989 .16705 2.82226

BI VARIATE COEFFICIENT OF CORRELATION ANALYSIS To analyse the impact of Working capital efficiency on Profitability, correlation test has been conducted between Profitability and various components. In the analysis it is vivid that there is a positive correlation existing between Inventory turnover ratio, Debtor turnover ratio, Creditor turnover, current ratio, quick ratio and cash ratio to Profitability. which strongly recommends that efficient utislisation of inventory, better management of debts and payables, and proper liquidity of the organisation leads for profitability. Another important finding is that excess investment in Working capital and Current Assets lead to negative role in profitability because the relationship between Working capital ratio and current asset ratio is negative.

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ITR ITR DTR CTR CUR AR CAR WCTR CATR PTR 1 DTR .289 1 CTR .697 -.018 1 CU R .474 .105 .902 1 AR .592 .001 .879 .976 1 CAR .618 .374 .743 .843 .918 1 WCTR -.237 .402 -.671 -.897 -.874 -.676 1 .144 -.291 -.316 -.350 .548 1 .644 .607 .93 .641 -.304 -.204 1 CATR .382 .105 PTR .375 .400

Source: Annual Reports of the companty CONCLUSIONS The components of working capital, sources of working capital, estimation of working capital, net working capital and the relationship of various components of working capital with profitability play a pivotal role. It is being analysed that 50 per cent of the long term funds are used in financing working capital, and efficiency of the components of working capital has positive relationship with profitability. Thus effective and efficient management of current assets is the need of the hour. REFERENCES 1. Anand, M., & Gupta, C. P. (2001). Working capital performance of corporate India: an emprirical survey for the year 2000-2001. Management and Accounting Research, 4(4), 35-65. Auerbach, C. F., & Silverstein, L. B. (2003). Qualitative data an introduction to coding and analysis. New York, NY: New York University Press. Bacani, C. (2007). The big squeeze. Retrieved August 2, 2008 from - 67 -


3. 4.

Eljelly A, 2004. Liquidity-profitability tradeoff: an empirical investigation in an emerging market. International Journal of Commerce and Management, 14: 48-61. Falope OI, Ajilore OT, 2009. Working capital management and corporate profitability: evidence from panel data analysis of selected quoted companies in Nigeria. Research Journal of Business Management, 3: 73-84. Ghosh SK, Maji SG, 2003. Working capital management efficiency: a study on the Indian cement industry. The Institute of Cost and Works Accountants of India. [http:/ /] Mathuva D, 2009. The influence of working capital management components on corporate profitability: a survey on Kenyan listed firms. Research Journal of Business Management, 3: 1-11. Abdul Rahman, R., & Mohamed Ali, F. H. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7), 783-804. Reason, T. (2008). Preparing your company for recession. Retrieved August 2, 2008 f r omht t p :/ / ezp r ox a c. nz/ login?u r l= htt p :/ / p r oques t. u mi. com/ pqdweb?did=1423329 071&Fmt=7&clientId=18963&RQT=309&VName=PQD Reyman, G. (2005). How Johnsondiversey implemented s&op in Europe. Journal of Business Forecasting Methods and Systems, 24(3), 20-28. Richards, V. D., & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management, 9(1), 32-38. Sartoris, W. L., Hill, N. C., & Kallberg, J. G. (1983). A Generalized Cash Flow Approach to Short-Term Financial Decisions/Discussion. The Journal of Finance, 38(2), 349-360. Shin HH, Soenen L, 1998. Efficiency of working capital management and corporate profitability. Financial Practice and Education,8: 37-45




8. 9. 10.


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Mr.Shaik Masood, Asst Professor of Finance, Dept of Business Management, Alluri Institute of Management Sciences, Warangal, A.P. he can be reached at Navaneeth, Student of MBA IV semester, Alluri Institute of Management Sciences, Warangal, A.P. Anitha, Student of MBA IV semester, Alluri Institute of Management Sciences, Warangal, A.P.

ABSTRACT The objective of the corporate management is to maximise the market value of the organisation. Generally investors expect returns out of their investments and dividend policy of the organisation motivates the investors to invest in their companies. Thus the dividend policy should be as inclined as to satisfy the interest of share holders as well as to attract the potential investors and the positive reception in the market price of share. The present paper is to study the determinants and impact of dividend policy on market price of the share with reference to select FMCG companies. KEY WORDS Dividend, Market price, Payout ratio. CONCEPT OF DIVIDEND POLICY In corporate finance one of the major issues for the managers that are can influence the market value of the business, financing structure of the firm, market prices of equity prices and shareholders value maximaisation. As companies are artificial human being, the decision regarding utilisation of profits rests with a group of people, namely the board of directors. As in any other types of organization, the disposal of net earnings of a company involves either their retention in the business or their distribution to the owners (i.e. shareholders) in the form of dividend, or both. Yet the decision regarding distribution of disposal earnings to the shareholders is very considerable one. Besides affecting the mood of the present shareholders, dividend may also influence the mood, behaviour responses of prospective investors, stock exchanges and financial institutions because the relationship of dividend is strongly linked with fundamental performance of a company that can also show its impact on the market value of the shares. The decisions regarding dividend is taken by their Board of directors and is meeting of the company. Disposal of profits in the form of dividends can become a controversial-issue because of conflicting interests if various parties like the directors, employees, shareholders, - 69 -

debenture holders, lending institutions, etc. even among the shareholders there may be conflicts as they may belong to different income groups. While some may be interested in regular income, others may be interested in capital appreciation and capital gains. Hence, formulation of dividend policy is a complex decision. It needs careful consideration of various factors, one thing, however, standout. Instead of an ad hoc approach, it is more desirable to follows a reasonably long term policy regarding dividends. REVIEW OF LITERATURE Dr. T. Satyanarayana Chary and Mohammed Mujahed Ali (2009) dividend as a return to the factor of production is considered to be an image maker for a commercial enterprise, irrespective of the arguments in favour and against the dividend proposition and confidence about the performance and profitability of such enterprise. I.M. Panday and Ramesh Bhatt in their article Dividend Behaviour of Indian Companies under Monetary Policy Restrictions, focused on the corporate dividend behavior as a key research area in finance. They opine on the lines of Black (1976) that dividend behavior of companies and the dividend puzzle still remains unsolved. Under the assumption that capital markets are perfect, the finance researchers have shown that dividends are irrelevant, and that they have no influence on the share price (Miller and Modigliani, 1961). When capital markets are imperfect, some researchers have argued that dividends do matter and firms pursue an appropriate dividend policy. Several empirical surveys indicate that both managers and investors favour payment of dividends. Fama et al. (1969) have conducted the seminal study on semi-strong form of market efficiency with a view to determine the effect of stock splits on share prices. The study has a special importance in the area of finance because it was the first to develop a research methodology for testing market efficiency which is still widely used by the researchers. Narsimhan and Asha (1977) discussed the impact of dividend tax on dividend policy of companies. They observe that the uniform tax rate of 10 % on dividend as proposed by the union budget 1997-98, altered the demand of investors in favour of high payouts rather than low payouts because of 20% tax on capital gains in the said period. According to Mohanty (1999), the theory of finance considers a bonus issue as a financial illusion because it does not add value to the company under the symmetric information assumption. This is because bonus issue is just an accounting adjustment. The accountant just makes a book entry by debiting some free reserves account and crediting the share capital account. It does not directly affect any cash flow or outflow and, therefore, it is assumed that it does not add value to the company. If a company distributes a known fraction of its earnings each year as dividend, then the bonus issue will bring down the dividend in proportion to the bonus ratio and hence the theoretical ex-bonus share price will go down in - 70 -

proportion to the bonus ratio. However, the number of shares the company holds increases in the same proportion and hence the shareholders wealth remains unchanged. If, however, management has better information about the future prospects of a company than the shareholders, then a bonus issue may convey some valuable information to the shareholders. The shareholders, for example, may think that the management is more confident of the future and hence the cash flows due to dividend will increase after the bonus issue. In this case, the bonus issue will be welcomed by the shareholders. NEED FOR THE STUDY The dividend is an amount of return expected by the shareholders of the joint stock company, this is a motivate factor for the investors behaviour in the securities market, it influence the market prices of the security, hence it felt to analyse the practices dividend policy in FMCG industry with reference to select companies. OBJECTIVE OF THE STUDY 1. 2. 3. To analyse the dividend practices of FMCG industry and their market value in India with specific reference to select sample companies, To find out the factors influencing the determinants of dividend payout, To compare the market price of share of selected companies to share value attained through Modigliani - Miller model to the actual market price.

LIMITATION OF THE STUDY The study is very comprehensive in nature, but subject to study of select companies FMCG industry, limited data of five years from 2007-08 to 2011-12 only, the values are approximation and on basis of annual reports and market prices taken from the stock exchange directories, lastly the analysis made from the past financial statements and thus there are no indicators of future. RESEARCH METHODOLOGY The research uses secondary data as collected the annual reports from respective companies, market prices information, other related information collected through stock exchanges, RBI, published journal and articles. Data thus collected was processed and analysed through financial tools such as MPS, EPS, P/E, Ke, r dividend theory proposed by Modigliani - Millers as well as yield to investor. Hence the calculation of cost of equity (Ke) and comparison to the rate of return (r) is made in the study. The MPS was calculated by using Modigliani Miller and compare with actual MPS. - 71 -

MODIGLIANI AND MILLERS Modigliani - Millers thoughts for irrelevance of dividends are most comprehensive and logical. According to them, dividend policy does not affect value of a firm and is therefore, of no consequence. They are of the view that the sum of the discounted value per share after dividend payments is equal to the market value per share before dividend is paid. It is earning potentially and investment policy of a firm rather than its pattern of distribution of remainings that affects value of the firm. The basic assumptions of M-M approach are: 1) There exists perfect capital market where all investors are rational-information is available to all at no cost, there are no transaction costs and floatation costs, there is no such investor as could alone influence market value of shares. There does not exist taxes. Alternatively, there is no tax differential between income on dividend and capital gains Firms investment policy is well planned and is fixed for all the time to come. There is no uncertainty as to future investments and profits of the firm. Thus, investors are able to predict future prices and dividends with certainty. This assumption was dropped by M-M later.

2) 3) 4)

This model, which opines that dividends policy of firm effects its value, is based on the following assumptions M-M formula for determining the market price per share is as follows. P 1 = {Po * (1+Ke)} - D1 Where P1 = Market price of the share at the end of the year, Po = last year MPS, D1= Dividend Per Share, Ke = cost of Equity DATA ANALYSIS AND INTERPRETATION The table 1 revels that the calculated market price and actual market price was changed due to change in D/P ratio, as cost of equity increases market price also increase, it can be conclude that as investors expectation were influence the market price rather than actual value of the market price. The interest rate shows the negative relation with d/P ratio, inflation to d/p shows positive, it may conclude that as inflation factor influence on market prices. - 72 -

Table 1 Analysis of ITC

Year 2008 2009 2010 2011 2012 Corr D/P EPS 7.88 6.45 10.64 8.65 8.28 0.78 D/P 0.44 0.57 0.94 0.51 0.54 DPS 3.50 3.70 10.00 4.45 8.28 G 20 15 3 22 22 Ke 21.95 20.49 4.29 24.25 23.99 r 21.85 17.09 6.40 24.22 23.57 Yield 1.70 2.00 3.80 2.44 1.98 Ke vs r Ke>r Ke>r Ke<r Ke>r Ke>r MPS 206.25 184.85 263.05 182.10 226.90 MPS* 182.84 245.53 185.74 327.84 224.98 i 7 4.5 4.75 6.5 8 -0.01 I 8.32 10.83 12.11 8.87 9.13 0.56

(Source: Annual reports of the company)

MPS*- calculated MPS, MPS- Current MPS, i interest rate, I inflation rate, Ggrowth rate of earnings, Ke - cost of equity, EPS- Earning Per Share, r- Return on investment, DPS- Dividend Per Share, The table 2 revels that the calculated market price and actual market price was as change in D/P ratio, as cost of equity is higher than to return on investment increases market price also increase, it can be conclude that as investors expectation were influence the market price rather than actual value of the market price. The interest rate shows the positive relation with d/P ratio, inflation to d/p shows as equivalent to zero so here it may conclude both ware independent, it may conclude that as inflation factor influence on market prices. Table 2 Analysis of Dabur India ltd
Year 2008 2009 2010 2011 2012 Corr D/P EPS 3.90 4.50 5.80 3.30 3.70 -0.04 D/P 0.38 0.40 0.34 0.39 0.38 DPS 1.50 1.80 2.00 1.30 3.70 G 44 30 43 28 26 Ke 45.65 32.39 44.07 29.39 27.68 r 45.38 32.19 44.51 29.29 27.33 Yield 1.35% 1.81% 1.26% 1.35% 1.31% Ke vs r Ke>r Ke>r Ke<r Ke>r Ke>r MPS 110.80 99.20 158.80 96.10 106.60 MPS* 139.18 149.14 142.17 207.98 123.91 i 7 4.5 4.75 6.5 8 0.49 I 8.32 10.83 12.11 8.87 9.13 0.01

