SYNOPSIS

Analysis of Capital Structure of Selected Indian

Companies

Masters of Commerce
( MCOP – 001 )

Submitted by

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INDIRA GANDHI NATIONAL OPEN UNIVERSITY

Maidan Garhi, New Delhi – 110068
 INTRODUCTION
The present business environment is complex, dynamic, and uncertain and
the survival of the fittest is the slogan of the corporate world. Complexity is
one of the salient hallmarks of the 21st century. It is evident not only in
business, but also in every facet of the globalized world in which we live.
Companies are continuously exposed to innumerable challenges, including
innovation, technological disruptions, global competition, leadership
change, and shifting economic, social and regulatory conditions. To ensure
survival and growth, decision makers must lead their enterprise with an
effective data-driven transformation strategy. The managers of the present
corporate world have to follow systems approach in their decision making
process because a decision taken in isolation can bring a firm the verge of
disaster. Of all of the aspect of financing decision, capital structure decision
is the vital one because the performance of an enterprise is directly
affected by such decision. Therefore much care and attention need to be
given while making the capital structure decision. Capital structure decision
involves the decision about the combination of the various sources of funds
required for financing assets and business operation. These sources include
the use of long term and short term debt financing as well as equity
financing. For determining the appropriate mix of these funds, capital
structure analysis plays an important role. There should be a correct
proportion of these finances to keep up an optimum capital structure.
Optimum capital structure provides to the firm a good condition to operate
in a profitable manner.

Capital structure theories was developed for the first time by a well known
financial economist, David Durand in 1952 stating that firm can increase its
value or lower the cost of capital by using the debt capital (Net income
Approach). He further suggested through Net Operating Income approach
(quite opposite to the former) which contents that the value of a firm and
cost of the capital is independent to capital structure. Thus the firm cannot
increase its value by judicious mixture of debt and equity capital. These are
two extreme approaches to capital structure. Thereafter, Solomon (1963)
developed another approach which states that the cost of capital is
dependent on the capital structure and there is an optimal capital structure
which increases firm value. The idea of modern capital structure theory was
pioneered by the contribution of Modigliani and Miller in 1958. In their
work they elaborated on the conditions under which the firm would be
largely indifferent as to the sources of its finance where interest is not tax
deductible. Thereafter the literature on capital structure has expanded by
adding many theoretical and empirical researches. The strict assumption
made by the MM theory have been relaxed in the subsequent models by
taking into account corporate taxes (MM in 1963), bankruptcy costs
(Baxter, 1967), agency costs (Jenson and Mecling, 1976) and information
asymmetric (Myers and Majluf, 1984) as the potential determinants of
corporate capital structure. Martin and others summarized the debt
capacity theories developed by different scholars during 1970 and
concluded that the value of the firm is maximized when marginal benefit of
debt is equal to the marginal cost of debt. The rest of the paper proceeds as
follows:

1. Rational
2. Literature Review
3. Objectives
4. Research Methodology
5. Implications
6. Limitations

RATIONAL
Analyzing the capital structure of selected Indian companies is a
crucial research topic with several rational reasons. Firstly, the capital
structure of a company plays a vital role in determining its financial
health and stability. By analyzing the capital structure, researchers can
gain insights into how companies are financing their operations,
whether through debt or equity, and the impact of these decisions on
their overall performance. Secondly, understanding the capital
structure of Indian companies can provide valuable information for
investors, creditors, and other stakeholders. It can help them assess
the risk profile of a company, its ability to meet financial obligations,
and its potential for growth and profitability. This information is
essential for making informed investment decisions and managing
risks effectively. Furthermore, studying the capital structure of Indian
companies can also shed light on the broader economic landscape
and business environment in the country. It can reveal trends in
financing preferences, industry-specific patterns, and the impact of
regulatory changes on corporate financing decisions. This knowledge
is crucial for policymakers, regulators, and industry experts to make
informed decisions and formulate effective strategies to promote
sustainable growth and development. Overall, analyzing the capital
structure of selected Indian companies is a relevant and significant
research topic that can provide valuable insights into the financial
health, performance, and growth prospects of companies in the
country. It can help stakeholders make informed decisions, manage
risks effectively, and contribute to the overall development of the
Indian economy.

