Download Palani 2 - Welcome to Bharathidasan University Central Library

34
CHAPTER II
CONCEPTS AND REVIEW OF LITERATURE
WORKING CAPITAL MANAGEMENT
Working capital management is concerned with the decisions which are
related with the current assets and the current liabilities. It means, it concerned
with day-to-day management activities.
The key factor, which is used to differentiate long term financial
management and short- term financial management, is the timing of cash.
Long- term financial decisions by buying capital equipment or issuing
debentures, involve cash which flows over an extended period of time.
But a short time financial decision mainly involves the cash flow within
a year, or within the operating cycle of the firm.
TWO DANGEROUS POINTS OF CURRENT ASSETS
Danger of inadequate working capital
1. Inadequate working capital will lead to a condition, in which one
cannot pay its short-term liabilities in time. So there arises a situation where
there is a loss of reputation and tight credit terms.
2. The organization’s requirements cannot be fulfilled in bulk; hence it
cannot take the advantage of cash discounts.
35
3. Difficulties will arise in meeting the day-to-day expenses. This will
lead to inefficiency and increase in costs with the minimum profits.
4. Lack of working capital will lead to less favorable marketing
conditions and less profitable projects.
5. Due to scarcity of working capital, fixed assets are not properly
utilized. Thus this results in the fall of investments return.
Danger of Excessive Working Capital
1. Excessive working capital will lead to low investments in fixed assets.
Hence there will be no profits for the business and there can be no proper route
of return on its investments.
2. The low rate of return on investment will lead to the fall in the value
of shares.
3. Excessive working capital will lead to unnecessary purchasing and
excessive amount of inventories. As a result, there are chances of theft and
loses.
4. Excessive debtors and defective credit policy are the indication of
excessive working capital. There may be delay in collection and increased
incidence of bad debts.
5. Excessive working capital will make the management complacent.
This will lead to overall inefficiency in the organization.
36
NEED FOR WORKING CAPITAL MANAGEMENT
Beyond the limit, both the current assets i.e., inadequate working capital
and excessive working capital are dangerous. Beyond the limitations of both
the level, the common goal of the organization cannot be achieved.
Working capital Management provides effective and efficient decision to
allocate the current assets.
Financial statements render a yeoman’s service to owners, suppliers,
government agencies, employees, customers and even common public in their
respective field of interest. It may, however, be observed that mere presentation
of these statements does not serve the purpose of none of the aforesaid parties
in any way. In other words, the significance of these statements lies not in their
preparation but in their analysis and interpretation. There is need for
developing some scientific methods, like that one used in the preparation of
these statements through the use of which these accounting data is made to
speak nothing but what is reality.
COMPARATIVE STATEMENTS
Comparative statements are those statements which summarise and
present related accounting data for a number of years incorporating therein the
changes (absolute or relative or both) in individual items. While preparing (and
then making use of) comparative statements for the purpose of financial
37
analysis, the techniques, procedures and principles followed in the collection,
recording and presentation of accounting data do not differ over the period of
which the business history is studied. Any material change in the techniques,
procedures and principles will render these comparative statements to be
useless and become an insignificant tool of financial analysis.
COMMON SIZE STATEMENTS
For the purpose of analysis, the various items of assets and liabilities of
Balance sheets are shown not at their absolute figures but at their relative
values. In other words, each item of asset is converted into percentage to Total
Assets and each item of capital and liabilities is expressed into percentage to
Total Liabilities and Capital Fund. Thus, the whole Balance sheet is converted
into percentage form. Such converted Balance sheet is known as common size
balance sheet. When balance sheets of the same concern for several years and
or when balance sheets of two or more than two concerns for the same year are
converted into percentage form and presented as such, they are known as
comparative common-size balance sheets. However, such comparative
common-size balance sheets cannot convey any knowledge about the nature of
a particular asset or liability. This statement depict as what changes have taken
place in relationship of one item of asset to total assets. Though this type of
information is not much useful for the analyst a number of significant decisions
38
taken on the basis of such information, provided there are some predetermined
standards for such relationship among various items of assets. Some experts
hold the opinion that such statements are not used to determine the trend.
Moreover, these statements are used in getting the proportion or ratio of one
item of Assets to Total Assets. The special feature of this presentation is that
Balance sheet of one concern cannot only fully compared with another balance
sheet of the same concern, but with corresponding balance sheet of any other
concern also.
TREND ANALYSIS
The trend analysis also occupies an important place in the analysis and
interpretation of financial statements. Trend in general term signifies a
tendency. In other words, the review and appraisal of tendency in accounting
variables are nothing but trend analysis. Such an analysis of business facts is
very significant from the point of view of forecasting or budget. It discloses the
changes in the financial and operating data between specific periods and makes
possible for the analyst to form an opinion as to whether favourable or
unfavourable tendencies are reflected by the data. The analysis of the trend in
business facts may be made in any of the following ways.
a. By calculating trend ratio or percentages or
b. By plotting on graph-paper or chart.
39
TREND RATIOS
Financial statements of a number of years are required for the purpose of
calculating trend ratios or percentages and information contained in these
statements are tabulated separately for a number of years. The calculation of
trend ratio involves the ascertainment of arithmetical relationship with each
item of several years’ bears to the same item of base year. Thus, one particular
year out of many years is taken as base. The values of one particular item out
of several items shown in the financial statements are converted into ratio or
percentage taking the value of that item in base year as equal to 100. In fact
trend analysis implies such a statistical method which has been used by the
statisticians from the very beginning. This method is also used in Economics
for calculating price indices. Thus, trend ratios like indices (index numbers)
which indicate the movements of fluctuations in various financial facts of the
business.
RATIO ANALYSIS
Ratio analysis is one of the techniques of financial analysis where it is
used as a yardstick for evaluating the financial conditions and performance of a
firm. Analysis and interpretation of various accounting ratios gives a skilled
and experienced analyst a better understanding of the financial condition and
performance of the firm than what he could have obtained only through a
40
perusal of financial statements. Ratios are relationships expressed in
mathematical terms between figures which are connected with each other in
some manner. Obviously, no purpose will be served by comparing two sets of
figures which are not at all connected with each other. Moreover, absolute
figures are also unfit for comparison.
Significance and Use
Ratio analysis is a powerful tool of financial analysis. It is used as a
device to analyse and interpret the financial health of a firm. Analysis of
financial statements with the aid of ratios helps the management in decision
making and control.
The use of ratio analysis is not confined to financial managers only.
Different parties are interested in knowing the financial position of a firm for
different purposes. Ratio analysis is used by creditors, banks, financial
institutions, investors and shareholders. It helps them in making decisions
regarding the granting of credit and making investments in the firm. Thus ratio
analysis has wide applications and is of immense use.
Important Managerial uses of Ratio Analysis
1. Simplifies Financial Statement
Ratio analysis simplifies the comprehension of financial statements. It
explains the whole story of change in the financial condition of the firm.
41
2. Helps measuring Performance and Position:
Through leverage and solvency ratios, ratio analysis helps in assessing
the financial position of a firm. Similarly, activity ratios and profitability ratios
are useful in evaluating the efficiency of performance.