(Source: Annual reports of the company)

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The table 3, it can analysed that D/P ratio initial period of the study was 23 percent and gradually constant in subsequent period, market price to calculated price was low it can also analysed from the cost of equity is higher than to return on investment increases market price also increase, it can be conclude that as investors expectation were influence the market price rather than actual value of the market price. The interest rate shows the negative relation with d/p ratio means as inflation increases the investors expecting more return as inflation high, market prices was also moved in same direction, inflation to d/p shows high it may conclude that as interest rate increases market price falling down. Analysis of Table 3 BRITANNIA INDUSTRIES LIMITED
Year 2008 2009 2010 2011 2012 Corr D/P EPS 79.95 75.51 48.77 12.16 15.63 0.70 D/P 0.23 0.53 0.51 0.53 0.54 DPS 18.00 40.00 25.00 6.50 15.63 G 21 12 12 12 23 Ke 23.93 14.19 12.66 14.43 24.39 r 22.25 15.26 13.83 13.89 24.07 Yield 1.37 2.86 1.59 1.74 1.43 Ke vs r Ke>r Ke<r Ke<r Ke>r Ke>r MPS 1315.95 1400.05 1573.90 372.50 593.00 MPS* 1570.43 1485.05 1557.27 1824.62 460.36 i 7 4.5 4.75 6.5 8 0.73 I 8.32 10.83 12.11 8.87 9.13 0.64

Source: Annual reports of the company From the table 4, it can analysed that D/P ratio initial period of the study was 28 percent and gradually decreased subsequent period, it was observed from the analysis of actual market price is higher than market price at the same time cost of equity is equal to return on investment, hence probably the as investors expectation satisfied, the interest rate shows the negative relation with d/p ratio means as inflation increases the investors expecting more return as inflation high, market prices was also moved in same direction, inflation to d/ p shows high it may conclude that as interest rate increases market price falling down.

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Table 4 Analysis of MARICO

Year 2008 2009 2010 2011 2012 Corr D/P EPS 2.35 2.33 3.86 5.13 5.47 0.62 D/P 0.28 0.28 0.17 0.13 0.13 DPS 0.66 0.66 0.66 0.66 5.47 G 26 24 30 26 24 Ke 26.99 24.64 30.64 26.91 24.01 r 26.99 24.64 30.64 26.88 23.92 Yield 0.97 1.09 0.61 0.47 0.40 Ke vs r Ke=r Ke=r Ke=r Ke>r Ke>r MPS 67.80 60.30 109.05 139.45 175.30 MPS* 78.83 87.44 80.59 141.47 176.92 i 7 4.5 4.75 6.5 8 0.69 I 8.32 10.83 12.11 8.87 9.13 -0.26

Source: Annual reports of the company From the table 5, it is observed from the analysis actual market price is higher than market price at the same time cost of equity is equal to return on investment except starting and ending of the period, the dividend policy follows a stable rupee dividend, it may conclude that investors happy in stability in dividend payments as per their expectation, the interest rate shows the positive relation with d/p ratio, it means as interest rate increases market prices also increases it may corporate follow the policy to keep the shareholders happy by paying stable and high dividends, inflation increases the investors expecting more return as inflation high, market prices was also moved in opposite direction. Table 5 Analysis of P&G
Year 2008 2009 2010 2011 2012 Corr D/P EPS 40.48 55.10 55.38 46.48 35.85 -0.58 D/P 0.49 0.41 0.41 0.48 0.63 DPS 20.00 22.50 22.50 22.50 35.85 G 26 29 27 14 11 Ke 29.03 31.35 27.68 15.52 11.83 r 28.70 31.35 27.68 15.52 11.72 Yield 2.62 2.51 1.12 1.14 1.02 Ke vs r Ke>r Ke=r Ke=r Ke=r Ke>r MPS 763.95 896.15 2008.20 1968.05 2197.65 MPS* 1023.10 1008.76 1136.34 2321.84 2188.15 i 7 4.5 4.75 6.5 8 0.59 I 8.32 10.83 12.11 8.87 9.13 -0.15

Source: Annual reports of the company - 75 -

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

REFERENCES 1. 2. Bhat R and Pandey I.M. (1994), Dividend Decision: A Study of manager s perceptions, Decision. Dr. T. Satyanarayana Chary and Mohammed Mujahed Ali (2009),Dividend Practices and Market Value of Pharma and Paper Industries- An Analytical Study, Pragyaan : JOM Volume 7 : Issue 2, Dec 2009 Fama E.F. and French K R (2001) Disappearing Dividends: Changing firm Characteristics or lower Propensity to pay ?, Journal of Applied Corporate Finance. Gupta L C (1981) Rates of Return on equities the Indian Experience, Oxford University Press. Kevin S (1992), Dividend Policy: An Analysis of some Determinants, Finance India. Mohanty P (1999), Dividend and Bonus Polices of Indain Companies Vikalpa Narasimhan M S and Asha C (1997), Implications of Dividend Tax on Corporate Financial Policies, The Icfai Journal of Applied Finance. Reddy S Y (2002), Dividend Policy of Indian Corporate Firms: An Analysis of trends and determinants, NSE Research Initiative

3. 4. 5. 6.


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1 2

Dr. T. Gopi, Assistant Professor, UPGC, Kakatiya University , Khammam K.Hanumantha Rao, Lecturer in Commerce and Business Management, Trinity PG College, Khammam, He can be reached at email:

ABSTRACT The capital markets channel the wealth of savers to those who can put it to long term productive use, such as companies or governments making long term investments. When a company wants to raise money for long term investment, one of its first decisions is whether to do so by issuing bonds or shares. When a government wants to raise long term finance it will often sell bonds to the capital markets. One indicator of future is that the IRDA is expected to change the investment norms it prescribes for insurance companies. Under the current regulations, a firm can invest up to 50% of its fund in government securities, 15% in infrastructure bonds, and 35% in corporate paper and equities. Indias life insurance market has grown at more than 40% annually (measured in terms of new business premium) in the past six years. But the ratio of insurance premium to GDP is around 4%. Penetration is very low, practically zero in the unbanked segment. For the industry, premium income is likely to go up sharply. A well developed and evolved insurance sector is a boon for economic development of a country. It provides long-term funds for infrastructure development and concurrently strengthens the risk-taking ability of the country. There are certain factors that need to be considered by the Indian insurance industry to ensure a seamless growth in business like distribution channels, focus on financial inclusion. The Government is showing interest to introduce the bill of raising FDI in insurance from 26% to 49%. KEY WORDS: Capital Market, IRDA, Life Insurance. INTRODUCTION Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are longterm choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities. - 77 -

OBJECTIVES 1. 2. 3. 4. 5. To study the tools required to make investment decisions To study about financial services by different markets. To study the role of insurance in capital provision to analyse the trends of the insurance sector to make conclusions and suggestions

Capital investment decisions Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. (1) Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. (2) These projects must also be financed appropriately. (3) If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends). Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. Tools required to make investment decisions Net Present Value: According to this method that project which has highest NPV will be selected at invested. Along with this time value of money is considered Internal Rate of Return: The rate at which the present values of investment and present value of cash inflows equals. Project with highest IRR is selected.

Finance is the study of how investors allocate their assets over time under conditions of certainty and uncertainty. A key point in finance, which affects decisions, is the time value of money, which states that a unit of currency today is worth more than the same unit of currency tomorrow. Finance aims to price assets based on their risk level, and expected rate of return. Finance can be broken into three different sub categories: public finance, corporate finance and personal finance. Managerial or corporate finance is the task of providing the funds for a corporations activities. Corporate finance generally involves balancing risk and profitability, while attempting to maximize an entitys wealth and the value of its stock, and generically entails three interrelated decisions. In the first, the investment decision, management must decide which projects (if any) to undertake. The discipline of capital budgeting is devoted to this question, and may employ standard business valuation techniques or even extend to real options valuation. The second, the financing decision relates to how these investments are to be funded - capital here is provided by shareholders, in the form of equity or debt financing - 78 -

which includes bank loans and bond sales. The owners of both bonds and stock, may be institutional investors - financial institutions such as investment banks and pension funds or private individuals, called private investors or retail investors. Short-term funding or working capital is mostly provided by banks extending a line of credit. The balance between these elements forms the companys capital structure. The third, the dividend decision, requires management to determine whether any unappropriated profit is to be retained for future investment / operational requirements, or instead to be distributed to shareholders, and if so in what form Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value one has to decide what, how much and when to invest. To do this, a company must: Identify relevant objectives and constraints Identify the appropriate strategy Measure the portfolio performance

Financial risk management, an element of corporate finance, is the practice of creating and protecting economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. FINANCIAL SERVICES Financial System includes all those activities dealing in finance, organized into a system. Financial system plays a crucial role in the functioning of the economy because, it allows transfer of resources from savers to investors. It comprises four major components 1. 2. 3. 4. financial institutions financial markets financial instruments and financial services.

Financial market is a place or mechanism where funds or savings are transferred from surplus units to deficit units, and can classified into money markets and capital markets. Money market deals with shot-term claims or financial assets. The capital market plays a vital role in mobilizing the savings and making them available to the enterprising investors. The primary capital market helps government and industrial concerns in raising funds by issuing various funds of securities. The secondary market provides liquidity to the outstanding/ existing securities. Financial services include the services offered by both types of companiesAsset Management Companies and Liability Management Companies. Financial institutions provide service as intermediaries of financial markets. They are responsible for transferring - 79 -

funds from investors to companies in need of those funds and facilitate the flow of money through the economy. Financial Institutions in India mainly comprises of the Central Bank which is better known as the Reserve Bank of India, the commercial banks, the credit rating agencies, the securities and exchange board of India, insurance companies and mutual funds. The financial services helps to decide the financing finds and to ensure their efficient deployment, help to decide the financing mix and extend their services upto the stage of servicing of lenders. A financial instrument is a real or virtual document representing a legal agreement involving some sort of monetary value. Financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. INDIA INSURANCE India insurance is a flourishing industry, with several national and international players competing and growing at rapid rates. With reforms and the easing of policy regulations, the Indian insurance sector been allowed to flourish, and as Indians become more familiar with different insurance products, this growth can only increase, with the period from 2010 2015 projected to be the Golden Age for the Indian insurance industry. The history of the Indian insurance sector dates back to 1818, when the Oriental Life Insurance Company was formed in Kolkata. A new era began in the India insurance sector, with the passing of the Life Insurance Act of 1912. The Indian Insurance Companies Act was passed in 1928. This act empowered the government of India to gather necessary information about the insurance organizations operating in the Indian financial markets. The formation of the Malhotra Committee in 1993 initiated reforms in the Indian insurance sector. The recommendations of the committee put stress on offering operational autonomy to the insurance service providers and also suggested forming an independent regulatory body. The Insurance Regulatory and Development Authority Act of 1999 brought about several crucial policy changes in the insurance sector of India. It led to the formation of the Insurance Regulatory and Development Authority (IRDA) in 2000 by ending of government monopoly lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. As per rules, the upper limit of foreign direct investment permitted in this sector is 49 percent. However, this has to be done through the automatic route and the investor needs a license from Insurance Regulatory and Development Authority (IRDA). The IRDA has recently taken away the tariffs of the interest rates and this has provided insurers greater independence when it comes to deciding the price of their insurance policies. The insurance industry has also become more competitive as a result. Yet another important factor affecting this sector has been the recent financial meltdown. - 80 -

INDIA INSURANCE INDUSTRY CONTRIBUTION TO GDP Around the world the insurance industry contributes around 4.5% to national GDPs. The Chairman of IRDA, Hari Narayan has ruled out any such possibility asking if Indias GDP growth will be that much in the next few years ahead. If the insurance sector is to do well in terms of contribution to GDP then more people should be convinced about its capability to provide good ROI (return on investment). With an annual growth rate of 15-20% and the largest number of life insurance policies in force, the potential of the Indian insurance industry is huge. Total value of the Indian insurance market (2004-05) is estimated at Rs. 450 billion (US$10 billion). According to government sources, the insurance and banking services contribution to the countrys gross domestic product (GDP) is 7% out of which the gross premium collection forms a significant part. The funds available with the state-owned Life Insurance Corporation (LIC) for investments are 8% of GDP. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have poured into the Indian market and 21 private companies have been granted licenses. Capital markets have a long history of over 100 years in India. Bombay Stock Exchange came into existence more than a hundred years ago to remove direct government control. Indian companies are now allowed to raise capital from abroad and Foreign Institutional Investors are allowed to enter the market due to an important policy initiative in 1993. For a stronger and resilient financial system, India needs to move beyond peripheral issues and act maturely by increasing profitability and efficiency, providing better solutions to the customers. TRENDS IN INSURANCE SECTOR 1. INDIAN ECONOMY (GROWTH RATE IN GDP) Table No: 1
year rate 2006-07 9.6 2007-08 9.0 2008-09 6.7 2009-10 8.0 2010-11 8.5 2011-12 6.5

Source: irda annual reports ANALYSIS A slowdown can be observed in the economy in the year 2008-09 to 6.7 and a robust growth (surge) in consecutive two years 2009-10 and 2010-11. A dismal growth of 6.5 percent in 2011-12 was registered, the lowest growth rate in the last decade. - 81 -



Insurer Year amount crore rs.