LITERATURE REVIEW
In order to study the corporate capital structure pattern, a lot of research
has been undertaken so far by various researchers all over the world. The
review of some of the major studies has been undertaken so as to develop
a clear understanding about the significance of capital structure. Modigliani
and Miller (1958) argued that debt-equity combination does not affect the
firm‘s market value under some strict assumptions as to absence of taxes,
asymmetric information, bankruptcy costs, transaction cost and in an
efficient market with homogeneous expectations.

Evidence would suggest that this does not operate in reality and new
research work was conducted to test the relationship between capital
structure theories with firm performance. While other theories such as Net
Operating Income supports MM assertion, Net Income approach and
Traditional view rejects the MM theory by arguing that how finance the
firm has effect on the value of the firm to a large extent hence is relevant in
decision making.

Rajan and Zingals (1995) investigate the determinants of capital structure

choice by analyzing the financial decisions of public firms in the major
industrialized countries. The study put forth that firm leverage is fairly
similar across the G-7 countries. Feidakis and Rovolis (2007) in their study
on capital structure determinants for large European construction firms
from 1996-2004, shows that the size is positively and profitability is
negatively related to leverage. Tawiah (2014) examined inter-country
variation of capital structure of the companies from India and Ghana and
found that due to the existence of high interest rate in Ghana when
compared to India, Ghanaian companies employed less debt finance.
Further, Indian companies are decreasing the debt finance over the period
while Ghanaian companies are increasing at (1%) a marginal rate.

The high performance and efficient capital market in India has boosted
shareholders confidence thereby reducing company borrowings. Hajiha and
Akhlaghi (2013) examined the firm specific determinants of debt maturity
structure taking 140 Iranian manufacturing firms listed in Tehran Stock
Exchange during the period of 2001-02 to 2009-10 financial years. The
result shows that firm specific variables such as profitability, firm size,
tangibility, growth opportunity and financial leverage have significant
effects on debt maturity choice in Iranian firms.

This also reveals that tax effect and business risk are not significant to the
debt maturity structure. Chisti et al. (2013) investigated the impact of
capital structure on the profitability of listed Indian companies from 2007-
08 to 2011-12 and found that capital structure do have statistically
significant impact on the profitability of the firm. Yadav (2014) investigated
the determinants of capital structure and financial leverage of Indian
companies during the period of 2002 to 2012. Multiple regression and
correlation have applied on fifty companies listed in the National Stock
Exchange.

The study reveal that profitability, collateral value of assets, growth,

liquidity, firm size and debt service capacity are positively correlated to
debt equity ratio while tax rate, non-debt tax shield, uniqueness and
business risk are negatively correlated. Tawiah (2014) analyzes the
emerging trends in capital structure pattern of companies in Ghana and
India taking 20 listed companies from both countries revealed that
companies in Ghana used less debt in its capital structure as compared to
companies in India.

This is due to the fact that there is high interest rate in Ghana. The efficient
capital market and high corporate performance has helped to boost up
shareholders confidence and thereby companies reduce borrowing. It is
quite clear from the above review of empirical works that different authors
have approached financial leverage in different perspectives of varying
levels of analysis. It throws more light on the extensive and diverse works
on capital structure. The existing empirical research on capital structure has
been largely confined to a few developed countries. In the context of India,
it has received a limited research attention. Besides, most of the work done
on Indian market is on the determinants of capital structure.
Hence, there is a sufficient justification to conduct a study on ―Capital
Structure Pattern of Companies in India: with Special Reference to the
Companies listed in National Stock Exchange.

The present study is primarily restricted to the public limited companies

which are listed in the National Stock Exchange (NSE) of India. The study
covers financial data for a period of ten years from 2006-07 to 2015-16. An
investigation in the capital structure pattern of the selected companies
listed with National Stock Exchange (NSE) of India is to be done to test the
extent of variation among selected industries.

The findings of the study might be useful to all companies to frame an

optimum capital structure. It is also expected that the study will be useful
to the management, finance professionals and researchers in the corporate
sector.

OBJECTIVES
1. To understand the impact of regulatory factors, such as government
policies, tax laws, and financial regulations, on the capital structure
decisions of Indian companies.
2. To examine the influence of market factors, including the availability of
capital, investor preferences, and economic conditions, on the financing
choices of Indian firms.

3. To identify the challenges and opportunities that Indian companies face

in accessing external financing and how these factors impact their capital
structure decisions.

4. To integrate regulatory and market factors into the analysis of capital

structure decisions in order to gain a more comprehensive understanding
of the external forces that influence financing choices in the Indian market.