3. Facilitates intra-firm comparison
Comparison of ratios of the same firm over a period of years can be
made. This will help to know whether the financial performance is improving
or deteriorating. Similarly, comparison of the performance of different
divisions of the firm can be made to assess their relative efficiency.
4. Facilitates inter-firm comparison
Absolute figures are not suitable for comparison between two or more
firms. Ratios of a firm can be compared with the ratios of similar firms in the
industry. Such a comparison will indicate how well the company is operating
relatively to its competitors.
5. Helps in Forecasting and Planning:
Profitability ratios indicate trends in costs, sales, profits, etc. The
ascertainment of trends helps in making forecasts. Such financial forecasts are
useful in planning.
42
6. Helps in Coordination:
Ratio analysis communicate the financial strengths or weaknesses of a
firm in a more easy and understandable manner. Such a clear communication
helps in better coordination in the enterprise.
7. Helps in Control:
Comparison of actual ratios with the standards reveals the deviations and
weaknesses. This helps the management to take corrective action at the right
time. Control of costs as well as performance is ensured.
CLASSIFICATION OF RATIOS
Accounting ratios can be classified in a number of ways. Important
among them are stated below:
1. Classification according to Statement
a. Profit and Loss Account Ratios
Ratios calculated on the basis of the items of the profit and loss account
only. Eg. Gross Profit Ratio, Expenses Ratio, Net Profit Ratio etc.
b. Balance Sheet Ratios
Ratios calculated on the basis of the figures of Balance Sheet only. Eg.
Current Ratio, Quick Ratio, Proprietary Ratio etc.
43
c. Composite Ratios
Ratios based on figures of Profit and Loss account as well as the Balance
sheet, eg. Debtors and Creditors turnover ratio, return on capital employed,
return on total resources etc.
2. Classification according to Function
a. Financial Ratios
Eg. Short term and long term solvency ratios.
b. Profitability Ratios
Eg. Gross Profit Ratio, Net Profit Ratio, Operating Ratio, Return on
Capital employed Ratio.
c. Turnover or activity ratios
Eg. Stock turnover ratio, Debtors Turnover ratio, Creditors turnover
ratio.
d. Capital Structure Ratio:
Eg. Capital gearing ratio.
LIMITATIONS OF RATIO ANALYSIS
Ratio analysis suffers from certain limitations. They are discussed
below:
44
1. Inadequacy of Standards:
Ratios are useful only if they are compared with some standards. But
adequate standards are not easily available.
2. Limitations of Financial Statements:
Ratios are based only on the information recorded in the financial
statements. Financial statements suffer from a number of limitations. Hence,
the ratios derived from them are also subject to those limitations.
3. Ratios alone are not adequate:
Ratios are only indicators. They cannot be taken as final regarding good
or bad financial position of the firm. Other things have also to be seen. For
example, a high current ratio generally means a satisfactory liquidity position.
But current assets may comprise of outdated stocks and this will affect the
liquidity position of a concern.
4. Difficulty in Comparison:
In actual practice, it is difficult to have similar companies for
comparison. Even if similar companies are available, their accounting periods
may differ. This makes inter-firm comparisons extremely difficult.
45
5. Problem of Price Level Changes:
Ratio analysis does not take into account the effects of changes in price
level. Ratios become invalid if due weightage is not given for changes in price
level.
6. Window Dressing:
Financial statements can easily be window-dressed to present a better
picture of the financial and profitability positions. Hence, one has to be very
careful in making a decision on the basis of ratios calculated from such
financial statements. But, it is very difficult for an outsider to know about the
window-dressing made by firm.
7. Personal Bias:
Ratios are only a means of financial analysis. They have to be
interpreted and different people may interpret the same ratios in different ways.
8. No Fixed Standards:
No fixed standards can be laid down for ideal ratios. However in case of
firms which have adequate credit arrangement with their bankers, it may be
perfectly ideal to have a ratio of 1:1.
46
9. No indicators of Future:
Ratios are generally calculated from past financial statements. Hence,
they are no indicators of future.
Research study should commence with the study of earlier studies in the
relevant area of research.
It requires the study of previous research
publications, articles and research findings.
Systematic research works
comparing performance of companies based on their geographical location are
not yet available. However there are research works on performance and the
factors influencing the performance. Research works carried out in India and a
few works done abroad are studied carefully. The methodology and findings of
these research works had been carefully studied and analyzed. Useful hints
were drawn from these studies which helped in putting the present research
work in a proper perspective. The list of some of the relevant research studies
and research papers on performance are presented in this chapter.
Chudson1 has presented a research paper on, “The pattern of corporate
financial structure”, in which he provides direct evidence on the companies
with high properties of fixed assets to use more long term debt. The research
also indicated that there is no simple linear relationship between corporate size
and debt ratio.
1
Chudson ‘The performance of Corporate Financial Structure’, National Bureau of Economic Research, 1945
47
Barges, Alexander,2 in his research paper on “The effect of Capital
Structure on the cost of capital”, adopted the most comprehensive test of
Modigliani-Miller hypothesis.
He analyzed the relationship between the
average cost of capital and leverage, and between the stock yield and debtequity ratio. For the purpose of his study, he utilized cross-section data from
three different industries namely rail road, departmental stores and cement
industries. Unlike Modigliani-Miller’s study, his observations have good
distribution over the entire range of capital structure. Each sample has a
significant number of observations with little or no debt. He made a special
effort to introduce homogeneity into the sample firms so that it might not
distort the relationships. Barges criticized Modigliani and Miller for using
market value as it introduced bias in the estimate of leverage coefficient. He,
therefore, used book value as measure of leverage.
Wippern Ronald,3 in his research paper on “Financial structure and the
value of the firm”, concentrated on the cost of equity function instead of the
overall cost of capital function. By doing this, he could show that the cost of
equity function was significantly linear and increased at an appropriate rate to
Barges, Alexander, “The effect of Capital Structure on the cost of capital”, New Jersey, Prentice Hall, Eagle wood cliffs,
pp.26-33, 1963
2
3
Wippern Ronald, “ Financial structure and the value of the firm”, Journal of Finance, Vol. IV, Dec.1966, pp.615-634
48
exactly off-set the injection of debt into the capital structure and keep the
overall cost of capital constant.
Comanor, W.S and Wilson.T,4 in their article on “Advertising, Market
Structure and performance”, examined the relevance of advertising intensity as
a factor for industrial profitability. They found advertising intensity as a major
determinant of profitability (leverage after-tax return on equity) in thirty five
US consumer goods industries.
There are number of works on determinants of profitability in India.
Subramanian and Papoia, T.S5 have studied the relationship between
profitability and growth of firms in Indian chemical industry during the period
1960-69 with data of 27 companies quoted in stock exchange. They found that
most of the firms want to grow in an expanding market with differing
intensities and that those who have ability aided by profit continued to grow
faster.
Gale6 has examined the effect of market share on the rate of return of
selected firms operating in different market environment using data of 106
firms. He found that high market share is associated with high rates of return
and that the effect of share on profitability depends on other firm and industry
Comanor, W.S. and Wilson.T, “ Advertising, Market Structure and Performance”, Review of Economics and Statistics,
Vol. 17, Sep. 1967, pp.423-44
5 Subramanian, K.K. and Papoia, T.S., Profitability and the Growth of the firms: The Case of Indian Chemical
Industry, Anvesak, June 1971, Vol. 1, No.1.