31-3-2007 lic private sector total increase in % private sector increase in % total 5 8119.41 8124.41

31-3-2008 5 12291.42 12296.42 51.38

31-3-2009 5 18249.77 18254.77 48.47

31-3-2010 5 21014.99 21019.99 15.15

31-3-2011 5 23656.85 23661.85 12.57

31-3-2012 100 24831.92 24931.92 4.97






Source: irda annual reports ANALYSIS There was an increase in the capital provided by insurance sector.,Capital provided by lic was stagnant upto 2011 but added Rs.95 crores in 2011-12. Though there was an increase in private sector capital, the percentage decreased year to year. 3. MARKET SHARE Table No: 3
Insurer Year 2006-07 lic private sector total 81.9 16.1 100 2007-08 74.39 25.61 100 2008-09 70.92 29.08 100 2009-10 70.1 29.9 100 percentage 2010-11 69.78 30.22 100 2011-12 70.68 29.32 100

Source: irda annual reports - 82 -

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

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Insurer year amount rs.Crores

2006-07 lic change % private sector change % total change % 156075.85 28253.01 127822.84

2007-08 149789.99 17.19 51561.42 82.50 201351.41 29.01

2008-09 157288.04 5.01 64497.44 25.09 221705.48 10.11

2009-10 186077.31 18.30 79373.06 23.06 265450.37 19.73

2010-11 203473.40 9.35 88165.24 11.08 291638.64 9.87

2011-12 202889.28 -0.29 84182.83 -4.52 287072.11 -1.57

Source: irda annual reports ANALYSIS There were wide fluctuations in case of lic and private sector upto 2010-11. In the year 2011-12 there was a slump in the business. REAL GROWTH IN PREMIUM YEAR WISE IN PERCENT Table No: 5
Regions/ countries advanced emerging asia India (financial year) world 2009 -2.8 4.2 1.8 10.1 -2.8 2010 1.8 13 4.2 4.2 3.2 2011 -2.3 -5.1 0.5 -8.5 -2.7

Source: Swiss RE, sigma (irda reports) - 84 -


year Density (usd) Penetr a tion % 2001 9.1 2002 11.7 2003 12.9 2004 15.7 2005 18.3 2006 30.3 2007 40.4 2008 41.2 2009 47.7 2010 56.7 2011 49










Source: Swiss Re, various issues (irda reports) 1. 2. Insurance density is measured as ratio of premium(in USD) to total population insurance penetration is measured as ratio of premium (in USD) to GDP (in USD)

ANALYSIS India has reported increase in insurance density for every subsequent year and for the first time reported a fall in the year 2011. Insurance penetration surged till 2009 and slumped continuously in two years 2010 and 2011. Pebetration is very low. TOTAL INVESTMENTS OF THE LIFE INSURANCE SECTOR Table No: 7
Year Public sector 31-3-2008 678402 (21.32)* 88.57** 87567 (94.68)* 11.43** 31-3-2009 799583 (17.86) 87.26 116772 (33.35) 12.74 31-3-2010 985028 (23.19) 81.73 220127 (88.51) 18.27 31-3-2011 1148589 (15.75) 80.31 281528 (27.89) 19.69 31-3-2012 1289670 (10.40) 80.51 312188 (10.80) 19.49

Private sector

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

source: irda annual reports ANALYSIS The same pattern was followed by both public and private sector. There were ups and downs in investments. A slump by 31-3-2009, 2011 and 2012, and surge in 31-3-2010. Investments of public sector to total investments year wise were above eighty percent and that of private sector were less than twenty percent. - 85 -

INSURANCE - MARKET EFFICIENCY Its good news for the insurance industry. For a sector that feeds on capital, the proposed hike in the foreign direct investment limit in insurance joint ventures to 49 per cent is a boon. Foreign players, whose stake is now capped at 24 per cent, can now bring in more money; most of them would love to own a larger stake if not the whole venture. India: The Next Insurance Giant In 2000, Indian insurance market size was $21.71 billion. Between 2000 and 2007, it had an increase of 120% and reached $47.89 billion. Between 2000 and 2007, total premiums maintained an average growth rate of 11.96% and the CAGR growth during this time frame has been 11.96%. Indian economy is the 12th largest in the world, with a GDP of $1.25 trillion and 3rd largest in terms of purchasing power parity. With factors like a stable 8-9 per cent annual growth, rising foreign exchange reserves, a booming capital market and a rapidly expanding FDI inflows, it is on the fulcrum of an ever increasing growth curve. CONCLUSIONS Insurance is one major sector which has been on a continuous growth curve since the revival of Indian economy. Taking into account the huge population and growing per capita income besides several other driving factors, a huge opportunity is in store for the insurance companies in India. Nearly 80% of Indian population is without life insurance cover, and this part of the population is also subjected to weak social security and pension systems with hardly any old age income security. Insurance in India is primarily used as a means to improve personal finances and for income tax planning; Indians have a tendency to invest in properties and gold followed by bank deposits. They selectively invest in shares also but the percentage is very small 4-5%. This in itself is an indicator that growth potential for the insurance sector is immense. Its a business growing at the rate of 15-20% per annum and presently is of the order of $47.9 billion. India is a vast market for life insurance that is directly proportional to the growth in premiums and an increase in life density. With the entry of private sector players backed by foreign expertise, Indian insurance market has become more vibrant. Competition in this market is increasing with companys continuous effort to lure the customers with new product offerings. However, the market share of private insurance companies remains very low in the 10-15% range. Even to this day, Life Insurance Corporation (LIC) of India dominates Indian insurance sector. The heavy hand of government still dominates the market, with price controls, limits on ownership, and other restraints. Increase in FDI in insurance sector would attract more business by more premi8um can be collected which can be transferred to capital market for robust economic development. - 86 -

SUGGESTIONS Higher savings pave the way for higher GDP growth rate. Given a particular incremental capital output ratio, the only way to achieve higher GDP growth is by having higher long-term savings, so that there is a stable growth in savings and also in GDP. Insurance is one of the long-term saving vehicles. Higher insurance penetration will enable to collect higher premium and these premiums are invested in debt and equity instruments. The insurance sector was a significant contributor to the capital market thereby lending support to the stability of capital markets. Infrastructure development is very crucial for us. Infrastructure projects are long term in nature and to provide capital for such sectors, the money has to come from insurance. Hence high insurance penetration will provide a decent capital contribution in providing infrastructure facilities. Insurance density should be improved comparatively to the Indias population so that more premium can be collected which is transferable to Indian industry and service sectors. 1. 2. India has to go for more foreign contribution from insurance sector, high sectoral reforms are needed like increase in FDI and FII. Reach rural areas as the most of the Indians live in rural areas and most of the rural people are not yet covered by insurance. With this more premium collections may be possible which can be invested in corporate sector for speedy economic development, See that the share of insurance in GDP increases so more capital can be provided for companies. Insurers have to speed up their businesses, endeavour to write more policies as the premiums collected are not immediately repayable, they can be used for economic development. Insurers have to give more services to the policy holders to develop trust among them. Avadhani.V.S., Security Analysis and Portfolio Management, Mumbai: Himalaya Publishing House, 8th ed., 2006, pp 1-45. IRDA annual reports for various years and other sites on internet. Madhukar Palli, A study on assessing life insurance potential in India, Bimaquest, Vol.6, Issue 2, July 2006. Pandey. I.M., Financial Management, New Delhi: Vikas Publishing House Pvt Ltd, 9th ed., 2004, pp 22-35 Selva Kumar.M and Vimal Priyan.J, A comparative study of public and private life insurance companies in India, Indian Journal of Commerce, Vol.65, No.1, Jan-Mar 2002, pp 81-87. Various issues of Insurance Institute of India. - 87 -

3. 4.


REFERENCES 1. 2. 3. 4. 5.




Mirza Juned Beg, LL.M 2011-14, NALSAR University of Law, Justice City, Shameerpet, R.R. Dist. 500078, Hyderabad, A.P. Habib Zafar Khan, LL.M 2012-14, NALSAR University of Law, Justice City, Shameerpet, R.R. Dist. 500078, Hyderabad, A.P.

ABSTRACT: Corporate restructuring is the process of dismantling and reconstructing either a whole organization or certain divisions of a corporation that need special attention. This may require considerable movement of the companys liabilities and assets. Corporate restructuring often involves redesigning and reorganising one or more facets of the organization. This process is undertaken for a variety of reason, the chief being to improve efficiency and profitability in the organisation. Thus reasons of corporate restructuring can be divided into two distinct heads; first corporate restructuring is a product of changing business scenario of corporations, and second, changing regulatory scenario of the nation. This paper explains the concept of corporate restructuring and presents and overview of Law, policy and procedure in India pertaining to corporate restructuring. In the final section of the paper, the theories, types and modes. KEYWORDS: Corporate Restructuring, Legal Provisions, Powers of Tribunal . INTRODUCTION The Companies Act, 1956 is a voluminous piece of legislation on the statute book with 658 sections and 14 schedules. However, there are only seven sections here on corporate restructuring including mergers, de mergers etc. Although corporate re-engineering physically occupies a small portion of the Companies Act comprising barely seven sections from 390 to 396A therein, yet its impact on industry and commerce has been far reaching. These provisions have been borrowed from the English Companies Act and have withstood the test of times. Chapter V of the Companies Act deals with schemes of compromises, arrangements and reconstructions covering Sections 390 to 396A. Restructuringisthecorporatemanagementtermfortheactofreorganizingthelegal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring. - 88 -

Corporaterestructuringistheprocessofredesigningoneormoreaspectsofacompany. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Restructuringacorporateentityisoftenanecessitywhenthecompanyhasgrownto the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share. Executives involved in restructuring often hire financial and legal advisors to assist in the transaction details and negotiation. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company. It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations. The basic nature of restructuring is a zero sum game. Strategic restructuring reduces financial losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt resolution of a distressed situation. Business firm engage in a broad range of activities including expanding, shrinking, and otherwise restructuring asset and ownership structures. In the words of Warren Buffet Corporate Restructuring is process, which prepares corporate entities to keep their competitiveness in the market. Corporate restructuring is the process of dismantling and reconstructing either a whole organization or certain divisions of a corporation that need special attention. This may require considerable movement of the companys liabilities and assets. Corporate restructuring often involves redesigning and reorganising one or more facets of the organization. This process is undertaken for a variety of reason, the chief being to improve efficiency and profitability in the organisation. Thus reasons of corporate restructuring can be divided into two distinct heads; first corporate restructuring is a product of changing business scenario of corporations, and second, changing regulatory scenario of the nation. THEORIES OF CORPORATE RESTRUCTURING There are two theories regarding corporate restructuring, these are: - 89 -

Agency Theory: According to this theory, managers have incentives to expand and diversify even when doing so does not increase the market value of the firm because their personal wealth is linked more too firm size and risk of bankruptcy than to firm performance. Consequently, restructuring will occur only when the threat of acquisition or activism by share-holders forces managers to reorganize. According to agency theory, corporate restructuring during the 1980s was a correction for the past inefficient growth and diversification by managers (Jensen, 1989, 1991) It argues that the managers, who are the agents of the shareholders, cannot be relied on to act in shareholders interests because their objectives are different. While shareholders wealth depends solely on the market value of a firm, managers pay depends more on its size and its bankruptcy risk, than its value. Consequently, managers have incentives to invest in growth and risk-reducing diversification, even when these investments do not increase shareholder wealth. Thus under Agency theory, excess growth and diversification can be reversed by (a) restructuring a firms portfolio of business and (b) financially restructuring the firm. ENVIRONMENT THEORY It suggests that downsizing and refocusing became valuable during the 1980s but not before, due to changes in the regulatory and competitive environment. A number of important changes in the business environment took place during the 1980s. First, The Reagan administration relaxed enforcement of the Cellar- Kefauver Act, making it easier for firms to undertake horizontal mergers. Because horizontal expansions allows firms to exploit core capabilities better than diversifying expansion, firms may have shed diversified businesses and focused corporate resources on horizontal expansion when the opportunity arose. DIFFERENT MODES OF CORPORATE RESTRUCTURING The Corporate restructuring is an umbrella term that includes mergers and consolidations, divestitures and liquidations and various types of battles for corporate control. The essence of corporate restructuring lies in achieving the long run goal of wealth maximisation. The term corporate restructuring encompasses three distinct, but related, groups of activities; Expansions including mergers and consolidations, tender offers, joint ventures, and acquisitions; Contraction including sell offs, spin offs, equity carve outs, abandonment of assets, and liquidation; - 90 -