5. To provide a nuanced and insightful examination of the complexities

involved in capital structure decisions and their implications for financial
management and decision-making in India.

6. To consider both internal and external factors in the analysis of capital

structure decisions to provide a more complete picture of the various
influences on financing choices in the Indian context.

7. To contribute to a more robust and valuable body of knowledge on

capital structure decisions in India by considering the interplay between
regulatory and market factors and their impact on financial management.

Research Methodology
The study is based on secondary data. The data for the study has been
taken from published annual reports of twenty companies selected at
random from four major sectors namely Automobile, Pharmaceuticals,
Metals and Mining and Telecom. This study covers a period of ten financial
years from 2006-07 to 2015-16. To fulfill the objectives of the study, ratio
analysis of capital structure for a period of ten years has been considered.
Mathematical and statistical tools like averages, percentages, ANOVA. etc.
have been used for analysis. Tables and charts of various types are also
used for presentation.

Table 1: Industry Group wise Classification of Selected Companies

Sector Sl. Name of the Company Year of Register Paid up
s No. Incorpora ed Capital
tion Office (Rs.in
Crores)
1 Hero Motor Corporation 1984 New Delhi 39.94

2 Bajaj Auto 2007 Maharashtra 289.37

3 Escorts 1994 Haryana 119.39

Automobile

4 Tata Motors 1945 Mumbai 679.18

5 Maruti Suzuki 1981 New Delhi 151.00

6 Sun Pharma 1993 Vadodara 240.66

7 Glenmark 1977 Mumbai 28.22

Pharmaceutical

8 Cipla 1935 Mumbai 160.68

9 Lupin 1983 Mumbai 90.12

 10 Dr.Reddys Laboratories 1984 Hyderabad 85.30

11 JSW Steel 1994 Mumbai 302.75

12 Coal India 1973 West 6316.36

Bengal

13 Hindalco 1958 Mumbai 206.52

Metals & Mining

14 Jindal Steel 1979 Hissar 91.49

15 SAIL 1973 New Delhi 4130.53

16 Bharti Airtel 1995 New Delhi 1998.70

17 Idea Cellular 1995 Gandhi 3600.51

Nagar
18 Reliance Communication 2004 New 1244.00
Mumbai
Telecom

19 Tata Communication 1986 Mumbai 285.00

20 Nu Tek India 1993 New Delhi 77.26

IMPLICATION
1. Academic Contribution: The research would contribute to the existing
body of knowledge on capital structure decisions in India, providing a
deeper understanding of the market factors influencing financing choices.
This could serve as a foundation for future studies on similar topics, offering
a framework for further exploration.

2. Practical Insights: The findings of the research could offer valuable

insights for financial managers and policymakers in India. By understanding
the impact of regulatory and market factors on capital structure decisions,
financial managers can make more informed financing choices, while
policymakers can use the research to develop effective regulations and
policies.

3. Actionable Guidance: The recommendations derived from the research

could provide actionable guidance for navigating the complexities of capital
structure decisions in the Indian market, ultimately improving the financial
performance and stability of companies in the region.

4. Benefit to Financial Managers: Financial managers can use the research

to make more informed financing choices, leading to better financial
performance and for their companies.

5. Benefit to Policymakers: Policymakers can use the research to develop

more effective regulations and policies, which can have a positive impact on
the overall financial landscape in India.

6. Far-reaching Impact: Overall, the implications of conducting this research

would be far-reaching, benefiting both the academic community and
practitioners in the field of finance in India.

LIMITATIONS
1. Limited Generalizability: The findings of the research may be specific to
the Indian market and may not be directly applicable to other countries or
regions, limiting the generalizability of the results.

2. Data Limitations: The research may be limited by the availability and

quality of data on capital structure decisions in India, which could impact
the robustness and reliability of the findings.

3. Time Constraints: The research may be constrained by time limitations,

which could affect the depth and breadth of the analysis and potentially
limit the scope of the study.

4. External Factors: The research may be influenced by external factors such

as changes in regulatory environment, market conditions, or economic
trends, which could impact the relevance and applicability of the findings
over time.

5. Bias and Subjectivity: There may be inherent biases or subjectivity in the

research process, such as in the selection of variables, methodologies, or
interpretations of results, which could impact the objectivity of the findings.

6. Ethical Consideration: The research may face ethical considerations

related to data privacy, confidentiality, and potential conflicts of interest,
which could impact the validity and credibility of the study.