6 Gale, B.T., Market Share and Rate of Return, The Review of Economical Statistics,Vol.LIV, No.4, November
1972, p.412.
4
49
characteristics such as degree of concentration and rate of growth in the
industries in which the firm competes and on the absolute size of the firm. He
also found that the relation between rate of return on equity and the equity to
capital ratio (a measure of risk in an inter-industry sample of firms) to be
positive and significant.
Hurdle7 has developed theoretical model relating to leverage, market
structure, risk and profitability and tested the model using cross-sectional data
on 228 U.S. manufacturing firms and 85 industries data covering the 1960s.
Hurdle used three simultaneous equations to test the hypothesis of his study
and found that the high profit firms earned this because of market structure and
not through capital structure.
Ghosh T.P. and Roy M.M8 have analyzed in their study to see how far
the liquidity of the firm is influenced by the economy and industry. Liquidity
characteristics have been chosen for replication of the model used elsewhere to
judge the industry and economy influence. Liquidity characteristics are judged
in terms of current ratio, since it is widely accepted tool of measuring liquidity.
Industry and economy influence on firm’s liquidity characteristic are
statistically significant although not dominating. It seems better to develop
7
Hurdle, G.J., Leverage, Risk, Market Structure and Profitability, Review of Economics and Statistics, 56, 1974.
Ghosh T.P. and Roy MM :‘The Industry and Secondary Influence on Firm’s Liquidity: a case study of Cement Industry’
October, Lok Udyog, 1977.
8
50
industry average and economy average for comparing firm’s financial
characteristic instead of comparing simply with the industry average.
Ghosh.D.K9 has studied the financial position of 18 private sector
companies, all with a paid up capital of Rs.50 lakhs and above, whose principal
item of manufacture was cement. He had analyzed the balance sheets and the
combined income and expenditure statements and found out that they were
financially sound.
Pramod Kumar10 has made a comparative study of the industry to
evaluate its performance and achieve higher standards in all the fields. A
comparative study has been made between private, state owned and central
owned firms. It reveals that the utilization of investment in augmenting sales
is better in private sector than in state-owned and central public sectors. The
income generated by the industry has shown an upward trend. This study also
reveals that long term funds are the major source of capital structure in the
private sector. The main points of this study are that highest priority should be
given to reduce the operating cost, optimizing capacity utilization; much
importance should be given to improve the liquidity and solvency position and
attention should be given to better packaging and distribution.
9
Ghosh.D.K, Financial Performance and Private Sector Cement Units in India.1977, December, Lok Udyog, 1978.
Pramod Kumar , ‘Analysis of Financial Statements of Cement Industry in India since 1979’, ‘A Survey of Research in
Commerce and Management’ 1980, P.275
10
51
T.L.N. Swamy11 has examined the various aspects of capital,
employment, productivity, profitability, rate of return on capital and cost
structure etc., of cement industry for the period 1965-78 in detail. The study
reveals that fixed capital of the industry showed a negative growth rate during
the period. Secondly, capital intensity declined drastically over the period
indicating deterioration of financial position of the industry. Ratio of working
capital to productive capital also declined over the period, whereas the inputoutput ratio showed a favourable increase. Finally, material consumed cost
increased over the period.
Sethuraman.T.V., Jog.S.D and Khaled.S.M12, have viewed that the
concept of social limits to growth has been with us for some time. Now that
the Indian economy is opened up, it has interesting implications for the
industry, which is poised for growth. This study was prompted by the cement
industry, which found itself in difficult conditions within months of
delicensing.
Using simple criteria, it is suggested here that the Indian
Economy be easily prone to market saturation. Relatively small increases in
output have succeeded in a turn around from scarcity and attractive margins to
falling unit realisation and capacity utilisation.
Since this behaviour is a
characteristic of the economy, it is feared that the story could easily be repeated
T.L.N. Swamy , ‘Trends in Cement Industry in India – 1965-78’, Lok Udyog, September 1984, P.46
Sethuraman T.V., Jog S.D and Khaled S.M., “Market Saturation in Indian Conditions-Cement Industry”, Indian
Economic Journal, Vol.35, No.3, 1985, pp. 39-46.
11
12
52
in other cases like fertilizers, two wheelers etc., closely on the heels of cement
and light commercial vehicle.
It is suggested that corporate management
should pay due attention to this characteristic in the course of planning and
implementation of expansion projects.
P.C.Chamoli,13 has attempted to assess the capital structure pattern of
Cement Industry in both private and public sector. It also makes a comparison
of observed ratios by debt-equity. With established norms it identifies the
factors responsible for the difference between them. It is suggested that if the
financial function of the industry is to be made self-propelling, the gear as well
as the pay-out ratios are to be pushed up by financing future expansion with the
help of long term debt and not with the help of addition to equity. General
reserves should be used to raise dividend on ordinary shares.
Arun Khandekar 14 has studied in his paper that the Seventh Plan target
for installed capacity of cement has been fixed at 60 million tonnes as against
the Sixth Plan-end level of 42.5 million tonnes. The production target has been
as against the actual production of 30 million tonnes in 1984-85. This means
the cement industry will have to grow one and a half times more within a span
of five years. By all standards, it is a challenging task.
13
14
P.C.Chamoli, ‘ A Panorama of Capital Structure Planning of Indian Cement Industry’, Lok Udyog, Dec 1985, P.23
Arun Khandekar, “Cement Industry: Challenging Task Ahead”, Commerce, April 12, 1986, pp 728-734.
53
Anup Agarwal and Nandu J. Nagarajan, 15 have published a research paper on,
“Corporate Capital Structure, Agency costs, and ownership control: The case
of all –equity firms”. In this study, they attempted to evidence that all equity
firms (Firms which use no long – term debt over a continuous five-year period)
exhibit greater levels of managerial stock holdings, more extensive family
relationships among top management, and higher liquidity positions than a
matched sample of levered firms. Further, it leads that the managerial control
of voting rights and family relationship among senior managers are important
factors in the decision to eliminate leverage. Their main findings are that i)
Managers of all-equity firms have significantly larger stock holdings than
managers of similar-sized levered firms in their industry, ii) there is
significantly greater family involvement in the corporate operations of allequity firms than in levered firms, iii) Managerial ownership in all equity firms
is positively related to the extent of family involvement, and
iv) all-equity
firms are characterized by greater liquidity positions than levered firms.
Dev Prasad, Garry D. Broton and Andreas G. Merikas,16 have presented
a research paper on “Long – run Strategic Capital Structure”, in which they
Anup Agarwal and Nandu J. Nagarajan, “Corporate Capital Structure,
Agency Costs, and ownership control-The case
of all-equity firms”, The journal of Finance, Vol. XLV, No.4, pp. 1325 – 1331:1992
16 Dev Prasad, Garry D. Broton and Andreas G. Merikas, “Long – run Strategic Capital Structure”, Journal of Financial and
Strategic Decisions, Vol 10, Num 1, Spring 1997, pp 47-58.