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

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, thats the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. TYPES OF CORPORATE RESTRUCTURING Restructuring in its literal sense means changing the basic structure of a corporate. Corporate restructuring generally means acquisitions, amalgamations, mergers or reconstruction consequent to a compromise or arrangement (arrangement includes reorganization of the share capital of a company by the consolidation or division of shares into shares of different classes or both) and may according be through an organic or nonorganic restructure. A compromise or arrangement may require the order of the National Company Law Tribunal. Every company big or small has a basic capital structure as far as its share capital is concerned which is approved by its Memorandum of Association. This structure of a company cannot be changed before the company has actually gone through certain procedures of law. Restructuring of a company is generally of two types: 1. 2. Organic Restructuring Non organic Restructuring

In modern context, corporate restructuring can be divided into three major categories, namely: 1. 2. 3. Organic Corporate Restructuring Non Organic Corporate Restructuring Portfolio Corporate Restructuring

TOOLS OR STRATEGIES OF C. RESTRUCTURING Following are the some important tools of corporate restructuring: Amalgamation, Merger, and Demerger, Reverse Merger, Slump Sale, Takeover/Acquisition, Joint Venture/ Strategic Alliance, and Disinvestment, etc. - 91 -

LEGAL PROVISIONS AFFECTING RESTRUCTURING Following are the legal provision which affect the corporate restructuring: 1. 2. 3. 4. 5. Companies Act, 1956 Section 391 to 394, Section 100 and many other sections Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003. Unlisted Public Companies (Preferential Allotment) Rules, 2003, Companies (Court) Rules, 1959. SEBI Act, Rules and Regulations i. ii. iii. iv. v. vi. Securities Exchange Board of India Act, 1992. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. SEBI (Prohibition of Insider Trading) Regulations, 1992. SEBI (Buy- Back of Securities) Regulations, 1998. SEBI (Delisting of Securities) Guidelines, 2003.

vii. SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. viii. SEBI (Informal Guidance) Scheme, 2003. ix. x. 6. 7. SEBI (Issue of Sweat Equity) Regulations, 2002. SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

Securities Contracts (Regulation) Act and rules. Stock exchange Listing Regulations i. ii. Provisions of Listing Agreement-Clause 24(f); Clause 24 (g); Clause 40A and 40B. Listing Guidelines Section 2(1B) Amalgamation, Section 2 (19A), 2 (19AA),2(42C) Section 47-Transactions not regarded as transfer Section 50, Section 50 B- Slump Sale, Section 50 C, Section 72A, and Section 79 Section 2(1b), Section 5, 6 - 92 -


Income Tax Act i. ii. iii.


Competition Act, 2002 i.

POWERS OF TRIBUNAL TO SANCTION COMPROMISE OR ARRANGEMENT According to Section 391 (1) where a compromise or arrangement is proposed between a company on one hand and its creditors or a class of them or with its members or a class of them, the Tribunal may on an application of concerned member or creditor order a meeting of the creditors or members or concerned class of them, as the case may be for consideration of such proposals. Such proposals for compromise or arrangement under Section 391 of the Companies Act can also involve a scheme of reconstruction or amalgamation of companies by virtue of Section 394 of the said Act. CONCLUSION It may be concluded that a company that has been restructured effectively will theoretically be leaner, more efficient, better organized, and better focused on its core business with a revised strategic and financial plan. If the restructured company was a leverage acquisition, the parent company will likely resell it at a profit if the restructuring has proven successful. Corporaterestructuringmaytakeplaceasaresultoftheacquisitionofthecompany by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place. In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually the hope that what remains can function well enough for a new buyer to purchase the diminished corporation and return it toprofitability. REFERENCES 1. 2. 3. 4. 5. 6. Chartered Secretary, ICSI, New Delhi Corporate Law Advisers, Post Bag No.3, Vasant Vihar, New Delhi. Dr. J.C. Varma, Corporate Merger and Takeovers, Bharat Publishing House Galpin Timothy J. Mark Headim, Complete Guide to Merger and Acquisition, Jossey Bases Publisher http//:www.shbathiya.com4 - 93 -

7. 8.

J.M Thakur, Takeover of Companies, Snow White Publications Pvt, Ltd Jenifer E. Bethel & Julia Libeskind, the Effects of Ownership Structure on Corporate Restructuring, Strategic Management Journal, Vol.14, Special Issue: Corporate Restructuring (Summer, 1993). P2 L.M Sharma, Acquisition, Amalgamation, Merger Takeovers, Company Law Journal, New Delhi S. Ramanujam, Mergers ET. Al; Tata McGraw Hill Publishing Company Ltd, New Delhi V.K Kaushal, Corporate Takeovers in India, Sarup & Sons, New Delhi

9. 10. 11.

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Ashutosh Pandit, Student, MBA (Finance), Department of Management Studies, Sri Sathya Sai Institute of Higher Learning, Email: Dr. Subhash Subramanian, Assistant Professor, Department of Management Studies, Sri Sathya Sai Institute of Higher Learning; email: Prof. U.S. Rao, Professor, Department of Management Studies, Sri Sathya Sai Institute of Higher Learning;

ABSTRACT Financial crisis have been an impediment all across the globe since a very long period of time. These crises have always complimented the falling of the financial markets. The fall was preceded by optimistic movement of prices in the markets; often called as the formation of a bubble. Hence the fall in the markets is seen as a correction of the market or a crash in the market. There have been attempts to find patterns and have a model which can predict the bursting of a bubble. Various technical analysis indicators have been used for this purpose. One such indicator is the Hindenburg Omen. The signal is triggered when a set of conditions are fulfilled at one point of time. Here, in this study, an attempt is made to test the accuracy of the Hindenburg Omen with regards to the NIFTY index. If crashes have occurred post a signal then I find the average time frame for the crash to occur and the average decline in the index. KEY WORDS Financial Bubble, Hindenburg Omen, JEL Classification: G1, G17, NIFTY, Prediction of Crash, Size of Crash. INTRODUCTION In the times of today, it would be right if someone said that each and every person on this planet is affected in some way or the other by the way economies around the world function. One may be a simple householder doing a routine 9 to 5 job, but ones life may be affected to the extent of one losing ones job or even losing ones house if one finds oneself in the midst of something like a global financial crisis. Owing to the global financial crisis that was witnessed, there is growing concern among people, corporations and even governments as to how they can hedge themselves against the likes of such crisis and minimize their loss. Thus, what is required is identifying situations which suggest that a financial bubble exists and then, identifying measures that can be taken to monitor the bubble. That would be good enough to reduce the damages of a bubble bursting to a great extent. - 95 -

Thus the problem statement for this study has been defined as Identifying bubbles in the financial markets and predicting their crash using the Hindenburg Omen. The purpose of the study here will be to find out the probability of a crash and the size of a crash using the Hindenburg Omen. The objective here is to test the efficacy of the Hindenburg Omen with regards to prediction of a crash in the context of the NIFTY index. The Hindenburg Omen is a technical analysis pattern that is said to predict a stock market crash. It uses the McClellan Oscillator. The simplified formula for determining the oscillator is: Oscillator = (19 day EMA of Advances minus Declines) (39 day EMA of Advances minus Declines) It helps to judge the markets overall bullishness or bearishness. LITERATURE REVIEW BASIC NEED FOR PREDICTION AND HISTORY OF CRISES Explaining the Hindenburg Omen, Robert D. McHugh (2007) says, The Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE, and by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash. The rationale is that under normal conditions either a substantial number of stocks may set new annual highs or annual lows, but not both at the same time. As a healthy market possesses a degree of uniformity, whether up or down, the simultaneous presence of many new highs and lows may signal trouble. Prediction of Stock market movements has always fascinated a lot of stakeholders. However, scientific attempts to do so have most of the times been unsuccessful. But, what has happened in great detail is a post mortem analysis of the same. Sendhil Mullainathan, in his article in the HBR, (2011) says that such postmortem analysis is useful to historians, but isnt helpful in any way for preventing an incident like collapsing housing prices. An early warning system would be more valuable. The question asked here is, Could behavioral finance be used to identify bubbles as they form? The answer seems to be a guarded yes. The goal is not to be able to predict when a bubble will burst. That might never be possible. How can the call on a on a rising bubble be made? Behavioral finance gives us the resources and perspective to spot telltale signs. Giving a comprehensive view of financial crises that have occurred in the past eight centuries all across the globe Carmen M. Reinhar and Kenneth S. Rogoff state that, a serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that this time is different among policymakers and investors. We also confirm that crises frequently emanate from the financial centres with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. They also identify other issues that compliment a crisis; those of inflation, exchange rate crashes, banking crises and currency debasements. - 96 -

BUBBLE FORMATION In another article, the authors, Franklin Allen and Douglas Gale (1997), discuss the various bubbles and the following crisis that we have been a witness to. They explain that, In recent financial crises a bubble, in which asset prices rise, is followed by a collapse and widespread default. Bubbles are caused by agency relationships in the banking sector. Investors use money borrowed from banks to invest in risky assets, which are relatively attractive because investors can avoid losses in low payoff states by defaulting on the loan. This risk shifting leads investors to bid up the asset prices. Risk can originate in both the real and financial sectors. Financial fragility occurs when positive credit expansion is insufficient to prevent a crisis. There is in depth study of the process of bubble formation in markets. They go into various factors that are responsible for the formation of the bubble and discuss them at length. SCIENTIFIC STUDIES To explain the phenomena of bubbles, various studies have been done. One such study in experimental markets has been done by Smithet al. (1988). Charles Noussair and Steven Tucker (2006) explain that The existence of bubbles and crashes in experimental markets with inexperienced participants is a well-documented result in experimental economics. Smithet al. (1988) first observed the bubble and crash pattern. They studied the markets with the following structure. The asset traded has a life of 15 periods. In each period, each unit of the asset pays a per-unit dividend that is common knowledge and not based on the identity of the agent who is holding the asset. The fundamental value can be calculated at any point of time because the intrinsic value in this case is based on 2 sources the finite time horizon and the dividends, whose distribution is common knowledge. The fundamental value declines over time, decreasing in each period by the per-period expected dividend. However, Smith et al. find that, when participants have little or no previous experience in asset markets of the same type, fundamental value is not what is tracked. Instead there are bubbles and crashes. For most of the time horizon, market prices greatly exceed fundamental values on high volume. Market crashes rapid drops in price to fundamental values often occur as the end of the life of the asset approaches. These theories give us insights into what could be the possible if not absolute causes of bubble formations and crashes in the real scenario. PREDICTION Chikashi Tsuji (2003) conducts a study to find out which among the two indicators of volatility and market liquidity is the best to predict a crash in the equity market. The authors conclude that the modified calculated market liquidity measure has a stronger forecasting power than volatility in relation to market crashes. Using the liquidity factor, the authors also construct a forecast model using time series analysis. Economic interpretations - 97 -

are also derived based on various financial theories. Thus the authors clarify that the best predictor of equity market crashes is not volatility but a modified calculation of liquidity measure. Earl A. Thompson (2004), in his article suggests that so far, stock and commodity market bubbles have been analyzed. If an asset price has been steadily rising over an extended period of time at a rate substantially exceeding the money rate of interest, contemporary economists traditionally infer the existence of high learning costs, insurance costs, traditional costs or holding costs. But if the price then plummets in the absence of any popularly recognized exogenous shock thereby forming a classic bubble the traditional reaction of economists is that investors should have known better than to extrapolate price trends rather than rationally contemplating the fundamentals determining the long-run value of the asset. We can do better than this. With an appropriate social and economic theory, we can predict both the birth and death of historys most famous price bubbles and explain why these economic anomalies have been unique to the societies in which they have occurred. Thus, this paper deals with the fascinating aspect of prediction of bubbles. POST CRASH ANALYSIS Referring to the sentiment/mood in the market post the crisis, the author, Dennis Doody (2008) says, The widely publicized subprime mortgage crisis and soaring crude oil prices have contributed to considerable market volatility in recent months, inducing queasiness among institutional investors. A four-layer approach to asset allocation that carefully considers assets, liquidity, currency, and risk may be the best strategy for maintaining an institutions financial health through todays volatile market. Perhaps the biggest challenge in such financially turbulent times is keeping fear in check. He adds that the investors can adjust to bull or bear market conditions. What really distress them are the wild swings and the speed at which they take place. Volatility can, indeed, create buying opportunities for skilled stock-pickers with a long-term horizon. And healthcare organizations have time in the market working strongly in their favor. Arguments in favor of the diversification benefit that held up pretty well in the early 1980s are less applicable today because of the integration of global markets. Allan Greenspan (2004) offers some conclusions about what he believes has been learned thus far, though he believes that with the passing of time, further study, and reflection will deepen our understanding of these developments. He observes that each generation of policymakers has had to grapple with a changing portfolio of problems. So while we eagerly draw on the experiences of our predecessors, we can be assured that we will confront different problems in the future. The innovative technologies that have helped us reap enormous efficiencies will doubtless present us with challenges that we cannot currently anticipate. Thus various authors have explored this fascinating concept in the light of various issues which leave us with an enhanced understanding of the entire concept. - 98 -

METHODOLOGY The objective is to apply the Hindenburg Omen to the NIFTY and predict the probability of crash along with the size of crash. The nature of study is empirical. This study deals with developing a mechanism to predict the size of a crash and its probability of a crash. The study is analytical in nature. The data for this purpose will be secondary in nature. The period of the study has been restricted from 01-02-2002 to 30-11-2011. For the Hindenburg signal to occur, four conditions must be fulfilled. We build a system to give a signal if all the four conditions are fulfilled on any particular trading day. Finally, we analyze based on the number of Hindenburg signals that appear and their timings, whether this is a valid indicator for the NIFTY and whether there was a fall in the Index post the signal and if there was, how much was it. ANALYSIS WITH THE HINDENBURG OMEN For the Hindenburg omen to occur four conditions must be satisfied. Their analysis is given below: CONDITION - 1 The daily number of new 52 week highs and the daily number of new 52 week Lows must be greater than 2.8%. Here, the period of study is for 10 years (01/12/2002 to 30/11/ 2011). The NIFTY stocks considered for the study are mentioned below (Table 1). Table 1 (List of Selected Stocks)

The daily number of 52 week highs (Fig. 1) and 52 week lows (Fig. 2) for the above stocks is shown below. Also shown (Fig. 3) is the figure where the Condition 1 has been satisfied. - 99 -

Figure 1 (NIFTY and Daily no. of new 52 week highs)

Figure 2 (NIFTY and Daily no. of new 52 week lows)

Figure 3 (NIFTY and Condition 1 satisfied)

CONDITION - 2 Condition 2 requires the Nifty index to be higher than what it was 50 trading days ago. Figure 4shows the times when this condition was fulfilled. - 100 -

Figure 4 (NIFTY and Condition 2 satisfied)

CONDITION - 3 Condition 3 requires the McClellan Oscillator to be negative. Shown below (Fig. 5) is the McClellan Oscillator with reference to NIFTY. Figure 5 (NIFTY and McClellan Oscillator)

CONDITION - 4 Condition 4 requires that the 52 week new high should not be more than twice the new 52 week low at that point in time. This with reference to the NIFTY is depicted below (Fig. 6).

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Figure 6 (NIFTY and Condition 4)

HINDENBURG SIGNAL For the signal to trigger, all four conditions must be satisfied simultaneously. The triggering of the Hindenburg signal in the NIFTY for the last 10 years is depicted in the figure 7. Figure 7 (NIFTY and Hindenburg Signal)

The graph above gives a vivid picture of when the Hindenburg signal has triggered acrross the timeline of last 10 years. The above information has been showcased in the form of a table (Table 2). This table expresses the above graph in terms of numbers. Also quantified is the fall that followed subsequent to the Hindenburg trigger along with the time taken for the bottom to occur. - 102 -

Table 2 (Hindenburg Signal Analysis)

Date of 1st signal 20th Feb 2006 28th April 2006 23rd Feb 2007 6th Aug 2007 17th Oct 2007 14th Dec 2007 29th May 2008 12th May 2010 28th Oct 2010 14th Nov 2011 No. of signals in a cluster 1 1 1 1 1 2 1 3 2 1 % Decline 13.27% 23.13% 9.27% 6.46% 6.75% 25.54% 48.17% 7.19% 13.16% 8.58% Days before it bottomed 78 33 6 10 3 63 103 9 72 7

OBSERVATIONS AND FINDINGS Looking at the data above, following observations were made. These are as stated below: 1. 2. 3. 4. 5. In the last 10 years, for the NIFTY index, the Hindenburg Signal has triggered 10 times. Of these, three times it was more than 1 signal within a span of 3 days. Decline/ crashes followed after the triggering of each signal. The average number of days before the index bottomed is 38.4 days. The average percentage crash after every signal is 16.15%.

LIMITATIONS 1. 2. 3. The study is focused to find out the relevance of the Hindenburg Omen to only NIFTY stocks; The period is restricted to 10 years (01/12/2002 to 30/11/2011); The stocks selected are those which had data for the last 10 years and have been part of NIFTY during the last 10 years. - 103 -

CONCLUSION With the exciting possibility of prediction of crashes in the financial markets in mind, this study seeks to make a contribution towards this work in progress. This study uses the Hindenburg Omen as a tool for the prediction of crashes in the market. It has been observed in this particular study that the Hindenburg Omen is relevant in the context of the NIFTY index. The original study had been done for the NYSE. The scope of this study was limited to only the Indian markets. This can be extended to financial markets in other countries too. It may be useful to study the relevance of the Hindenburg Omen across all emerging markets. There can also be an attempt to improve the accuracy of the model by introducing some more variables and conditions into the already existing model and test its efficacy. All in all with a more detailed study of the Hindenburg Omen we may get more insights into the trends of the markets before they crash. We can also explore a number of exciting options in this particular field of research, which is of high impact value as it is of great relevance to a number of stakeholders. REFERENCES 1. Alan Greenspan (2004). Innovations and issues in monetary policy: The last fifteen years, risk and uncertainty in monetary policy. AEA papers and proceedings vol. 94 no. 2. Carmen M. Reinhart, Kenneth S. Rogoff (2008). This time is different: A panoramic view of eight centuries of financial crises, Working Paper. Charles noussair, s. T. (2006). Futures markets and bubble formations in experimental asset markets. Pacific economic review , 167184. Dennis Doody (2008). How to recover from the financial market flu? Healthcare financial management. Earl A. Thompson, Jonathon Treussard, Charles R. Hickson (2004). Predicting bubbles and bubble substitutes. Working Paper No. 836, Dept. of Economics, University of California. Franklin allen, d. G. (1998). Bubbles and crisis. The wharton financial institutions center. Garber, p. M. (1990). Famous first bubbles. Journal of economic perspectives , 3554. Mullainathan, s. (2010). Spotting bubbles on the rise. Harvard business review , 8-9. Robert D. Mchugh, (2008). An update on the October 2007 The Hindenburg omen, Working Paper. - 104 -

2. 3. 4. 5.

6. 7. 8. 9.


Dr. Laila Memdani, Asst. Professor, IBS Hyderabad, can be reached at E-mail:,

ABSTRACT The case, as the name suggests, discusses about the Greece Crisis. It discusses how it started, causes and its impact on the world in general and India in particular. The main cause for the crisis was lack of prudent fiscal policy and failure of common monetary and independent fiscal policy regime of Euro Zone. Governments prime sources of utilisation of borrowings were to pay for the imports from abroad which were not offset by any exports. Trade deficits and the Budget of the government bubbled up during 2000s and failure of the government in channelizing the borrowed funds to the productive arenas of investment to reap future growth ,leading to creation of competitive economy and creation of new resources to repay the debt. KEY WORDS Greece Crisis, Fiscal Policy, Monetary Policy, European Union BACKGROUND OF THE CASE Early 2010 saw Euro zone (refers to the 17 members of the European Union (EU) that use the Euro as their currency. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Ireland, Italy, Luxemburg, Malta, Netherlands, Portugal, Slovakia, Spain, Greece and other European countries) in the midst of a major debt crisis. The government of all the countries in the Euro Zone had piled up what was considered to be unsustainable levels of Government debt. Greece, Portugal and Ireland had turned to other European Nations and the IMF (International Monetary Fund) for further loans to avoid default on their earlier Debt. The crisis had spread across to Italy and Spain the 3rd and the 4th largest economies in the Euro zone (New York Times Nov. 2012). Greece could be also termed as the epicentre to this epic crisis situation in the Euro zone having the highest levels of public debt amongst the Euro zone nations and accounting for one of the highest budget deficits. It was the first amongst the Euro zone members to come under intense pressure and set the trend of turning towards the IMF in the crisis situation, .ECB (European Central Bank) and the Greek government took substantial crisis response measures (Constncio 2011). In July2011 at the orders of the European Leaders, Greek Bond Holders had also indicated that they will be accepting losses on their Investments to mitigate Greeces short run debt payments .If the plans were carried out it would have seen Greece repeating its half a decade old history of default (1934-64) (Exhibit 2). - 105 -

The Greek economy survives on a history of defaults and the history dates back to 1932 when Greece was the only country was at default. Almost after five decades or 50 years the Greek economy was in doldrums and nearing to default. Major contributors to the Greek default were: Non Chalant Control of the economy Inefficient public administration Endemic Tax Evasion Widespread Political Influences Low interest rates

2008-09 crises led to acceleration of these problems and public finances were stained to an unsustainable degree. COURSE OF EVENTS AND CAUSES In the 1990s as Greece started its preparations of adoption of Euro as national currency, the countries borrowing costs dropped drastically. 10 year Greek Bonds interest rates had dropped by almost 18 %( 6.5% from 24.5%) between 1993 -99.The belief amongst the investors of a widespread convergence amongst the Euro Zone nations was instated. The investors belief was reinforced by Policy Target better known as convergence criteria-(It is the criteria which a country has to meet to join the Euro Zone) Common Monetary Policy being anchored by economic heavyweights which also included Germany and France and is managed by ECB very conservatively. Additionally every member of the EU were bound by the rules of Stability and Growth Pact which limits government deficits(3% of GDP) and the level of public debt (60% of GDP).These entire factors combined together contributed to the new and regained Investors Confidence in Greece and the other member states of Euro Zone with weaker traditional fundamentals. But things did not shape up as they were expected; even the influx of capital and the pursuit of meeting up with the eligibility criteria to sustain the Euro zone eligibility did not show any changes in the traditional way of the Greeks economy and Investment policies thereby increasing the competitiveness of the economy. Governments one of the prime sources of utilisation of borrowings was to pay for the imports from abroad which were not offset by any exports. Trade deficits and the Budget of the government bubbled up during 2000s and failure of the government in channelizing the borrowed funds to the productive arenas of investment to reap future growth ,leading to creation of competitive economy and creation of new resources to repay the debt. - 106 -

The cash generated through raising debt was primarily utilised for current consumption needs of the country rather than being used for growth generating prospects. Policies laid down by the EU for debt capacity check of individual nations had gone for a toss.35 cases were initiated against members violating the Stability and Growth Pact .This helped the EU to take a stand against the defaulting nations (Exhibit 3). When any government rely only on the borrowing from International Capital Markets for their budget and trade deficits, it is surely vulnerable to shift the investors confidence. This is what the situation Greek Government exposed itself to was. The Loss of investor confidence in the fact of Governments intention of repaying debt or rather its ability to pay debts compelled the investors not to lend anymore to the Government and rather if any lending was done it was done at a high rate beyond the Governments affordability. Lack of access of the new funds certainly made it difficult for the government to meet their existing liability arising out of debt maturities as it became due (rolling over of debt),leaving the government with an option to implement austerity . From 2009 onwards the investors confidence in Greece regarding the nations capability to service its debt dropped significantly. The Global Financial Crisis (2008-09) and the followed up economic downturn strained public finances of many advance economies including Greece which was a result of weakened because of increased spending on the unemployment benefits and lowering tax revenues. Reported Public debt of Greece rose from 6% to 126% of GDP in 2009. George Papandreou, the then elected prime minister stated that the earlier government had understated the budget deficit. The new government revised the budget deficit to higher by 6.5%. In the major turn of events major credit rating agencies downgraded the Greek bonds As more and more decline in the Investors confidence was noticed it made evident more clearly every time investors disbelief in the nations debt repayment capacity. This made the debt raising instruments issued by the government i.e., Greek Bonds more and more costly i.e., with demand of higher interest rates from the investors which compensated investors for their risk taking or act as a risk premium. It also drove up Greeces borrowing cost and increased the severity of its debt levels steering Greece more towards default (Exhibit 4). POLICY RESPONSE The ECB, European Leaders and the IMF came to a consensus on the matter that an uncontrolled and disorderly default of the Greek Debt would eventually turn out to be very risky and all attempts should be made to avoid it. The primary concern was that this default - 107 -

could give rise to a situation where there will be a major sell-off of bonds of other Euro zone members with high debt levels and those European Banks which were exposed to Greece and other Euro zone governments would not be able to bear losses on investments .Financial Turmoil and fear of contagion drove home a major policy response by IMF, Europeans and Greek Government in MAY 2010 to avoid a Greek default. A Second crisis response in 2011 was announced more than a year later from which Greece was saved from default. It can be said that till date crisis responses have been successful in keeping Greece economy away from default but no clear path to recovery or containing the Debt demon has been worked out. May 2010 saw the first round of crisis response in the form of austerity measures from the Greek government and financial assistance from the Euro zone and IMF.Central Banks too played a crucial reform and liquidity in this region. Euro zone leaders along with IMF declared a 3 year Euro 110 billion package(about $158 billion) in loans to Debt laden Greece a the market based interest rates. A contribution of Euro 80billion from the European countries was pledged and Euro30 billion was pledged from IMF. Disbursements were made on the condition of economic reforms. The EU leaders in an attempt to prevent any such crisis in the Euro zone in May2010 decided on a new mechanism of financial assistance to the members of the Euro zone The Mechanism was: Two temporary 3 year financial assistance to Euro zone members of loans totalling to Euro500 billion facing debt crisis. IMF could also provide additional support if required. Portugal and Ireland also subsequently were provided the IMF and EU program