15
54
analyzed to confirm the linkage between capital structure and strategic posture
of the firm. Specifically, managers were found to structure the selection of debt
and capital intensity in a mean consistent with the strategic goal of long – run
control of systematic risk. Therefore, the efficacy of a strategic perspective of
capital structure will be examined by investigating the control of systematic
risk in firms over the long term through the adjustment of the firm’s capital
structure.
Sanwar N.Mishra,17 in his paper stressed the factors responsible for
competitive gain. Under the process of globalization of industry, achievement
of the competitive advantage over the rival calls for an urgent management
attention. The factors he analyzed are production function characteristics, the
process technologies, update of an efficient process plant, maintenance, the
productive machine availability, human resources department concerns the
efficient use of manpower for effective total operations; customer relationship
management is crucial to the marketing functions and supply chain
management to the material function. In this context, the performance factors
tie up with the respective organizational functions.
An early attempt has been made by Prof.Ramanathan on Finances of
Public Enterprises in 1971, wherein he has examined and analyzed different
Sanwar N.Mishra, ‘Improving performance for a competitive gain in a cement plant, ‘Indian Cement Review, Apr 2003,
P.15
17
55
aspects of financing of public enterprises. While focusing his attention on the
profit and profitability criteria, he has explored into the impact of pricing
policies on the public sector financing.18
Sharma has highlighted the problems of financing the operations of
public enterprises at different stages such as gestation, operation and
expansion. It is observed from the study that the government was the major
provider of finances of these enterprises. The pattern of financing during
period was similar to the gestation period. The contribution of internal funds
was far behind the potential mainly due to the poor operating profits, which led
to the dependence on borrowed funds in the total capital structure of these
enterprises.19
Singh has made an exploratory study on the performance of public
enterprises during the period of ten years ending in 1979-80. He has identified
a number of reasons for the performance of public enterprises, which include
the long gestation periods, adoption of administered price policies, managerial
inefficiencies and indifferences, accountability, role of policies in policy
making etc.20
18
Ramanathan, V.V., Finance of Public Enterprises, Asia Publishing House, Bombay, 1971
Sharma, B.S. Financial Planning in Indian Public Sector, Vikas Publishing House, New Delhi, 1974
20
Singh, K.R. Public Sector Enterprises: An Evaluation of Performance, Southern Economist, Dec.1-15, 1981,
pp.9-14
19
56
Singhania and Balakrishna (1981) analyzed the relative performance of
the public and private sector taking a larger sample of 16 out of the 32
companies during the period 1977-78. They found out that share capital as a
percentage of total funds employed had been fairly stable at 33 to 36 percent in
the private sector while it had risen steadily from 67 to 80 percent in the public
sector within five years.
While the private sector generated and retained
sizeable funds for plough back, there had been erosion of capital in public
sector due to large accumulated losses. As for external finance, the private
sector units mostly relied on secured loans, debentures and term loans while
the public sector has brought in sizeable funds as unsecured loan from
government. Utilization of funds was markedly encouraging (efficient) in the
private sector than in the public.21
Bagchi had made an evaluation on the role of public sector in India
against the explicit and implicit objectives during the period 1976 and 1985.
He has appreciated the performance of these enterprises in respect of their
efficiency in generation of employment and their contribution to the net
domestic savings in India. He lamented on non-implementation of different
recommendations made by the different committees for the betterment of the
21
Singhania and Balakrishnan, performance of private and public sector units, 1981
57
efficiency of these enterprises.
He has pleaded for restructuring the
management styles and accountability aspects of these enterprises.22
Bhatia has made a review on different studies relating to the profitability
performance of public enterprises.
The studies reviewed by him have
concluded that the common melody for deteriorating performance of public
enterprises is the lack of commitment and lack of accountability of
management at all levels.23
Prakash has made an attempt to find out suitable criteria for measuring
the efficiency of public sector in India. After a careful analysis of the works of
different authors like Sergeant Florence, Gilber Walker, Om Prakash, G.P.
Keshav and others he suggested a set of different financial measures to
evaluate the efficiency of public sector.24
Economic Times Research Bureau (1984) presented detailed analysis of
the performance 101 giant companies and 150 mini giant companies in the
private sector. As regards the industries in particular it found that the major
22
23
Bagchi, K.Amiya, “The Role of Public enterprises in India”, Asian Development Review, 1982, pp.89-100.
Bhatia, B.S., Researchers on Profitability of Public Enterprises, RBI Occasional Papers, 1983, pp.32-39
Prakash, J., Measuring the efficiency of public enterprises, the Journal of Institute of public Enterprises,
April-June 1983
24
58
profitability ratios declined marginally in the year 1981-82 compared To 198081.25
Rao of Reserve Bank of India has evaluated the performance of nonfinancial non-departmental enterprises in public sector covering a period of two
decades ending in 1980-81. He observes good capital-output ratios and capital
formation rates during this period.
He has evaluated the productivity in
operations by employing Cobb-Douuglas production functions between
operating surpluses and the fixed assets turnover ratios and gross figure. He
found that the entire capital formation is financed through borrowing either
from government or other institutional agencies. He observes that the hike in
inflation rate has been reducing the operating surpluses to the extent of 0.92
percent with every one percent rise in Price Index.26
Kapadia has made a study to find out the contribution of ”taken over”
units, in the poor financial surpluses earned by public sector enterprises during
1978-83. He observes that the taken over units account for 18 percent of total
investment, 22 percent of total sales turnover and much higher 45 percent of
employment of all central government enterprises. He observes that 48 taken
over units are in red during the entire six-year period of the study amounting to
25
Corporate sector in India, Economic Times Research Bureau 1984, Vikas Publishing house Pvt. Ltd., New
Delhi.
26
Ramachandra Rao, K.S., Profitability of Non Financial and Non Departmental Enterprises in Public Sector,
1961-62 to 1980-81, RBI Staff Occasional Papers, 1984. pp.83-125
59
Rs. 936 crores. He suggests for no-more takeovers of sick industrial units just
for the sake of protecting the employment as these units subsequently behaving
as relief undertakings and mostly is non-viable to achieve the commercial
results from them.27
Chalam and Murthy have made a study on the performance of public
sector enterprises in India and they have attributed the poor financial
performance to the excessive use of external sources in their capital structure.
They have evaluated the effects of heavy external finances on net incomes and
on short-term liquidity position, in turn affecting the working funds available
for successful operation.
They have suggested for allowing more private
equity participation increasing the operating efficiency through controlling
costs and improving the capacity utilization and factor such alike.28
Srinivasan has made a study on some of the recent trends in financing
public sector enterprises in India. He observes that the role of equity has been
declining in public enterprises form 26.4 percent to 20.6 percent and interest
bearing funds have been occupying 30.3 percent to 33.6 percent of the total
capital structure during 1975 and 1983. These shifts together with increasing
interest rates have hiked up the interest burden of the enterprises and have
Kapadia, M.S., Public Sector’s Poor financial returns: Place for takenover units, Financial Express, No.7,
1985, p.5.
28
Chalam, G.V. and Dakshinamurthy. D., Performance of Public Enterprise in India: Impact of Heavy External
Financing, Public Enterprise, Vol.6, No.2, 1985
27
60
adversely affected the financial viability. This is contrary to the performance
of private sector enterprises that were able to bring down the share of costlier
bank loans during the same period. He suggested for adopting a more realistic
approach in the preparation of financing plans and adoption of innovative
modes of financing, considering the debt capacity and the available operating
surpluses in public sector enterprises.29
Trivedi has made an analysis on working of public sector enterprises to
construct a criterion for evaluating their financial performance.
While
discarding the concept of profitability as traditional criterion on the grounds
that this criterion suffers from the problems of accounting limitations, he has
suggested a simple multiple indicator. As per his indicator, the performance is
a weighted average of labour productivity and the ratio of production to its
capacity.
Further he has suggested an eight step alternative measure for
evaluating the performance of a unit in public sector.30
Viswanathan has evaluated the performance of public sector enterprises
during 1979-80 and 1984-85. Between the two categories of industrial unit, he
observes that the production-oriented industries are faring in a better way than
the others. In the light of loosing the entire capital base by some of the loss
29
Srinivasan, C.V., Some Recent Trends in the Financing of Public sector enterprises, Lokudyog, June 1985
Trivedi, Prajapathi, Public Enterprises in India: If not for profit then for what? Economic and Political
Weekly, Vol.XXI, No.48, Nov.1986, pp.137-148
30
61
making enterprises, he recommends for the adoption of joint-stock concept by
putting the enterprises on rails.31
Shastri Mehta had made a survey on the existing literature on the
working of public sector enterprises during the last three and half decades and
feels that because of the interference from different quarters, from project
approval to implementation, leads to lack of accountability. He estimates that
the delays, poor coordination, wrong decisions, wrong selection of sites,
machinery and staff will cost the nation to the extent of 10 percent of total
seventh plan outlay. He suggests for writing the accumulated losses of some
public sector undertaking and gives a chance to introduce a new work culture
for the future betterment in them.32
Gupta has made a study to find out how the investments in central public
enterprises are financed.
He has analyzed the role of extra budgetary
provisions and the recent prominence of public sector bonds, external
commercial borrowings, inters enterprise borrowings from specialized
coordinating committees, development funds and such others. He observes
that the governments’ budgetary support has been declining during the recent
31
32
Viswanathan, K.R., Performance Appraisal of Public Enterprises, Financial Express, April 1986, p.5.
Shastri Mehta. Has Public Sector lived up to our expectations, Yojana, April 16-30, 1987, pp.12-16
62
past.
This has made the enterprises to find sources for themselves on
competitive lines.33
Venkatachalam has made a study on the performance of public sector
enterprises especially considering the trends and relative roles of external and
internal sources in public sector enterprises covering a period of nineteen years
from 1960-61 to 1978-79. He has evaluated the financing patterns of public
sector enterprises and found that these enterprises were increasingly dependent
upon external sources of financé. The borrowing from government and semigovernment agencies are continuously increasing. He has observed that the
imbalances in the financial structure caused by heavy loses of debt capital has
created the interest burden and it is constituting in its own way for the poor
financial performance.
He has suggested for improving the operating
efficiency through allowing private equity participation, re-organization of
capital structure and rationalization of pricing policy.34
Chattopadyaya has brought an evaluation work on the performance of
central Government enterprises covering a period of 18 years from 1969-70 to
1986-87. He presented the criticisms leveled against the performance of ps
enterprises and evaluated that the public sector units do have the potential to
33
Gupta, P.Anand, Financial Public Enterprises investment in India, Economic and Political Weekly,
Vol.XXII, No.51, Dec.17, 1988, pp.2697-2702
34
Venkatachalam, G., Financing of Public Enterprises in India, Himalaya Publishing House, Bombay, 1988
63
record much better results, provided they are run on business lines by
maximizing the rate of return on capital employed. He has put forwarded a
number of suggestions to improve the working of these units, including the
application of principles of sound management.35
Sankar and Sai have conducted a comparative study on private and
public sector enterprises with respect to their financial efficiency during period
between 1986-87 and 1988-89. The study identifies that the private and public
sector enterprises differ in creating a surplus to the extent of 9 percent on sales.
The capital employed in public sector enterprises showed a better performance.
The profits earned in private sector are three times higher in size of the equity
than in the public sector. Capital structuring strategy and the accumulation of
reserves helped the private sector to a high financial efficiency. 36
Rao and Latha have made study on the Financial Management and
productivity in public sector enterprises covering a period of Ten years from
1975-76 to 1985-86.
Operational and financial performance of these
enterprises was evaluated through various operational and financial ratios. It
was observed that high capital output ratio and slow growth rates in partial and
total factor productivities as explanation for poor profitability in most public
35
Chattopadhayaya, P, Central Government Enterprises: An 18 Year Profile, Facts for You, Vol.10, No.9,
March 1989, pp.11-19
36
Sankar, T.L., and Sai, S.S.T, Private and Public Sector – A Comparative study of their financial efficiency
during 1986-87 and 1988-89, the Journal of Institute of Public Enterprises, Vol.13, No.4, Dec.1990, pp.291316
64
enterprises during the period. It was also noticed from the study that there
exists wider fluctuations in operating cost responsiveness, utilization of
resources and excessive investment on fixed assets of these enterprises.
The
study identified lower profitability in these enterprises during the study period
and suggest for improvement by allowing these enterprises work in an
entrepreneurial atmosphere.37
The performance appraisal of Tyre industry in India was made by Aziz
[25] by taking five important tyre units viz., Appollo Tyres limited, MRF Ltd.,
Dunlop tyres Ltd., Ceat Tyres of India Ltd., and Good year India Ltd. He has
used the performance appraisal techniques like ratio analysis and value added
analysis.
By using these techniques, he ahs analyzed the production
performance; cost and sales trends, profit performance and comparative
financial strength of these companies for a period of 7 years i.e., during 1980 to
1986.38
Rao and Parthasaraty, (1994) in their study of Debt-service coverage
ratio with reference to Andhra Pradesh state financial corporation and analyses
resources of SFCs, which influence the ratio. After identifying a fluctuating
37
Chandrasekara Rao, K., and Madhavi Latha, K., Financial Management in Public Sector Enterprises,
Discovery Publishing House, New Delhi, 1991
38
Aziz, A. Performance appraisal – Accounting and Quantitative Approaches – Pointer Publishers, Jaipur,
1993
65
trend in ratio, they suggested a ceiling on cash holding by the SFCs. Disposing
of assisted sick units and careful screening of loan applications.39
Singh, Arora and Anand (1994) have evaluated the performance of
Haryana financial corporation, and in doing so; they have compared it with the
performance of other SFCs using various ratios.
They opined that its
performance was commendable in developing SST’s in backward regions, but
its operation at efficiency and financial performance were disappointing.40
Majumdar has examined a study on relative performance of public, and
private sectors in Indian industry during the periods of 16 years between 197374 and 1988-89. The performance of these sectors was measured through
growth rates in total fixed assets, working capital and human capital against the
output of the respective sectors. The study results indicate that the joint sectors
firms but less efficient than those of in the private sector.41
Griffin (1984) has identified indices such as production efficiency,
corporate structure, health of earnings, R&D, economic function, executive
effectiveness, service to stockholders effectiveness of Board of Directors, fiscal
policies and sales, as factors that affect the performance of organizations.