In March 2011, EU leaders agreed on establishment of ESM (European Stability Mechanism) to replace temporary reliefs post their expiry in 2013. Implementation of healthcare and pension reforms by the government played a vital role in consolidation of public finances. In July 2010 the pension reform brought about the most sought reforms in the average retirement age and method of pension calculation in the parliament which was much advocated by advocates of Greek Economic Reforms. Healthcare reforms witnessed a reduction in total expenditures in healthcare and a consolidation in the Industry per say. Structural reforms of 2010 were focussed on rigid and highly fragmented market to boost competitiveness. A vital role was also played by the ECB and the US Federal Reserve (the fed) in responding to the crisis.ECB in May2010 announced for the first time start purchasing the European Government Bonds from the secondary markets to reinstate the investors confidence and lower the Bond spreads for Euro zone bonds under market pressure. - 108 -

In between May 2010 and June 2011, ECB had purchased government bonds totalling to Euro 78 billion of which more than half was Greek Bonds. ECB provided more liquidity for the support of private banks in Greece and provided more flexibility than it did before the Crisis. The liquidity support climbed up from Euro 47 billion in 2010 to Euro 98 billion in May 2011 which is roughly estimated to be 40% of Greeces GDP. FED support to the crisis response was through re-establishment of temporary reciprocal currency arrangements better known as swap lines, with a combination of several central banks to increase the dollar liquidity in global markets. Earlier swap lines were a tool used during Global Financial Crisis. Swap lines had an extended life till August 2012 just when it was about to expire. Advent of 2011 made it clear that the Greek crisis had led to severe and steady contraction of the Greek Economy the severity was more than expected and more assistance would be required in lieu of avoiding the default risk. After requirement of more austerity measures for adoption by Greek economy a second package was debated upon by IMF, ECB and EU for several weeks. Worsened economic conditions in 2011 compelled Greek Parliament to approve an additional round of structural reforms through austerity measures. These were compulsory for the Greek government to get the next round of disbursements of funds from original Euro zone and IMF financial assistance package. Greece proposed a consolidation program the so called MTFS (Medium Term Fiscal Strategy) of the Greek economy through 2015 worth Euro 28 billion (12%GDP), including Euro 6.5 billion additional cut down on spending through: Reducing the overstaffing of public sector Streamline social transfers By improving the performance of the public sector on a whole

These consolidation measures were expected to bring down the governments deficit by around 0.9% by 2015 Another significant component inculcated by the Greek Government towards the newly woven fiscal strategy and the most controversial as well was privatisation of the public real estate program which was expected to generate Euro 50 billion. Significant questions were being pointed at the Greek Governments governing capabilities. - 109 -

July 2011, saw Greece inching towards its second financial stimulus of approximately Euro 107 billion. The 2nd financial stimulus was more of in favour of Greece in respect of its terms and conditions which entailed larger maturity periods and lower interest rates. Offer of extension of maturity deadline of the earlier stimulus provided to Greece by the Euro zone members was accepted as well. IMF was not the contributor of the second stimulus despite repeated requests by the Euro zone. The terms and conditions of the EFSF in the meantime were made to be more flexible, its dimensions were increased from merely providing loan to even extending line of credit to those countries which were under the heat of market pressures it also included financing of recapitalisation of Euro zone banks, buying bonds in the secondary markets with the prior approval of ECB ratified by national parliaments. For lowering the Greek debt for a short term period European leaders in collaboration with IIF (Institute for International Finance- which is an association of the Private Financial Institutions) made an announcement regarding the contribution of EURO 50 billion from the holders of the Greek Bond. The policy responses to drive out Greece of an expected default in lieu of debt crisis have not been taken lightly by the IMF, Euro zone and the European leaders. The policies were aimed at: Prevent the Greek economy from default Restoration of debt sustainability in Greece Prevention to be taken from spreading of this crisis in other Euro zone countries.

The above mentioned responses had been made by the Greek government, IMF, Euro zone and European Leaders. All these crisis responses drew limited success in saving Greece from faltering into a debt default crisis but it has thus failed to put the economy in a clear path of recovery and sustainability. As per the IMF estimations: There was a substantial increase in the Greek debt levels in 2010-11 ranging from 143% of GDP to 166% of GDP. Forecasted Debt to GDP for 2012 would be172%. It is estimated that the debt levels would start to decline only after 2013. Lack of growth in the economy is the biggest hindrance being faced by Greece at this point of time. It is for the growth levels that once it starts increasing, the tables will turn and investors would be able to restore their confidence in the economy. - 110 -

The Greek economy is contracting y-o-y basis. In 2010 it contracted by 4.5%, In 2011 by 2.9% and 2012 is expected to witness a contraction of 3.5%.Growth in the near future seems difficult since the austerity performs have led to a depression of the domestic economy. Fostering of short term growth in the Greek economy is what has been seen by the Government at large as a response to governments austerity measures which makes the growth in the Following are some of the issues which comes across as a concern for the Greek economy: Depressed Domestic Growth due to austerity measures Non Reliance on exports for the Growth of the economy Being a member of the Euro zone, currency depreciation is impossible Policy responses of Greece Crisis have not come across as a stern policy thereby not convincing investors to prevent its spread in the other Euro zone countries. Weak Public finances due to lack of stern crisis response. Greece crisis has caused an increase in the Bond spreads for other Euro zone nations as well. 2010 saw Ireland and Portugal following the suit of turning to the authorities i.e., IMF and EU (BBC News, Sept 24 2010). Greece crisis is considered to be a trendsetter of crisis in the Euro zone. The policies and responses could not help the spread of the Debt Crisis beyond Greece European Leaders also can be blamed of not being decisive in the hour of crisis. European leaders failure to act decisively during the crisis and their piecemeal attitude to crisis response and their attitude to public disputes exaggerated investors anxiety. Not only Greece but the entire Euro zones fundamental fiscal challenges had become unsustainable. Spain is currently facing a severe housing bubble Ireland has a bloated banking Industry A decade of Anaemic Growth is being faced by Portugal. - 111 -

The roll-over risk was another issue which had played a crucial role in the Greek crisis. We can also call it as Greece debts had encountered a bad equilibrium. This is that when a government has to meet its public debt obligation that is they are nearing maturity. This happens when the countries in context are exposed debt to such an extent that they get forced to depend on the market to roll over debt. This also depends on the maturity structure of the debt. If the debt rollover has a longer maturity horizon then there is certain time period available in rollover but if shorter maturity of debt is there the amount which has to be rolled over entails large amount payable in a short span, may be even before completion of your investment cycle (Cochrane 2001). The Greece crisis was a living witness to the concern of the economists which proved to be valid as the European Leaders and the EU failed to respond swiftly in the crisis situation. The primary concern of the economist at the time of formation of the Euro zone was that different nations will be governed by different sets of rules and regulations and same monetary policy but having individual fiscal policies how will the governance be possible? On a larger horizon in view Euro zone was sparked by a larger question of how can one resolve tensions between common monetary policies and national fiscal policies IMPACT OF CRISIS IN GLOBAL MARKET Euro zone crisis continued to attract the eyeball of every individual as the centre of attraction as investors still continued to be anxious that in zeal to curb down deficits and bring down debt growth will be killed if any withdrawal of stimulus package takes place from Greece, Portugal and Spain. The anxiety of investors was reflected in Wall Street (exhibit 7). US Stocks took the highest beating in the stock markets. It took deepest plunge within a year and fears grew amongst the investors regarding the Euro zone crisis around the world just when US was on its way to recovery. Number of people who applies for unemployment benefits increased drastically Casualties were taken by Euro as a currency week after week. Post Crisis Euro had fallen to its lowest level ever. The next week it fell by 0.1% @ $1.2334/ Euro Earlier it rallied around $1.22377 which was its lowest level from $1.51 in previous year of crisis Questions by Investors on governments ability to handle such debt were increasing with time. - 112 -

IMPACT ON INDIA Indian markets saw a correction of 10%from its highs riding on the doldrums caused in the markets due to speculations of reaction of Greece driven Euro zone crisis. The question on Euro zone stability once again resurfaced when Spain was recently downgraded by Fitch. India however did not see a major correction in the market due to the Euro zone debt crisis as much as the global markets faced throughout. India was an out performer during the phase when global markets were facing the Jitters of the Euro debt crisis. The recent corrections in the market can be said to be driven somewhat by the Euro zone crisis but more on the chances of US facing a possibility of double dip recession. When it comes to Indian economy, it is an economy in the world which is hardly dependant on Europe for its exports or Imports. Even the Indian IT sector has a lower exposure or a limited exposure to an extent of a quarter of their revenues from Europe. Greece, Spain, Italy and Portugal combined together accounts for 4% of Indias Total Exports (Exhibit 9). As per latest statistical data revelations and the latest figure from the government on Indian Imports and Exports, India had a registered 5.1% in 2009, 3.7% in 2010 and 2.5% in 2011of total exports to the above stated nations. There are many parameters based on which Indian Stock markets have outperformed globally across stock markets (Exhibit 8). India primarily exports textiles, pharmacy products, Gems, etc to European countries which Euro zone combined accounts for 21%. But the PIGS nation accounts for only 4 % of the total exports for India. So if the debt crisis extends towards the entire Euro zone then there will be some chances of India to be tensed about otherwise India has not yet witnessed any major hiccups due to crisis. BENEFITS TO THE INDIAN ECONOMY FROM THE CRISIS A sovereign debt crisis is not a small issue in the eyes of investors. Since investors started losing money and along with money their confidence on the economy and started to drive out their money in the areas they had parked it earlier in the Euro zone nations and found the next best place to be Indian markets where they could park the money. As India was the second best economy of the world and growing at a pace of more than 5% of GDP and the countrys policies welcomed Fijis with open hand. - 113 -

EXHIBITS Exhibit 1

Exhibit 2

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Exhibit 3 Figure Representing Greeces Twin Deficit Budget & Current Account Deficit

(Exhibit 4)

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Exhibit 5 Table: 1. EU-IMF Assistance for Greece, Ireland, and Portugal

European Financial Assistance 80 billion (about $115 billion) 45 billion (about $65 billion) 52 billion (about $75 billion) IMF Financial Assistance 30 billion (about $43 billion) 22.5 billion (about $32 billion) 26 billion (about $37 billion) Total Financial Assistance 110 billion (about $158 billion) 67.5 billion (about $97 billion) 78 billion (about $112 billion)

Date Agreed


May 2010

Ireland Portugal

December 2010 May 2011

Source: IMF press releases. Exhibit 6

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Exhibit 8

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Exhibit 9

REFERENCES 1. BBC - Gavin Hewitts Europe Ireland The next Greece. 30 Nov. 2012. 2. 3. CESifo Group Munich - The Exposure Level. 30 Nov. 2012, 30 Nov. 2012 Cochrane 2001,Long Term Debt and Optimal Theory of Fiscal Policy. Econometrica, Vol. 69, No. 1 January, 2001 , 69 116 - Faculty. j o h n . c o c h r a n e / r e s e a r c h / P a p e r s / Cochrane%20Long%20Term%20Debt%20(Econometrica).pdf 30 Nov. 2012. Constncio (2011)ECB Contagion and the European debt crisis. press /key/date/2011/html/sp111010.en.html 30 Nov. 2012. Debt Levels Relative to GDP of PIIGS and Some Other Major .... http:// 30 Nov. 2012. Ersi Athanassiou (2009). Fiscal Policy and the Recession: The Case of Greece, centre for planning and economic research, No 103. European Debt Crisis - The New York Times. /top/ reference/timestopics/subjects/e/european_sovereign_debt_crisis/Index.html 30 Nov. 2012. - 118 -

4. 5.