39
Rao and Parthasarathy, Reports of Andhra Pradesh state financial Corporation 1993-94
Singh, Arora and Anand, “Reports of Haryana Financial corporations” 1993-94
Sumit K.Majumdar, Public, Joint and Private sectors in Indian Industry – Evaluating the Relative
Performance Differences, Economic and Political Weekly, Feb.1995, pp.18-25
40
41
66
Some reservations could be expressed as to the possibility of evaluating these
measures effectively in view of their subjective nature. But that is a general
limitation that makes social research completely different from physical
science research.42
Mr.V.Rengarajan (1996)43 has noted that the working capital
management is the Blood stream in the care of any company and is an integral
part of the overall corporate management. Very frequently one come across the
pessimist, the imitated or the excuse finder who laments about the
imponderables and obstacles of effective working capital management.
Management is the art of Anticipating and preparing for risks and uncertainties
and overcoming obstacles for the finance manager also is ready to play this
role and has a working knowledge of the tools and techniques he can employ to
carryout his tasks. The working capital sphere throws open a welcome
challenge and opportunity too.
Surendar Yadhav, P.K.Jain and Sanjiv Gambir made an attempt to study
the financial health of manufacturing companies in private sector. They have
selected 150 private companies of 5 years from 1991 to 1994. In this study,
they have analyzed the short-term liquidity and long-term solvency of these
42
Griffin, The Journal of Institute of Public Enterprises, Vol.19, No.5, Dec.1996, p.350
V.Rengarajan, An M.Phil Commerce dissertation entitled Working Capital Management A study with
particular reference to Steel Authority of India Limited, submitted to Bharathidasan University, April, 1996,
p.134.
43
67
companies through ratio analysis. From this study it is observed that the
current ratios have shown consistency over the periods of the study, but there is
not sufficient cushion to meet current liabilities. This has also been confirmed
by acid test ratios because of the fact that around 40% of current assets are in
the form of inventories. As regards leverage and coverage measures, the debt
equity ratio is calculated which shows a decreasing trend. When this ratio is
calculated including short term loans, it shows a similar term but reveals that
loans form a significant part (75%) of the total capital of a company. This
means there is a fixed liability which these companies have to bear year after
year. The trends in interest coverage ratios are fluctuating but above the norms
required by the financial institutions. Also the debt service coverage ratio is
above the norms required by the financial institutions. Also the debt service
coverage ratio is above the level stipulated by the financial institutions except
in one year.44
Management Succession and Financial Performance of Family
controlled firms by Smith, Brain-F; Amoako-Adu, Ben in the year 1999. This
paper examines the immediate and long-term impacts on financial performance
of 124 management successions within Canadian family controlled firms when
family successors are appointed, stock prices decline by 3.20% during the 344
Surendar Yadav, P.K. Jain, and Sanjiv Gambir, Management and Change, Vol.2, No.22, June-Dec.1998
68
day (-1 to +1) event window, whereas there is no significant decrease when
either non-family insiders or outsiders are appointed.
However, a cross-
sectional analysis indicates that the negative stock market reaction to family
successors is related to their relatively young age, which may reflect a lack of
management experience rather than their family connection per se. Investors
are uncertain about the “management quality” of family successors who have
less established reputations than more seasoned non-family insiders and
outsiders. Non-family member appointments tend to follow periods of poor
operating performance implying that there might be more scope for
improvement when a non-family successor is appointed. Unlike the US sample
in Mc Conayghy et al (1998), which indicates that the median percentage of
votes held by controlling families isles than 15%, the Canadian sample
indicates a more concentrated ownership with the median percentage of family
controlled votes exceeding 51%. Of the firms in our sample, 62% use dual
class capitalization to maintain control within the family. 45 Driving financial
performance through the du pont identity A Strategic Use of Financial Analysis
and planning by Firer, Colin in the year 1999. The researcher presents an easy
to understand conceptual model that provides a framework within which to
explore the financial health of the firm as well as a consideration of
45
Smith, Brain F., Amoako, Adu, Ben, Management Succession and Financial Performance of Family
controlled Firms, Review of Economic Dynamics, April 1998 1(2), 474-496 Journal-Article United States
69
international practices. It has been argued that the traditional layout of the du
pont identity should be modified.
To correctly interpret changes in the
financial health of the firm brought about by changes in the management of the
firm’s assets, the use of net assets rather than total assets and short-term debt
should be grouped together with long-term debt in the sources of funds portion
of the balance sheet. It is also shown that the concept of sustainable growth
can easily be integrated into the du pont identity, providing the linkage
between financial analysis and financial planning. Pitfalls in the use of some
of the published sustainable growth models are identified.46
Some scholars (Campfield, 1971; Martindell, 1962) have earlier advanced a
rather holistic argument saying that a good way of measuring performance is
by a complete review and evaluation of the organisation’s total set of activities.
It was further argued that by doing so, factors that impinge on organizational
performance and identified and evaluated.47
The business cycle financial performance and the retirement of capital
goods by Goolsbee, Austan in the year 1998 the neoclassical investment
literature assumes that capital is homogeneous, lives forever, and has a
constant depreciation rate. More recent theories of investment have shown that
46
Firer, Colin, Driving financial performance through the Du Pont Identity, A Strategic use of Financial
Analysis and Planning, Journal of Corporate Finance, Contracting, Governance and organisation, December
1999, 5(4) 341-68, Canada
47
Campfield, and Martindell, The Journal of Institute of Public Sector enterprises, Vol.3, No.4, pp.348-360
70
when there are distinct capital vintages with embodied technologies,
depreciation and capital vintages with embodied technologies, Depreciation
and capital retirement become economic decisions and this raises important
problems with existing empirical work.
Directing testing of these issues,
however, has been rare because of the lack of micro data. This paper uses new
data on the services levels of individual capital goods in the airline industry to
empirically examine the impact that economic factors have on capital
retirement.
The results strongly support the views that retirement is
fundamentally an economic decision.
Retirement is much more likely in
recessions, which the cost of capital is low, or when a firm has good financial
performance. Factor prices and industry regulation are also important. Since
many of these factors also influence capital expenditures, the results imply that
estimates from the conventional investment literature, such as the effect of the
cost of capital or financial performance, may substantially overstate the case
since their impact on net investment may be much more modest than their
impact on gross investment.
The results also have implications for the
measurements of productivity.48
A Note on the Dimensionality of the Firm Financial Performance
Construct Using Accounting, Market, and Subjective Measures by Rowe, W,
48
Goolsbee, Austan, The Business Cycle, Financial performance and the Retirement of capital Goods,
Universitat, Pompeu Fabra, Economics and Business Working Paper, 348, Jan 1999; 20-Barcelona-Spain
71
Glenn; Morrow, - J-L, Jr” in the year1999.
Most research in strategic
management operationalizes firm financial performance by using either
accounting or market-based measures. Recently, some have suggested that
subjective measures may be useful in assessing a firm’s financial performance.
We argue that there is a theoretical basis for viewing firm financial
performance as having a higher order structure consisting of three separate yet
distinct dimensions.
Using second-order confirmatory factor analysis, we
found that while differences exist among accounting, market, and subjective
measures of firm financial performance, there is evidence to support the
concept of a single underlying construct. While our findings are statistically
significant and thus support our hypotheses, the substantive nature of our
results suggests that much more research is needed before we fully understand
the dimensionality of firm financial performance.49
Corporate Governance And Financial Performance: A Study of German
and UK initial public offerings by Goergen, Marc in the year 1998. Analyzes
the ownership of both German and UK companies that went public during the
1980’s, the evolution of ownership from the flotation to six years afterwards,
and the consequences for corporate value.
49
Provides an overview of
Rowe. W.Glenn, Morrow, J.L. Jr., A Note on the Dimensionalisty of Firm Financial Performance Construct
using Accounting, Market and subjective measures, Financial practice and Education, Spring-Summer 1999
9(1) 34-45,
72
institutional arrangements in Germany and the United Kingdom and analyzes
whether possible differences in the listing rules and inheritance tax explain the
observed differences in ownership of British and German firms studies the
evolution of ownership and control in the German initial public offerings
(IPOs) compares German IPOs with UK IPOs using two matched samples,
one matching German with UK firms of the same size and the other matching
German with UK firms in the same industry. Develops an econometric model
to analyze the evolution of ownership and control in the two matched samples
and explains different ownership structures between the firms and coteries by
levels of risk, the personal liquidity needs of he initial shareholders, the preIPO ownership concentration, and the involvement of the founder in his firm.
Analyzes whether firms of different ownership structures levels of financial
performance derives policy implications.50
V.P.Seetharaman has made a study on the “financial performance of
public sector enterprises in India ‘with reference to selected Heavy and
Medium engineering enterprises. This study covers a periods of 21 years from
1975-76 to 1995-96. He has taken the tools like capital-output ratios; value
added, capital formation, trends in productivity and management of funds and
productivity. The results of the various indicators favoured the BHEL of
50
Goergen, Marc, Corporate Governance and Financial performance, A Study on German and UK, Revenue
Canadienne Sciences Administration, Canadian Journal of Administrative Sciences March 1999, 16(1) 58-70
73
Heavy engineering and BEL in case of Medium engineering enterprises and
their performance was found to be good during the study period next to the two
sample units, the respective groups during the study period. All the other
sample units did not have progressive performances.51
Sudha has made a study in the year 2001 on Financial Performance of
public sector enterprises and New Economic Policy”. From the study, it is
observed that the financial performance of public sector enterprises have been
much better than what one expected after NEP. The general contention that all
public sector enterprises are loss making and are best privatized is not the most
appropriate conclusion that can be understood on logical terms. From the
study, it is quite clear that public sector enterprises made good provisions to
gear up against the challenges of competition and a rather hostile wave against
them.
It is thus commendable that despite all the charges of sluggish
performance and growth, all public sector enterprises are taken tighter at the
end of the day make profits.52
Voulgari, Fotini made a study on “Size and Financial Performance in
The Greek Manufacturing Sector” in the year 2002 this purer explores the
financial aspects of the manufacturing sector in Greece and investigates
51
Seetharaman, V.P., Financial performance of Public Enterprises in India with reference to Heavy and
Medium Engineering Industries, unpublished Doctoral work, Pondicherry University, April 2000
52
Sudha, Business Perspectives, A Journal of Birla Institute of Management Technology, Vol.1, No.1, JanJune 2001
74
differences in the financial performance between small and medium sized
enterprises (SMEs) and large sized enterprises (LSEs). Financial panel data are
utilized covering a period of nine years. The ANOVA and MANOVA tests
were used to examine whether the mean scores differ significantly between the
two-size groups based on selected performance measures.
The research
revealed that Greek SMEs have significantly different performance from LSEs.
More specifically, they exhibit higher liquidity, lower profitability, inefficient
inventory management and lower net profit margins compared to the large
sized firms of the sector.53
Hamill, Philip, A. Mcilkenny, Philip, Opong, and Kwaku, K, made a
study on “Directors’ share Dealings and Company’s Financial Performance” in
the year 2002. This paper examines the response of security prices to the share
dealings by directors of small capitalized firms in the United Kingdom and
tests as to whether the share dealing contain information with regard to the
firm’s future financial performance. The results of the study indicate that
investors respond positively to the information signals of directors’ equity
purchases. Researchers find little evidence to suggest that directors’ equity
sales possess significant information content. The results suggest that there is a
53
Voulgari, Fotini, Size and Financial Performance in the Greek Manufacturing sector in the year 2002,
Archives of Economic History, Jan-June 2002, 14 (1), pp.99-118
75
positive association between financial performance and the type of trade
directors engage in.54
Cheng, Yuk-Shing; Lo, Dic made a study on the topic “Explaining the
Financial Performance of China’s Industrial Enterprises: Beyond the
Competition-Ownership Controversy”.
Scholarly explanations of the
worsening financial performance of Chinese industry over the reform era,
particularly the loss-making phenomenon, have coalesced around two rival
stories: the “inefficient institutions causing poor financial performance” story
and the “increased competition inducing profitability decline’ story.
This
article critically reviews the arguments and empirical substantiation of the two
stories, and gives an alternative explanation that takes demand conditions and
industrial configurations is a macro as well as micro problem that the
worsening financial performance is a macro as well as micro problem that
points to the fundamental contradictions in contemporary Chinese political
economy.
Some policy implications from this analysis are raised in the
concluding section.55
Hamill, Philip, A Mcilkenny, Philip, Opong, Kwaku, K A study on Directors’ Share Dealings and Company
Financial Performance in the Year 2002, Journal of Management and Governance, 2002, 6(3): 215-234
55
Cheng Yuk-Shing, Lo Dic, Explaining the Financial Performance of China’s Industrial Enterprises: Beyond
the Competition–Ownership Controversy, China Quarterly, June 2002, 0(170), 413-440
54
76
K.Zionraj (2004)56 has expressed the need of financial systems that with
the operating up our country to world through liberalization. Privatisation and
Globalization, it became very difficult for our country’s products to cope with
the competition of products from other countries which are giving high quality
products at a low price.
The cost factor thus has become a major concern for the industries
companies change their production areas to the areas where they could get
cheap labour to cut down their costs in this situation, where the cost plays a
major role. The study on cost management is attaining it efficiently through
costing techniques which is the need of the hour for the Management and so
the study on activity based costing and effectiveness of implementing it is
studied.
Mr.M.Velmurugan (2004)57 has explained in his dissertation that the
financial performance analysis and especially the budgetary control means
laying down in monetary and quantitative term what exactly has to be done and
how exactly it has to be done over the coming period and then to ensure that
actual results do not diverse from the planned course more than necessary. The
K.Zionraj, The Dissertation entitled Activity Based Costing – A Dynamic Costing System with Special
Reference to Costing System of Neyveli Lignite Corporation Limited, submitted to Bharathidasan University,
MBA Degree, July 2004, p.17
57
M.Velmurugan, A Dissertation submitted for MBA Degree to Bharathidasan University entitled Evaluation
of Budgetary Control System with reference to Salem Steel Plant, July, 2004, p.40
56
77
word “Necessary” is not to be loosely interpreted.