6. 7.

8. 9.

GREECE Painful adjustment http/ 2011_autumn/el_en.pdf 30 Nov. 2012. HOUSING 2012 housing systems EUROPE REVIEW. www.housingeurope .eu/ 30 Nov. 2012. Joshua Aizenman et al. (2011). What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk, National Bureau of Economic Research, working paper 17407. Moneim Rady, D. (2012). GREECE DEBT CRISIS: CAUSES, IMPLICATIONS AND POLICY OPTIONS. Academy Of Accounting & Financial Studies Journal, 1687-96. The Economic Adjustment Programme for Greece (Spring 2011). European Economy Occasional Papers, Fourth Review 82.




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M. Vamshi Krishna, Assistant Professor, Department of Business Management, Swarna Bharathi College of engineering (SBCE), Khammam. A.P. can bereached at email: mobile: 9866117115.

ABSTRACT The financial crisis has occurred several times. Globalization has ensured that the Indian economy and financial markets cannot stay insulated from the present financial crisis in the developing economies. While the global financial system takes to nurse its wonders leading to low demand for investments in emerging markets, the impact will be on the cost and related premium. The impact will be felt both the trade and capital account. In such scenario, one of the ways to mitigate risks would be to so read it among many clients. The recent developments may not directly affect Indian enterprises yet but those who have dealing with companies based on overseas markets especially in the U.S will surely face the pinch when it comes to payments. KEY WORDS Capital Market, Financial Crisis, Overseas Markets . INTRODUCTION Since 2007, the U.S. and global economies have struggled through the worst financial crisis since the Depression of the 1930s. Major businesses have failed; large American and European banks were forecast to lose roughly $2.8 trillion between 2007 and 2010 and more in 2011 to 2012; the S&P 500, a major stock index, fell 45% from its high in 2007; and more than $9.8 trillion in wealth was erased between the height of the stock market and November 2011. (Americans total net worth shrank by about 29 %.) Unemployment reached the highest levels in 15 years; more than a million families have lost their homes to foreclosure; and many nations governments, including ours, have spent billions to keep banks and other businesses afloat. While there are signs of recovery, including a partial recovery in stock prices, the world still seemed to be in the grip of persistent recession as of, 2011. The US administration and Congress are creating a 5700 billion rescue- package to resolve the worst financial crisis since the Great Depression of 1930s. In 1942, Winston Churchills commented, This is not the end. It is not even the beginning of the end but is, perhaps, the end of the beginning. The financial Crunch that began in mid-2007 has worsened so dramatically that all politicians have agreed to a government rescue. In that sense we have reached the cad of the beginning of the current drama. - 120 -

But two major chapters are yet to unfold. The first relates to problems that will hamstring, and may be doom the rescue. The second relates to the global recession that has probably started, and we will hit countries like India far harder than mere the Wall Street turmoil. Professor Nouri- el Roubini was the first to predict this massive carnage. He now estimates bad loans at 52 trillion, large enough to overwhelm the rescue package. Roubini correctly predicted the fall of the shadow financial sector- lightly regulated financial entitles that avoided the light supervision imposed on banks, such as off- balance sheet SIVs (special investment vehicles), leveraged investment banks, and leveraged hedge funds. He now predicts that the carnage will spread to hedge funds, for which the rescue package makes no provision. Meanwhile risk is set to multiply in derivatives. Most at risk are credit default swaps (CDS) which insure against bond and loan default. The size of the CDS market is $62 trillion, four times the GDP of the US. After netting out offsetting transactions, the balance CDS risk is around a trillion dollars. The future of the market depends on the real Economy. A major recession is now. Unavoidable and this will mean more corporate and banking defaults. Some experts think at least 4,000 US banks will go bust. Recession typically lead to a 10% default on corporate bonds. The default rate last year was only 1.8%. So a surge in defaults is coming, and CDS markets are trembling. US monetary and fiscal policies have policies have flooded the country and the world with dollars to try and stave off recession. The Feb has given financial markets unprecedented access to liquidity and the cut in interest rates was just 2% the US Congress has legislated $140 billion in cheques mailed to consumers, just to increase purchasing power. The trade deficit remains high, and is paid for by issuing dollars to the world. This Niagara of dollars has kept purchasing power (and GDP) rising despite the credit crunch. But a major recession is now unavoidable. For global financial crisis. Japan and some European counties suffered negative growth in the 2nd quarter of 2011, and the US may already be in recession this quarter Emerging markets are all slowing down. The credit crunch means that fresh financing of both consumers and industry is going to slow down, in the US and globally. Risk aversion is financial markets means that emerging economy companies will face problems in rolling over $111 billion of debt failing due over the next year. Several Companies that had banked on cheap loans and high IPO prices now find doors closed. The problem may persist through 2011-12. So, the greatest financial crisis since the Great Depression has a long way to go yet. And the journey may be long and painful. STAGES IN THE CRISIS The financial crisis has unfolded in overlapping stages. - 121 -

THE MORTGAGE CRISIS . Low interest rates in the early 2000s encouraged many Americans to buy homes. As a result of the increased demand, home prices more than doubled during the decade ending in 2006, leading to a widespread belief that real estate prices would continue to rise indefinitely. Investors from around the world, eager to profit from this steady price climb, bought new investment products tied to mortgages. So many people wanted to invest in these products that, in order to satisfy them, more and more mortgages had to be sold. But the number of would-be home-buyers with good credit was limited. Banks therefore relaxed their lending standards, and encouraged people who would have been turned down for loans a few years earlier to borrow more than they could afford, or to take out adjustable rate mortgages with low initial interest rates but automatic rate increases that not all customers understood. Many of these borrowers couldnt keep up with their payments. When home prices eventually fell, some people found that they owed more on their mortgages than their houses were worth; many responded by stopping their payments. By September 2009, more than 14% of all mortgage borrowers in the U.S. were either behind on their payments or else in foreclosure. Real estate values fell in neighborhoods ravaged by foreclosure, and the banks ended up owning more homes than they could sell. More than 100 mortgage lenders went bankrupt in 2007 and 2008. The decline in home values resulted in heavy losses for investors around the world, and severely damaged financial institutions left with mortgage-related securities they could no longer sell. In 2009, President Obama created a $75 billion plan to help up to nine million homeowners refinance their mortgages or avoid foreclosurebut, as of April, 2010, only 170,000 households had had their mortgages adjusted.

THE CREDIT CRUNCH: Before the housing bubble burst, Americans took on more debt than ever before, in the form of mortgages, home equity loans, car loans, and credit card debt. The biggest investment banks took on more debt, toomaking them more vulnerable when the economy took a downturn. As more people failed to pay back their loans, mortgage-related investments lost value. Lenders found themselves with much less money to lend; it became harder for businesses and individuals to get loans, which slowed economic activity in general. In response, the Federal Reserve (the central bank of the U.S.) cut its base interest rate to nearly 0%, and the government lent billions to banks to enable them to start lending again. The government neglected to requirethat the funds be used for lending, however, and many banks used the money instead to pay debts and acquire other businesses. - 122 -

BAILOUTS FOR COMPANIES TOO BIG TO FAIL:In September, 2008, Treasury Secretary Henry Paulson and N.Y. Federal Reserve President Timothy Geithner met with legislators and proposed a $700 billion emergency bailout, to pump money into the system and avert economic catastrophe. After initial defeat in the House of Representatives, the Emergency Economic Stabilization Act (also known as the Troubled Asset Relief Program, or TARP) was passed by Congress and signed into law by President Bush. At the same time, the Big Three American auto manufacturersGM, Ford, and Chryslercame close to bankruptcy. (The main reasons: fewer people were buying new cars, and many of those who did chose smaller, more fuel-efficient foreign cars; and Detroits labor costs, including the cost of pensions for retired workers, far exceed those of its foreign competitors.) In order to protect these companies from going out of business (which would have cost up to 3 million jobs and undermined confidence in the entire U.S. economy), the federal government lent GM and Chrysler billions of dollars and forced them to undergo restructuring. The financial crisis became President Obamas first priority once he took office. Congress passed his $787 billion stimulus proposal in February, 2009 with only three Republican votes in the Senate, and none in the House of Representatives.

GLOBAL RECESSION: The crisis has spread far beyond our borders. Several European banks invested heavily in mortgage-backed securities, and their losses put some of them out of business. Many countries have turned to the International Monetary Fund, an agency of the U.N., for emergency aid. All around the world, lack of money available for loans has resulted in shrinking economic activity, reduced demand for goods, and lost jobs. The U.S., China, and other countries responded with stimulus plans in 2009, hoping to revive their economies with an infusion of funds. Many central banks cut interest rates almost to zero, following the lead of the U.S. Federal Reserve. In late 2009, Greeces new prime minister announced that his countrys deficit was three times the size his predecessor had admitted. Other southern European nations, including Spain, Italy, and Portugal, had also over borrowed while interest rates were low, and found themselves in trouble when the global economy soured. The more stable economies of northern Europe resisted bailing out the debt-ridden south; but in May, 2010, the European Unions Parliament approved loan packages worth nearly $1 trillion to help the economies in trouble. The results remain to be seen.

UNCERTAINTY:Major American banks were earning profits again in 2009; by April, 2010, recipients of bailout funds had paid back all but $89 billion. As of May, 2011, the Dow Jones Industrial Average (an index of the stock prices of some of - 123 -

Americas biggest companies) had regained 5,600 of the 7,000 points it lost between October, 2007 and February, 2009. General Motors and Chrysler escaped bankruptcy, andFordpostedprofitsin2009and2010withoutabailout.Butcreditremainedtight for smaller borrowers, and unemployment hovered above 9% from July 2009 to July 2010, the highest levels since 1983. Two urgent imperatives are now in conflict: the need to stimulate the economy and pull the country out of recession, and the need to begin rolling back a deficit that stood at more than $14 trillion by August, 2011. Though most economists agree that more government spending is needed, the budget agreement passed in August, 2011 includes trillions of dollars in spending cuts. CRISIS OF FINANCIAL INSTITUTIONS: The 158 year old Lehman Bros, the fourth largest investment bank in the world, had filed for Chapter 11 bankruptcy (akin to a company taking refuge in BIFR., the Board for Industrial and Financial Reconstruction on India). And the equally blue- chip Merrill Lynch, brokerage giant whose name is more familiar in Indian than Lehman, thanks to its long partnership with DSP as DSP Merrill Lynch, had been bought over by Bank of America. Two major financial deals announced on the same day. But while one saw a venerable name (Lehman) disappear altogether (thought it may reemerge in another avatar some years hence) the other saw another equally proud name America. Two major financial deals announced on the same day but while one saw a venerable name (Lehman) disappear all together (thought it may reemerge in another some years hence) the other saw another equally proud name (Merrill) survive; perhaps as a pale shadow of its earlier self, but survive nonetheless. So what distinguished them and hence determined their dramatically different fates? Just one world: leadership. Add to that another that many have talked of after the collapse of Lehman: hubris. Contrast this with what happened at Merrill Lynch. As one of the most powerful brokerage houses in the US, CEO john thain had reason to be just as cocky as Lehman But he was also more pragmatic. Through a relative new corner to Merrill, or perhaps because of it, Thain, who joined only in November last, was able to adapt to the fast changing environment. He was quick to catch on that if Lehman could go down, so could Merrill. So he quickly sealed the deal with Bank of America. Which had been toying with an idea of taking over Lehman and might even have preferred to do so had the price been right. Fulds obduracy gave Thain the chance he was looking for. He managed to seduce Bank of America with a deal that even if it values Merrill at half of what it was a year ago is a good sight better than zero ! at 70% above Merrills closing price on Friday and 29% higher than its average price last week, many believe that Bank of America might even have over- paid. It certainly couldnt have had time to do a proper due diligence. - 124 -

Indias top software exporters are closely monitoring the financial crisis spreading across markets. The IT giants which had all these investment banks as their clients are TCS, Wipro Satyam and Infosys Technologies HCL, seems to have escaped the loss as neither Lehman nor Merill Lynch (ML) were its clients. The Indian government is worried that the ongoing crisis would have an adverse impact on Indian banks. Lehman Brothers and Merrill Lynch had invested substantially in the stocks of Indian Banks. The banks, in turn, have invested in derivatives, which might have exposure to these in investment bankers. PSU banks like Bank of India. Bank of Baroda have exposure towards derivatives. ICICI bank is the worst hit as of now. With Lehman Brothers filing for bankruptcy in the US, the countrys largest private bank, ICICI Bank is expected to lose approximately 580 million (Rs. 375 cr) invested in Lehmans bonds through the Banks UK subsidiary. The meltdown is also expected to hit Axis bank but the impact is not clear yet. IMPACT ON INDIA Globalization has ensured that the Indian economy and financial markets cannot stay insulated from the present financial in the developed economies. The debate, therefore, can only be on the extent of impact and how resilient India is to withstand the storm with minimal damage. In the light of the fact that the Indian economy is linked to global markets through a full float in current account (trade and service) and partial float in capital account (debt and equity), we need to analyze the impact based on three critical factors, Availability of global liquidity, demand for India investment and cost thereof and decreased consumer demand affecting Indian exports. The concerted intervention by central banks of developed countries in injecting liquidity is expected to reduce the unwinding of India investments held by foreign entitles, but fresh investment flows investment flows into India are in doubt. The impact on India of this will be three fold. The element of GDP growth driven by off shore flows (along with skills and technology) will be diluted, correction in the asset prices which were hitherto pushed by foreign investors and demand for domestic liquidity putting pressure on interest rates. While the global finance system takes time to nurse its wounds leading to low demand for investments in emerging markets. The markets the impact will be on the cost and related risk premium. The impact will be felt both in the trade and capital account. Indian companies which had access to cheap foreign currency funds for financing their import and export, will be the worst hit. Also foreign funds debt and equity) with be available at huge premium and would be limited to blue-chip companies. The impact of whim, again, will be three fold-Reduced capacity expansion leading to supply side pressure, increased interest expenses to affect corporate profitability and increased demand for domestic liquidity putting pressure on the interest rates. - 125 -

Consumer demand in developed economies is certain to the hurt by the present crisis, leading to lower demand for Indian goods and services, thus affecting the Indian experts. The impact of whim, once again, will be three fold: Export oriented units will be the worst hit impacting employment: reduced exports will further widen the trade gap to put pressure on rupee exchange rate and interruption lending to sucking out Liquidity and pressure on interest rates. The impact on the financial markets will be the following: Equity market will continue to remain in bearish mood with reduced off shore flows, limited domestic appetite due to liquidity pressure and pressure on corporate earnings, while the inflation would stay under control, increased demand for domestic liquidity will push interest rates higher and we are likely to witness gradual rupee depredation and depleted currently reserves. Overall, while RBI would inject liquidity through CRR/SLR cuts, maintaining growth beyond. 7% will be a struggle. The banking sector will have the least impact as high interest rates, increased demand for rupee loans and reduced statutory reserve will lead to improved NIM while, on the other hand, other income from cross- border business flows and distribution of investment products will take a hit. Banks with capabilities to generate low cost CASA and zero cost float funds will gain the most as revenues from financial intermediation will drive the banks profitability. Given the dependence on foreign funds and off shore consumer demand for the Indian growth story, India cannot wish away from the negative impact of the present global financial crisis but should quickly focus on alternative remedial measures to limit damage and look inwards to sustain growth. FUNDS MAY DRY UP Emerging companies will have to re think at the aggressiveness of their plans, Sectors, which are capital intensive, would be facing tough times. Emerging companies in sectors such as power and infrastructure, aviation, software and real estate would be the worst hit. In the past few months, small companies starved of cheap funds had seen a ray of hope with the influx of private equity and FDI. But with the collapse of many large financial institutions in the US, that route of funding could soon dry up. Over the long term, say 6 to 18 months, private equity fund flows in to the country is likely to slow down. The researcher of the view that the money which has been pledged and announced was certain to come, but raising future funds and their easy disbursement will be severally affected. To add salt to injury, even of funds become available, deal valuations were likely to take beatings as PE players will start to be more aggressive. According Rajesh Jain, chairman and Managing Director of EMCO Ltd, a Rs. 700 crore power sector company, the biggest causality of the crisis will be the availability of finance at competitive rates and companies will be forced to rethink their strategies, As the - 126 -

capability to raise funds, or rather cheap funds becomes difficult in such a downturn, companies will be forced to rethink their strategies As the capability to raise funds, or rather cheap funds become difficult in such a downturn, companies will be forced to rethink their strategies. As the capability to raise funds, or rather cheap funds become difficult in such a downturn, companies will have to relook at the validity of new project as the cost of funds will go up. It also means that ramping up capacities isnt going to happen any time soon. Private equity investors are assessing the small and medium enterprise sector, especially those with higher exports dependency on the US. The more the dependence, the tougher it would to raise funds for expansion. Though we havent put brakes on our investment strategies towards SMEs yet, it is imperative we become selective. Indian companies having larger dependency on the US may find the going tough. Also, there will be an impact on valuations for such companies. But there are still a few small players who are ready to strike deals at this level because they see an opportunity ahead. Industry experts are predicting a showdown, in inflows of foreign direct investment (FDI) too. Many small companies in the manufacturing sector were raising funds for their expansion through FDI. That was also another way of accessing technology. But if (FDI) slows down, companies, which have built over the years, will find it difficult to upgrade their products for luck o technology. One way to tackle this is to acquire companies abroad. But companies looking ti raise funds overseas may not be able to fetch attractive deals. At the same time, Indian SMEs who prefer to raise finances through debt may face difficulty in raising funds as many banks, which lend money to the SME sector are already under stress following repercussions of the recent developments. Already reeling under inflationary pressures, overall increase in input costs and as already higher lending rate by banks has already made lending to SMEs difficult, Small companies are usually the last end borrowers as they are the most risk prone as far banks are concerned SME have already witnessed a slowdown of 20-25% over the last 5-6 months owing to these pressures. Some sectors, of course are hit more than the others like auto components and suppliers to the housing sector. PERVADE ON INDIAN CAPITAL MARKET Wall Street wolf pack has lost its fangs. And the Indian markets are finding it tough to stand apart despite strong economic fundamentals and a largely insulated macroeconomic situation. The answers are quite clear, this is the underbelly of globalization. The Indian economy is feeling the heast of the contagion effect, like never before. We will certainly be influenced by this global slowdown, the pain will be felt with the stock markets reacting in a downturn. - 127 -

There has been a double whammy for India. Direct hit are ones, which had since of business linkages with no longer existing global investment banking gains, such as IT services, real estate and infrastructure. The major players, which are hurt in the IT segment, include TCs. Wipro and Satyam. In the real estate sector, Unitech and DLF among others, have been affected. Analysis agree that all those companies, which had these investment banks holdings as a significant proportion of their portfolio and business are feeling the squeeze. Among banks ICICI Bank is the worst hit private bank, while PSU players. Bank of India and Bank of Baroda are affected because of their derivative exposure. FIIs pressed the panic button on India as global agency. Fitch downgraded the credit profile to negative. However, investors in India have been hit only indirectly, through exposure in the markets. The linkages of Indian investors within these extents have been weak as none of these banks are allowed to set up branches in India. There is a consensus among assets managers that Indian investors will not be affected very badly. The Indian market are certainly over reacting. The global meltdown has created volatility in the markets but it will not last for long. However not all optimistic. But every large player had invested in some way or the other in India. Lehman had holdings in Satyam. AIG had partnership with Tatas Insurance wing and Merrill Lynch had business with Infosys. But nobody is aware of the depth and magnitude of the crisis. The situation is not transparent as of now. The impact of global financial crisis on Indian Capital Market will certainly be felt but not at the port file level. The short term volatility may erupt but the medium and long- firm perspective are healthy and safe. EXTENUATING RISKS In such a scenario, one of the ways to mitigate be to spread it among many clients. If you are an exporter, you dont have complete dependency on the US alone. A dollar billing could be disastrous. So, why not sign up businesses in Europe or insist on Euro billing. Also, doing business with more than one company will be a good idea, Reliance on one big client means your prospects are severally effected if that company faces financial trouble. Big companies have to grow in order to ensure that the smaller companies also prosper. But there is something called the trickle down effect. Insurance companies at the same time expect SMEs will resort to insurance to insure themselves from such risks. The recent developments may not directly affect Indian enterprises yet but those who have dealings with companies based in overseas market especially in the US will surely face the pinch when it comes to payments. Exporters will be the worst affected right in the beginning. Those supplying goods or services to the US or UK might not receive payments from customers in time. With credit being tight, buyers would find making payments extremely difficult. Such a situation calls for - 128 -

options such as credit insurance. Most insurers and banks offer this option. Credit insurance is cheap and can cover 100% of the losses arising from payment defaults. The premium fro credit insurance cover tends to be about 0.4% of the sum assured. We expect widespread demand for these productions in the next couple of weeks as the effects of ..Cent developments sink in. Also important will be liability insurance Lehman and Merrill Lynch didnt just supply capital to companies but also to banks, including Indian Banks. The ability to provide fresh credit to SMEs may thus be compromised, which is expected to have a cascading effect on supply of goods and services. If that is the case insurers expect the spotlight to fall on liability products, such as product liability insurance and errors and omission insurance. At this stage, insures are sitting on the sidelines and are adopting a wait and watch approach. There are some subtle fears in the tile SME segment, but whether that will translate into increased sales of covers remains to be seen. However, insurers would be reaching out to this segment to make them aware of the risks they could be facing, especially with relation to credit default. The challenge will be to get them to shed then to shed their dependence on Chartered Accountants and introduce them to a proper risk analysis and protection mechanism. The hazy definition of SMEs in India and their diffused nature make it challenging for insurers to identify the pain points they face as a sector. Bur traditional sectors slowly get more organized and rely on banking relationship banc assurance produce too will be in demand going forward. Now the main problem in India is the liquidity crunch . There is absolutely no liquidity in the system. Spooked investors everywhere are unwinding their position and swiftly moving to cash. In India, the foreign institutional investors (FIIs) have acted like lemmings and with drawn several billions of dollars in the last few weeks by selling their equity exposures. But they arent the only scared rabbits facing the headlight. Banks all over, and the Indian ones are no exception, are making big investments in pillow cases to stuff whatever cash they can sequester. No wonder, then, that the overnight LIBOR rate has shot above 7% ; and, at home, the inter-bank call money rate rules between 28% and 19%. How can we, in India, deal with this dried our liquidity scenario? In a sentence, by taking quick, decisive and big ticket actions. RBI with appropriate blessing of the ministry of finance can take the following action Action1: Cut the cash reserve ratio(CRR) and cut it deep. Yes the RBI has finally cut CRR by 150 basis points up from a very timid initial move of 50 bps. And it deserves kudos for this action Even up to 2007the CRR was 6% .There is absolutely no reason why the CRR cannot be brought down in another 150 bps cut to 6%. - 129 -

Action 2: Cut the Repo and Reverse Repo rate by 200 basis points to 7% . Do so in one fell swoop instead of bits and bobs of 50 bps per time. Again this will demonstrate proactive flexibility and the ability to make serious interventions something that the RBI needs to do. CONCLUSION : The current global financial crisis, which started in 2008, has been adversely affecting all the world economies and the magnitude of its impact is exceeded that of great depression of 1930s. Indias integration into the world economy with a higher trade/GDP ratio and increased dependence on external capital flows made it more vulnerable to global crises. The immediate effects were plummeting stock prices, loss of Forex reserves, and depreciation of Indian rupee, reversal of capital flows and sharp tightening of domestic liquidity. large American and European banks were forecast to lose roughly $2.8 trillion between 2007 and 2010 and more in 2011 to 2012; the S&P 500, a major stock index, fell 45% from its high in 2007; and more than $9.8 trillion in wealth was erased between the height of the stock market and November 2011. (Americans total net worth shrank by about 29 %.) Unemployment reached the highest levels in 15 years. US monetary and fiscal policies have policies have flooded the country and the world with dollars to try and stave off recession. For more than a year since the outbreak of the crisis, it appeared that the Emerging Asian Economies, especially China and India, would not only remain insulated from the crisis, but also play a major role in moderating the global slowdown and paving the way for worldwide recovery in a year or so. While the overall policy approach has been able to mitigate the potential impact of the turmoil on domestic financial markets, with the increasing integration of the Indian economy and its financial markets with the rest of the world, there is recognition that the country does face some downslide risk from these international developments. With increased linkages with world economy it could not be decoupled from the global financial crisis. The contagion effect of global financial crisis spread from advanced economies to Indian market during the latter half of 2007 through three distinct channel (a) Financial channel (b) trade channel and(c) confidence channel. Financial channel includes the banking sector and major channel of capital flows such as FDI, portfolio inflows ,external commercial borrowings (ECBs), trade credits, overseas borrowings of banks and remittances. REFERENCES 1) 2) 3) 4) 5) Different issues of Tehelka, weekly magazine ,Delhi publication I.M Pandey .Vikas publishing House PVTLTD.(10th edition ) News papers Like Business Line and Business Standard Share guru - 130 -