Divergence due to
inefficiency is not necessary.
M.Balamurugan (2005)58 has stated in his research work that the
financial Information system (FIS) is a budgetary control system which is
designed to help user to express and formatise the management plan and future
actions. It also helps to prepare and cater the information relating to the annual
budget in an easy and systematic manner. And also added that there are two
steps in the budgetary control systems which are the measurable targets and
related comparison & actual with targets. If so it is possible to design and
implement a total budgetary control system for all the departments of a
company or at staff level that can also be used as Measurement tool for
incentives.
Sai Krishna (2006)59 in his article stated that the development of
financial markets has played a significant role in promoting the process of
industrialization.
Strong financial markets are vital for proper economic
development. Banks and other financial institution play a major role in the
formal financial systems vacantly. Stock markets have marked their presence
especially with foreign capital flows and through the entry of foreign
58
M.Balamurugan, An Analysis of Budget Process Mechanisms and Monitory System at BHEL, Trichy, a
dissertation submitted to Bharathidasan University for an MBA Degree, July 2005, p.8
59
Sai Krishna, Faculty member, the ICFAI National College, Hyderabad, An Article entitled Globalisation of
the Financial Markets, October 2006, p.25.
78
investment institutions and are playing an important role in the economy.
After globalization and liberalization of financial markets, developing
countries have become highly susceptible to speculative capital Movements.
Dr.D.Ramani (2007)60 in his article has stated that the financial literacy
is the ability of Individuals to make informed judgements and effective
decisions about the use and management of money. The delivery of financial
education can be said to comprise three key themes, building skills, increasing
knowledge and developing understanding and in each of these a client’s
confidence should also be developed.
Dr.V.Jeelan Basha, (2007)61: There has been a sea change in the
Functioning of Banking Scenario since the implementation of liberalization
policy in 1991. The rapid growth and Development of information technology
and communication system have made banking services accessible to
customers at the click of mouse/his finger tips. The organization of these things
has resulted in acute competition not only among domestic banks but also
between domestic banks and foreign banks. The Indian banking system has
undergone a major and rapid structural transformation over the last four decade
from social banking to commercial banking; traditional class banking to mass
60
D.Ramani, Faculty in Commerce, MKU College, Andipatti, Tamilnadu, An Article published in ICFAI
Reader, June 2007, p.51
61
Dr.V.Jeelan Basha, Consulting Editor, The ICFAI Research Centre, Pune
79
banking; brick and mortal banking (Banking at Fixed Branch premise) to
electronic banking and local banking to Universal banking.
V.P. Prasanth (2010)62: The unraveling of the global financial crisis
sends a clear signal that India has to make Fundamental changes in its
Management of the Banking and Financial Sector. The First Pre-requisite is a
return to relationship banking, and the arrangement under which contact
between the Lending Bank Manager and the Borrowing and the direct and not
Impersonal. The Immediate Indian Response to the Global crisis shall be to
work towards lowering interest rates which at their high level have hurt
manufacturing investment in both the large and small scale seeders. The
economy also needs the pursuit of an Expansionary policy by waiving the
Fiscal roles.
C.P.Chandrasekhar (2011)63 Liberalization and Financial integration
may not have resulted in excess exposure of the Indian Banking system to the
Toxic assets that Originated in the US and Europe. It has altered banking
behaviour. So, that it has begun it resemble that of Banks in those Countries.
One Consequence is increased Exposure to Risk, which is a matter of concern
62
V.P.Prasanth, Economic and Political Weekly, October 24, 2010, p.22.
C.P.Chandrasekhar is with the Centre for Economic studies and planning, Jawaharlal Nehru University,
New Delhi, Economical and political – weekly, May, 15, 2011. Page No: 8.
63
80
in itself and not just because, the Indian regulatory System is not yet geared to
deal with such risk, if it can at all.
Bernard D`mello: Since the late 1970`s, a gravitational shift of economic
activity from the production of Goods and Non-Financial services to Finance
has been underway. One Indicator of this process has been the rapid growth
since then of the share of financial profits in total corporate profits. Also
reflective of this process of
“Financialisation”, is the Explosive Growth
Private debt-household, Non-financial, and financial business – as a proportion
of gross domestic product and the piling of layers upon layers of claims with
the existence of instruments like options Futures, swaps and the like and
financial entities like hedge funds and structural investments vehicles. With
Financialisation of employment of money capital in the finance markets and in
speculation, more generally to make more money, bypassing the rate of
commodity production, increasingly became the name of the game.64
Jyotimoy Bhattacharya (2009)65: There is no reason why larger
borrowing by the government need raise interest rates in the economy. It is a
case of prejudice in Favour of “Small” Government. That is the Reason for the
continued Currency of the View. Or even if the expressed view is due to desire
Bernard D’Mello, Economic & Political Weekly, May 15, 2009, p.27
Jyotimoy Bhattacharya, Indian Institute of Management, Kozhikode, Economic and Political Weekly, June
5, 2009, p.20
64
65
81
to keep foreign institutional investors happy, should it not be better to control
speculative capital directly instead of recommending deflationary fiscal
policies in the midst of recession?
Amaresh Samantaraya, (2009)66: Monetary policy is a key constituent of
overall economic policy across the industrial and emerging economics for the
purpose of stabilization of output and prices. In a standard textbook sequence,
monetary expansion reduces interest rates and augments aggregate demand
through increase in investment and consumption spending. This increase in
aggregate demand exerts a temporary influence on real output, while the
upward pressure on price is presumed to be of a permanent nature. In a similar
fashion, monetary retightening leads to reduction of prices and a temporary
output loss. In practice, the conduct of monetary policies involves setting bank
reserves or the short-term policy rate to obtain Financialisation and Monetary
conditions consistent with achieving the objectives of monetary policy.
Preeti Phuskele,67: Consulting Editor, the ICFAI, Research Centre, Pune,
says, the financial markets all over the world is facing turmoil. This has
reduced the confidence levels of the general public in the international
financial institutions. Restoring financial stability is one of the major issues
66
67
Amaresh Samantaraya, Reserve Bank of India, Economic and Political Weekly, May 22, 2009, p.46.
Preeti Phuskele, Consulting Editor, The ICFAI, Research Centre, Pune
82
confronting of these institutions and economists all over the world. This
problem of financial stability emerged due to lack of liquidity.
Economists have contradictory views on the significance of the liquidity
to finance stability. It is true that liquidity is very important for the smooth
functioning of any economy and excess liquidity can be more harmful, if not
tackled by the monetary authorities of the country, simulated less liquidity can
also be dangerous for the smooth functioning of the economy as discussed in
the article.
SR Rajagopal,68 The Government departments and financial institutions
have their own audit sections/departments. However, corporate entities,
excepting a few have not given importance to such internal audit system. In
the changed global environment an internal audit team with Qualified
Personnel is a must. The internal audit reports should be processed honestly
and remedial actions for the irregularities should be pointed out. Internal audit
must be looked upon as a tool for the top management to manage their
activities and to know how their administration and operational departments
are functioning.
68
S.R.Rajagopal, PA To Manager, SBI Zonal Inspection Office, Chennai